XEROX HOLDINGS CORPORATION Throughout the Management's Discussion and Analysis (MD&A) that follows, references to "Xerox Holdings " refer toXerox Holdings Corporation and its consolidated subsidiaries, while references to "Xerox" refer toXerox Corporation and its consolidated subsidiaries. References herein to "we," "us," "our," or the "Company," refer collectively to bothXerox Holdings and Xerox unless the context suggests otherwise. References to "Xerox Holdings Corporation " refer to the stand-alone parent company and do not include its subsidiaries. References to "Xerox Corporation " refer to the stand-alone company and do not include subsidiaries. Currently,Xerox Holdings' primary direct operating subsidiary is Xerox and Xerox reflects nearly all ofXerox Holdings' operations. Accordingly, the following MD&A primarily focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and its results of operations and financial condition. Throughout this combined Form 10-K, references are made to various notes in the Consolidated Financial Statements which appear in Part II, Item 8 of this combined Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.Xerox Holdings' other direct subsidiary isXerox Ventures LLC , which was established in 2021 solely to invest in startups and early/mid-stage growth companies aligned with the Company's innovation focus areas and targeted adjacencies.Xerox Ventures LLC had investments of approximately$8 million atDecember 31, 2021 . Due to its immaterial nature, and for ease of discussion,Xerox Ventures LLC's results are included within the following discussion.
Executive Overview
Our expectation entering 2021 was that in-office work would normalize following 2020's wave of COVID-19 infections and the global rollout of effective vaccines. However, the emergence of various variants of COVID-19 in 2021 resulted in many of our customers delaying their plans to return employees to the workplace and allowing employees to continue to work remotely or in a hybrid environment. This impact resulted in a reduction in expected Post sale revenue and profits. In the second half of the year, we also experienced an unprecedented level of supply chain disruption, in part due to the ongoing effects of the COVID-19 pandemic, with conditions deteriorating throughout the final two quarters of the year. These disruptions resulted in revenue falling below expectations for the year, with most of the shortfall comprised of high-margin mid-range devices and Post sale revenue. Supply chain disruptions also drove an increase in our backlog1 of equipment and IT hardware to nearly$350 million , which is approximately 2.5 times higher than at the end of 2020. We continue to streamline and optimize our operations and exceeded our target Project Own It savings of$375 million in 2021. As we head into 2022, demand for our equipment remains strong as evidenced by our backlog1 of approximately$350 million as of year-end, which is primarily comprised of high-margin office equipment. We expect to have an elevated backlog1 at least through the first half of the year. As the backlog1 clears, our equipment revenue mix is expected to improve, which should result in improvements in gross margin. We also expect that there will be a broader return of workers to the office in the second half of 2022 and for Xerox, the correlation between return-to-work trends, page volumes, and post sale revenues remains strong, which suggests employees print when they return to the office and clients continue to value our printing services. Although our financial results are expected to improve in 2022, our earnings for fourth quarter and full year 2021 includes an after-tax noncash goodwill impairment charge of$750 million ($781 million pre-tax) or$4.38 and$4.08 per share, respectively. This charge largely reflects the impact that the economic disruption caused by the COVID-19 pandemic has had and is expected to continue to have on the Xerox print business. Some of this impact is expected to be mitigated by growth of our digital services and offerings targeted for hybrid work business models. Additionally, the Company is currently pursuing its strategy to develop and expand certain expected growth businesses, such as financing, software and innovation to offset and, eventually, exceed reduced cash flows from the print business, but this strategy will take time to develop. Refer to the Application of Critical Accounting Policies section of the MD&A as well as Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding theGoodwill impairment.
Refer to Financial Overview for further discussion regarding additional impacts of the COVID-19 pandemic on our business in 2021 and 2020.
_____________
(1)Order backlog is measured as the value of unfulfilled sales orders, shipped
and non-shipped, received from our customers waiting to be installed, including
orders with future installation dates. It includes printing devices as well as
IT hardware associated with our IT services offerings.
Xerox 2021 Annual Report 27
--------------------------------------------------------------------------------Table of Contents
Business Overview
With annual revenues of approximately$7.0 billion , we remain a leading global provider of digital print technology and related services, software and solutions. Our primary offerings span four main areas: Workplace Solutions, Production Solutions, Xerox Services and FITTLE. We disclosed at our Investor Conference onFebruary 23, 2022 , that we have rebranded ourXerox Financial Services (XFS) business, which is now known as FITTLE. •Workplace Solutions includes two strategic product groups, Entry and Mid-Range, much of which share common solutions, apps and ConnectKey® software. Workplace Solutions revenues include the sale of products (captured primarily as equipment sales) as well as the supplies and associated technical services and the financing of those products through FITTLE (captured as post sale revenue).
•Production Solutions are designed for customers in the graphic communications, in-plant and production print environments with high-volume printing requirements.
•Xerox Services includes a continuum of solutions and services that helps our customers optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels of security. Our primary offerings in this area are Managed Print Services (MPS), Capture & Content Services (CCS) and Customer Engagement Services (CES) as well as IT Services. CCS and CES encompass a range of Digital Services that leverage our software capabilities in Workflow Automation, Personalization andCommunication Software , Content Management Solutions, and Digitization Services. •FITTLE (formerly XFS) is a global financing solutions business and currently offers financing for direct channel customer purchases of Xerox equipment through bundled lease agreements and lease financing to end-user customers who purchase Xerox equipment through our indirect channels. In addition to our four primary offering areas described above, a smaller but growing portion of our revenues comes from non-core streams including paper sales in our developing market countries, wide-format systems, licensing revenue, as well as from IT Services, CareAR, which is comprised of DocuShare® and XMPie, and PARC (Innovation). Headquartered inNorwalk, Connecticut , with approximately 23,300 employees, Xerox serves customers in approximately 160 countries. We have a broad and diverse base of customers by both geography and industry, ranging from small and medium-sized businesses (SMBs) to printing production companies, governmental entities, educational institutions and Fortune 1000 corporations. Our business does not depend upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. In 2021, approximately 40% of our revenue was generated outsidethe United States .
Market and Business Strategy
Our market and business strategy is to maintain overall market share leadership in our core market and increase our participation in the growth areas, while expanding into adjacent markets and leveraging our innovation capabilities to enter new markets. The Company's four strategic initiatives, summarized below, remain at the core of how we operate and deliver results for all stakeholders. 1.Optimize Operations for Simplicity •Continuously improve operating efficiency, revenue flow-through and return on assets •Invest in augmented reality, robotic process automation, business process outsourcing, analytics and system enhancements to drive efficiencies 2.Drive Revenue •Drive increased adoption and utilization of CareAR •Scale IT Services and robotic process automation in the SMB market •Grow our financing business as a global financing solutions business •Expand distribution of digital solutions among existing Print and Services clients 3.Monetize Innovation •Leverage$250 million corporate venture fund to bolster investment and innovation •Add value-added equity partners to accelerate development and market penetration •Embed PARC's technology into new and existing businesses 4.Focus on cash flow and increasing capital returns •Maximize annual free cash flow1 generation •Deploy excess capital for strategic M&A •Opportunistic share repurchases
_____________
(1)Free cash flow is defined as Operating cash flow from continuing operations less capital expenditures.
Xerox 2021 Annual Report 28
--------------------------------------------------------------------------------Table of Contents
Post-sale Based Business Model
In 2021, 78% of our total revenue was post-sale based, which includes contracted services, equipment maintenance, supplies and financing. These revenue streams generally follow equipment placements and provide some stability to our revenue and cash flows. Key indicators of future post sale revenue include installs and related removals of printers and multifunction devices, the number and type of machines in the field (MIF), page volumes (including the mix of pages printed on our MIF, including color devices) and the type and nature of related software and services provided to customers. Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization. Project Own It During the second half of 2018, we initiated a transformation project - Project Own It - centered on creating a more effective organization to enhance our focus on our customers and our partners, instill a culture of continuous improvement and improve our financial results through on-going cost reductions and savings. The primary goal of this project is to improve productivity by driving end-to-end transformation of our processes and systems to improve effectiveness and to reduce costs. These efforts are considered critical to making us more competitive and giving us the capacity to invest in growth and maximize shareholder returns. Key opportunities under Project Own It include establishing more effective shared service centers (captive and through our outsource partners), rationalizing our IT infrastructure, reducing our real estate footprint, and improving our supply chain management and the productivity of our supplier base. In 2021, we exceeded our gross savings target of$375 million . Since its inception, total savings from Project Own It are approximately$1.8 billion . We expect to generate approximately$300 million of gross savings in 2022. This project also involves evaluating the sourcing of all of our products to optimize our options. Our approach is to analyze our potential options both by product category and holistically to determine what sourcing makes the most strategic and economic sense. InMarch 2019 , as part of Project Own It, Xerox entered into a shared services arrangement with HCL Technologies (HCL) pursuant to which we transitioned certain global administrative and support functions, including selected finance functions, from Xerox to HCL. InJuly 2021 , Xerox entered into an arrangement with Tata Consulting Services (TCS), whereby TCS will provide business processing outsourcing services in support of our global finance organization. This will include the transition of the finance processes currently being provided by HCL. We incurred restructuring and related costs, net of$38 million for the year endedDecember 31, 2021 primarily related to costs incurred to implement initiatives under our business transformation projects including Project Own It. Refer to Restructuring and Related Costs, Net section of the MD&A and Note 14 - Restructuring Programs in the Consolidated Financial Statements for additional information. New Businesses Strategy In 2021, we stood up three new businesses: CareAR,Xerox Financial Services (now known as FITTLE) and Innovation (PARC). As a result of this effort, we believe we are positioned to begin reporting separate financial and non-financial information for each business in 2022.CareAR Holdings (CareAR) is Xerox's newly formed software business and is comprised of:CareAR, Inc. , an enterprise augmented reality business Xerox acquired in late 2020; DocuShare®, a cloud-based content management system; and XMPie, a multi-channel marketing software platform. Together, these software assets combine to provide an AR and AI-driven visual support platform that provides real-time access to expertise for service companies, field service employees and end-use customers. FITTLE has historically offered financing for direct channel customer purchases of Xerox equipment through bundled lease agreements and lease financing to end-user customers who purchase Xerox equipment through Xerox indirect dealer channels. At the outset of 2021, FITTLE changed its strategy to broaden its portfolio of assets financed to include numerous growth opportunities independent of Xerox equipment and services, such as the expansion of its dealer relationships to include an increasing number of non-Xerox dealers, leveraging its existing dealer relationships to finance a wider breadth of products and forming relationships with new vendors. Additionally, in 2021, FITTLE became the primary equipment lease provider for our XBS business. Innovation (known as PARC Innovation, or PARC) includes the scientists and engineers located at our facilities inPalo Alto, Calif. ;Webster, N.Y. ;Cary, N.C. , andToronto, Canada . PARC is focused on incubating, productizing and commercializing disruptive technology aligned with innovation focus areas such as 3D Printing, Sensors and Services for the IoT, AI and clean tech. Xerox 2021 Annual Report 29 --------------------------------------------------------------------------------
Table of Contents
In 2021 we also made progress toward our goal of monetizing and strategically diversifying our investments in innovation. In May, we announced the formation of Eloque, a joint venture with the government ofVictoria, Australia to commercialize IoT sensor-based technology and services for monitoring the structural health of bridges. In September, we announced the formation of CareAR, in conjunction with a$10 million noncontrolling investment from digital workflow leader ServiceNow, Inc. Although minimal in terms of revenue, we also began commercializing our 3D liquid metal printing technology through the sales and placements of ElemX 3D printing devices.
Financial Overview
Impact of COVID-19 on Our Business Operations
The COVID-19 pandemic continued to have a significant effect on the Company's operations in 2021. Although business results improved in the first half of 2021 and the Company was meeting expectations, the emergence of new COVID-19 variants during the year resulted in many of our customers delaying their plans to return employees to workplaces and allowing employees to continue to work remotely or in a hybrid environment. This impact combined with the global supply chain and logistic issues, created in part by the COVID-19 pandemic, had a negative effect on the Company's results particularly in the latter part of the third quarter 2021 and throughout the fourth quarter 2021. We expect the ongoing effects of the COVID-19 pandemic, including the potential emergence of new variants, as well as the global supply chain disruption, to delay economic recovery and continue to impact our revenues and margins, with improvements anticipated in the second half of 2022. In response to the COVID-19 pandemic, various governments enacted various measures to provide aid and economic stimulus directly to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees. InMarch 2020 , in response to the COVID-19 pandemic, theU.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), and certain provisions from that Act were extended as part of the American Rescue Plan, which was enacted inMarch 2021 . Similar pay protection programs were enacted inCanada andEurope that primarily provide direct grants to companies to cover the salary and wages of employees (retained or temporarily furloughed). In 2021, we recognized savings of approximately$34 million from these various government assistance programs as compared to$107 million recognized in 2020. Estimated savings were recorded as follows in the Consolidated Statements of (Loss) Income: Year Ended December Year Ended December (in millions) 31, 2021 31, 2020 Cost of sales $ - $ 1 Cost of services, maintenance and rentals 20 73 Research, development and engineering expenses 1 1 Selling, administrative and general expenses 13 32 Total Estimated savings $ 34 $ 107
We continue to monitor government programs and actions being implemented or expected to be implemented to counter the economic impacts of the COVID-19 pandemic.
2021 Operating Results
Total revenue of$7.0 billion in 2021 increased 0.2% from the prior year, including a 1.6-percentage point favorable impact from currency and an approximate 0.5-percentage point favorable impact from 2021 and 2020 acquisitions. Total revenue for 2021 reflected the impacts from the COVID-19 pandemic as well as the global product supply and logistics constraints, which limited our ability to fulfill orders and drove an increase in our order backlog in the second half of the year. Total revenue reflected a 1.1% increase in Equipment sales revenue, including a 1.5-percentage point favorable impact from currency, while Post sale revenue was flat, including a 1.7-percentage point favorable impact from currency. While the COVID-19 pandemic significantly impacted our 2021 revenues as a result of business closures and office building capacity restrictions, the progress of vaccinations and the gradual reopening of workplaces resulted in higher year-over-year page volumes for most of 2021. Net (loss) income from continuing operations attributable toXerox Holdings was as follows: Year Ended December 31, B/(W) (in millions) 2021 2020 2019 2021 2020 Net (loss) income from continuing operations attributable to Xerox Holdings$ (455) $ 192 $ 648 $ (647) $ (456) Adjusted(1) Net income from continuing operations attributable to Xerox Holdings 293 313 828 (20) (515) Xerox 2021 Annual Report 30
--------------------------------------------------------------------------------
Table of Contents
Net loss from continuing operations attributable toXerox Holdings for 2021 of$(455) million decreased$647 million as compared to Net income from continuing operations attributable toXerox Holdings of$192 million in 2020. The decrease primarily reflected the after-taxGoodwill impairment charge of$750 million ($781 million pre-tax), which was partially offset by lower bad debt expense, non-service retirement-related costs, Restructuring and related costs, net, Income tax expense, and Transaction and related costs, net. These benefits were partially offset by reduced temporary government assistance as well as higher supply chain cost, including higher freight and shipping costs, which accordingly reduced gross profit. Adjusted1 net income from continuing operations attributable toXerox Holdings for 2021 decreased$20 million as compared to the prior year primarily reflecting reduced temporary government assistance and higher supply chain cost, including freight and shipping costs, which were only partially offset by lower bad debt expense and Income tax expense. Adjustments in 2021 include an after-taxGoodwill impairment charge of$750 million ($781 million pre-tax), Restructuring and related costs, net and Amortization of intangible assets, as well as non-service retirement-related costs. Operating cash flow provided by continuing operations ofXerox Holdings was$629 million in 2021 as compared to$548 million in 2020. The increase includes the receipt of an upfront prepaid fixed royalty fromFUJIFILM Business Innovation Corp. (formerlyFuji Xerox Co., Ltd. ) of$100 million , and primarily reflects higher cash from working capital2 and lower accrued compensation, partially offset by a lower run-off of finance receivables and higher cash tax payments. Cash used in investing activities of continuing operations ofXerox Holdings was$85 million in 2021, reflecting capital expenditures of$68 million and acquisitions of$53 million , which were partially offset by proceeds from sales of non-core business assets of$44 million . Cash used in financing activities ofXerox Holdings was$1,310 million in 2021, reflecting payments of$518 million on secured borrowing arrangements, partially offset by proceeds of$311 million on a new secured financing arrangement, as well as payments of$888 million for share repurchases and dividend payments of$206 million .
2022 Outlook
We currently expect 2022 revenue to grow to$7.1 billion in actual currency (and remain flat at$7.0 billion at constant currency1). We expect revenue growth in 2022 to be weighted to the second half of 2022 as the supply chain is likely to remain challenged through the first half of the year. Post sale revenue growth is expected to track a return of workers to the office, which we assume will likewise occur in the second half of the year. Similar to revenue, we expect profitability to be weighted to the second half of 2022. We expect gross margin to be negatively affected by supply chain disruption through at least the first half of the year. We began implementing price increases for equipment supplies and services in 2021, which will partially offset elevated shipping and logistic costs. Furthermore, as supply chain conditions and page volumes improve, we expect gross margin to benefit from a more favorable equipment and revenue mix. We are confident in our ability to generate cash and plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders. We expect 2022 Operating cash flows from continuing operations to be approximately$475 million , with capital expenditures of approximately$75 million . During 2022, we expect to opportunistically make share repurchases utilizing our remaining share repurchase authorization of approximately$113 million .
_____________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of this non-GAAP financial measure. (2)Working capital, net reflects Accounts receivable, net, Inventories and Accounts payable.
Currency Impact
To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies intoU.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency", "currency impact" or "the impact from currency." This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate and is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates. Approximately 40% of our consolidated revenues are derived from operations outside of theU.S. where theU.S. Dollar is normally not the functional currency. As a result, foreign currency translation had a 1.6-percentage point favorable impact on revenue in 2021 and a 0.2-percentage point favorable impact on revenue in 2020. Xerox 2021 Annual Report 31 --------------------------------------------------------------------------------
Table of Contents
Application of Critical Accounting Policies
In preparing our Consolidated Financial Statements and accounting for the underlying transactions and balances, we apply various accounting policies. Senior management has discussed the development and selection of the critical accounting policies, estimates and related disclosures included herein with the Audit Committee of the Xerox Holdings Board of Directors. We consider the policies discussed below as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management's judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclosed the impact of these different estimates on our operations. In certain instances, such as revenue recognition for leases, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period. As discussed above (see Impact of COVID-19 on Our Business Operations), during 2021 the Company continued to be impacted by the economic disruption caused by the COVID-19 pandemic. This disruption required us to continue our increased review of the majority of our estimates to ensure we appropriately considered the impacts caused by the COVID-19 pandemic. As the extent and duration of the impacts from the COVID-19 pandemic continue, the Company's estimates and assumptions may evolve as conditions change. Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements.
Revenue Recognition
Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates including ASC Topic 606 - Revenue from Contracts with Customers and ASC Topic 842 Leases. We adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606) onJanuary 1, 2018 and ASU 2016-02, Leases (ASC Topic 842) onJanuary 1, 2019 . Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding our revenue recognition and lease revenue recognition policies. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the revenue related to the following areas involves significant judgments and estimates: Bundled Lease Arrangements: We sell our equipment direct to end customers under bundled lease arrangements, which typically include the equipment, service, supplies and a financing component for which the customer pays a single negotiated fixed minimum monthly payment for all elements over the contractual lease term. These arrangements also typically include an incremental, variable component for page volumes in excess of the contractual page volume minimums, which are often expressed in terms of price-per-image or page. Lease deliverables include the equipment and financing, while the non-lease deliverables generally consist of the services, which include supplies. Sales made under bundled lease arrangements directly to end customers or through third party leasing companies comprise 42.0% or$664 million of our equipment sales revenue. Revenues under these bundled lease arrangements are allocated considering the relative standalone selling prices of the lease and non-lease deliverables included in the bundled arrangement. The allocation of revenue among the elements - equipment vs. post sale (service, supplies and financing) - has remained fairly consistent at approximately 25% and 75%, respectively, over the past three years. Sales to Distributors and Resellers: We utilize distributors and resellers to sell many of our products, supplies and parts to end-user customers. Sales to distributors and resellers are generally recognized as revenue when products are shipped to such distributors and resellers. Distributors and resellers participate in various discount, rebate, price-support, cooperative marketing and other programs, and we record provisions and allowances for these programs as a reduction to revenue when the sales occur. Similarly, we also record estimates for sales returns and other discounts and allowances when the sales occur. We consider various factors, including a review of specific transactions and programs, historical experience and market and economic conditions when calculating these provisions and allowances. Total sales of equipment, supplies and parts to distributors and resellers were$1,130 million for the year endedDecember 31, 2021 and provisions and allowances recorded on these sales were approximately 25% of the associated gross revenues. Xerox 2021 Annual Report 32 --------------------------------------------------------------------------------
Table of Contents
Allowance for Doubtful Accounts and Credit Losses
The allowance for doubtful accounts and credit losses is based on an assessment of historical collection experience as well as consideration of current and future economic conditions and changes in our customer-specific collection trends. Our methodology includes an expected loss model that incorporates an assessment of current and future economic conditions. We recorded bad debt provisions of$7 million ,$116 million and$46 million in Selling, administrative and general (SAG) expenses in our Consolidated Statements of (Loss) Income for the three years endedDecember 31, 2021 , 2020 and 2019, respectively. Reserves, as a percentage of trade and finance receivables, were 4.3% atDecember 31, 2021 , as compared to 4.8% and 3.0% atDecember 31, 2020 and 2019, respectively. We continue to assess our receivables portfolio in light of the current economic environment and its impact on our estimation of the adequacy of the allowance for doubtful accounts. The significant increase in bad debt provision and reserve percentage in 2020, as compared to 2019, was principally due to the impact of the COVID-19 pandemic on our customers. In assessing the level of provision and related reserve for 2020, we critically assessed current and forecasted economic conditions as a result of the COVID-19 pandemic at the time to ensure we objectively included those expected impacts in the determination of our reserve. That assessment resulted in the recognition of a$60 million incremental bad debt provision in the first quarter 2020. This increased provision was primarily related to finance receivables due to their larger balance and long-term nature. In 2021 we recorded approximately$31 million of bad debt reversals reflecting improvements in the macroeconomic environment as well as lower write-offs as a result of the COVID-19 pandemic. During the five year period endedDecember 31, 2021 , our reserve for doubtful accounts ranged from 3.0% to 4.8% of gross receivables. Holding all assumptions constant, a 0.5-percentage point increase or decrease in the reserve from theDecember 31, 2021 rate of 4.3% would change the 2021 provision by approximately$20 million . Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Note 7 - Accounts Receivable, Net and Note 8 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding our policy with respect to the Allowance for Doubtful Accounts and Credit Losses. Pension Plan Assumptions We sponsor defined benefit pension plans in various forms in several countries covering employees who meet eligibility requirements. Where legally possible, we have amended our major defined benefit pension plans to freeze current benefits and eliminate benefit accruals for future service, including our primaryU.S. defined benefit plan for salaried employees, the Canadian Salary Pension Plan and theU.K. Final Salary Pension Plan. In certain Non-U.S. plans, we are required to continue to consider salary increases and inflation in determining the benefit obligation related to prior service. Our pension plan inthe Netherlands was changed to a Collective Defined Contribution (CDC) plan. From a Company risk perspective, this plan operates just like a defined contribution plan as the Company is only responsible for a contribution for annual benefit accruals under 5-year agreements. Although the Company risk has been mitigated, underU.S. GAAP this plan doesn't meet the definition of a defined contribution plan and therefore is accounted for as a defined benefit plan. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our defined benefit pension plans. These factors include assumptions we make about the expected return on plan assets, discount rate, lump-sum settlement rates, the rate of future compensation increases and mortality. Differences between these assumptions and actual experiences are reported as net actuarial gains and losses and are subject to amortization to net periodic benefit cost over future periods. Cumulative net actuarial losses for our defined benefit pension plans of$1.7 billion as ofDecember 31, 2021 decreased by$661 million fromDecember 31, 2020 , primarily due to the increase of the discount rates and the resultant decrease in the Projected Benefit Obligation (PBO), excess of actual returns over expected returns, the recognition of actuarial losses through amortization andU.S. settlement losses as well as currency. The total actuarial loss atDecember 31, 2021 is subject to offsetting gains or losses in the future due to both changes in actuarial assumptions and future experience and will be recognized in future periods through amortization or settlement losses. We used a consolidated weighted average expected rate of return on plan assets of 3.9% for 2021, 4.1% for 2020 and 4.6% for 2019, on a worldwide basis. During 2021, the actual return on plan assets was a gain of$504 million as compared to an expected return of$325 million , with the difference largely due to positive equity market returns, the positive impact of decreasing interest rates on our fixed income investments and the impact of our hedging portfolio in theU.S. When estimating the 2022 expected rate of return, in addition to assessing recent performance, we considered the historical returns earned on plan assets, the rates of return expected in the future, particularly in Xerox 2021 Annual Report 33 --------------------------------------------------------------------------------
Table of Contents
light of current economic conditions, and our investment strategy and asset mix with respect to the plans' funds. The weighted average expected rate of return on plan assets we will use in 2022 is 3.9% with no change from 2021. Another significant assumption affecting our defined benefit pension obligations and the net periodic benefit cost is the rate that we use to discount our future anticipated benefit obligations. In theU.S. and theU.K. , which comprise approximately 75% of our PBO, we consider yield curves derived from Moody's Aa or better rated Corporate Bonds andU.K. Corporate bonds rated AA by at least one of the main ratings agencies, respectively, in the determination of the appropriate discount rate assumptions. The consolidated weighted average discount rate we used to measure our pension obligations as ofDecember 31, 2021 and to calculate our 2022 expense was 2.1%; the rate used to calculate our obligations as ofDecember 31, 2020 and our 2021 expense was 1.6%. The increase reflects higher interest rates in bothU.S. and non-U.S. regions.
Holding all other assumptions constant, the following table summarizes the estimated impacts of a 0.25% change in the discount rate and a 0.25% change in the expected return on plan assets:
Discount Rate Expected Return
(in millions) 0.25% Increase 0.25% Decrease 0.25% Increase 0.25% Decrease
Increase/(Decrease)
2022 Projected net periodic pension cost $ (5) $ 10 $ (20) $ 20
Projected benefit obligation as of December 31,
2021 (365) 400 N/A N/A
One of the most significant and volatile elements of our net periodic defined
benefit pension plan expense is settlement losses. Our primary domestic plans
allow participants the option of settling their vested benefits through the
receipt of a lump-sum payment. We recognize the losses associated with these
settlements immediately upon the settlement of the vested benefits. Settlement
accounting requires us to recognize a pro-rata portion of the aggregate
unamortized net actuarial losses upon settlement. As noted above, cumulative
unamortized net actuarial losses were $1.7 billion at December 31, 2021 , of
which the U.S. primary domestic plans, with a lump-sum feature, represented
approximately $590 million . The pro-rata factor is computed as the percentage
reduction in the projected benefit obligation due to the settlement of a
participant's vested benefit. Settlement accounting is only applied when the
event of settlement occurs - i.e. the lump-sum payment is made. Since settlement
is dependent on an employee's decision and election, the level of settlements
and the associated losses can fluctuate significantly from period to period.
During the three years ended December 31, 2021 , 2020 and 2019, U.S. plan
settlements were approximately $300 million , $220 million and $355 million ,
respectively, and the associated settlement losses on those plan settlements
were $54 million , $53 million and $93 million , respectively. In 2022, on
average, we estimate that approximately $100 million of plan settlements will
result in settlement losses of approximately $20 million .
The following is a summary of our benefit plan costs for the three years ended
Estimated Actual
(in millions) 2022 2021 2020 2019
Defined benefit pension plans(1)$ (80) $ (64) $ 5 $ 16 U.S. settlement losses 50 54 53 93 Defined contribution plans(2) 40 18 19 49 Retiree health benefit plans(3) (5) (55) (63) (65) Total Benefit Plan Expense$ 5 $ (47) $ 14 $ 93 _____________ (1)ExcludesU.S. settlement losses. (2)The decrease in 2021 and 2020 reflects the Company's decision to suspend and not make the 2021 or 2020 employer matching contribution to ourU.S. based 401(k) savings plans for salaried employees. The employer matching contribution is expected to be resumed and provided for in 2022. (3)The 2018 U.S. Retiree Health Plan amendment was fully amortized byDecember 31, 2021 . Accordingly, we estimate amortization of prior service credits in 2022 to decrease by approximately$50 million , as compared to 2021. Xerox 2021 Annual Report 34 --------------------------------------------------------------------------------
Table of Contents
The following is a summary of our benefit plan funding for the three years ended
Estimated Actual
(in millions) 2022 2021 2020 2019 U.S. Defined benefit pension plans$ 25 $ 24 $ 35 $ 26 Non-U.S. Defined benefit pension plans 110 111 104 115 Defined contribution plans(1) 20 18 19 49 Retiree health benefit plans 25 25 25 30 Total Benefit Plan Funding$ 180 $ 178 $ 183 $ 220 _____________ (1)The difference between the estimated funding amount and the estimated expense in 2022 of$20 million is due to estimated contributions for ourU.S. based 401(k) savings plans for salaried employees expensed in 2022 as earned but which are expected to be contributed in January of 2023. The 2021 U.S. Defined benefit plans contributions did not include any contributions for our domestic tax-qualified defined benefit plans because none were required to meet the minimum funding requirements. There are no contributions required in 2022 for ourU.S. tax-qualified defined benefit plans to meet the minimum funding requirements.
Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding defined benefit pension plan assumptions, expense and funding.
Income Taxes
We are subject to income taxes in theU.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable. We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and the amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. Deferred tax assets are assessed for realizability and, where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. We apply judgment in assessing the realizability of these deferred tax assets and the need for any valuation allowances. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, we considered historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the valuation allowance against our deferred tax assets. Our valuation allowance (decreased) increased through income tax expense by approximately$(9) million ,$25 million and$16 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. There were other decreases to our valuation allowance, including the effects of currency, of$(30) million ,$(28) million and$(14) million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. These did not affect income tax expense in total as there was a corresponding adjustment to Deferred tax assets or Other comprehensive income.
The following is a summary of gross deferred tax assets and the related
valuation allowances for the years ended
Year Ended December 31,
(in millions) 2021 2020 2019
Gross deferred tax assets $ 1,062 $ 1,379 $ 1,463
Valuation allowance (357) (396) (399)
Net deferred tax assets $ 705 $ 983 $ 1,064
We are subject to ongoing tax examinations and assessments in various
jurisdictions. Accordingly, we may incur additional tax expense based upon our
assessment of the more-likely-than-not outcomes of such matters. In addition,
when applicable, we adjust the previously recorded tax expense to reflect
examination results. Our ongoing assessments of the more-likely-than-not
outcomes of the examinations and related tax positions require judgment and can
materially increase or decrease our effective tax rate, as well as impact our
operating results.
Xerox 2021 Annual Report 35
--------------------------------------------------------------------------------Table of Contents
Unrecognized tax benefits were
Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.
Business Combinations and
We allocate the fair value of purchase consideration to tangible assets, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated toGoodwill . The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, future expected cash flows of acquired customers, development of new offerings, acquired technology and trade names from a market participant perspective, as well as estimates of useful lives and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable and when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset toGoodwill . Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Refer to Note 5 - Acquisitions and Investments in the Consolidated Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions. OurGoodwill balance was$3.3 billion atDecember 31, 2021 . We assessGoodwill for impairment at least annually, during the fourth quarter based on balances as ofOctober 1st , and more frequently on an interim basis if we believe indicators of impairment exist. The application of an interim or the annualGoodwill impairment test begins with the identification of reporting units, which requires judgment. Consistent with the determination that we have one operating segment, we determined that there is one reporting unit and therefore we testedGoodwill for impairment at the Company or entity level. The process of evaluating the potential impairment ofGoodwill is highly subjective and requires significant judgment. Our review of impairment starts with an assessment of qualitative factors to determine whether events or circumstances lead to a determination that it is more-likely-than-not that the fair value of the Company is less than the net book value. Our qualitative assessment of the recoverability ofGoodwill , whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more-likely-than-not that the fair value of the Company is less than its net book value, no further assessment is performed. If we determine that it is more-likely-than-not that the fair value of the Company is less than net book value or if we elect to bypass the qualitative assessment, we proceed to a quantitative assessment or test ofGoodwill . If a quantitative assessment ofGoodwill is required, the determination of the fair value of the Company will involve the use of significant estimates and assumptions. Our quantitativeGoodwill impairment test uses both the income approach and the market approach to estimate fair value. The income approach is based on the discounted cash flow method that uses the Company's estimates of forecasted future financial performance including revenues, gross margins, operating expenses, and taxes, as well as working capital and capital asset requirements. These estimates are developed as part of our long-term planning process based on assumed market segment growth rates and our assumed market segment share, estimated costs based on historical data and various internal estimates. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risks unique to the subject cash flows. When performing our market approach, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to our entity. The selected multiples consider our entity's growth, profitability, size and risk relative to those of the selected publicly traded companies. The COVID-19 pandemic continued to have a significant effect on the Company's operations impacting revenues, expenses, cash flows and market capitalization in 2021. Although business results improved in the first half of 2021 and the Company was meeting expectations, the emergence of new COVID-19 variants during the year resulted in many of our customers delaying their plans to return employees to workplaces and continuing to work remotely and in a hybrid environment. This impact combined with the global supply chain and logistic issues, created in part by Xerox 2021 Annual Report 36 --------------------------------------------------------------------------------
Table of Contents
the COVID-19 pandemic, had a negative effect on the Company's results particularly in the third and fourth quarter of 2021. As a result of these impacts and projections of these impacts on our future operating results, as well as a sustained market capitalization below book value, we elected to utilize a quantitative model for the assessment of the recoverability of ourGoodwill balance for our annual fourth quarter 2021 impairment test. After completing our annual impairment test, we concluded that the estimated fair value of the Company - our single segment and reporting unit - had declined below its carrying value. As a result, we recognized an after-tax non-cash impairment charge of$750 million ($781 million pre-tax) related to our goodwill for the year endedDecember 31, 2021 . In estimating the fair value of our single reporting unit, our analysis reflected a 75/25 allocation between the income and market approach and the application of a discount rate applied to our projected cash flows of approximately 7.75%. The heavier weighting to the income approach was consistent with the prior year and reflects the inherent limitations of a market comparison. We likewise believe the discount rate applied was reasonable based on the estimated capital costs of applicable market participants and an appropriate company-specific risk premium that reflects current market and industry conditions. We ran sensitivity cases on the discount rate and, although in certain scenarios our fair value declined further, we believe the implied premiums that would be indicated at our estimated fair value are reasonable. Our current results and our internal future forecasts clearly indicate that Xerox has been and will continue to be significantly impacted by the economic disruption caused by the COVID-19 pandemic. This includes a recognition that two years into the pandemic, the transition to more remote and hybrid work environments will continue to have an expected impact on the print business as compared to its pre-pandemic levels. Some of this impact is expected to be mitigated by providing additional digital services and offerings targeted for the hybrid business model. Our business forecasts reflect these developments, including an easing of the supply chain and logistics issues encountered in 2021 and although our operating results are expected to improve, projected revenues and cash flows are not expected to return to the levels achieved prior to the commencement of the COVID-19 pandemic. While the Company is currently pursuing a strategy to develop and expand certain expected growth businesses such as financing, software and innovation to offset and eventually exceed the reduced cash flows from the print business, this strategy carries an increased level of implementation risk consistent with all new business pursuits. In performing its assessment, the Company believes it has made reasonable estimates based on the facts and circumstances that were available as of the reporting date in light of the continuing impacts from the COVID-19 pandemic and other factors noted above. However, the determination of fair value includes assumptions that are subject to risk and uncertainty. The discounted cash flow calculations are dependent on subjective factors including the timing and amount of future cash flows and the discount rate. If assumptions or estimates used in the fair value calculations change, including assumptions related to future cash flows as well as the duration and severity of the COVID-19 pandemic and the supply chain and logistics issues and our ability to initiate management actions to recover from those issues, it may result in a further decline in our estimated fair value and trigger future impairment charges. We will continue to monitor developments in 2022 including updates to our forecasts as well as our market capitalization and an update of our assessment and related estimates may be required in the future.
Subsequent to our fourth quarter impairment test, we did not identify any triggering events that required an update to the annual impairment test.
Refer to Note 13 -
Xerox 2021 Annual Report 37
--------------------------------------------------------------------------------Table of Contents Revenue Results Summary Total Revenue Revenue for the three years endedDecember 31, 2021 , 2020 and 2019 was as follows: Revenue % Change CC % Change % of Total Revenue (in millions) 2021 2020 2019 2021 2020 2021 2020 2021 2020 2019 Equipment sales$ 1,581 $ 1,564 $ 2,062 1.1 % (24.2) % (0.4) % (24.6) % 22 % 22 % 23 % Post sale revenue 5,457 5,458 7,004 - % (22.1) % (1.7) % (22.1) % 78 % 78 % 77 % Total Revenue$ 7,038 $ 7,022 $ 9,066 0.2 % (22.5) % (1.4) % (22.7) % 100 % 100 % 100 %
Reconciliation to Consolidated Statements of (Loss) Income: Sales
$ 2,582 $ 2,449 $ 3,227 5.4 % (24.1) % 3.9 % (24.3) % Less: Supplies, paper and other sales (1,001) (885) (1,165) 13.1 % (24.0) % 11.5 % (23.6) % Equipment sales$ 1,581 $ 1,564 $ 2,062 1.1 % (24.2) % (0.4) % (24.6) % Services, maintenance and rentals$ 4,235 $ 4,347 $ 5,595 (2.6) % (22.3) % (4.3) % (22.5) % Add: Supplies, paper and other sales 1,001 885 1,165 13.1 % (24.0) % 11.5 % (23.6) % Add: Financing 221 226 244 (2.2) % (7.4) % (4.1) % (7.7) % Post sale revenue$ 5,457 $ 5,458 $ 7,004 - % (22.1) % (1.7) % (22.1) %Americas $ 4,432 $ 4,589 $ 5,963 (3.4) % (23.0) % (4.1) % (22.7) % 63 % 65 % 66 % EMEA 2,434 2,246 2,817 8.4 % (20.3) % 4.6 % (21.5) % 35 % 32 % 31 % Other 172 187 286 (8.0) % (34.6) % (8.0) % (34.6) % 2 % 3 % 3 % Total Revenue(1)$ 7,038 $ 7,022 $ 9,066 0.2 % (22.5) % (1.4) % (22.7) % 100 % 100 % 100 % _____________
CC - See "Currency Impact" section for description of constant currency. (1)Refer to the "Geographic Sales Channels and Product and Offerings Definitions" section.
Revenue
Total revenue increased 0.2% for the year endedDecember 31, 2021 as compared to the prior year, including a 1.6-percentage point favorable impact from currency, and an approximate 0.5-percentage point favorable impact from 2021 and 2020 acquisitions. Revenue reflected global product supply logistics constraints which limited our ability to fulfill orders and drove an increase in our order backlog1 in the second half of the year. The COVID-19 pandemic also affected our revenues by limiting office occupancy; however, the progress of vaccinations and the gradual reopening of workplaces resulted in higher year-over-year page volumes for most of the year. Total revenue decreased 22.5% for the year endedDecember 31, 2020 compared to the prior year, including a 0.2-percentage point favorable impact from currency and an approximate 1.2-percentage point favorable impact from 2020 partner dealer acquisitions, partially offset by an approximate 0.6-percentage point unfavorable impact from a one-time upfront OEM license fee of$77 million received in the prior year. The decline in revenue primarily reflected the effects the global pandemic on IT spending and office attendance. During 2021, our business continued to be impacted by the COVID-19 pandemic. The prolonged impact of the virus, including the Delta and Omicron variants, drove many of our customers to delay their plans to return employees to workplaces. We continued to see a correlation between the roll-out of vaccinations and the return of employees to the workplace, and the gradual recovery of our post sale revenues, but page-volume-driven Post sale revenue was lower than anticipated in the beginning of the year. In addition, global supply chain issues, created in part by the COVID-19 pandemic, resulted in an unprecedented level of disruption, leading to shortages and delays in the receipt of our products and third-party IT hardware. Supply chain disruptions resulted in lower than anticipated equipment and IT hardware sales, higher transportation and logistics costs. Continued strength in demand for our equipment led to a nearly 150% increase in our order backlog1. We expect the effects of the COVID-19 pandemic, including the potential emergence of new variants, as well as global supply chain disruptions, to continue to affect our revenues and margins at least through the first half of 2022. Geographically, revenue increased in our EMEA region and declined in ourAmericas region during 2021. In EMEA, we have a larger presence across SMB businesses, which generally recovered faster and showed greater resiliency against pandemic resurgences than larger enterprises. Revenue decreased in our North American operations, which were more significantly impacted by shipping and logistics constraints, which were further amplified by labor shortages within the North American transportation industry.North America also has a higher proportion of large enterprise customers, who are generally experiencing a slower pace of return to workplaces. ______________ (1)Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT service offerings. Xerox 2021 Annual Report 38 --------------------------------------------------------------------------------
Table of Contents
Total revenues included the following:
Post sale revenue
Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which is affected by installs and removals, but also by the page volumes generated from the usage of such devices and the revenue per printed page. Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization. For the year endedDecember 31, 2021 , Post sale revenue was flat as compared to the prior year with a 1.7-percentage point favorable impact from currency. For the year endedDecember 31, 2020 , Post sale revenue decreased 22.1% as compared to the prior year with no impact from currency and an approximate 0.8-percentage point unfavorable impact from an upfront OEM license fee in the prior year, excluding the impact of currency.
Post sale revenue is comprised of the following:
Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings. •For the year endedDecember 31, 2021 , these revenues decreased 2.6% as compared to the prior year, including a 1.7-percentage point favorable impact from currency, the decline at constant currency1 reflected the impact of lower royalty revenue and lower third-party financing commissions (resulting from higher XFS lease penetration of our XBS operations), as well as a lower net population of devices, and higher mix of services with lower per-page revenues, partially offset by modestly higher page volumes corresponding with the gradual reopening of workplaces, and higher IT revenues, driven by higher demand for our offerings, partially offset by IT hardware product constraints. •For the year endedDecember 31, 2020 , these revenues decreased 22.3% as compared to the prior year, including a 0.2-percentage point favorable impact from currency and an approximate 1.1-percentage point unfavorable impact from the one-time OEM license fee in the prior year. The decline at constant currency1 reflected a lower population of devices (which is partially associated with lower installs in prior and current periods), a competitive price environment and lower page volumes (including a higher mix of lower average-page-volume products) that are worse than pre-COVID-19 decline trends due to the impact of business closures sinceMarch 2020 . While these revenues are contractual in nature, on average, our bundled services contracts include a minimum fixed charge and a significant variable component based on print volumes.
Supplies, paper and other sales includes unbundled supplies and other sales.
•For the year endedDecember 31, 2021 , these revenues increased 13.1% as compared to the prior year, including a 1.6-percentage point favorable impact from currency. This increase at constant currency1 primarily reflected higher supplies and paper revenues consistent with the gradual reopening of workplaces, which drove higher demand. We also saw a marginal improvement in inventories carried by channel partners, as confidence in the recovery continued to moderately improve. Paper revenue increased$18 million in 2021 as compared to 2020. •For the year endedDecember 31, 2020 , these revenues decreased 24.0% as compared to the prior year, including a 0.4-percentage point unfavorable impact from currency. The decline at constant currency1 primarily reflected lower supplies revenues associated with lower page volume trends, partially offset by higher IT revenues from our XBS channel and from recently acquired IT dealers outside of theU.S. The decrease in supplies was significantly impacted by lower sales through indirect channels, as resellers, in response to the lower demand caused by the pandemic, have reduced their inventory purchases to manage liquidity. Financing revenue is generated from financed equipment sale transactions. For the year endedDecember 31, 2021 , Financing revenue decreased 2.2% as compared to the prior year, including a 1.9-percentage point favorable impact from currency, while Financing revenue for the year endedDecember 31, 2020 decreased 7.4% as compared to the prior year, including a 0.3-percentage point favorable impact from currency. The decline at constant currency1 reflected a lower finance receivables balance due to run-off of our lease portfolio and lower equipment sales in prior periods. The decline in 2021 also reflected the impact of lower equipment sales in the second half of 2021. However, lease originations increased in 2021 as compared to the prior year, primarily as a result of higher XFS (renamed FITTLE in 2022) lease penetration from our XBS sales unit.
_____________
(1)See "Currency Impact" section for description of constant currency.
Xerox 2021 Annual Report 39
--------------------------------------------------------------------------------
Table of Contents
Equipment sales revenue
Equipment revenue for the three years ended December 31, 2021 , 2020 and 2019 was
as follows:
Revenue % Change CC % Change % of Equipment Revenue(in millions) 2021 2020 2019 2021 2020 2021 2020 2021 2020 2019 Entry$ 282 $ 228 $ 217 23.7% 5.1% 22.2% 4.7% 18% 14% 11% Mid-range 972 986 1,404 (1.4)% (29.8)% (2.9)% (30.3)% 62% 63% 68% High-end 304 325 421 (6.5)% (22.8)% (7.7)% (23.4)% 19% 21% 20% Other 23 25 20 (8.0)% 25.0% (8.0)% 25.0% 1% 2% 1% Equipment sales$ 1,581 $ 1,564 $ 2,062 1.1% (24.2)% (0.4)% (24.6)% 100% 100% 100% _____________
CC - See "Currency Impact" section for description of constant currency.
Equipment sales revenue increased 1.1% for the year endedDecember 31, 2021 as compared to the prior year, including a 1.5-percentage point favorable impact from currency. The decrease at constant currency1 in Equipment sales revenue in 2021 reflected the significant adverse impact of product supply constraints (consistent with market-wide shortages of computer chips and resins) and global freight disruptions, which were further amplified by labor shortages within the transportation industry. Demand increased during the year as businesses reopened, resulting in a backlog of orders at the end of 2021 that was nearly 150% higher than the prior year and higher than pre-pandemic levels. The supply chain disruption most significantly impacted the availability of our mid-range and high-end devices, causing a negative mix impact on total Equipment sales revenue. Equipment sales revenue increased in EMEA, as the impact of supply chain disruptions was offset by higher demand from our indirect channels serving SMB, and from large government deals (inEurope and certain developing market regions). Equipment sales revenue decreased in ourAmericas operations as shipping and logistics disruptions were more prevalent in theU.S. than other markets. We expect supply chain disruptions to affect Equipment sales revenue through the first half of 2022. For the year endedDecember 31, 2020 , Equipment sales revenue decreased 24.2% as compared to the prior year, including a 0.4-percentage point favorable impact from currency as well as the impact of price declines of less than 5%. The COVID-19 pandemic significantly impacted our equipment sales revenue during 2020 as a result of business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused delayed installations. Additionally, our mix of revenues from lower-end black-and-white devices increased as a result of hybrid workplace trends associated with the COVID-19 pandemic.
The change at constant currency1 reflected the following:
Entry
•For the year endedDecember 31, 2021 , the increase as compared to the prior year was driven by higher demand for our lower-end printers and MFPs through our indirect channels primarily in EMEA as well as in theAmericas , which included markedly higher installs related to government deals in the developing regions of EMEA. We also saw higher demand for entry devices associated with hybrid work environments. While sales increased across this portfolio, we experienced an unfavorable mix from significantly higher sales of our lower-end black-and-white devices. •For the year endedDecember 31, 2020 , the increase as compared to the prior year was primarily due to higher installs of our black-and-white devices in developing regions in EMEA, including large-order government deals in Eurasia, partially offset by lower sales of devices in our indirect channels in EMEA,Latin America and theU.S. affected in part by the COVID-19 pandemic.
Mid-range
•For the year endedDecember 31, 2021 , the decrease as compared to the prior year was primarily driven by the significant impact of global product supply constraints and freight disruptions that had a more severe effect on ourU.S. operations. These negative impacts were partially offset by higher demand consistent with the gradual reopening of workplaces, as compared to business shutdowns that reduced purchases of office devices in the prior year. •For the year endedDecember 31, 2020 , the decrease as compared to the prior year was primarily driven by the COVID-19 pandemic and related office closures, which significantly impacted our sales through indirect channels in theU.S. andEurope , as resellers, in response to lower demand caused by the pandemic, reduced their inventory purchases to manage liquidity, partially offset by strong demand for ourPrimeLink and new generation ConnectKey® devices. Xerox 2021 Annual Report 40 --------------------------------------------------------------------------------
Table of Contents
High-end
•For the year endedDecember 31, 2021 , the decrease as compared to the prior year primarily reflected the impact of global product supply constraints and freight disruptions, resulting in lower sales of color systems in theU.S. , as well as lower sales of larger color production engines, which continued to be depressed as a result of our customers' delayed capital investment decisions. These negative impacts were partially offset by improvement in sales of devices in the lower-end of the range and to SMB customers, as well as higher sales of black-and-white systems corresponding with our customers' refresh cycles. •For the year endedDecember 31, 2020 , the decrease as compared to the prior year primarily reflected lower installs of our Versant entry-production systems and iGen production presses, as well as lower installs of our Iridesse production presses in EMEA, which were partially offset by demand for our larger Baltoro cut-sheet inkjet press and higher sales in theU.S. of our continuous-feed color systems. _____________ (1)See "Currency Impact" section for description of constant currency.
Revenue Metrics
Installs reflect only new placements of devices (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations). Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our services revenues (which are both reported within our Post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity for Xerox and non-Xerox branded products installed by our XBS sales unit. Detail by product group (see Geographic Sales Channels and Products and Offerings Definitions) is shown below.
Installs for the year ended
Entry
•7% increase in color multifunction devices reflecting higher installs of color personal devices at the low-end of the portfolio and higher installs of ConnectKey® devices through our indirect channels in EMEA andNorth America . •36% increase in black-and-white multifunction devices reflecting higher activity primarily from low-end devices through indirect channels primarily from developing regions in EMEA, which included large order government deals, and in theAmericas .
Mid-Range(1)
•8% increase in mid-range color installs primarily in EMEA, reflecting higher installs of our recently launched new-generation of ConnectKey® multi-function printers, as well as ourPrimeLink entry-production color devices. •7% increase in mid-range black-and-white installs reflecting higher installs of our recently launched new-generation of ConnectKey® multi-function devices, as well as ourPrimeLink entry production black-and-white devices.
High-End(1)
•12% increase in high-end color installs reflecting primarily growth from our lower-end Versant devices as well as our Iridesse and iGen production systems. •19% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices primarily related to cyclical account refreshes in theU.S and EMEA.
Installs for the year ended
Entry
•21% decrease in color multifunction devices reflecting lower installs of ConnectKey® devices through our indirect channels in theU.S. and EMEA. •20% increase in black-and-white multifunction devices reflecting higher activity primarily from sales in the lower end of the portfolio through indirect channels in our developing regions in EMEA andLatin America associated with work-from-home sales programs, partially offset by lower installs through our indirect channels in theU.S.
Mid-Range(1)
•26% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our recently launchedPrimeLink entry-production color devices and our new generation of ConnectKey® multifunction devices. •22% decrease in mid-range black-and-white installs reflecting in part global market trends, partially offset by strong demand for our recently launchedPrimeLink light-production multi-function devices and our new generation of ConnectKey® multifunction devices. Xerox 2021 Annual Report 41 --------------------------------------------------------------------------------
Table of Contents
High-End(1)
•42% decrease in high-end color installs primarily reflecting lower installs of our lower-end Versant devices, along with lower installs of our Iridesse and iGen production systems, partially offset by strong demand for our Baltoro cut-sheet inkjet press and higher installs in theU.S. of our continuous-feed systems. •13% decrease in high-end black-and-white systems reflecting lower installs of our Nuvera devices along with market trends. _____________ (1)Mid-range and High -end color installations excludeFUJIFILM Business Innovation Corp. digital front-end sales; includingFUJIFILM Business Innovation Corp. digital front-end sales, Mid-range color devices increased 8% and decreased 26% for the years endedDecember 31, 2021 and 2020, respectively, while High-end color systems increased 12% and decreased 42% for the years endedDecember 31, 2021 and 2020, respectively.
Geographic Sales Channels and Product and Offerings Definitions
Our business is aligned to a geographic focus and is primarily organized on the basis of go-to-market sales channels, which are structured to serve a range of customers for our products and services. In 2019, we changed our geographic structure to create a more streamlined, flatter and more effective organization, as follows:
•Americas, which includes our sales channels in the
•EMEA, which includes our sales channels in
•Other, primarily includes sales to and royalties from
Our products and offerings include:
•"Entry", which includes A4 devices and desktop printers. Prices in this product
group can range from approximately
•"Mid-Range", which includes A3 Office and Light Production devices that
generally serve workgroup environments in mid to large enterprises. Prices in
this product group can range from approximately
•"High-End", which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises. Prices for these systems can range from approximately$30,000 to$1,000 ,000+.
Equipment Sales Revenue - Classification Update
During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit to conform the classification of devices across Xerox sales channels. The revision had no impact on reported total equipment sales revenue.
For the Year ended December 31, 2020
(in millions) As Reported Change As Revised
Entry $ 188 $ 40 $ 228
Mid-range 1,043 (57) 986
High-end 312 13 325
Other 21 4 25
Equipment Sales $ 1,564 $ - $ 1,564
Xerox 2021 Annual Report 42--------------------------------------------------------------------------------
Table of Contents
Costs, Expenses and Other Income
Summary of Key Financial Ratios
The following is a summary of our key financial ratios used to assess our
performance:
Year Ended December 31,
(in millions) 2021 2020 2019 2021 B/(W) 2020 B/(W)
Gross Profit $ 2,403 $ 2,626 $ 3,650 $ (223) $ (1,024)
RD&E 310 311 373 1 62
SAG 1,718 1,851 2,085 133 234
Equipment Gross Margin 24.2 % 27.4 % 32.6 % (3.2) pts. (5.2) pts.
Post sale Gross Margin 37.0 % 40.3 % 42.5 % (3.3) pts. (2.2) pts.
Total Gross Margin 34.1 % 37.4 % 40.3 % (3.3) pts. (2.9) pts.
RD&E as a % of Revenue 4.4 % 4.4 % 4.1 % - pts. (0.3) pts.
SAG as a % of Revenue 24.4 % 26.4 % 23.0 % 2.0 pts. (3.4) pts.
Pre-tax (Loss) Income(1) $ (475) $ 252 $ 822 $ (727) $ (570)
Pre-tax (Loss) Income Margin(1) (6.7) % 3.6 % 9.1 % (10.3) pts. (5.5) pts.
Adjusted(2) Operating Profit $ 375 $ 464 $ 1,192 $ (89) $ (728)
Adjusted(2) Operating Margin 5.3 % 6.6 % 13.1 % (1.3) pts. (6.5) pts.
_____________
(1)2021 includes a pre-tax non-cash Goodwill impairment charge of $781 million .
(2)Refer to the "Non-GAAP Financial Measures" section for an explanation of the
non-GAAP financial measure.
Pre-tax (Loss) Income Margin
Pre-tax loss margin for the year ended December 31, 2021 of (6.7)% decreased
10.3-percentage points from the pre-tax income margin of 3.6% in 2020. The
decrease primarily reflected the non-cash Goodwill impairment charge of $781
million ($750 million after-tax), and the impact of lower adjusted1 operating
margin (see below), of 1.3-percentage points, partially offset by lower
Restructuring and related costs, net, Transaction and related costs, net and
Other expenses, net.
Pre-tax income margin for the year ended December 31, 2020 of 3.6% decreased
5.5-percentage points compared to 2019. The decrease primarily reflected the
impact of lower adjusted1 operating margin (see below), of 6.5-percentage
points, as well as higher Amortization of intangible assets and Transaction and
related cost, net, partially offset by lower Restructuring and related costs,
net and Other expenses, net.
Pre-tax (loss) income margin includes Restructuring and related costs, net, the
Amortization of intangible assets, Transaction and related costs, net and Other
expenses, net, all of which are separately discussed in subsequent sections.
Adjusted1 Operating margin, discussed below, excludes these items. 2021
Adjusted1 Operating margin also excludes the non-cash Goodwill impairment charge
of $781 million ($750 million after-tax).
Adjusted1 Operating Margin
Adjusted1 operating margin for the year endedDecember 31, 2021 of 5.3% decreased 1.3-percentage points compared to 2020. The decrease primarily reflects an approximate 1.5-percentage point negative impact of supply chain disruptions, including higher shipping and logistics costs, and an unfavorable mix of equipment revenue due to product constraints, as well as a negative 0.4-percentage points from lower royalty revenue fromFUJIFILM Business Innovation Corp. Adjusted1 operating margin also reflected an approximate 1.1-percentage point negative impact of lower savings from temporary government assistance and furlough measures, and an approximate 0.7-percentage point unfavorable impact from lower third-party lease commissions and incremental costs associated with investments to support future growth. These unfavorable factors were partially offset by an approximate 1.5-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year, reflecting the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic. Additionally, cost and expense reductions associated with our Project Own It transformation actions, favorably impacted adjusted1 operating margin. Adjusted1 operating margin for the year endedDecember 31, 2020 of 6.6% decreased 6.5-percentage points as compared to 2019. The decrease reflects the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic on our business and a 0.9-percentage point unfavorable impact due to an increase in bad debt expense of$61 million in the first quarter of 2020 to reflect the expected impact to our customer base and related outstanding trade and finance receivable portfolio as a result of the economic disruption caused by the Xerox 2021 Annual Report 43 --------------------------------------------------------------------------------
Table of Contents
pandemic. These negative impacts were partially offset by lower costs and expenses, which include savings associated with our Project Own It transformation actions as well as additional savings from various cost reductions actions to mitigate the impact of the pandemic. These actions include approximately$107 million from temporary government assistance measures and furlough programs and other reductions in discretionary spending such as near-term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions for the year 2020, as well as lower compensation incentives consistent with lower sales and operating results. The decrease also included an approximate 0.4-percentage point unfavorable impact from transaction currency and was affected by an approximate 0.7-percentage point unfavorable impact from the one-time OEM license fee received in the prior year.
_____________
(1) Refer to Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section.
Gross Margin Total gross margin for the year endedDecember 31, 2021 of 34.1% decreased 3.3-percentage points compared to 2020, reflecting unfavorable impacts of approximately 1.5-percentage points associated with supply chain costs and capacity restrictions (including significantly higher freight and shipping costs and constrained availability of higher margin equipment) and 0.8-percentage points associated with investments to support future growth. The remainder of the decline reflects the impact of lower savings from temporary government assistance and furlough measures, lower royalty revenue fromFUJIFILM Business Innovation Corp. and higher mix of services with lower per-page revenues. These headwinds were partially offset by the cost savings from our Project Own It transformation actions. Total gross margin for the year endedDecember 31, 2020 of 37.4% decreased 2.9-percentage points compared to 2019, primarily reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures, as well as price promotion programs, and an approximate 0.5-percentage point adverse combined impact from transaction currency and higher tariffs. The decrease was also affected by an approximate 0.6-percentage point unfavorable impact from the one-time OEM license fee received in the prior year. These headwinds were partially offset by the cost savings from our Project Own It transformation actions, as well as additional cost reduction actions to mitigate the impact of the pandemic, including savings of approximately$74 million from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions. Equipment gross margin for the year endedDecember 31, 2021 of 24.2% decreased 3.2-percentage points compared to 2020, primarily reflecting the impact of higher transportation costs and an unfavorable mix of growth in low-end devices associated with product supply constraints, partially offset by higher revenues and favorable transaction currency. Equipment gross margin for the year endedDecember 31, 2020 of 27.4% decreased 5.2-percentage points compared to 2019, primarily reflecting the impact of lower revenues (primarily as a result of COVID-19-related business closures) as well as the adverse impact of price promotion programs, incremental tariff costs and the 0.6-percentage point unfavorable impact from transaction currency partially offset by cost reductions from Project Own It. Post sale gross margin for the year endedDecember 31, 2021 of 37.0% decreased 3.3-percentage points compared to 2020, reflecting lower savings from temporary government assistance and furlough measures, lower royalty revenues and third-party lease commissions and a higher mix of services with lower per-page revenues, partially offset by restructuring savings associated with Project Own It transformation actions. Post sale gross margin for the year endedDecember 31, 2020 of 40.3% decreased 2.2-percentage points compared to 2019, reflecting the impact of lower revenues (primarily as a result of COVID-19-related business closures impacting page volumes) and price erosion on contract renewals, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate the impact of the pandemic. These actions include approximately$73 million of savings from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions. The decrease was also affected by an approximate 0.6-percentage point unfavorable impact from the one-time OEM license fee received in the prior year. Xerox 2021 Annual Report 44 --------------------------------------------------------------------------------
Table of Contents
Research, Development and Engineering Expenses (RD&E)
Year Ended December 31, Change
(in millions) 2021 2020 2019 2021 2020
R&D $ 251 $ 257 $ 311 $ (6) $ (54)
Sustaining engineering 59 54 62 5 (8)
Total RD&E Expenses $ 310 $ 311 $ 373 $ (1) $ (62) RD&E as a percentage of revenue for the year ended
RD&E of$310 million for the year endedDecember 31, 2021 , decreased$1 million from 2020, primarily reflecting savings from restructuring and productivity as well as benefits from the timing of program development cycles, partially offset by investments in our innovation portfolio. RD&E as a percentage of revenue for the year endedDecember 31, 2020 of 4.4% was 0.3-percentage points higher compared to 2019, as the impact of revenue declines outpaced the rate of cost reductions. RD&E of$311 million for the year endedDecember 31, 2020 , decreased$62 million from 2019 reflecting savings from Project Own It that enhanced simplification and rationalization in our core technology spend, and other temporary cost actions, as well as the impact from the timing of investments, partially offset by higher spend in our innovation areas.
Selling, Administrative and General Expenses (SAG)
SAG as a percentage of revenue of 24.4% decreased 2.0-percentage points for the year endedDecember 31, 2021 compared to 2020 primarily as a result of an approximate 1.5-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic as well as bad debt reversals in the current year. The remaining decrease was primarily due to the impact of lower selling expenses, as a result of cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs and employee benefit programs). SAG expenses of$1,718 million for the year endedDecember 31, 2021 were$133 million lower than 2020, primarily reflecting lower bad debt expenses, as well as cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs), partially offset by an approximate$30 million adverse impact from translation currency, higher compensation related accruals (corresponding with higher expected operating results) and other investments in the business to support future growth, as well as the impact of lower benefits from temporary government assistance and furlough measures and higher legal expenses and expenses from prior year acquisitions. Our bad debt expense for the year endedDecember 31, 2021 of$7 million decreased$109 million as compared to the prior year period, primarily due to the prior year reflecting an approximate$60 million incremental provision to cover estimated write-offs primarily on our finance receivable portfolio from the COVID-19 pandemic, while 2021 reflected finance receivable reserve reductions of approximately$31 million and lower reserves for trade receivables. The 2021 reductions in our finance and trade reserves reflect improvements in the macroeconomic environment as well as lower write-offs. Although actual finance receivable write-offs incurred to date continued to lag expectations, we believe our current reserve position remains sufficient to cover expected future losses that may result from future economic conditions. We continue to monitor developments regarding the pandemic, including business closures and reopenings and mitigating government support actions as well as future economic conditions, and as a result our reserves may need to be updated in future periods. On a trailing twelve-month basis (TTM), bad debt expense was approximately 0.9% percent of total receivables (excluding the 2021 reductions of$31 million ), which is consistent with the pre-pandemic trend and reflects the consistent level of reserves subsequent to the first quarter 2020 charge. SAG as a percentage of revenue of 26.4% increased 3.4-percentage points for the year endedDecember 31, 2020 compared to 2019 and included a 0.9-percentage point unfavorable impact due to the increase in bad debt expense of$61 million in the first quarter 2020. The increase also reflected the impact of lower revenues, partially offset by the benefits from cost reductions associated with our Project Own It transformation actions and savings from additional cost reduction actions to mitigate the impact of the pandemic. These actions included approximately$32 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near-term targeted marketing programs, the use of contract employees and the Xerox 2021 Annual Report 45 --------------------------------------------------------------------------------
Table of Contents
temporary suspension of the 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results.
SAG expenses of$1,851 million for the year endedDecember 31, 2020 were$234 million lower than 2019, reflecting cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic, as noted above. These savings were partially offset by higher bad debt expense, as well as expenses from recent acquisitions. Bad debt expense for the year endedDecember 31, 2020 was$116 million or$70 million higher than the prior year primarily as a result of the increase in the bad debt provision recorded in first quarter 2020, which reflects the estimated impact on our customer base and related outstanding receivables portfolio as a result of the economic disruption caused by the COVID-19 pandemic. The majority of the increased provision was related to finance receivables due to their larger balance and longer-term nature. During the remainder of 2020, write-offs as well as the bad debt reserves for our trade and finance receivables portfolios were in line with our projections and consistent with future expectations regarding our estimated impacts from the COVID-19 pandemic. Bad debt expense of approximately 2.7% percent of total gross receivables on a trailing-twelve-month basis (TTM) was higher than the 2019 trend of less than one percent, reflecting the significant increase in 2020 due to impacts from the COVID-19 pandemic.
Restructuring and Related Costs, Net
We incurred restructuring and related costs, net of$38 million for the year endedDecember 31, 2021 , as compared to$93 million for the year endedDecember 31, 2020 . These costs were primarily related to the implementation of initiatives under our business transformation projects including Project Own It. The decrease in restructuring and related costs in 2020 is partially due to a higher level of asset impairments and severance and related costs in 2019 for employees transferred as part of an outsourcing arrangement. The following is a breakdown of costs: Year Ended December 31, (in millions) 2021 2020 2019 Restructuring and severance costs(1)$ 30 $ 107 $ 81 Asset impairments - leased right-of-use assets(2) 3 4 39 Asset impairments - owned assets(2) 12 2 22 Other contractual termination costs(3) 3 3 19 Net reversals(4) (21) (29) (34) Restructuring and asset impairment costs 27 87 127 Retention related severance/bonuses(5) 6 4 39 Contractual severance costs(6) 1 (2) 43 Consulting and other costs(7) 4 4 20 Total$ 38 $ 93 $ 229 _____________ (1)Reflects headcount reductions of approximately 400, 1,850 and 1,000 employees worldwide for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (2)Primarily related to the exit and abandonment of leased and owned facilities, net of any potential sublease income and other recoveries. (3)Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs. (4)Reflects net reversals for changes in estimated reserves from prior period initiatives. Net reversals for 2021 also include a$4 million gain on the sale of surplus land. (5)Includes retention related severance and bonuses for employees expected to continue working beyond their minimum retention period before termination. (6)Primarily reflects severance and other related costs associated with employees transferred (approximately 2,200) as part of a shared service arrangement entered into with HCL Technologies. (7)Represents professional support services associated with our business transformation initiatives. 2021 actions impacted several functional areas, with approximately 25% focused on gross margin improvements and approximately 70% focused on SAG reductions, and the remainder focused on RD&E optimizations. We expect 2022 pre-tax savings of approximately$15 million from our 2021 restructuring actions.
2020 actions impacted several functional areas, with approximately 55% focused on gross margin improvements and approximately 45% focused on SAG reductions.
The implementation of our Project Own It initiatives as well as other business
transformation initiatives is expected to continue to deliver significant cost
savings in 2022. While many initiatives are underway and have yet to yield the
full transformation benefits expected upon their completion, the changes
implemented thus far have improved our cost structure and are beginning to yield
longer-term benefits. However, expected savings associated with these
Xerox 2021 Annual Report 46
--------------------------------------------------------------------------------Table of Contents
initiatives may be offset to some extent by business disruption during the implementation phase as well as investments in new processes and systems until the initiatives are fully implemented and stabilized.
Restructuring Summary
The restructuring reserve balance as of
Refer to Note 14 - Restructuring Programs in the Consolidated Financial Statements for additional information regarding our restructuring programs.
Transaction and Related Costs, Net
Transaction and related costs, net primarily reflect costs from third party providers for professional services associated with certain major and strategic M&A projects. There were no Transaction and related costs, net incurred during 2021 as compared to$18 million incurred in 2020 and$12 million in 2019. Transaction and related costs, net in 2020 primarily related to legal and other professional costs associated with the terminated proposal to acquire HP Inc. in early 2020.
Amortization of Intangible Assets
Amortization of intangible assets for the three years endedDecember 31, 2021 , 2020 and 2019 was$55 million ,$56 million and$45 million , respectively. The increased level of amortization in 2021 and 2020 was primarily due to intangible assets associated with our 2021 and 2020 acquisitions. Additionally, the increase in amortization of$11 million in 2020 as compared to 2019 was primarily due to the accelerated write-off of certain XBS tradenames as part of our continued efforts to realign and consolidate this sales unit as part of Project Own It.
Refer to Note 13 -
Worldwide Employment
Worldwide employment was approximately 23,300 as ofDecember 31, 2021 and decreased by approximately 1,8001 fromDecember 31, 2020 . The reduction resulted from net attrition (attrition net of gross hires), a large portion of which is not expected to be backfilled, as well as the impact of organizational changes.
_____________
(1)Decrease based on revised headcount atDecember 31, 2020 of 25,100 from 24,700 due to the change in definition of full-time equivalent employee. Other Expenses, Net Year Ended December 31, (in millions) 2021 2020 2019 Non-financing interest expense$ 96 $ 94 $ 105 Interest income (4) (14)
(16)
Non-service retirement-related costs (89) (29)
18
Gains on sales of businesses and assets (40) (30)
(21)
Currency losses, net 7 3
7
Loss on sales of accounts receivable 2 2
3
Loss on early extinguishment of debt - 26
-
Litigation matters 2 (1)
(8)
Contract termination costs - IT services - 3
(12)
Tax indemnification from Conduent - (9) - All other expenses, net 2 - 8 Other expenses, net$ (24) $ 45 $ 84
Non-financing interest expense
Non-financing interest expense for the year endedDecember 31, 2021 of$96 million was$2 million higher than 2020. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense of$207 million decreased by$8 million from the prior year period primarily reflecting a lower average debt balance. Non-financing interest expense for the year endedDecember 31, 2020 of$94 million was$11 million lower than 2019. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense of$215 million decreased by$21 million from the prior year period reflecting a lower average debt balance primarily due to the full-year effect of the 2019 debt repayments that were not refinanced. Xerox 2021 Annual Report 47 --------------------------------------------------------------------------------
Table of Contents
NOTE: For the years endedDecember 31, 2021 and 2020 bothXerox Holdings and Xerox reported total interest expense of$207 million and$215 million , respectively, however, the amount reported by Xerox includes$80 million and$32 million , respectively, of interest paid toXerox Holdings on an Intercompany Loan. The Intercompany Loan represents a loan of the net proceedsXerox Holdings Corporation received from its Senior Notes to Xerox, which was used to repay existing debt ofXerox Corporation . Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding theXerox Holdings Corporation/Xerox Corporation Intercompany Loan, our debt activity and information regarding the allocation of interest expense. Interest Income
Interest income for the year ended
Non-service retirement-related costs
Non-service retirement-related costs decreased$60 million for the year endedDecember 31, 2021 as compared to 2020 primarily driven by lower discount rates and higher expected returns on plan assets due to higher asset balances. Non-service retirement-related costs decreased$47 million for the year endedDecember 31, 2020 as compared to 2019 primarily driven by lower losses from pension settlements in theU.S. of$53 million , a$40 million decrease compared to 2019.
Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding non-service retirement-related costs.
Gains on sales of businesses and assets
Gains on sales of businesses and assets increased$10 million and$9 million for the years endedDecember 31, 2021 and 2020, respectively, as compared to the respective prior year periods, and reflect the sales of non-core business assets in all periods presented.
Loss on early extinguishment of debt
During fourth quarter 2020 we recorded a$26 million loss associated with the early extinguishment of$1,062 million of the Senior Notes dueMay 2021 . The net loss included the payment of a redemption premium of$24 million as well as the write-off of unamortized debt issuance costs and other debt carrying value adjustments.
Contract termination costs - IT services
Contract termination costs were a$3 million charge in 2020 and a$12 million credit in 2019, both of which are adjustments to a$43 million penalty recorded in 2018 related to the termination of an IT services arrangement. The penalty was associated with a minimum purchase commitment that would not be fulfilled due to the termination of the related IT services arrangement. The adjustments in 2020 and 2019 reflect changes in the estimate regarding the expected spending in the run-off of this terminated IT services arrangement and the amount due under the minimum purchase agreement. The commitment was settled in 2020 for approximately$34 million . The minimum purchase commitment had originally been entered into in connection with the sale of our Information Technology Outsourcing (ITO) business in 2015.
Tax indemnification from Conduent
Represents an indemnification payment expected to be received from Conduent as part of the settlement of pre-separation unrecognized tax positions related to Conduent when included in our consolidated return. The equal and offsetting charge to this receipt is recorded in Income tax expense, as part of our obligation to pay the taxing authorities.
Income Taxes
The 2021 effective tax rate was 3.6%. On an adjusted1 basis, the 2021 effective tax rate was 6.5%. Both rates were lower than theU.S. statutory tax rate of 21% primarily due to the benefits from tax law changes, additional incentives as a result of changes in elections made with the filed tax returns, the decrease in deferred tax valuation allowances as well as the remeasurement of uncertain tax positions. The adjusted1 effective tax rate also reflects partial offsets for the geographical mix of earnings. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: non-cashGoodwill impairment, Restructuring and related costs, net, Xerox 2021 Annual Report 48 --------------------------------------------------------------------------------
Table of Contents
Amortization of intangible assets and non-service retirement-related costs, as described in our Non-GAAP Financial Measures section.
The 2020 effective tax rate was 25.4%. On an adjusted1 basis, the 2020 effective tax rate was 26.3%. These rates were higher than theU.S. statutory tax rate of 21% primarily due to state taxes, non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by the impact from various tax law changes. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section. The 2019 effective tax rate was 21.8% and included a credit of$35 million related to the 2017 Tax Cuts and Jobs Act (the Tax Act). On an adjusted1 basis, the 2019 effective tax rate was 26.1%. Both rates were higher than theU.S. statutory tax rate of 21% primarily due to state taxes. In addition to excluding the impact of the Tax Act, the adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section. Xerox operations are widely dispersed. However, no one country outside of theU.S. is a significant factor in determining our overall effective tax rate. The tax impact from these non-U.S. operations on our full-year effective tax rate for 2021 was (0.9)%. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the geographic mix of income before taxes and the related impacts on our effective tax rate. Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable.
_____________
(1)Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section.
Equity in Net Income of Unconsolidated Affiliates
InNovember 2019 ,Xerox Holdings sold its remaining indirect 25% equity interest in Fuji Xerox, which had been previously accounted for as an equity method investment. Accordingly, our remaining Investment in Affiliates, at Equity largely consists of several minor investments in entities in theMiddle East region. Year Ended December 31, (in millions) 2021 2020 2019
Equity in net income of unconsolidated affiliates - Fuji Xerox(1)
$ -
$ -
3 4 8
Total Equity in net income of unconsolidated affiliates $ 3
$ 4
Fuji Xerox after-tax restructuring and other charges included in equity income - - 20 _____________ (1)Equity in net income for Fuji Xerox is reported in Income from discontinued operations, net of tax for all years presented. The equity in net income for Fuji Xerox in 2019 is through the date of sale.
Refer to Note 6 - Divestitures in the Consolidated Financial Statements for additional information regarding the sale of Fuji Xerox. Refer to Note 12 - Investment in Affiliates, at Equity in the Consolidated Financial Statements for additional information regarding our equity investments.
Net (Loss) Income from Continuing Operations
Net loss from continuing operations attributable toXerox Holdings for the year endedDecember 31, 2021 was$(455) million , or$(2.56) per diluted share, which includes an after-taxGoodwill impairment charge of$750 million (pre-tax charge of$781 million ) or ($4.08 ) per share. On an adjusted1 basis, Net income from continuing operations attributable toXerox Holdings was$293 million , or$1.51 per diluted share, and includes adjustments for theGoodwill impairment charge, Restructuring and related costs, net, Amortization of intangible assets, as well as non-service retirement-related costs and other discrete, unusual or infrequent items, as described in our Non-GAAP Financial Measures. Xerox 2021 Annual Report 49 --------------------------------------------------------------------------------
Table of Contents
Net income from continuing operations attributable toXerox Holdings for the year endedDecember 31, 2020 was$192 million , or$0.84 per diluted share. On an adjusted1 basis, Net income from continuing operations attributable toXerox Holdings was$313 million , or$1.41 per diluted share, and includes adjustments for Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, which included a Loss on the early extinguishment of debt, as described in our Non-GAAP Financial Measures. Net income from continuing operations attributable toXerox Holdings for the year endedDecember 31, 2019 was$648 million , or$2.78 per diluted share. On an adjusted1 basis, Net income from continuing operations attributable toXerox Holdings was$828 million , or$3.55 per diluted share, and includes adjustments for Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, including the impact from the Tax Act, as described in our Non-GAAP Financial Measures. Refer to Note 26 - (Loss) Earnings per Share in the Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share. _____________ (1)Refer to the Net (Loss) Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section. Discontinued Operations Discontinued operations relate to theNovember 2019 Sales of our indirect 25% equity interest in Fuji Xerox and our indirect 51% partnership interest inXerox International Partners (XIP), which had been consolidated.
Refer to Note 6 - Divestitures in the Consolidated Financial Statements for additional information regarding discontinued operations.
Other Comprehensive Income
Other comprehensive income attributable to Xerox was$344 million in 2021 and included the following: i)$489 million of net gains from the changes in defined benefit plans primarily due to remeasurement and net actuarial gains as a result of higher discount rates, as well as the favorable impact of currency; ii)$141 million of net translation adjustment losses reflecting the weakening of our major foreign currencies against theU.S. Dollar during 2021; and iii)$4 million in unrealized losses, net. Other comprehensive income attributable to Xerox was$314 million in 2020 and included the following: i) net translation adjustment gains of$241 million reflecting the strengthening of our major foreign currencies against theU.S. Dollar during 2020; ii)$69 million of net gains from changes in defined benefit plans primarily reflecting net actuarial gains due to actual returns in excess of expected returns offsetting the impacts from lower discount rates as well as the amortization or recognition through settlement losses of accumulated losses from AOCL. These impacts were partially offset by other losses, primarily due to unfavorable currency; and iii)$4 million in unrealized gains, net. Other comprehensive income attributable to Xerox was$46 million in 2019 and included the following: i) net translation adjustment gains of$62 million reflecting aggregate translation gains of$45 million from the strengthening of most of our major foreign currencies against theU.S. Dollar during 2019, as well as a reclassification of$17 million of accumulated translation losses from AOCL into earnings as a result of the divestiture of our investments in FX and XIP; ii)$10 million of net losses from changes in defined benefit plans reflecting net losses of$138 million associated with defined benefit plan changes during 2019, primarily as a result of lower discount rates, as well as other losses of$21 million , primarily due to unfavorable currency. These losses were partially offset by the reclassification of$148 million of accumulated losses from AOCL into earnings as a result of the divestiture of our investments in FX and XIP; and iii)$6 million in unrealized losses, net. Refer to our discussion of Pension Plan Assumptions in the Application of Critical Accounting Policies section of the MD&A as well as Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding changes in our defined benefit plans. Refer to Note 17 - Financial Instruments in the Consolidated Financial Statements for additional information regarding our foreign currency derivatives and associated unrealized gains and losses. Xerox 2021 Annual Report 50
--------------------------------------------------------------------------------
Table of Contents
New Business Strategy/Segment Reporting
InJanuary 2021 we announced our intention to stand up our Software, Financing and Innovation businesses as separate units by 2022. During 2021, the operations and financial results for these units continued to be primarily managed by and reported in our "go-to-market" (GTM) sales channels and we did not have discrete and complete financial information for these new businesses. Accordingly, the chief operating decision maker (CODM) continued to manage the Company's operations, including the products and services from these new units, primarily through the GTM sales channels and as a result, we continued to have one operating and reportable segment. Based on our efforts in 2021, as of year-end these new businesses have largely been stood-up as separate units and we will proceed with these efforts in 2022 and provide additional information related to these businesses during the year. Accordingly, as a result of this effort, we will be reassessing our operating and reportable segments in 2022 and a revision of our segment reporting is expected in 2022.
Recent Accounting Pronouncements
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting
Policies in the Consolidated Financial Statements for a description of recent
accounting pronouncements including the respective dates of adoption and the
effects on results of operations and financial conditions.
Xerox 2021 Annual Report 51
--------------------------------------------------------------------------------Table of Contents
Capital Resources and Liquidity
Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations. Additional liquidity is also provided through access to the financial capital markets and through secured borrowings on our finance receivable balances. Our 2021 financial results continued to be impacted by the ongoing COVID-19 pandemic and those impacts are expected to continue at least through the first half of 2022. However, we believe we have sufficient liquidity to manage the business through the economic disruption caused by this pandemic. The following is a summary of our liquidity position: •As ofDecember 31, 2021 and 2020, total cash, cash equivalents and restricted cash were$1,909 million and$2,691 million , respectively, and apart from restricted cash of$69 million and$66 million , respectively, was readily accessible for use. •As ofDecember 31, 2021 and 2020, there were no borrowings or letters of credit outstanding under our$1.8 billion Credit Facility. The Credit Facility, which terminates inAugust 2022 , contains various investment grade covenants at a time when the Company is not investment grade rated. The Company may seek to renegotiate or replace such facility, including reducing the size of such facility, or may determine not to replace such facility at all and may instead pursue other forms of liquidity. Any new credit agreement may result in higher borrowing costs and may contain non-investment grade covenants, such as those that would place greater restrictions on how the Company can run its businesses and/or limit the Company from taking certain actions that might otherwise be beneficial to the Company and/or its shareholders, customers, suppliers, partners and/or lenders. •We continue to focus our efforts on incremental actions to prioritize and preserve cash as we manage through the pandemic. •We expect operating cash flows from continuing operations to be approximately$475 million in 2022, reflecting increased investment across each of our new businesses as well as the absence of the upfront prepaid fixed royalty from FX of$100 million . Additionally, we expect that capital expenditures will be approximately$75 million .
Cash Flow Analysis
The following summarizes our cash flows for the three years endedDecember 31, 2021 , 2020 and 2019, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements: Year Ended December 31, Change (in millions) 2021 2020 2019 2021 2020 Net cash provided by operating activities of continuing operations$ 629 $
548
- - 89 - (89)
Net cash provided by operating activities 629 548 1,333 81 (785)
Net cash used in investing activities of
continuing operations (85) (246) (85) 161 (161)
Net cash provided by investing activities of
discontinued operations - - 2,233 - (2,233)
Net cash (used in) provided by investing
activities (85) (246) 2,148 161 (2,394)
Net cash used in financing activities (1,310) (416) (1,834) (894) 1,418
Effect of exchange rate changes on cash, cash
equivalents and restricted cash (16) 10 - (26) 10
(Decrease) increase in cash, cash equivalents and
restricted cash (782) (104) 1,647 (678) (1,751)
Cash, cash equivalents and restricted cash at
beginning of year 2,691 2,795 1,148 (104) 1,647
Cash, Cash Equivalents and Restricted Cash at End
of Year $ 1,909 $
2,691
Cash Flows from Operating Activities
Net cash provided by operating activities of continuing operations was
•$211 million decrease in pre-tax income before depreciation and amortization,
provisions, goodwill impairment, restructuring and related costs, net and
defined benefit pension costs.
•$241 million increase from accounts payable primarily due to higher spending as
compared to the prior year and the timing of supplier and vendor payments.
•$222 million increase from inventory primarily due to significant cash usage in
2020 as inventory levels increased because of lower demand resulting from the
COVID-19 pandemic.
Xerox 2021 Annual Report 52
--------------------------------------------------------------------------------
Table of Contents
•$136 million increase in other current and long-term liabilities, reflecting
higher accruals from the increased level of operations as compared to the prior
year.
•$94 million increase from accrued compensation primarily related to higher
employee incentive accruals and year-over-year timing of employee incentive
payments.
•$57 million net increase primarily due to the receipt of an upfront prepaid
fixed royalty from FX of $100 million for their continued use of the Xerox brand
trademark subsequent to the termination of our technology agreement with them.
•$22 million increase primarily due to lower payments for restructuring and
related costs.
•$328 million decrease from accounts receivable primarily due to a lower
year-over-year decline in revenues as well as the timing of collections.
•$163 million decrease from a lower net run-off of finance receivables due to an
increased level of direct lease originations from our XBS sales unit as well as
higher equipment sales.
Net cash provided by operating activities of continuing operations was
•$729 million decrease in pre-tax income before depreciation and amortization, provisions, gain on sales of businesses and assets, restructuring and related costs, net, defined benefit pension costs and loss on early extinguishment of debt. •$243 million decrease from higher levels of inventory primarily due to lower sales volume. •$147 million decrease in other current and long-term liabilities, reflecting lower accruals, particularly incentive-related payments associated with our direct channel partners and decrease in deferred revenue reflecting lower sales activity. •$95 million decrease from accrued compensation primarily due to decreased spending and the year-over-year timing of payments. •$76 million decrease from lower accounts payable primarily related to lower inventory and other spending partially offset by the timing of supplier and vendor payments. •$359 million increase from accounts receivable primarily due to lower revenue and the timing of invoicing and collections. •$117 million increase primarily related to a higher level of net run-off due to lower originations of finance receivables of$82 million and lower equipment on operating leases of$35 million . •$57 million increase from net taxes primarily due to lower payments in 2020 as a result of lower pre-tax income. •$51 million increase primarily due to lower payments for restructuring and related costs.
Cash Flows from Investing Activities
Net cash used in investing activities of continuing operations forXerox Holdings was$85 million for the year endedDecember 31, 2021 . The$161 million change in cash from 2020 was primarily due to the following: •$150 million change due to three acquisitions completed in the current year for$53 million as compared to five acquisitions in the prior year for$203 million . •$11 million increase due to proceeds from the sales of non-core business assets of$38 million in the current year as compared to$27 million in the prior year. •Other investing, net ofXerox Holdings includes$8 million of noncontrolling investments as part of our corporate venture capital fund. Net cash used in investing activities of continuing operations was$246 million for the year endedDecember 31, 2020 . The$161 million change in cash from 2019 was primarily due to five acquisitions completed for$203 million in the current year compared to two acquisitions in the prior year for$42 million .
Cash Flows from Financing Activities
Net cash used in financing activities forXerox Holdings was$1,310 million for the year endedDecember 31, 2021 . The$894 million increase in the use of cash from 2020 was primarily due to the following: •$588 million increase due to share repurchases in the current year of$888 million compared to share repurchases in the prior year of$300 million . •$341 million increase from net debt activity. 2021 reflects payments of$518 million on secured financing arrangements and$1 million of deferred debt issuance costs offset by proceeds of$311 million on a new secured financing arrangement. 2020 reflects payments of$2,137 million on Senior Notes,$73 million for secured financing arrangements and$16 million of deferred debt issuance costs offset by proceeds of$1,507 million from a Senior Notes offering and$840 million from secured financing arrangements. •$24 million decrease due to lower common stock dividends due to lower outstanding shares. Xerox 2021 Annual Report 53 -------------------------------------------------------------------------------- Table of Contents •Other financing, net includes receipts for noncontrolling investments of$5 million in Eloque, a joint venture for the remote monitoring of critical infrastructure assets and$10 million inCareAR Holdings LLC , a newly formed software business. Net cash used in financing activities for Xerox was$1,318 million for the year endedDecember 31, 2021 . 2021 reflects payments of$518 million on secured financing arrangements and$1 million of deferred debt issuance costs offset by proceeds of$311 million on a new secured financing arrangement. 2020 reflects payments of$2,137 million on Senior Notes,$73 million for secured financing arrangements and$3 million of deferred debt issuance costs offset by proceeds of$840 million from secured financing arrangements. Distributions toXerox Holdings were$1,120 million and were primarily used to fundXerox Holdings continuing dividends to shareholders and share repurchases. Xerox's distributions to the parent are expected to continue with those distributions primarily being used byXerox Holdings to fund dividends and share repurchases. Net cash used in financing activities forXerox Holdings was$416 million for the year endedDecember 31, 2020 . The$1,418 million decrease in the use of cash from 2019 was primarily due to the following: •$1,083 million decrease from net debt activity. 2020 reflects payments of$2,137 million on Senior Notes,$73 million for secured financing arrangements and$16 million of deferred debt issuance costs offset by proceeds of$1,507 million from a Senior Notes offering and$840 million from secured financing arrangements. 2019 reflects payments of$960 million on Senior Notes. •$300 million decrease due to lower share repurchases. •$13 million decrease due to lower common stock dividends due to lower outstanding shares. •$11 million decrease from lower distributions of noncontrolling interests. Net cash used in financing activities for Xerox was$416 million for the year endedDecember 31, 2020 . 2020 reflects payments of$2,137 million on Senior Notes,$73 million for secured financing arrangements and$3 million of deferred debt issuance costs offset by proceeds of$840 million from secured financing arrangements. Distributions toXerox Holdings were$549 million and were primarily used to fundXerox Holdings continuing dividends to shareholders and share repurchases. Xerox's distributions to the parent are expected to continue with those distributions primarily being used byXerox Holdings to fund dividends and share repurchases. Contributions from parent of$1,494 million primarily represent the contribution byXerox Holdings of aggregate net debt proceeds received from its Senior Note offerings in the third quarter of 2020 to Xerox.
Cash, Cash Equivalents and Restricted Cash
Refer to Note 15 - Supplementary Financial Information in the Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash.
Operating Leases We have operating leases for real estate and vehicles in our domestic and international operations and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to eleven years and a variety of renewal and/or termination options. As ofDecember 31, 2021 and 2020, total operating lease liabilities were$283 million and$333 million , respectively. Refer to Note 11 - Lessee in the Consolidated Financial Statements for additional information regarding our right-of-use (ROU) assets and lease obligations associated with our operating leases. Xerox 2021 Annual Report 54 --------------------------------------------------------------------------------
Table of Contents
Debt and Customer Financing Activities
The following summarizes our total debt:
December 31,
(in millions) 2021 2020
Xerox Holdings Corporation $ 1,500 $ 1,500
Xerox Corporation 2,200 2,200
Xerox - Other Subsidiaries(1) 561 767
Subtotal - Principal debt balance(2) 4,261 4,467
Debt issuance costs
(11) (13)
Xerox Corporation (6) (11)
Xerox - Other Subsidiaries(1) (1) (3)
Subtotal - Debt issuance costs (18) (27)
Net unamortized premium 3 3
Fair value adjustments(3)
- terminated swaps - 1
Total Debt $ 4,246 $ 4,444
_____________
(1)Represents subsidiaries of Xerox Corporation .
(2)There were no Notes Payable at December 31, 2021 and December 31, 2020 ,
respectively.
(3)Fair value adjustments include the following: (i) fair value adjustments to
debt associated with terminated interest rate swaps, which are being amortized
to interest expense over the remaining term of the related notes; and (ii)
changes in fair value of hedged debt obligations attributable to movements in
benchmark interest rates. Hedge accounting requires hedged debt instruments to
be reported inclusive of any fair value adjustment.
Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding our debt activity.
Credit Rating Downgrade
As a result of the downgrade of our debt ratings inFebruary 2022 by one of the rating agencies, the coupon rate on our$1.0 billion Senior Notes due 2023 of 4.375% will increase by 0.25% to 4.625% effectiveMarch 15, 2022 .
Finance Assets and Related Debt
We provide lease equipment financing to our customers. Our lease contracts
permit customers to pay for equipment over time rather than at the date of
installation. Our investment in these contracts is reflected in total finance
assets, net. We primarily fund our customer financing activity through cash
generated from operations, cash on hand, sales and securitizations of finance
receivables and proceeds from capital markets offerings.
We have arrangements, in certain international countries and domestically, with
our small and mid-sized customers in which third-party financial institutions
independently provide lease financing directly to our customers, on a
non-recourse basis to Xerox. In these arrangements, we sell and transfer title
of the equipment to these financial institutions. Generally, we have no
continuing ownership rights in the equipment subsequent to its sale; therefore,
the unrelated third-party finance receivable and debt are not included in our
Consolidated Financial Statements.
The following represents our total finance assets, net associated with our lease
and finance operations:
December 31,
(in millions) 2021 2020
Total finance receivables, net(1)
$ 3,323 $ 3,461
____________
(1)Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Consolidated Balance Sheets. (2)The change fromDecember 31, 2020 includes a decrease of$74 million due to currency. Xerox 2021 Annual Report 55 --------------------------------------------------------------------------------
Table of Contents
Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in Total finance receivables, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets. Approximately 35% of our Total Finance assets, net balance atDecember 31, 2021 include indirect lease financing primarily provided to end-user customers who purchased equipment sold through distributors, resellers and dealers.
Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt:
December 31,
(in millions) 2021 2020
Finance receivables debt(1) $ 2,687 $ 2,769
Equipment on operating leases debt 221 259
Financing debt 2,908 3,028
Core debt 1,338 1,416
Total Debt $ 4,246 $ 4,444
_____________(1)Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Consolidated Statements of (Loss) Income.
AtDecember 31, 2021 , leverage was assessed against the Total Debt ofXerox Holdings Corporation andXerox Corporation since the debt held byXerox Holdings Corporation is guaranteed byXerox Corporation and the funds from that borrowing were contributed in full byXerox Holdings Corporation toXerox Corporation . In 2022, we expect to continue leveraging our finance assets on a Total Debt basis at an assumed 7:1 ratio of debt to equity.
Capital Market/Debt Activity
During 2021 we received$311 million from a secured financing arrangement. The secured loan was an amendment of theJuly 2020 secured borrowing with the same financial institution, which had a remaining balance of$136 million , and we received the incremental net cash. Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding our debt activity, as well as Note 27 - Subsequent Events in the Consolidated Financial Statements for additional information related to our secured financing arrangements.
Financial Instruments
Refer to Note 17 - Financial Instruments in the Consolidated Financial Statements for additional information.
Sales of Accounts Receivable
The net impact from the sales of accounts receivable on reported net cash flows
is summarized below:
Year Ended December 31,
(in millions) 2021 2020 2019
Estimated (decrease) increase to net cash flows(1)
_____________
(1)Represents the difference between current and prior year fourth quarter accounts receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the year and (iii) currency. The decrease in 2020 reflects a decrease in the level of accounts receivable sold due to lower sales revenue as a result of impacts from the COVID-19 pandemic.
Refer to Note 7 - Accounts Receivable, Net in the Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements.
Share Repurchase Programs - Treasury Stock
InJanuary 2021 , theXerox Holdings Corporation's Board of Directors authorized an additional$100 million of share repurchase authority, bringing the total authorization of its original share repurchase program, initiated inJuly 2019 , to$1.1 billion (exclusive of any commissions and other transaction fees and costs related thereto). InOctober 2021 , theXerox Holdings Corporation's Board of Directors authorized a$500 million share repurchase program (exclusive of any commissions and other transaction fees and costs related thereto). This program replaced the approximate$450 thousand of authority remaining underXerox Holdings Corporation's previously authorized$1.1 billion share repurchase program. During 2021,Xerox Holdings Corporation repurchased 19.4 million shares of our common stock for an aggregate cost of approximately$388 million , including fees. The remaining authorization atDecember 31, 2021 is approximately$113 million . Xerox 2021 Annual Report 56 --------------------------------------------------------------------------------
Table of Contents
Including the shares repurchased underXerox Holdings Corporation's current and previously authorized share repurchase programs in 2021,Xerox Holdings Corporation repurchased 40.2 million shares of our common stock for an aggregate cost of approximately$888 million , including fees.
During 2020,
During 2019,Xerox Holdings Corporation repurchased 9.1 million shares of our common stock for an aggregate cost of$300 million , including fees. Including the shares repurchased underXerox Corporation's previously authorized share repurchase program,Xerox Holdings Corporation repurchased 18.3 million shares of our common stock for an aggregate cost of$600 million , including fees, during 2019.
Refer to Note 23 - Shareholders' Equity in the Consolidated Financial Statements for additional information regarding our share repurchase program.
Dividends
Aggregate dividends of$181 million ,$209 million and$226 million were declared on common stock in 2021, 2020 and 2019, respectively. The decrease in dividends since 2019 primarily reflects lower shares of common stock outstanding as a result of our share repurchase programs.
Aggregate dividends of
Liquidity and Financial Flexibility
We manage our worldwide liquidity using internal cash management practices, which are subject to (i) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (ii) the legal requirements of the agreements to which we are a party and (iii) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services.
Our principal debt maturities are in line with historical and projected cash flows and are spread over the next five years as follows:
Xerox Holdings Xerox - Other
(in millions) Corporation Xerox Corporation Subsidiaries(1) Total
2022 - Q1 $ - $ 300 $ 96 $ 396
2022 - Q2 - - 92 92
2022 - Q3 - - 85 85
2022 - Q4 - - 78 78
2023 - 1,000 185 1,185
2024 - 300 25 325
2025 750 - - 750
2026 - - - -
2027 and thereafter 750 600 - 1,350
Total(2) $ 1,500 $ 2,200 $ 561 $ 4,261
_____________
(1)Represents subsidiaries of Xerox Corporation .
(2)Includes fair value adjustments.
Loan Covenants and Compliance
AtDecember 31, 2021 , we were in full compliance with the covenants and other provisions of our Credit Facility and Senior Notes. We have the right to terminate the Credit Facility without penalty. Failure to comply with material provisions or covenants of the Credit Facility and Senior Notes could have a material adverse effect on our liquidity and operations and our ability to continue to fund our customers' purchases of Xerox equipment.
Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt arrangements and our Credit Facility.
Xerox 2021 Annual Report 57
--------------------------------------------------------------------------------Table of Contents
Contractual Cash Obligations and Other Commercial Commitments and Contingencies
At
(in millions) 2022 2023 2024 2025 2026 Thereafter Total debt(1)$ 651 $ 1,185 $ 325 $ 750 $ -$ 1,350 Interest on debt(1) 178 138 120 100 77 472 Minimum operating lease commitments(2) 98 78 45 31 26 35 Defined benefit pension plans 135 - - - - - Retiree health payments 25 25 24 22 21 87 Estimated Purchase Commitments: FUJIFILM Business Innovation Corp.(3) 1,180 - - - - - Flex(4) 140 - - - - - HCL(5) 215 193 189 186 46 - TCS(6) 36 33 29 26 25 14 Other(7) 150 87 25 19 10 - Total$ 2,808 $ 1,739 $ 757 $ 1,134 $ 205 $ 1,958 _____________ (1)Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt and interest on debt. (2)Refer to Note 11 - Lessee in the Consolidated Financial Statements for additional information related to minimum operating lease commitments. (3)FUJIFILM Business Innovation Corp. : The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. (4)Flex: We outsource certain manufacturing activities to Flex. The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. In the past two years, actual purchases from Flex averaged approximately$123 million per year. (5)HCL: Shared services arrangement with HCL Technologies. (6)TCS: Shared services arrangement with Tata Consulting Services. (7)Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.
Pension and Retiree Health Benefit Plans
We sponsor defined benefit pension plans and retiree health plans that require periodic cash contributions. Our 2021 cash contributions for these plans were$135 million for our defined benefit pension plans and$25 million for our retiree health plans. In 2022, based on current actuarial calculations, we expect to make contributions of approximately$135 million to our worldwide defined benefit pension plans and$25 million to our retiree health benefit plans. There are no contributions required in 2022 for ourU.S. tax-qualified defined benefit plans to meet the minimum funding requirements. Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors, including the investment performance of plan assets and discount rates as well as potential legislative and plan changes. AtDecember 31, 2021 , the net unfunded balance of our defined benefit pension plans was$119 million , which is a$786 million decrease from the balance atDecember 31, 2020 . The decrease is primarily due to contributions, favorable asset returns and higher discount rates, which lowered the benefit obligation. The$119 million net unfunded position atDecember 31, 2021 includes the following: •$(763) million for certain unfunded plans that by design do not require or allow for advanced funding. •$(571) million for under-funded plans, primarily ourU.S. tax qualified plans ($512 million under-funded). •$1,215 million for over-funded plans, primarily ourU.K. plan ($1,044 million over-funded). Cash contributions to our retiree health plans are made each year to cover medical claims costs incurred during the year. The amounts reported in the above table as retiree health payments represent our estimate of future benefit payments. Our retiree health benefit plans are non-funded and are primarily related to domestic operations. The unfunded balance of our retiree health plans of$303 million atDecember 31, 2021 decreased$67 million from the balance atDecember 31, 2020 primarily due to a plan amendment to ourU.S. Retiree Health plan, which reduced future benefits and the benefit obligation by approximately$50 million , as well as benefit payments and higher discount rates.
Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding contributions to our defined benefit pension and retiree health plans.
Xerox 2021 Annual Report 58
--------------------------------------------------------------------------------Table of Contents
As previously disclosed, inNovember 2019 ,Xerox Holdings completed the sale of its indirect 25% equity interest in Fuji Xerox (now known asFUJIFILM Business Innovation Corp. ). However, arrangements withFUJIFILM Business Innovation Corp. whereby we purchase inventory from and sell inventory toFUJIFILM Business Innovation Corp. continued after the sale. We purchased products, including parts and supplies, fromFUJIFILM Business Innovation Corp. totaling$966 million ,$1.1 billion and$1.3 billion in 2021, 2020 and 2019, respectively. Our product supply agreements withFUJIFILM Business Innovation Corp. are designed to support the entire product lifecycle, end-to-end, including the availability of spare parts, consumables and technical support throughout the time such products are with our customers. Our purchase orders under such agreements are made in the normal course of business and typically have a lead time of three months.
Shared Services Arrangements
InMarch 2019 , as part of Project Own It, Xerox entered into a shared services arrangement with HCL Technologies (HCL) pursuant to which we transitioned certain global administrative and support functions, including, among others, selected information technology and finance functions, from Xerox to HCL. This transition was expected to be completed during 2020, however, it sustained some delays caused by the COVID-19 pandemic, and it is now expected to be finalized by the end of 2021. HCL is expected to make certain ongoing investments in software, tools and other technology to consolidate, optimize and automate the transferred functions with the goal of providing improved service levels and significant cost savings. The shared services arrangement with HCL includes a remaining aggregate spending commitment of approximately$829 million over the next 5 years. However, we can terminate the arrangement at any time at our discretion, subject to payment of termination fees that decline over the term, or for cause. InJuly 2021 , Xerox entered into an arrangement with Tata Consulting Services (TCS), whereby TCS will provide business processing outsourcing services in support of our global finance organization. This included the transition of all the finance processes currently being provided by HCL. These activities started to transition during the third quarter 2021 and were completed in fourth quarter 2021. The transition does not impact our minimum revenue commitments to HCL and will result in all of our finance business processing outsourcing services being provided by one vendor. TCS will leverage their existing technology and make additional investments as required to consolidate, optimize and automate the supported services with the goal of providing improved service levels and cost savings. The arrangement is initially for 6 years with a total contract value of approximately$163 million . We can terminate the arrangement subject to payment of termination fees that decline over the term. We incurred net charges of$207 million and$185 million for the years endedDecember 31, 2021 and 2020, respectively, related to these shared services arrangements. The cost has been allocated to the various functional expense lines in the Consolidated Statements of (Loss) Income based on an assessment of the nature and amount of the costs incurred for the various transferred functions prior to their transfer to HCL and TCS.
Brazil Contingencies
Our Brazilian operations have received or been the subject of numerous
governmental assessments related to indirect and other taxes. These tax matters
principally relate to claims for taxes on the internal transfer of inventory,
municipal service taxes on rentals and gross revenue taxes. We are disputing
these tax matters and intend to vigorously defend our positions. Based on the
opinion of legal counsel and current reserves for those matters deemed probable
of loss, we do not believe that the ultimate resolution of these matters will
materially impact our results of operations, financial position or cash flows.
Below is a summary of our Brazilian tax contingencies:
December 31, December 31,
(in millions) 2021 2020
Tax contingency - unreserved $ 292 $ 355
Escrow cash deposits 32 39
Surety bonds 96 112
Letters of credit 74 78
Liens on Brazilian assets - -
The decrease in the unreserved portion of the tax contingency, inclusive of any
related interest, was primarily related to closed cases and currency, partially
offset by interest. With respect to the unreserved tax contingency, the majority
has been assessed by management as being remote as to the likelihood of
ultimately resulting in a loss to the Company. In connection with the above
proceedings, customary local regulations may require us to make escrow cash
deposits or post other security of up to half of the total amount in dispute, as
well as additional surety bonds
Xerox 2021 Annual Report 59
--------------------------------------------------------------------------------Table of Contents
and letters of credit, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens on assets would be removed to the extent the matters are resolved in our favor. We are also involved in certain disputes with contract and former employees. Exposures related to labor matters are not material to the financial statements as ofDecember 31, 2021 and 2020. We routinely assess all these matters as to probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable.
Other Contingencies and Commitments
As more fully discussed in Note 21 - Contingencies and Litigation in the Consolidated Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates. Nonperformance under a contract including a guarantee, indemnification or claim could trigger an obligation of the Company. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, financial position and cash flows in the period or periods in which such change in determination, judgment or settlement occurs.
Unrecognized Tax Benefits
As ofDecember 31, 2021 , we had$107 million of unrecognized tax benefits. This represents the tax benefits associated with various tax positions taken, or expected to be taken, on domestic and foreign tax returns that have not been recognized in our financial statements due to uncertainty regarding their resolution. The resolution or settlement of these tax positions with the taxing authorities is at various stages and, therefore, we are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters. In addition, certain of these matters may not require cash settlement due to the existence of credit and net operating loss carryforwards, as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available.
Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding unrecognized tax benefits.
Off-Balance Sheet Arrangements
We may occasionally utilize off-balance sheet arrangements in our operations (as defined by the SEC Financial Reporting Release 67 (FRR-67), "Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations"). Accounts receivable sales facilities arrangements that we enter into may have off-balance sheet elements. During 2017, we terminated all accounts receivable sales arrangements inNorth America and all but one arrangement inEurope . Refer to Note 7 - Accounts Receivable, Net in the Consolidated Financial Statements for further information regarding accounts receivable sales. As ofDecember 31, 2021 , we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, see the preceding table for the Company's contractual cash obligations and other commercial commitments and contingencies and Note 21 - Contingencies and Litigation in the Consolidated Financial Statements for additional information regarding contingencies, guarantees, indemnifications and warranty liabilities. Xerox 2021 Annual Report 60
-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects.
Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below in the following tables.
These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP.
Adjusted Earnings Measures
•Net (Loss) income and Earnings per share (EPS) •Effective tax rate
The above measures were adjusted for the following items:
Restructuring and related costs, net: Restructuring and related costs, net include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance. Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods. Transaction and related costs, net: Transaction and related costs, net are costs and expenses primarily associated with certain strategic M&A projects. These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements that may arise in connection with those M&A transactions. These costs are considered incremental to our normal operating charges and were incurred or are expected to be incurred solely as a result of the planned transactions. Accordingly, we are excluding these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis. Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the Company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in Other expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans. Other discrete, unusual or infrequent items: We excluded the following items given their discrete, unusual or infrequent nature and their impact on our results for the period: •Non-cashGoodwill impairment charge. •Losses on early extinguishment of debt. •Contract termination costs - IT services. •Impacts associated with the Tax Cuts and Jobs Act (the Tax Act) enacted inDecember 2017 . Xerox 2021 Annual Report 61 --------------------------------------------------------------------------------
Table of Contents
We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods and expected future trends in our business.
Adjusted Operating Income and Margin
We calculate and utilize adjusted operating income and margin measures by adjusting our reported pre-tax (loss) income and margin amounts. In addition to the costs and expenses noted above as adjustments for our adjusted earnings measures, adjusted operating income and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business.
Constant Currency (CC)
Refer to the Currency Impact section in the MD&A for discussion of this measure and its use in our analysis of revenue growth.
Summary
Management believes that all of these non-GAAP financial measures provide an additional means of analyzing the current period's results against the corresponding prior period's results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our Consolidated Financial Statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.
Net (Loss) Income and EPS reconciliation
Year Ended December 31,
2021 2020 2019
(in millions, except per share
amounts) Net (Loss) Income EPS Net Income EPS Net Income EPS
Reported(1) $ (455) $ (2.56) $ 192 $ 0.84 $ 648 $ 2.78
Adjustments:
Goodwill impairment 781 - -
Restructuring and related costs, net 38 93 229
Amortization of intangible assets 55 56 45
Transaction and related costs, net - 18 12
Non-service retirement-related costs (89) (29) 18
Loss on early extinguishment of debt - 26 -
Contract termination costs - IT
services - 3 (12)
Income tax on adjustments(2) (37) (46) (77)
Tax Act - - (35)
Adjusted $ 293 $ 1.51 $ 313 $ 1.41 $ 828 $ 3.55
Dividends on preferred stock used in
adjusted EPS calculation(3) $ 14 $ 14 $ -
Weighted average shares for adjusted
EPS(3) 185 211 233
Estimated fully diluted shares atDecember 31, 2021 (4) 162 _____________ (1)Net (loss) income and EPS from continuing operations attributable toXerox Holdings . 2021 Net (loss) and EPS include an after-tax non-cash goodwill impairment charge of$750 million or$4.08 per share. (2)Refer to Effective Tax Rate reconciliation. (3)For those periods that include the preferred stock dividend, the average shares for the calculations of diluted EPS exclude the 7 million shares associated withXerox Holdings Corporation's Series A Convertible preferred stock. (4)Represents common shares outstanding atDecember 31, 2021 plus potential dilutive common shares used for the calculation of adjusted diluted earnings per share for the year endedDecember 31, 2021 . The amount excludes shares associated withXerox Holdings Corporation's Series A convertible preferred stock as they were anti-dilutive. Xerox 2021 Annual Report 62 --------------------------------------------------------------------------------
Table of Contents
Effective Tax Rate reconciliation
Year Ended December 31,
2021 2020 2019
Pre-Tax Income Tax
(Loss) (Benefit) Effective Pre-Tax Income Tax Effective Pre-Tax Income Tax Effective
(in millions) Income Expense Tax Rate Income Expense Tax Rate Income Expense Tax Rate
Reported(1) $ (475) $ (17) 3.6 % $ 252 $ 64 25.4 % $ 822 $ 179 21.8 %
Goodwill impairment(2) 781 31 - - - -
Non-GAAP Adjustments(2) 4 6 167 46 292 77
Tax Act - - - - - 35
Adjusted(3) $ 310 $ 20 6.5 % $ 419 $ 110 26.3 % $ 1,114 $ 291 26.1 %
_____________
(1)Pre-tax (Loss) Income and Income tax (benefit) expense from continuing
operations.
(2)Refer to Net (Loss) Income and EPS reconciliation for details.
(3)The tax impact on Adjusted Pre-Tax Income from continuing operations is
calculated under the same accounting principles applied to the Reported Pre-Tax
(Loss) Income under ASC 740, which employs an annual effective tax rate method
to the results.
Operating (Loss) Income and Margin reconciliation
Year Ended December 31,
2021 2020 2019
(Loss)
(in millions) Profit Revenue Margin Profit Revenue Margin Profit
Revenue Margin
Reported(1) $ (475) $ 7,038 (6.7) % $ 252 $ 7,022 3.6 % $ 822 $ 9,066 9.1 %
Adjustments:
Goodwill impairment 781 - -
Restructuring and related
costs, net 38 93 229
Amortization of intangible
assets 55 56 45
Transaction and related
costs, net - 18 12
Other expenses, net(2) (24) 45 84
Adjusted $ 375 $ 7,038 5.3 % $ 464 $ 7,022 6.6 % $ 1,192 $ 9,066 13.1 %
_____________
(1)Pre-tax (Loss) Income and revenue from continuing operations.
(2)Includes non-service retirement-related costs of
Xerox 2021 Annual Report 63
--------------------------------------------------------------------------------Table of Contents
© Edgar Online, source
