SEC Info - Xerox Holdings Corp., et al.

PART I — FINANCIAL INFORMATION

TABLE OF CONTENTS


		Page
Part I — Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Xerox Holdings Corporation Condensed Consolidated Statements of Income (Loss)	3
	Xerox Holdings Corporation Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Xerox Holdings Corporation Condensed Consolidated Balance Sheets	5
	Xerox Holdings Corporation Condensed Consolidated Statements of Cash Flows	6
	Xerox Corporation Condensed Consolidated Statements of Income (Loss)	7
	Xerox Corporation Condensed Consolidated Statements of Comprehensive Income (Loss)	8
	Xerox Corporation Condensed Consolidated Balance Sheets	9
	Xerox Corporation Condensed Consolidated Statements of Cash Flows	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Capital Resources and Liquidity	50
	Financial Risk Management	54
	Non-GAAP Financial Measures	55
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.	Controls and Procedures	58
Part II — Other Information
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	60
Signatures		62
Exhibit Index		63

For additional information about Xerox Holdings Corporation and Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. The content of our website is not incorporated by reference into this combined Form 10-Q unless expressly noted.

Xerox 2021 Form 10-Q 2

ITEM 1 — FINANCIAL STATEMENTS

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

Three Months Ended
March 31,

(in millions, except per-share data)

2021

2020

Revenues

Sales

i 602

i 565

Services, maintenance and rentals

i 1,053

i 1,236

Financing

i 55

i 59

Total Revenues

i 1,710

i 1,860

Costs and Expenses

Cost of sales

i 420

i 387

Cost of services, maintenance and rentals

i 651

i 731

Cost of financing

i 28

i 30

Research, development and engineering expenses

i 74

i 84

Selling, administrative and general expenses

i 448

i 541

Restructuring and related costs, net

i 17

i 41

Amortization of intangible assets

i 15

i 11

Transaction and related costs, net

i —

i 17

Other expenses, net

i 4

i 23

Total Costs and Expenses

i 1,657

i 1,865

Income (Loss) before Income Taxes and Equity Income

i 53

( i 5)

Income tax expense (benefit)

i 14

( i 1)

Equity in net income of unconsolidated affiliates

i —

i 2

Net Income (Loss)

i 39

( i 2)

Less: Net income attributable to noncontrolling interests

i —

Net Income (Loss) Attributable to Xerox Holdings

i 39

( i 2)

Basic Earnings (Loss) per Share

i 0.18

( i 0.03)

Diluted Earnings (Loss) per Share

i 0.18

( i 0.03)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 3

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended
March 31,

(in millions)

2021

2020

Net Income (Loss)

i 39

( i 2)

Less: Net income attributable to noncontrolling interests

i —

Net Income (Loss) Attributable to Xerox Holdings

i 39

( i 2)

Other Comprehensive (Loss) Income, Net(1)

Translation adjustments, net

( i 51)

( i 197)

Unrealized (losses) gains, net

( i 7)

i 5

Changes in defined benefit plans, net

i 55

i 54

Other Comprehensive Loss, Net Attributable to Xerox Holdings

( i 3)

( i 138)

Comprehensive Income (Loss), Net Attributable to Xerox Holdings

i 36

( i 140)

_____________

(1) Refer to Note 17 - Other Comprehensive Income (Loss) for gross components of Other comprehensive loss, net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 4

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data in thousands)

Assets

Cash and cash equivalents

i 2,379

i 2,625

Accounts receivable (net of allowance of $ i 68 and $ i 69, respectively)

i 781

i 883

Billed portion of finance receivables (net of allowance of $ i 4 and $ i 4, respectively)

i 92

i 99

Finance receivables, net

i 1,065

i 1,082

Inventories

i 841

i 843

Other current assets

i 262

i 251

Total current assets

i 5,420

i 5,783

Finance receivables due after one year (net of allowance of $ i 131 and $ i 129, respectively)

i 1,920

i 1,984

Equipment on operating leases, net

i 277

i 296

Land, buildings and equipment, net

i 393

i 407

Intangible assets, net

i 223

i 237

Goodwill

i 4,075

i 4,071

Deferred tax assets

i 510

i 508

Other long-term assets

i 1,454

i 1,455

Total Assets

i 14,272

i 14,741

Liabilities and Equity

Short-term debt and current portion of long-term debt

i 678

i 394

Accounts payable

i 932

i 983

Accrued compensation and benefits costs

i 241

i 261

Accrued expenses and other current liabilities

i 794

i 840

Total current liabilities

i 2,645

i 2,478

Long-term debt

i 3,674

i 4,050

Pension and other benefit liabilities

i 1,473

i 1,566

Post-retirement medical benefits

i 339

i 340

Other long-term liabilities

i 498

i 497

Total Liabilities

i 8,629

i 8,931

Commitments and Contingencies (See Note 19)

Convertible Preferred Stock

i 214

Common stock

i 199

i 198

Additional paid-in capital

i 2,456

i 2,445

Treasury stock, at cost

( i 162)

i —

Retained earnings

i 6,267

i 6,281

Accumulated other comprehensive loss

( i 3,335)

( i 3,332)

Xerox Holdings shareholders’ equity

i 5,425

i 5,592

Noncontrolling interests

i 4

Total Equity

i 5,429

i 5,596

Total Liabilities and Equity

i 14,272

i 14,741

Shares of common stock issued

i 198,651

i 198,386

Treasury stock

( i 6,704)

i —

Shares of Common Stock Outstanding

i 191,947

i 198,386

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 5

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended
March 31,

(in millions)

2021

2020

Cash Flows from Operating Activities

Net Income (Loss)

i 39

( i 2)

Adjustments required to reconcile Net income (loss) to Cash flows from operating activities

Depreciation and amortization

i 86

i 94

Provisions

i 20

i 80

Net gain on sales of businesses and assets

i —

( i 1)

Stock-based compensation

i 16

i 11

Restructuring and asset impairment charges

i 21

i 29

Payments for restructurings

( i 27)

( i 35)

Defined benefit pension cost

i —

i 24

Contributions to defined benefit pension plans

( i 35)

( i 33)

Decrease in accounts receivable and billed portion of finance receivables

i 92

i 166

Increase in inventories

( i 18)

( i 126)

Increase in equipment on operating leases

( i 28)

( i 32)

Decrease in finance receivables

i 37

i 93

Decrease (increase) in other current and long-term assets

i 18

( i 16)

(Decrease) increase in accounts payable

( i 31)

i 51

Decrease in accrued compensation

( i 36)

( i 108)

Decrease in other current and long-term liabilities

( i 35)

( i 38)

Net change in income tax assets and liabilities

i 6

( i 10)

Net change in derivative assets and liabilities

i 3

i 8

Other operating, net

( i 11)

i 18

Net cash provided by operating activities

i 117

i 173

Cash Flows from Investing Activities

Cost of additions to land, buildings, equipment and software

( i 17)

( i 23)

Proceeds from sales of businesses and assets

i —

i 2

Acquisitions, net of cash acquired

i —

( i 193)

Net cash used in investing activities

( i 17)

( i 214)

Cash Flows from Financing Activities

Proceeds from issuance of long-term debt

i —

i 2

Payments on long-term debt

( i 95)

i —

Dividends

( i 54)

( i 58)

Payments to acquire treasury stock, including fees

( i 162)

i —

Other financing, net

( i 7)

( i 4)

Net cash used in financing activities

( i 318)

( i 60)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

( i 12)

( i 29)

Decrease in cash, cash equivalents and restricted cash

( i 230)

( i 130)

Cash, cash equivalents and restricted cash at beginning of period

i 2,691

i 2,795

Cash, Cash Equivalents and Restricted Cash at End of Period

i 2,461

i 2,665

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 6

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

Three Months Ended
March 31,

(in millions)

2021

2020

Revenues

Sales

i 602

i 565

Services, maintenance and rentals

i 1,053

i 1,236

Financing

i 55

i 59

Total Revenues

i 1,710

i 1,860

Costs and Expenses

Cost of sales

i 420

i 387

Cost of services, maintenance and rentals

i 651

i 731

Cost of financing

i 28

i 30

Research, development and engineering expenses

i 74

i 84

Selling, administrative and general expenses

i 447

i 541

Restructuring and related costs, net

i 17

i 41

Amortization of intangible assets

i 14

i 11

Transaction and related costs, net

i —

i 17

Other expenses, net

i 4

i 23

Total Costs and Expenses

i 1,655

i 1,865

Income (Loss) before Income Taxes and Equity Income

i 55

( i 5)

Income tax expense (benefit)

i 14

( i 1)

Equity in net income of unconsolidated affiliates

i —

i 2

Net Income (Loss)

i 41

( i 2)

Less: Net income attributable to noncontrolling interests

i —

Net Income (Loss) Attributable to Xerox

i 41

( i 2)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 7

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended
March 31,

(in millions)

2021

2020

Net Income (Loss)

i 41

( i 2)

Less: Net income attributable to noncontrolling interests

i —

Net Income (Loss) Attributable to Xerox

i 41

( i 2)

Other Comprehensive (Loss) Income, Net(1)

Translation adjustments, net

( i 51)

( i 197)

Unrealized (losses) gains, net

( i 7)

i 5

Changes in defined benefit plans, net

i 55

i 54

Other Comprehensive Loss, Net Attributable to Xerox

( i 3)

( i 138)

Comprehensive Income (Loss), Net Attributable to Xerox

i 38

( i 140)

_____________

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 8

XEROX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions)

Assets

Cash and cash equivalents

i 2,379

i 2,625

Accounts receivable (net of allowance of $ i 68 and $ i 69, respectively)

i 781

i 883

Billed portion of finance receivables (net of allowance of $ i 4 and $ i 4, respectively)

i 92

i 99

Finance receivables, net

i 1,065

i 1,082

Inventories

i 841

i 843

Other current assets

i 263

i 251

Total current assets

i 5,421

i 5,783

Finance receivables due after one year (net of allowance of $ i 131 and $ i 129, respectively)

i 1,920

i 1,984

Equipment on operating leases, net

i 277

i 296

Land, buildings and equipment, net

i 393

i 407

Intangible assets, net

i 216

i 229

Goodwill

i 4,072

i 4,068

Deferred tax assets

i 510

i 508

Other long-term assets

i 1,455

Total Assets

i 14,264

i 14,730

Liabilities and Equity

Short-term debt and current portion of long-term debt

i 678

i 394

Accounts payable

i 932

i 983

Accrued compensation and benefits costs

i 241

i 261

Accrued expenses and other current liabilities

i 736

i 750

Total current liabilities

i 2,587

i 2,388

Long-term debt

i 2,180

i 2,557

Related party debt

i 1,494

i —

Pension and other benefit liabilities

i 1,473

i 1,566

Post-retirement medical benefits

i 339

i 340

Other long-term liabilities

i 497

i 494

Total Liabilities

i 8,570

i 7,345

Commitments and Contingencies (See Note 19)

Additional paid-in capital

i 3,351

i 4,879

Retained earnings

i 5,674

i 5,834

Accumulated other comprehensive loss

( i 3,335)

( i 3,332)

Xerox shareholder's equity

i 5,690

i 7,381

Noncontrolling interests

i 4

Total Equity

i 5,694

i 7,385

Total Liabilities and Equity

i 14,264

i 14,730

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 9

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended
March 31,

(in millions)

2021

2020

Cash Flows from Operating Activities

Net Income (Loss)

i 41

( i 2)

Adjustments required to reconcile Net income (loss) to Cash flows from operating activities

Depreciation and amortization

i 85

i 94

Provisions

i 20

i 80

Net gain on sales of businesses and assets

i —

( i 1)

Stock-based compensation

i 16

i 11

Restructuring and asset impairment charges

i 21

i 29

Payments for restructurings

( i 27)

( i 35)

Defined benefit pension cost

i —

i 24

Contributions to defined benefit pension plans

( i 35)

( i 33)

Decrease in accounts receivable and billed portion of finance receivables

i 92

i 166

Increase in inventories

( i 18)

( i 126)

Increase in equipment on operating leases

( i 28)

( i 32)

Decrease in finance receivables

i 37

i 93

Decrease (increase) in other current and long-term assets

i 18

( i 16)

(Decrease) increase in accounts payable

( i 31)

i 51

Decrease in accrued compensation

( i 36)

( i 108)

Decrease in other current and long-term liabilities

( i 36)

( i 38)

Net change in income tax assets and liabilities

i 6

( i 10)

Net change in derivative assets and liabilities

i 3

i 8

Other operating, net

( i 11)

i 18

Net cash provided by operating activities

i 117

i 173

Cash Flows from Investing Activities

Cost of additions to land, buildings, equipment and software

( i 17)

( i 23)

Proceeds from sales of businesses and assets

i —

i 2

Acquisitions, net of cash acquired

i —

( i 193)

Net cash used in investing activities

( i 17)

( i 214)

Cash Flows from Financing Activities

Proceeds from issuance of long-term debt

i —

i 2

Payments on long-term debt

( i 95)

i —

Distributions to parent

( i 220)

( i 58)

Other financing, net

( i 3)

( i 4)

Net cash used in financing activities

( i 318)

( i 60)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

( i 12)

( i 29)

Decrease in cash, cash equivalents and restricted cash

( i 230)

( i 130)

Cash, cash equivalents and restricted cash at beginning of period

i 2,691

i 2,795

Cash, Cash Equivalents and Restricted Cash at End of Period

i 2,461

i 2,665

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2021 Form 10-Q 10

XEROX HOLDINGS CORPORATION

XEROX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per-share data and where otherwise noted)

Note 1 – i Basis of Presentation

References to “Xerox Holdings” refer to Xerox Holdings Corporation and its consolidated subsidiaries while references to “Xerox” refer to Xerox Corporation and its consolidated subsidiaries. References herein to “we,” “us,” “our,” the “Company” refer collectively to both Xerox 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 its subsidiaries.

The accompanying unaudited Condensed Consolidated Financial Statements and footnotes represent the respective, consolidated results and financial results of Xerox Holdings and Xerox and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of Xerox Holdings and Xerox, which includes separate unaudited Condensed Consolidated Financial Statements for each registrant.

The accompanying unaudited Condensed Consolidated Financial Statements of both Xerox Holdings and Xerox have been prepared in accordance with the accounting policies described in the Combined 2020 Annual Report on Form 10-K ("2020 Annual Report"), except as noted herein, and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in the Combined 2020 Annual Report.

In our opinion, all adjustments, which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented, have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.

As of March 31, 2021, although we did see certain improvement in our financial results as businesses gained confidence in the progress to control the COVID-19 pandemic and resumed investments in new printing technology and services, the pandemic continues to progress and impact our financial results. Accordingly, many of our estimates and assumptions continue to require an increased level of judgment and may have to change in the future as events continue to evolve and additional information becomes available.

For convenience and ease of reference, we refer to the financial statement caption “Income (Loss) before Income Taxes and Equity Income” as “pre-tax income (loss)”.

Notes to the Condensed Consolidated Financial Statements reflect the activity for both Xerox Holdings and Xerox for all periods presented, unless otherwise noted.

Goodwill

Interim Impairment Evaluation

We perform our annual goodwill impairment testing in the fourth quarter of each year. After completing our quantitative impairment review in the fourth quarter 2020, we concluded that Goodwill was not impaired. Based on various forecast models, which we believe reflected the inherent uncertainty of the future, we estimated that the excess of fair value over carrying value ranged between i 15% and i 20%.

During the quarter ended March 31, 2021, although business performance continues to improve, we determined that the continued negative impacts on our current operations resulting from the COVID-19 pandemic as well as a market capitalization that remains less than book value required us to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our goodwill was impaired as of March 31, 2021. Based on our interim qualitative assessment as of March 31, 2021, we determined that it was more-likely-than-not that the fair value of the Company was greater than the net book value and that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of goodwill. Our review of macroeconomic and industry considerations, as well as the Company's financial results for the first quarter 2021 and projections for the full year 2021, were consistent with the expectations and sensitivities assessed as part of our review performed in the fourth

Xerox 2021 Form 10-Q 11

quarter 2020. Further, although our market capitalization remained below our net book value, the Company's market capitalization did improve in the first quarter 2021.

If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, including those assumptions relating to the duration and severity of the financial impact from the COVID-19 pandemic, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.

Note 2 – i Recent Accounting Pronouncements

Xerox Holdings and Xerox consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). The ASUs listed below apply to both registrants. ASUs not listed below were assessed and determined to be not applicable to the Condensed Consolidated Financial Statements of either registrant.

Accounting Standard Updates to be Adopted:

Debt

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. This update is effective for our fiscal year beginning January 1, 2022. We are currently evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements and related disclosures.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which provided clarification guidance to ASU 2020-04. These ASUs were effective commencing with our quarter ended March 31, 2020 through December 31, 2022. There has been no impact to date as a result of ASU 2020-04 or ASU 2021-01 and subsequent amendments on reference rate reform, however we continue to evaluate potential future impacts that may result from the discontinuation of LIBOR or other reference rates as well as the accounting provided in this update on our financial condition, results of operations, and cash flows.

Accounting Standard Updates Adopted in 2021:

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted this update effective for our fiscal year beginning January 1, 2021. The adoption did not have nor is expected to have a material impact on our results of operations, financial position or disclosures.

Other Updates

In 2021 and 2020, the FASB also issued the following ASUs, which impact the Company but did not have or are not expected to have a material impact on our financial condition, results of operations or cash flows upon adoption. Those updates are as follows:

•Investments: ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323) and Derivatives and Hedging (Topic 815). This update is effective for our fiscal year beginning January 1, 2021.

Xerox 2021 Form 10-Q 12

Note 3 – i Revenue

Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows:

Three Months Ended
March 31,

2021

2020

Primary geographical markets(1):

United States

i 974

i 1,114

Europe

i 499

i 481

Canada

i 93

i 108

Other

i 144

i 157

Total Revenues

i 1,710

i 1,860

Major product and services lines:

Equipment

i 381

i 325

Supplies, paper and other sales

i 221

i 240

Maintenance agreements(2)

i 435

i 529

Service arrangements(3)

i 489

i 566

Rental and other

i 129

i 141

Financing

i 55

i 59

Total Revenues

i 1,710

i 1,860

Sales channels:

Direct equipment lease(4)

i 147

i 126

Distributors & resellers(5)

i 254

i 223

Customer direct

i 201

i 216

Total Sales

i 602

i 565

_____________

(1)Geographic area data is based upon the location of the subsidiary reporting the revenue.

(2)Includes revenues from maintenance agreements on sold equipment as well as revenues associated with service agreements sold through our channel partners as Xerox Partner Print Services (XPPS).

(3)Primarily includes revenues from our Managed Services offerings. Also includes revenues from embedded operating leases, which were not significant.

(4)Primarily reflects sales through bundled lease arrangements.

(5)Primarily reflects sales through our two-tier distribution channels.

Contract Assets and Liabilities: We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $ i 126 and $ i 130 at March 31, 2021 and December 31, 2020, respectively. The majority of the balance at March 31, 2021 is expected to be amortized to revenue over approximately the next i 30 months.

Contract Costs: Incremental direct costs of obtaining a contract primarily include sales commissions paid to sales people and agents in connection with the placement of equipment with associated post sale services arrangements. These costs are deferred and amortized on the straight-line basis over the estimated contract term, which is currently estimated to be approximately i four years. We pay commensurate sales commissions upon customer renewals, therefore our amortization period is aligned to our initial contract term.

Incremental direct costs are as follows:

Three Months Ended
March 31,

2021

2020

Incremental direct costs of obtaining a contract

i 13

i 15

Amortization of incremental direct costs

i 19

i 21

Xerox 2021 Form 10-Q 13

The balance of deferred incremental direct costs net of accumulated amortization at March 31, 2021 and December 31, 2020 was $ i 140 and $ i 145, respectively. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately i four years.

We may also incur costs associated with our services arrangements to generate or enhance resources and assets that will be used to satisfy our future performance obligations included in these arrangements. These costs are considered contract fulfillment costs and are amortized over the contractual service period of the arrangement to cost of services. In addition, we provide inducements to certain customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. As of March 31, 2021 and December 31, 2020 amounts deferred associated with contract fulfillment costs and inducements were $ i 17 and $ i 13, respectively. The related amortization was $ i 1 and $ i 1 for the three months ended March 31, 2021 and 2020, respectively.

Equipment and software used in the fulfillment of service arrangements and where the Company retains control are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific.

Note 4 – i i Lessor /

Revenue from sales-type leases is presented on a gross basis when the company enters into a lease to realize value from a product that it would otherwise sell in its ordinary course of business, whereas in transactions where the Company enters into a lease for the purpose of generating revenue by providing financing, the profit or loss, if any, is presented on a net basis. In addition, we have elected to account for sales tax and other similar taxes collected from a lessee as lessee costs and therefore we exclude these costs from contract consideration and variable consideration and present revenue net of these costs.

i i i

The components of lease income are as follows:

Three Months Ended
March 31,

Location in Statements of Income (Loss)

2021

2020

Revenue from sales type leases

Sales

i 147

i 126

Interest income on lease receivables

Financing

i 55

i 59

Lease income - operating leases

Services, maintenance and rentals

i 67

i 86

Variable lease income

Services, maintenance and rentals

i 15

i 22

Total Lease income

i 284

i 293

/ / /

Profit at lease commencement on sales type leases was estimated to be $ i 56 and $ i 43 for the three months ended March 31, 2021 and 2020, respectively.

Xerox 2021 Form 10-Q 14

Note 5 – i Supplementary Financial Information

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash amounts were as follows:

Cash and cash equivalents

i 2,379

i 2,625

Restricted cash

Litigation deposits in Brazil

i 38

i 42

Escrow and cash collections related to secured borrowing arrangements(1)

i 43

i 22

Other restricted cash

i 1

i 2

Total Restricted cash

i 82

i 66

Cash, cash equivalents and restricted cash

i 2,461

i 2,691

_____________

(1)Represents collections on finance receivables pledged for secured borrowings that will be remitted to lenders in the following month.

Restricted cash primarily relates to cash collections on finance receivables that were pledged for secured borrowings as well as escrow cash deposits made in Brazil associated with ongoing litigation. As more fully discussed in Note 19 - Contingencies and Litigation, various litigation matters in Brazil require us to make cash deposits to escrow as a condition of continuing the litigation. Restricted cash amounts are classified in our Condensed Consolidated Balance Sheets based on when the cash will be contractually or judicially released.

Restricted cash was reported in the Condensed Consolidated Balance Sheets as follows:

Other current assets

i 44

i 23

Other long-term assets

i 38

i 43

Total Restricted cash

i 82

i 66

Supplemental Cash Flow Information

Summarized cash flow information is as follows:

Three Months Ended
March 31,

2021

2020

Provision for receivables

i 11

i 74

Provision for inventory

i 9

i 6

Provision for product warranty

i 2

Depreciation of buildings and equipment

i 19

i 21

Depreciation and obsolescence of equipment on operating leases

i 42

i 51

Amortization of internal use software

i 10

i 11

Amortization of acquired intangible assets(1)

i 15

i 11

Amortization of customer contract costs(2)

i 20

i 22

Cost of additions to land, buildings and equipment

i 8

i 18

Cost of additions to internal use software

i 9

i 5

Common stock dividends - Xerox Holdings Corporation

i 50

i 54

Preferred stock dividends - Xerox Holdings Corporation

i 4

Repurchases related to stock-based compensation - Xerox Holdings Corporation

i 4

i 7

_____________

(1)Amortization of acquired intangible assets of Xerox is $ i 14 for the three months ended March 31, 2021.

(2)Amortization of customer contract costs is reported in Decrease (increase) in other current and long-term assets in the Condensed Consolidated Statements of Cash Flows. Refer to Note 3 - Revenue - Contract Costs for additional information.

Xerox 2021 Form 10-Q 15

Note 6 – i Accounts Receivable, Net

Accounts receivable, net were as follows:

Invoiced

i 637

i 735

Accrued(1)

i 212

i 217

Allowance for doubtful accounts

( i 68)

( i 69)

Accounts receivable, net

i 781

i 883

_____________

(1)Accrued receivables include amounts to be invoiced in the subsequent quarter for current services provided.

/ i

The allowance for doubtful accounts was as follows:

2021

2020

Balance at December 31st

i 69

i 55

Provision

i 4

i 8

Charge-offs

( i 5)

( i 2)

Recoveries and other(1)

i —

( i 1)

Balance at March 31st

i 68

i 60

_____________

(1)Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivable is determined based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment the allowance for doubtful accounts as a percent of gross accounts receivable was i 8.0% at March 31, 2021 and i 7.2% at December 31, 2020. The allowance for doubtful accounts as a percent of gross accounts receivable remain at an elevated level as compared to historical levels primarily as a result of the macroeconomic and market disruption caused by COVID-19.

Accounts Receivable Sales Arrangements

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days. We have one facility in Europe that enables us to sell accounts receivable associated with our distributor network on an ongoing basis, without recourse. Under this arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser.

Of the accounts receivable sold and derecognized from our balance sheet, $ i 93 and $ i 136 remained uncollected as of March 31, 2021 and December 31, 2020, respectively.

Accounts receivable sales activity was as follows:


	Three Months Ended March 31,
		2021		2020
Accounts receivable sales(1)		$	i 107	$	i 53

____________

(1)Losses on sales were not material. Customers may also enter into structured-payable arrangements that require us to sell our receivables from that customer to a third-party financial institution, which then makes payments to us to settle the customer's receivable. In these instances, we ensure the sale of the receivables are bankruptcy-remote and the payment made to us is without recourse. The activity associated with these arrangements is not reflected in this disclosure, as payments under these arrangements have not been material and these are customer directed arrangements.

Xerox 2021 Form 10-Q 16

Note 7 - Finance Receivables, Net

Finance receivables include sales-type leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets.

Finance receivables, net were as follows:

Gross receivables

i 3,596

i 3,691

Unearned income

( i 384)

( i 393)

Subtotal

i 3,212

i 3,298

Residual values

i —

Allowance for doubtful accounts

( i 135)

( i 133)

Finance receivables, net

i 3,077

i 3,165

Less: Billed portion of finance receivables, net

i 92

i 99

Less: Current portion of finance receivables not billed, net

i 1,065

i 1,082

Finance receivables due after one year, net

i 1,920

i 1,984

Finance Receivables – Allowance for Credit Losses and Credit Quality

Our finance receivable portfolios are primarily in the U.S., Canada and EMEA. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality.

The allowance for credit losses is determined principally based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment the allowance for doubtful credit losses as a percentage of gross finance receivables (net of unearned income) was i 4.2% at March 31, 2021 and i 4.0% at December 31, 2020. In determining the level of reserve required we had to critically assess current and forecasted economic conditions in light of the COVID-19 pandemic to ensure we objectively included those expected impacts in the determination of our reserve. Our assessment also included a review of current portfolio credit metrics and the level of write-offs incurred over the past year of the COVID-19 pandemic.

The allowance for doubtful accounts and provision for credit losses represents an estimate of the losses expected to be incurred from the Company's finance receivable portfolio. The level of the allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments. This is the level at which we develop and document our methodology to determine the allowance for credit losses. This projected loss rates are primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current and future economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups.

The allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to i three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. We believe our estimates, including any qualitative adjustments, are reasonable and have considered all reasonably available information about past events, current conditions, and reasonable and supportable forecasts of future events and economic conditions. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.

Since our allowance for doubtful finance receivables is effectively determined by geography, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of the countries/regions included in those geographies. Since EMEA is comprised of various countries and regional economies, the risk profile within that portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries.

The first quarter 2020 reflected an incremental $ i 60 provision to cover estimated write-offs on our finance receivable portfolio from the economic disruption caused by the COVID-19 pandemic. Subsequent to the first quarter of 2020 provision and through the first quarter of 2021, actual write-offs incurred to date have lagged expectations but

Xerox 2021 Form 10-Q 17

remain in line with our original projections over the life of the lease portfolio and consistent with future expectations regarding our estimated impacts from the COVID-19 pandemic. Accordingly, our total reserve as a percent of receivables has remained fairly consistent subsequent to the first quarter 2020 charge at around i 4%.

The allowance for doubtful accounts as well as the related investment in finance receivables were as follows:

United States

Canada

EMEA(1)

Total

Balance at December 31, 2020

i 77

i 15

i 41

i 133

Provision

i 2

i 1

i 3

i 6

Charge-offs

( i 2)

i —

( i 1)

( i 3)

Recoveries and other(2)

i 1

i —

( i 2)

( i 1)

Balance at March 31, 2021

i 78

i 16

i 41

i 135

Finance receivables as of March 31, 2021 collectively evaluated for impairment (3)

i 1,806

i 288

i 1,118

i 3,212

Balance at December 31, 2019

i 59

i 10

i 20

i 89

Provision

i 35

i 6

i 25

i 66

Charge-offs

( i 3)

( i 1)

( i 4)

( i 8)

Recoveries and other(2)

i —

( i 1)

Balance at March 31, 2020

i 91

i 15

i 40

i 146

Finance receivables as of March 31, 2020 collectively evaluated for impairment(3)

i 1,866

i 289

i 1,132

i 3,287

_____________

(1)Includes developing market countries.

(2)Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.

(3)Total Finance receivables exclude the allowance for credit losses of $ i 135 and $ i 146 at March 31, 2021 and 2020, respectively.

In the U.S., customers are further evaluated by class based on the type of lease origination. The primary categories are direct, which primarily includes leases originated directly with end customers through bundled lease arrangements, and indirect, which primarily includes leases originated through our XBS sales channel that utilizes a combination of internal and third party leasing in its lease arrangements with end customers. Indirect also includes lease financing to end-user customers who purchased equipment we sold to distributors or resellers.

We evaluate our customers based on the following credit quality indicators:

•Low Credit Risk: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poor's (S&P) rating of BBB- or better. Loss rates in this category in the normal course are generally less than i 1%.

•Average Credit Risk: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category in the normal course are generally in the range of i 2% to i 5%.

•High Credit Risk: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from low and average credit risk evaluation when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category in the normal course are generally in the range of i 7% to i 10%.

Credit quality indicators are updated at least annually, or more frequently to the extent required by economic conditions, and the credit quality of any given customer can change during the life of the portfolio.

Xerox 2021 Form 10-Q 18

Details about our finance receivables portfolio based on geography, origination year and credit quality indicators are as follows:

2021

2020

2019

2018

2017

Prior

Total
Finance
Receivables

United States (Direct):

Low Credit Risk

i 46

i 154

i 134

i 111

i 56

i 21

i 522

Average Credit Risk

i 17

i 53

i 89

i 43

i 20

i 6

i 228

High Credit Risk

i 18

i 87

i 39

i 24

i 12

i 5

i 185

Total

i 81

i 294

i 262

i 178

i 88

i 32

i 935

United States (Indirect):

Low Credit Risk

i 57

i 194

i 140

i 69

i 26

i 4

i 490

Average Credit Risk

i 42

i 110

i 99

i 56

i 24

i 5

i 336

High Credit Risk

i 9

i 16

i 8

i 3

i 1

i 45

Total

i 108

i 320

i 247

i 133

i 53

i 10

i 871

Canada

Low Credit Risk

i 11

i 36

i 31

i 21

i 7

i 3

i 109

Average Credit Risk

i 10

i 44

i 36

i 23

i 15

i 4

i 132

High Credit Risk

i 3

i 16

i 10

i 9

i 7

i 2

i 47

Total

i 24

i 96

i 77

i 53

i 29

i 9

i 288

EMEA(1)

Low Credit Risk

i 65

i 176

i 156

i 109

i 46

i 14

i 566

Average Credit Risk

i 52

i 153

i 138

i 89

i 38

i 12

i 482

High Credit Risk

i 7

i 19

i 21

i 12

i 8

i 3

i 70

Total

i 124

i 348

i 315

i 210

i 92

i 29

i 1,118

Total Finance Receivables

Low Credit Risk

i 179

i 560

i 461

i 310

i 135

i 42

i 1,687

Average Credit Risk

i 121

i 360

i 362

i 211

i 97

i 27

i 1,178

High Credit Risk

i 37

i 138

i 78

i 53

i 30

i 11

i 347

Total

i 337

i 1,058

i 901

i 574

i 262

i 80

i 3,212

Xerox 2021 Form 10-Q 19

December 31, 2020

2020

2019

2018

2017

2016

Prior

Total
Finance
Receivables

United States (Direct):

Low Credit Risk

i 164

i 151

i 128

i 71

i 32

i 4

i 550

Average Credit Risk

i 54

i 95

i 52

i 26

i 8

i 2

i 237

High Credit Risk

i 90

i 42

i 27

i 13

i 5

i 3

i 180

Total

i 308

i 288

i 207

i 110

i 45

i 9

i 967

United States (Indirect):

Low Credit Risk

i 193

i 140

i 79

i 33

i 7

i —

i 452

Average Credit Risk

i 129

i 124

i 71

i 31

i 8

i —

i 363

High Credit Risk

i 19

i 9

i 3

i 1

i —

i 41

Total

i 341

i 273

i 159

i 67

i 16

i —

i 856

Canada

Low Credit Risk

i 37

i 34

i 24

i 10

i 5

i 1

i 111

Average Credit Risk

i 46

i 39

i 26

i 17

i 6

i 1

i 135

High Credit Risk

i 18

i 10

i 3

i —

i 51

Total

i 101

i 83

i 60

i 37

i 14

i 2

i 297

EMEA(1)

Low Credit Risk

i 197

i 177

i 131

i 62

i 20

i 4

i 591

Average Credit Risk

i 170

i 160

i 108

i 51

i 17

i 4

i 510

High Credit Risk

i 23

i 24

i 15

i 10

i 4

i 1

i 77

Total

i 390

i 361

i 254

i 123

i 41

i 9

i 1,178

Total Finance Receivables

Low Credit Risk

i 591

i 502

i 362

i 176

i 64

i 9

i 1,704

Average Credit Risk

i 399

i 418

i 257

i 125

i 39

i 7

i 1,245

High Credit Risk

i 150

i 85

i 61

i 36

i 13

i 4

i 349

Total

i 1,140

i 1,005

i 680

i 337

i 116

i 20

i 3,298

_____________

(1)Includes developing market countries.

Xerox 2021 Form 10-Q 20

The aging of our receivables portfolio is based upon the number of days an invoice is past due. Receivables that are more than 90 days past due are considered delinquent. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed and is generally based on individual credit evaluations, results of collection efforts and specific circumstances of the customer. Subsequent recoveries, if any, are credited to the allowance.

We generally continue to maintain equipment on lease and provide services to customers that have invoices for finance receivables that are 90 days or more past due and, as a result of the bundled nature of billings, we also continue to accrue interest on those receivables. However, interest revenue for such billings is only recognized if collectability is deemed reasonably assured.

The aging of our billed finance receivables is as follows:

Current

31-90

Days

Past Due

>90 Days

Past Due

Total Billed

Unbilled

Total

Finance

Receivables

>90 Days

and

Accruing

Direct

i 30

i 7

i 8

i 45

i 890

i 935

i 70

Indirect

i 18

i 4

i 3

i 25

i 846

i 871

i —

Total United States

i 48

i 11

i 70

i 1,736

i 1,806

i 70

Canada

i 6

i 2

i 1

i 9

i 279

i 288

i 13

EMEA(1)

i 12

i 3

i 2

i 17

i 1,101

i 1,118

i 17

Total

i 66

i 16

i 14

i 96

i 3,116

i 3,212

i 100

December 31, 2020

Current

31-90

Days

Past Due

>90 Days

Past Due

Total Billed

Unbilled

Total

Finance

Receivables

>90 Days

and

Accruing

Direct

i 33

i 6

i 9

i 48

i 919

i 967

i 74

Indirect

i 21

i 4

i 3

i 28

i 828

i 856

i —

Total United States

i 54

i 10

i 12

i 76

i 1,747

i 1,823

i 74

Canada

i 8

i 2

i —

i 10

i 287

i 297

i 12

EMEA(1)

i 12

i 3

i 2

i 17

i 1,161

i 1,178

i 23

Total

i 74

i 15

i 14

i 103

i 3,195

i 3,298

i 109

_____________

(1)Includes developing market countries

Secured Borrowings and Collateral

In July 2020, we sold $ i 355 of U.S. based finance receivables to a consolidated special purpose entity (SPE), which funded the purchase through a secured loan agreement with a financial institution. As of March 31, 2021 the SPE holds $ i 248 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

In December 2020, we sold $ i 610 of U.S. based finance receivables to a consolidated SPE, which funded the purchase through a secured loan agreement with a financial institution. As of March 31, 2021 the SPE holds $ i 543 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

Refer to Note 11 - Debt, for additional information related to this arrangement including the related secured loan agreement.

Xerox 2021 Form 10-Q 21

Note 8 – i Inventories and Equipment on Operating Leases, Net

The following is a summary of Inventories by major category:

Finished goods

i 697

i 707

Work-in-process

i 48

i 43

Raw materials

i 96

i 93

Total Inventories

i 841

i 843

The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Condensed Consolidated Statements of Cash Flows in the operating activities section. Equipment on operating leases and similar arrangements consists of our equipment rented to customers and depreciated to estimated salvage value at the end of the lease term.

Equipment on operating leases and the related accumulated depreciation were as follows:

Equipment on operating leases

i 1,332

i 1,376

Accumulated depreciation

( i 1,055)

( i 1,080)

Equipment on operating leases, net

i 277

i 296

Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $ i 15 and $ i 22 for the three months ended March 31, 2021 and 2020, respectively.

Xerox 2021 Form 10-Q 22

Note 9 – i Lessee

i 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 i twelve years and a variety of renewal and/or termination options.

The components of lease expense are as follows:

Three Months Ended
March 31,

2021

2020

Operating lease expense

i 27

i 28

Short-term lease expense

i 5

Variable lease expense(1)

i 12

Sublease income

( i 1)

i —

Total Lease expense

i 43

i 45

_____________

(1)Variable lease expense is related to our leased real estate for offices and warehouses and primarily includes labor and operational costs as well as taxes and insurance.

As of March 31, 2021, we have i one additional real estate operating lease that has not yet commenced. This operating lease has an obligation and corresponding right-of-use (ROU) asset of $ i i 8 / and commenced in April 2021 with a lease term of approximately i 6 years and a i one-time option to terminate the lease after i 3 years.

Operating lease ROU assets, net and operating lease liabilities were reported in the Condensed Consolidated Balance Sheets as follows:

Other long-term assets

i 287

i 310

Accrued expenses and other current liabilities

i 79

i 83

Other long-term liabilities

i 231

i 250

Total Operating lease liabilities

i 310

i 333

Xerox 2021 Form 10-Q 23

Note 10 – i Restructuring Programs

We engage in restructuring actions through Project Own It as well as other transformation efforts in order to reduce our cost structure and realign it to the changing nature of our business. As part of our efforts to reduce costs, our restructuring actions may also include the off-shoring or outsourcing of certain operations, services and other functions, as well as reducing our real estate footprint.

During the three months ended March 31, 2021, we recorded net restructuring and asset impairment charges of $ i 21, which included $ i 14 of severance costs related to headcount reductions of approximately i 350 employees worldwide, $ i 1 of other contractual termination costs and $ i 10 of asset impairment charges. These costs were partially offset by $ i 4 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.

Information related to restructuring program activity is outlined below:

Severance and

Related Costs

Other Contractual Termination Costs(2)

Asset Impairments(3)

Total

Balance at December 31, 2020

i 78

i 4

i —

i 82

Provision

i 14

i 1

i 10

i 25

Reversals

( i 4)

i —

( i 4)

Net current period charges(1)

i 10

i 1

i 10

i 21

Charges against reserve and currency

( i 29)

( i 1)

( i 10)

( i 40)

Balance at March 31, 2021

i 59

i 4

i —

i 63

______________

(1)Represents net amount recognized within the Condensed Consolidated Statements of Income (Loss) for the period shown for restructuring and asset impairment charges.

(2)Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs.

(3)Primarily relates to the exit and abandonment of leased and owned facilities. The charge includes the accelerated write-off of $ i 1 for leased ROU assets and $ i 9 for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries, including potential sales, in the first quarter of 2021.

/ i

The following table summarizes the reconciliation to the Condensed Consolidated Statements of Cash Flows:

Three Months Ended
March 31,

2021

2020

Charges against reserve and currency

( i 40)

( i 35)

Effects of foreign currency and other non-cash items

i 13

i —

Restructuring cash payments

( i 27)

( i 35)

/ i

In connection with our restructuring programs, we also incurred certain related costs as follows:

Three Months Ended
March 31,

2021

2020

Retention related severance/bonuses(1)

( i 4)

i 7

Contractual severance costs

i —

i 4

Consulting and other costs(2)

i —

i 1

Total

( i 4)

i 12

_____________

(1)Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. The credit of $ i 4 in the first quarter 2021 reflects a change in estimate.

(2)Represents professional support services associated with our business transformation initiatives.

Cash paid for restructuring related costs were approximately $ i 3 and $ i 0 for the three months ended March 31, 2021 and 2020, respectively, while the reserve was $ i 13 and $ i 21 at March 31, 2021 and December 31, 2020. The balance at March 31, 2021 is expected to be paid over the next twelve months.

Xerox 2021 Form 10-Q 24

Note 11 – i Debt

Xerox Holdings Corporation / Xerox Corporation Intercompany Loan

In August 2020, Xerox Holdings Corporation issued $ i 550 of i 5.00% Senior Notes due August 2025 (the "2025 Senior Notes") at par and $ i 550 of i 5.50% Senior Notes due August 2028 (the "2028 Senior Notes") at par resulting in aggregate net proceeds (after fees and expenses) of approximately $ i 1,089. On August 24, 2020, Xerox Holdings Corporation issued an additional $ i 200 of the 2025 Senior Notes at i 100.75% of par and an additional $ i 200 of the 2028 Senior Notes at i 102.50% of par resulting in additional aggregate net proceeds (after premium, fees and expenses) of approximately $ i 405 for total aggregate net proceeds from both issuances of approximately $ i 1,494. In 2020, the net debt proceeds were contributed by Xerox Holdings Corporation to Xerox Corporation and recorded as Additional paid-in capital by Xerox Corporation.

In February 2021, Xerox Holdings Corporation and Xerox Corporation entered into an Intercompany Loan agreement for the net proceeds of $ i 1,494 contributed by Xerox Holdings Corporation to Xerox Corporation in 2020. The intercompany loan, which did not involve the exchange of cash in the current period, resulted in the capitalization of the amount as Related Party Debt for Xerox Corporation as of March 31, 2021. The amount was originally recorded as Additional paid-in capital in 2020 when the cash was contributed by Xerox Holdings Corporation.

The intercompany loan was established to mirror the terms included in Xerox Holdings Corporation’s 2025 and 2028 Senior Notes, including interest rates and payment dates. The intercompany interest expense also includes a ratable amount to reimburse Xerox Holdings Corporation for its debt issuance costs and premium.

At March 31, 2021, the balance of the Intercompany Loan reported in Xerox Corporation’s Condensed Consolidated Balance Sheet was $ i 1,494, which is net of related debt issuance costs, and the intercompany interest payable was $ i 10. Xerox Corporation’s interest expense for the three months ended March 31, 2021 included $ i 20 of interest expense associated with this Intercompany Loan.

Secured Borrowings and Collateral

In July 2020, we entered into a secured loan agreement with a financial institution where we sold $ i 355 of U.S. based finance receivables and the rights to payments under operating leases with an equipment net book value of $ i 10 to a special purpose entity (SPE). The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $ i 340. The debt has a variable interest rate based on LIBOR plus a spread (current rate of i 1.69% at March 31, 2021).

In December 2020, we entered into a second secured loan agreement with a financial institution where we sold $ i 610 of U.S. based finance receivables to an SPE. The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $ i 500. The debt has a variable interest rate based on the financial institution's cost of funds plus a spread (current rate of i 1.73% at March 31, 2021).

Below are the assets and liabilities held by the consolidated SPEs, which are included in our Condensed Consolidated Balance Sheets. As a result of the above sales, the assets of the SPEs are not available to satisfy any of our other obligations. Conversely, the credit holders of these SPEs borrowings do not have legal recourse to the Company’s general credit or other assets.

Assets held by SPEs

Billed portion of finance receivables, net

i 25

i 28

Finance receivables, net

i 326

i 350

Finance receivables due after one year, net

i 440

i 510

Equipment on operating leases, net

i 6

i 8

Restricted cash(1)

i 43

i 22

Total Assets

i 840

i 918

Liabilities held by SPEs

Current portion of long-term debt, net(2)

i 380

i 394

Long term debt, net(2)

i 290

i 370

Total Liabilities

i 670

i 764

_____________

(1)Restricted cash is included in Other current assets in our Condensed Consolidated Balance Sheet.

(2)Net of debt issuance costs of $ i 3.

Xerox 2021 Form 10-Q 25

Interest Expense and Income

Interest expense and income were as follows:

Three Months Ended
March 31,

2021

2020

Interest expense(1)(2)

i 52

i 51

Interest income(3)

i 56

i 67

_____________

(1)Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income (Loss).

(2)Interest expense for the three month ended March 31, 2021 for Xerox Corporation includes $ i 20 of intercompany interest expense for the Xerox Holdings Corporation / Xerox Corporation Intercompany Loan.

(3)Includes Financing revenue as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income (Loss).

Note 12 – i Financial Instruments

Interest Rate Risk Management

We use interest rate swap and interest rate cap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged. At March 31, 2021 there were no material interest rate derivative contracts outstanding.

Foreign Exchange Risk Management

We are a global company and we are exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:

•Foreign currency-denominated assets and liabilities

•Forecasted purchases and sales in foreign currency

At March 31, 2021 and December 31, 2020, we had outstanding forward exchange and purchased option contracts with gross notional values of $ i 968 and $ i 1,161 respectively, with terms of less than 12 months. Approximately i 78% of the contracts at March 31, 2021 mature within three months, i 11% mature in three to six months and i 11% in six to twelve months. The decrease in hedge position from December 31, 2020 is primarily for GBP and YEN exposures due to lower requirements. There has not been any material change in our hedging strategy.

Foreign Currency Cash Flow Hedges

We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses. The net (liability) asset fair value of these contracts were $( i 7) and $ i 2 as of March 31, 2021 and December 31, 2020, respectively.

Xerox 2021 Form 10-Q 26

Summary of Derivative Instruments Fair Value

The following table provides a summary of the fair value amounts of our derivative instruments:

Designation of Derivatives

Balance Sheet Location

Derivatives Designated as Hedging Instruments

Foreign exchange contracts - forwards

Other current assets

i 1

i 3

Accrued expenses and other current liabilities

( i 8)

( i 2)

Foreign currency options

Other current assets

i —

i 1

Net designated derivative (liability) asset

( i 7)

i 2

Derivatives NOT Designated as Hedging Instruments

Foreign exchange contracts – forwards

Other current assets

i 3

Accrued expenses and other current liabilities

( i 6)

( i 3)

Net undesignated derivative liability

( i 3)

i —

Summary of Derivatives

Total Derivative assets

i 4

i 7

Total Derivative liabilities

( i 14)

( i 5)

Net Derivative (liability) asset

( i 10)

i 2

Summary of Derivative Instruments Gains (Losses)

Derivative gains and (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses).

Designated Derivative Instruments Gains (Losses)

The following table provides a summary of gains (losses) on derivative instruments:

Three Months Ended
March 31,

Gain (Loss) on Derivative Instruments

2021

2020

Fair Value Hedges - Interest Rate Contracts

Derivative loss recognized in interest expense

i —

( i 1)

Hedged item gain recognized in interest expense

i —

i 1

Cash Flow Hedges - Foreign Exchange Forward Contracts and Options

Derivative (loss) gain recognized in OCI (effective portion)

( i 10)

i 7

Derivative loss reclassified from AOCL to income - Cost of sales (effective portion)

( i 1)

During the three months ended March 31, 2021 and 2020, i i no / amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income (Loss) for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness. In addition, i i i i no / / / amount was recorded for an underlying exposure that did not occur or was not expected to occur.

As of March 31, 2021, a net after-tax loss of $ i 5 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Non-Designated Derivative Instruments Gains (Losses)

Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the remeasurement of the underlying foreign currency-denominated asset or liability.

The following table provides a summary of gains and (losses) on non-designated derivative instruments:

Derivatives NOT Designated as Hedging Instruments

Location of Derivative (Loss) Gain

Three Months Ended
March 31,

2021

2020

Foreign exchange contracts – forwards

Other expense – Currency (losses) gains, net

( i 18)

i 14

For the three months ended March 31, 2021 and 2020 currency losses, net were $ i 2 and $ i 2, respectively. Net currency gains and losses include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the remeasurement of foreign currency-denominated assets and liabilities and are included in Other expenses, net.

Xerox 2021 Form 10-Q 27

Note 13 – i Fair Value of Financial Assets and Liabilities

The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs.

Assets

Foreign exchange contracts - forwards

i 4

i 6

Foreign currency options

i —

i 1

Deferred compensation plan investments in mutual funds

i 17

i 18

Total

i 21

i 25

Liabilities

Foreign exchange contracts - forwards

i 14

i 5

Deferred compensation plan liabilities

i 17

Total

i 31

i 22

We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2.

Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for those funds. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections.

Summary of Other Financial Assets and Liabilities

The estimated fair values of our other financial assets and liabilities were as follows:

December 31, 2020

Carrying

Amount

Fair

Value

Carrying

Amount

Fair

Value

Cash and cash equivalents

i 2,379

i 2,625

Accounts receivable, net

i 781

i 883

Short-term debt and current portion of long-term debt

i 678

i 688

i 394

i 396

Long-term Debt

Xerox Holdings Corporation

i 1,494

i 1,558

i 1,493

i 1,596

Xerox Corporation

i 1,890

i 1,992

i 2,187

i 2,298

Xerox - Other Subsidiaries(1)

i 290

i 292

i 370

i 372

Long-term debt

i 3,674

i 3,842

i 4,050

i 4,266

_____________

(1)Represents subsidiaries of Xerox Corporation

The fair value amounts for Cash and cash equivalents and Accounts receivable, net, approximate carrying amounts due to the short maturities of these instruments. The fair value of Short-term debt, including the current portion of long-term debt, and Long-term debt was estimated based on the current rates offered to us for debt of similar maturities (Level 2). The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date.

Xerox 2021 Form 10-Q 28

Note 14 – i Employee Benefit Plans

The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:

Three Months Ended March 31,

Pension Benefits

U.S. Plans

Non-U.S. Plans

Retiree Health

Components of Net Periodic Benefit Costs:

2021

2020

2021

2020

2021

2020

Service cost

i —

i 1

i 5

i 1

Interest cost

i 18

i 23

i 22

i 29

i 2

Expected return on plan assets

( i 28)

( i 26)

( i 52)

( i 47)

i —

Recognized net actuarial loss

i 5

i 7

i 15

i 14

i —

Amortization of prior service credit

i —

( i 17)

( i 19)

Recognized settlement loss

i 15

i 19

i —

Recognized curtailment gain

i —

( i 1)

i —

Defined benefit plans

i 10

i 24

( i 10)

i —

( i 14)

( i 16)

Defined contribution plans

i —

i 5

n/a

Net Periodic Benefit Cost (Credit)

i 10

i 29

( i 5)

i 5

( i 14)

( i 16)

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):

Net actuarial (gain) loss(1)

( i 44)

i 12

i 1

i —

Amortization of net actuarial loss

( i 20)

( i 26)

( i 15)

( i 14)

i —

Amortization of prior service credit

i —

i 17

i 19

Total Recognized in Other Comprehensive Income (Loss)(2)

( i 64)

( i 14)

i 17

i 19

Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss)

( i 54)

i 15

( i 19)

( i 9)

i 3

_____________

(1)The net actuarial (gain) loss for U.S. Plans primarily reflects the remeasurement of our primary U.S. pension plans as a result of the payment of periodic settlements.

(2)Amounts represent the pre-tax effect included within Other Comprehensive Income (Loss). Refer to Note 17 - Other Comprehensive Income (Loss) for related tax effects and the after-tax amounts.

Contributions

The following table summarizes cash contributions to our defined benefit pension plans and retiree health benefit plans.

Three Months Ended
March 31,

Year Ended December 31,

2021

2020

Estimated 2021

2020

U.S. plans

i 6

i 25

i 35

Non-U.S. plans

i 29

i 27

i 105

i 104

Total Pension

i 35

i 33

i 130

i 139

Retiree Health

i 6

i 5

i 30

i 25

There are i no mandatory contributions required in 2021 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements.

Defined Contribution Plans

In the first quarter 2021, the Company temporarily suspended and will not make its full year 2021 employer match/contribution for its U.S. based 401(k) saving plans for salaried employees. The suspension is expected to result in savings of approximately $ i 20 for the year ending December 31, 2021.

Xerox 2021 Form 10-Q 29

Note 15 – i Shareholders’ Equity of Xerox Holdings

(shares in thousands)

The shareholders' equity information presented below reflects the consolidated activity of Xerox Holdings.

Common

Stock(1)

Additional

Paid-in

Capital

Treasury Stock

Retained

Earnings

AOCL(2)

Xerox Holdings

Shareholders’

Equity

Non-controlling

Interests

Total

Equity

Balance at December 31, 2020

i 198

i 2,445

i —

i 6,281

( i 3,332)

i 5,592

i 4

i 5,596

Comprehensive income (loss), net

—

i 39

( i 3)

i 36

i —

i 36

Cash dividends declared - common(3)

—

( i 49)

—

( i 49)

—

( i 49)

Cash dividends declared - preferred(4)

—

( i 4)

—

( i 4)

—

( i 4)

Stock option and incentive plans, net

i 1

i 11

—

i 12

—

i 12

Payments to acquire treasury stock, including fees

—

( i 162)

—

( i 162)

—

( i 162)

Balance at March 31, 2021

i 199

i 2,456

( i 162)

i 6,267

( i 3,335)

i 5,425

i 4

i 5,429

Common

Stock(1)

Additional

Paid-in

Capital

Treasury Stock

Retained

Earnings

AOCL(2)

Xerox Holdings

Shareholders’

Equity

Non-

controlling

Interests

Total

Equity

Balance at December 31, 2019

i 215

i 2,782

( i 76)

i 6,312

( i 3,646)

i 5,587

i 7

i 5,594

Comprehensive loss, net

—

( i 2)

( i 138)

( i 140)

i —

( i 140)

Cash dividends declared - common(3)

—

( i 54)

—

( i 54)

—

( i 54)

Cash dividends declared - preferred(4)

—

( i 4)

—

( i 4)

—

( i 4)

Stock option and incentive plans, net

—

i 4

—

i 4

—

i 4

Cancellation of treasury stock

( i 2)

( i 74)

i 76

—

i —

Balance at March 31, 2020

i 213

i 2,712

i —

i 6,252

( i 3,784)

i 5,393

i 7

i 5,400

_____________

(1)Common Stock has a par value of $ i 1 per share.

(2)Refer to Note 17 - Other Comprehensive Income (Loss) for the components of AOCL.

(3)Cash dividends declared on common stock for the three months ended March 31, 2021 and 2020 were $ i i 0.25 / per share, respectively.

(4)Cash dividends declared on preferred stock for the three months ended March 31, 2021 and 2020 were $ i i 20.00 / per share, respectively.

Treasury Stock

The following is a summary of the purchases of common stock during 2021:

Amount

Balance at December 31, 2020

i —

Purchases(1)

i 6,704

i 162

Cancellations

i —

Balance at March 31, 2021

i 6,704

i 162

_____________

(1)Includes associated fees.

Xerox 2021 Form 10-Q 30

Note 16 – i Shareholder's Equity of Xerox

The shareholder's equity information presented below reflects the consolidated activity of Xerox.

Additional

Paid-in

Capital

Retained

Earnings

AOCL(1)

Xerox
Shareholder's
Equity

Non-controlling

Interests

Total

Equity

Balance at December 31, 2020

i 4,879

i 5,834

( i 3,332)

i 7,381

i 4

i 7,385

Comprehensive income (loss), net

—

i 41

( i 3)

i 38

—

i 38

Dividends declared to parent

—

( i 201)

—

( i 201)

—

( i 201)

Intercompany loan capitalization(2)

( i 1,494)

—

( i 1,494)

—

( i 1,494)

Transfers to parent

( i 34)

—

( i 34)

—

( i 34)

Balance at March 31, 2021

i 3,351

i 5,674

( i 3,335)

i 5,690

i 4

i 5,694

Additional

Paid-in

Capital

Retained

Earnings

AOCL(1)

Xerox
Shareholder's
Equity

Non-controlling

Interests

Total

Equity

Balance at December 31, 2019

i 3,266

i 6,247

( i 3,646)

i 5,867

i 7

i 5,874

Comprehensive loss, net

—

( i 2)

( i 138)

( i 140)

i —

( i 140)

Dividends declared to parent

—

( i 290)

—

( i 290)

—

( i 290)

Transfers from parent

i 238

—

i 238

—

i 238

Balance at March 31, 2020

i 3,504

i 5,955

( i 3,784)

i 5,675

i 7

i 5,682

_____________

(1)Refer to Note 17 - Other Comprehensive Income (Loss) for the components of AOCL.

(2)Refer to Note 11- Debt for information regarding capitalization of balance to Intercompany Loan with Xerox Holdings Corporation.

Xerox 2021 Form 10-Q 31

Note 17 - i Other Comprehensive Income (Loss)

Other Comprehensive Income (Loss) is comprised of the following:

Three Months Ended
March 31,

2021

2020

Pre-tax

Net of Tax

Pre-tax

Net of Tax

Translation Adjustments Losses

( i 52)

( i 51)

( i 204)

( i 197)

Unrealized (Losses) Gains

Changes in fair value of cash flow hedges (losses) gains

( i 10)

( i 8)

i 7

i 4

Changes in cash flow hedges reclassed to earnings(1)

i 1

Net Unrealized (Losses) Gains

( i 9)

( i 7)

i 8

i 5

Defined Benefit Plans Gains (Losses)

Net actuarial/prior service gains (losses)

i 43

i 32

( i 12)

( i 9)

Prior service amortization(2)

( i 17)

( i 12)

( i 19)

( i 14)

Actuarial loss amortization/settlement(2)

i 35

i 26

i 40

i 30

Other gains(3)

i 9

i 47

Changes in Defined Benefit Plans Gains

i 70

i 55

i 56

i 54

Other Comprehensive Income (Loss) Attributable to Xerox Holdings/Xerox

i 9

( i 3)

( i 140)

( i 138)

____________

(1)Reclassified to Cost of sales - refer to Note 12 - Financial Instruments for additional information regarding our cash flow hedges.

(2)Reclassified to Total Net Periodic Benefit Cost - refer to Note 14 - Employee Benefit Plans for additional information.

(3)Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL.

Accumulated Other Comprehensive Loss (AOCL)

AOCL is comprised of the following:

Cumulative translation adjustments

( i 1,771)

( i 1,720)

Other unrealized (losses) gains, net

( i 5)

i 2

Benefit plans net actuarial losses and prior service credits

( i 1,559)

( i 1,614)

Total Accumulated Other Comprehensive Loss Attributable to Xerox Holdings/Xerox

( i 3,335)

( i 3,332)

Xerox 2021 Form 10-Q 32

Note 18 – i Earnings (Loss) per Share

(shares in thousands)

The following table sets forth the computation of basic and diluted earnings (loss) per share of Xerox Holdings Corporation's common stock:

Three Months Ended
March 31,

2021

2020

Basic Earnings (Loss) per Share

Net Income (Loss) Attributable to Xerox Holdings

i 39

( i 2)

Accrued dividends on preferred stock

( i 4)

Adjusted Net income (loss) available to common shareholders

i 35

( i 6)

Weighted average common shares outstanding

i 195,985

i 212,750

Basic Earnings (Loss) per Share

i 0.18

( i 0.03)

Diluted Earnings (Loss) per Share

Net Income (Loss) Attributable to Xerox Holdings

i 39

( i 2)

Accrued dividends on preferred stock

( i 4)

Adjusted Net income (loss) available to common shareholders

i 35

( i 6)

Weighted average common shares outstanding

i 195,985

i 212,750

Common shares issuable with respect to:

Stock options

i —

Restricted stock and performance shares

i 2,181

i —

Convertible preferred stock

i —

Adjusted weighted average common shares outstanding

i 198,166

i 212,750

Diluted Earnings (Loss) per Share

i 0.18

( i 0.03)

The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive:

Stock options

i 693

i 849

Restricted stock and performance shares

i 5,327

i 6,478

Convertible preferred stock

i 6,742

Total Anti-Dilutive Securities

i 12,762

i 14,069

Dividends per Common Share

i 0.25

Xerox 2021 Form 10-Q 33

Note 19 – i Contingencies and Litigation

Legal Matters

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. 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. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters 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, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.

Brazil Contingencies

Our Brazilian operations have received or been the subject of numerous governmental assessments related to indirect and other taxes. The 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. i Below is a summary of our Brazilian tax contingencies: