NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per-share data and where otherwise noted)
Note 1 – 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 2021 Annual Report on Form 10-K (2021 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 2021 Annual Report.
In our opinion, all adjustments 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.
For convenience and ease of reference, we refer to the financial statement caption “(Loss) Income before Income Taxes and Equity Income” as “pre-tax (loss) income”.
Notes to the Condensed Consolidated Financial Statements reflect the activity for both Xerox Holdings and Xerox for all periods presented, unless otherwise noted.
Segments
During the first quarter of 2022, the Company made a change to its reportable segments from one reportable segment to two reportable segments - Print and Other, and Financing (FITTLE) - to align with a change in how the Chief Operating Decision Maker (CODM), our Chief Executive Officer (CEO), allocates resources and assesses performance against the Company’s key growth strategies. As such, prior period reportable segment results and related disclosures have been conformed to reflect the Company’s current reportable segments.
Refer to Note 4 - Segment Reporting for additional information regarding this change.
Goodwill
Interim Impairment Evaluation
Our goodwill balance was $3.3 billion at March 31, 2022 and December 31, 2021, respectively. The balance at December 31, 2021 reflects a pre-tax impairment charge of $781 recorded in the fourth quarter 2021 after completion of our fourth quarter annual goodwill impairment assessment. We assess goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
As noted above, during the first quarter 2022, the Company made a change to its operating and reportable segments from one operating/reportable segment - Printing - to two operating/reportable segments - Print and Other, and Financing (FITTLE). As a result of the new operating and reportable segments, we also reassessed our reporting units for the evaluation of goodwill. Prior to this change, consistent with the determination that we had one operating/reportable segment, we determined that we had one reporting unit for goodwill assessment purposes. Our
reassessment during the first quarter of 2022 determined that likewise consistent with the determination that we had two operating/reportable segments, we now have two reporting units – Print and Other, and Financing (FITTLE).
As a result of the change in reporting units, effective January 1, 2022, we estimated the fair value of our new reporting units and, based on an assessment of the relative fair values of our new reporting units after the change, we determined that no goodwill was allocable to the Financing (FITTLE) segment. This determination was largely based on the fact that at this stage in the stand-up of the Financing (FITTLE) business, its separate valuation is constrained and limited because the operation is significantly integrated with the Print and Other segment and is primarily an extension or enabler to facilitate the sale of the Company’s products. The change in reporting units was also considered a triggering event indicating a test for goodwill impairment was required as of January 1, 2022 before and after the change in reporting units. The Company performed those impairment tests, which did not result in the identification of an impairment loss as of January 1, 2022.
During the first quarter 2022, the Company encountered significant operational challenges and uncertainties, due to supply chain constraints, inflationary pressure on costs, geopolitical uncertainty in Europe and the threat of additional COVID-19 variants. Despite these uncertainties, the Company expects to maintain its full year 2022 financial outlook since at this stage in the year we do not have enough information or clarity (positive or negative) on these uncertainties to warrant an adjustment in our outlook. Accordingly, based on our interim assessment as of March 31, 2022, we determined that it was more-likely-than-not that the fair value of Print and Other reporting unit (the only reporting unit with goodwill) was still greater than its net book value and that we did not have a “triggering event” requiring a quantitative assessment of Goodwill. Despite indications that our excess fair value is likely reduced as compared to the impairment test as of January 1, 2022, the Company's projections for the full year 2022, reviewed as part of our quantitative analysis, are still within the range of our sensitivity analysis performed as part of our January 1, 2022 interim impairment assessment.
If assumptions or estimates with respect to the Company's future performance vary from what is expected, including those assumptions relating to the supply chain constraints, inflationary pressure on costs, geopolitical uncertainty in Europe and the threat of additional COVID-19 variants, 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 – 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:
Financial Instruments
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures - Gross Write-offs. The amendments in this update eliminate the accounting guidance for Troubled Debt Restructurings (TDRs) by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables. The update is applicable for financing receivables and net investments in leases that are within the scope of ASC 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. This update is effective for our fiscal year beginning on January 1, 2023, but early adoption is permitted. The provisions of this amendment are to be applied on a prospective basis. 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 2022:
Government Assistance
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. The update increases the transparency surrounding government assistance by requiring disclosure of 1) the types of assistance received, 2) an entity’s accounting for the assistance, and 3) the effect of the assistance on the entity’s financial statements. We adopted this update effective for our fiscal year beginning January 1, 2022. The impact of adoption was not material to our Consolidated Financial Statements. Impacts on future periods will depend on the amounts of government assistance received. Prior to the COVID pandemic, the amounts of government assistance the Company received were not material and since the update is limited to increased disclosures, we do not expect the adoption to have a material impact on our financial condition, results of operations, and cash flows in future periods.
Business Combinations
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. We early adopted this update effective for our fiscal year beginning January 1, 2022. The impact of adopting the new standard will depend on the magnitude of future acquisitions. The standard will not impact contract assets or liabilities acquired in business combinations that occurred prior to the adoption date.
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 simplified the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amended the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and required the application of the if-converted method for calculating diluted earnings per share. We adopted this update effective for our fiscal year beginning January 1, 2022. The adoption of this update did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Other Updates
In 2022 and 2021, 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:
•Derivatives and Hedging: ASU 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method. This update is effective for our fiscal year beginning January 1, 2023.
•Equity Instruments: ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options). This update is effective for our fiscal year beginning January 1, 2022.
•Leases: ASU 2021-05, Leases - Certain Lease Payments with Variable Lease Payments (ASC 842). This update is effective for our fiscal year beginning January 1, 2022.
Note 3 – Revenue
Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
Primary geographical markets(1): | | | | | | | | |
| United States | | | | | | $ | 940 | | | $ | 974 | |
| Europe | | | | | | 466 | | | 499 | |
| Canada | | | | | | 115 | | | 93 | |
| Other | | | | | | 147 | | | 144 | |
| Total Revenues | | | | | | $ | 1,668 | | | $ | 1,710 | |
| | | | | | | | |
| Major product and services lines: | | | | | | | | |
| Equipment | | | | | | $ | 314 | | | $ | 381 | |
| Supplies, paper and other sales | | | | | | 278 | | | 221 | |
Maintenance agreements(2) | | | | | | 429 | | | 435 | |
Service arrangements(3) | | | | | | 486 | | | 489 | |
| Rental and other | | | | | | 108 | | | 129 | |
| Financing | | | | | | 53 | | | 55 | |
| | | | | | | | |
| Total Revenues | | | | | | $ | 1,668 | | | $ | 1,710 | |
| | | | | | | | |
| Sales channels: | | | | | | | | |
| | | | | | | | |
Direct equipment lease(4) | | | | | | $ | 135 | | | $ | 147 | |
Distributors & resellers(5) | | | | | | 261 | | | 254 | |
| Customer direct | | | | | | 196 | | | 201 | |
| Total Sales | | | | | | $ | 592 | | | $ | 602 | |
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(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 arrangements. Also includes revenues from embedded operating leases in our Managed Service arrangements, 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 advance billings for maintenance and other services to be performed and were approximately $138 and $144 at March 31, 2022 and December 31, 2021, respectively. The majority of the balance at March 31, 2022 will be amortized to revenue over approximately the next 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 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, |
| | | | | | 2022 | | 2021 |
| Incremental direct costs of obtaining a contract | | | | | | $ | 13 | | | $ | 13 | |
| Amortization of incremental direct costs | | | | | | 18 | | | 19 | |
The balance of deferred incremental direct costs net of accumulated amortization at March 31, 2022 and December 31, 2021 was $128 and $132, respectively. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately 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, 2022 and December 31, 2021, amounts deferred associated with contract fulfillment costs and inducements were $14 and $15, respectively, and the related amortization was $1 and $1 for the three months ended March 31, 2022 and 2021, 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 – Segment Reporting
Our reportable segments are aligned with how we manage the business and view the markets we serve. During the first quarter of 2022, the Company changed to its reportable segments from one reportable segment to two reportable segments - Print and Other, and Financing (FITTLE) to align with a change in how the Chief Operating Decision Maker (CODM), our Chief Executive Officer (CEO), allocates resources and assesses performance against the Company’s key growth strategies. Our two reportable segments are based on the information reviewed by the CODM together with the Company’s management to evaluate performance of the business and allocate resources. As such, prior period reportable segment results and related disclosures have been conformed to reflect the Company’s current reportable segments.
During 2021 we progressed with the standing up of three new businesses: Software (CareAR), Financing (FITTLE) and Innovation (PARC). As a result of this effort, during the first quarter of 2022, we reassessed our operating and reportable segments and determined that, based on the financial information reviewed by our CODM as well as the CEO’s management and assessment of the Company’s operations, we had two operating and reportable segments - Print and Other, and Financing.
•Print and Other - the design, development and sale of document management systems, solutions and services as well as associated technology offerings including IT and software products and services.
•Financing (FITTLE) – primarily provides financing for the sales of Xerox equipment.
We also determined that the other businesses – Software and Innovation - did not meet the requirements to be considered separate operating segments largely due to their continued management through the Print and Other Segment as well as their immateriality to our results at this stage. Accordingly, those groups will continue to be reported as part of the Print and Other Segment.
Our Print and Other segment includes the sale of document systems, supplies and technical services and managed services. The segment also includes the delivery of managed services that involve a continuum of solutions and services that help our customers optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels of security. This segment also includes IT services and software. Our product groupings range from:
•“Entry,” which includes A4 devices and desktop printers; to
•“Mid-range,” which includes A3 devices that generally serve workgroup environments in mid to large enterprises and includes products that fall into the following market categories: Color 41+ ppm priced at less than $100 thousand and Light Production 91+ ppm priced at less than $100 thousand; to
•“High-end,” which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.
Customers range from small and mid-sized businesses to large enterprises. Customers also include graphic communication enterprises as well as channel partners including distributors and resellers. Segment revenues also include commissions and other payments from the Financing segment for the exclusive right to provide lease financing for Xerox products. These revenues are reported as part of Intersegment Revenues, which are eliminated in consolidated revenues.
The Financing (FITTLE) segment provides leasing solutions through either bundled or unbundled lease agreements of Xerox products or direct purchases of equipment. These leasing solutions support a wide range of customers, from government to graphic communications and SMB to Enterprise as well as financing for direct channel customer purchases of both Xerox and non-Xerox equipment. Segment revenues primarily includes financing income on sales-type leases, operating lease income (including month to month rentals and extensions) and leasing fees.
Segment Policy
We derive the results of our business segments directly from our internal management reporting system. The accounting policies that the Company uses to derive its segment results are substantially the same as those used by the Company in preparing its consolidated financial statements. The segment results include a significant level of management estimates regarding the allocation of revenues such as finance income in bundled lease arrangements and other leasing revenues and operating lease revenues embedded in our managed services contracts as well as the allocation of expenses for shared selling and administrative services. Accordingly, the financial results for the Financing segment may not be indicative of the results the business would have as on a standalone basis or what might be presented for the business in stand-alone financial statements. The CODM measures the performance of each segment based on several metrics, including segment revenues and profit. The CODM uses these results, in part, to evaluate the performance of, and to allocate resources to each segment. The Financing (FITTLE) segment also includes interest expense associated with allocated debt of the Company in support of its Finance assets, while no interest expense is allocated to the Print and Other segment.
Selected financial information for our reportable segments was as follows:
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| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | Print and Other | | Financing (FITTLE) | | Total | | Print and Other | | Financing (FITTLE) | | Total |
| External net revenue | | $ | 1,513 | | | $ | 155 | | | $ | 1,668 | | | $ | 1,533 | | | $ | 177 | | | $ | 1,710 | |
Intersegment net revenue(1) | | 37 | | | 3 | | | 40 | | | 48 | | | 3 | | | 51 | |
| Total Segment net revenue | | $ | 1,550 | | | $ | 158 | | | $ | 1,708 | | | $ | 1,581 | | | $ | 180 | | | $ | 1,761 | |
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| Segment (loss) profit | | $ | (20) | | | $ | 17 | | | $ | (3) | | | $ | 71 | | | $ | 18 | | | $ | 89 | |
Segment margin(2) | | (1.3) | % | | 11.0 | % | | (0.2) | % | | 4.6 | % | | 10.2 | % | | 5.2 | % |
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| Depreciation and amortization | | $ | 29 | | | $ | 32 | | | $ | 61 | | | $ | 29 | | | $ | 42 | | | $ | 71 | |
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| Interest income | | — | | | 53 | | | 53 | | | — | | | 55 | | | 55 | |
Interest expense(3) | | — | | | 26 | | | 26 | | | — | | | 30 | | | 30 | |
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(1)Intersegment net revenue is primarily commissions and other payments made by the Financing Segment to the Print and Other Segment for the lease of Xerox Equipment placements.
(2)Segment margin based on External net revenue only.
(3)Interest expense for the Financing Segment includes $2 and $2 of non-financing interest expense on allocated debt associated with Equipment on operating lease for the three months ended March 31, 2022 and 2021, respectively.
Selected financial information for our reportable segments was as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| | | | | | | | |
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| Pre-tax (Loss) Income | | | | | | | | |
| Total reported segments | | | | | | $ | (3) | | | $ | 89 | |
| Restructuring and related costs, net | | | | | | (18) | | | (17) | |
| Amortization of intangible assets | | | | | | (11) | | | (15) | |
| Other expenses, net | | | | | | (57) | | | (4) | |
| Total Pre-tax (loss) income | | | | | | $ | (89) | | | $ | 53 | |
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| Depreciation and Amortization | | | | | | | | |
| Total reported segments | | | | | | $ | 61 | | | $ | 71 | |
| Amortization of intangible assets | | | | | | 11 | | | 15 | |
| Total Depreciation and amortization | | | | | | $ | 72 | | | $ | 86 | |
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| Interest Expense | | | | | | | | |
| Total reported segments | | | | | | $ | 26 | | | $ | 30 | |
| Corporate | | | | | | 27 | | | 22 | |
| Total Interest expense | | | | | | $ | 53 | | | $ | 52 | |
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| Interest Income | | | | | | | | |
| Total reported segments | | | | | | $ | 53 | | | $ | 55 | |
| Corporate | | | | | | 1 | | | 1 | |
| Total Interest income | | | | | | $ | 54 | | | $ | 56 | |
Note 5 – 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.
The components of lease income are as follows:
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| | | | | | Three Months Ended
March 31, |
| | Location in Statements of (Loss) Income | | | | | | 2022 | | 2021 |
| Revenue from sales type leases | | Sales | | | | | | $ | 135 | | | $ | 147 | |
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| Interest income on lease receivables | | Financing | | | | | | 53 | | | 55 | |
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| Lease income - operating leases | | Services, maintenance and rentals | | | | | | 48 | | | 67 | |
| Variable lease income | | Services, maintenance and rentals | | | | | | 15 | | | 15 | |
| Total Lease income | | | | | | | | $ | 251 | | | $ | 284 | |
Profit at lease commencement on sales-type leases was estimated to be $44 and $56 for the three months ended March 31, 2022 and 2021, respectively.
Note 6 – Acquisitions and Investments
Acquisition
In the first quarter 2022, Xerox acquired Powerland, a leading IT services provider in Canada, for approximately $54 (CAD 69 million). The acquisition also includes contingent consideration up to approximately $22 (CAD 28 million) based on future performance of the acquisition over the next two years. The acquisition strengthens Xerox’s IT services offerings in North America, which include cloud, cyber security, end user computing and managed services. The goodwill associated with the acquisition of Powerland is included in our Print and Other segment.
The operating results of this acquisition are not material to our financial statements and are included within our results from the acquisition date. The purchase price was all cash for 100% ownership of the acquired company and was primarily allocated to Intangible assets, net (approximately $40) and Goodwill (approximately $41), with the remainder to tangible assets and assumed/recorded liabilities. The allocations are based on preliminary management estimates, which continue to be reviewed, and are expected to be finalized by the end of 2022 and may include input and support from third-party valuations. Any adjustments to the preliminary allocations are not expected to be material.
Note 7 – Supplementary Financial Information
Government Assistance
In response to the COVID-19 pandemic, various governments employed temporary measures to provide aid and economic stimulus to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees. Estimated savings from these various government assistance programs are recorded as follows in the Condensed Consolidated Statements of (Loss) Income:
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| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| | | | | | | | |
| Cost of services, maintenance and rentals | | | | | | $ | — | | | $ | 7 | |
| | | | | | | | |
| Selling, administrative and general expenses | | | | | | — | | | 3 | |
| Total Estimated savings | | | | | | $ | — | | | $ | 10 | |
Cash, Cash Equivalents and Restricted Cash
Restricted cash primarily relates to escrow cash deposits made in Brazil associated with ongoing litigation as well as cash collections on finance receivables that were pledged for secured borrowings. As more fully discussed in Note 21 - 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.
Cash, cash equivalents and restricted cash amounts are as follows: | | | | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Cash and cash equivalents | | $ | 1,681 | | | $ | 1,840 | |
| Restricted cash | | | | |
| Litigation deposits in Brazil | | 42 | | | 34 | |
Escrow and cash collections related to secured borrowing arrangements(1) | | 37 | | | 32 | |
| Other restricted cash | | 1 | | | 3 | |
| Total Restricted cash | | 80 | | | 69 | |
| Cash, cash equivalents and restricted cash | | $ | 1,761 | | | $ | 1,909 | |
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(1)Represents collections on finance receivables pledged for secured borrowings that will be remitted to lenders in the following month.
Restricted cash is reported in the Condensed Consolidated Balance Sheets as follows:
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| | March 31,
2022 | | December 31,
2021 |
| Other current assets | | $ | 38 | | | $ | 33 | |
| Other long-term assets | | 42 | | | 36 | |
| Total Restricted cash | | $ | 80 | | | $ | 69 | |
Supplemental Cash Flow Information
Summarized cash flow information is as follows: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| Provision for receivables | | | | | | $ | 14 | | | $ | 11 | |
| Provision for inventory | | | | | | 5 | | | 9 | |
| Provision for product warranties | | | | | | 1 | | | 2 | |
| Depreciation of buildings and equipment | | | | | | 18 | | | 19 | |
| Depreciation and obsolescence of equipment on operating leases | | | | | | 32 | | | 42 | |
| Amortization of internal use software | | | | | | 11 | | | 10 | |
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| Amortization of acquired intangible assets | | | | | | 11 | | | 15 | |
Amortization of customer contract costs(1) | | | | | | 19 | | | 20 | |
| Cost of additions to land, buildings and equipment | | | | | | 12 | | | 8 | |
| Cost of additions to internal use software | | | | | | 4 | | | 9 | |
| Common stock dividends - Xerox Holdings | | | | | | 42 | | | 50 | |
| Preferred stock dividends - Xerox Holdings | | | | | | 4 | | | 4 | |
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| Payments to noncontrolling interests | | | | | | 1 | | | — | |
| Repurchases related to stock-based compensation - Xerox Holdings | | | | | | 10 | | | 4 | |
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(1)Amortization of customer contract costs is reported in (Increase) decrease 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.
Note 8 – Accounts Receivable, Net
Accounts receivable, net were as follows: | | | | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Invoiced | | $ | 658 | | | $ | 660 | |
Accrued(1) | | 212 | | | 216 | |
| Allowance for doubtful accounts | | (63) | | | (58) | |
| Accounts receivable, net | | $ | 807 | | | $ | 818 | |
_____________
(1)Accrued receivables include amounts to be invoiced in the subsequent quarter for current services provided.
The allowance for doubtful accounts was as follows:
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| | 2022 | | 2021 |
Balance at January 1st | | $ | 58 | | | $ | 69 | |
| Provision | | 9 | | | 4 | |
| Charge-offs | | (3) | | | (5) | |
Recoveries and other(1) | | (1) | | | 0 | |
Balance at March 31st | | $ | 63 | | | $ | 68 | |
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_____________(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 7.2% at March 31, 2022 and 6.6% at December 31, 2021. The increase in the allowance is primarily due to an increased provision to cover expected write-offs of receivables in our Russian subsidiary.
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, $87 and $102 remained uncollected as of March 31, 2022 and December 31, 2021, respectively.
Accounts receivable sales activity was as follows:
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| | | | | Three Months Ended
March 31, |
| | | | | | | 2022 | | 2021 |
Accounts receivable sales(1) | | | | | | $ | 116 | | | $ | 107 | |
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____________
(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.
Note 9 - 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:
| | | | | | | | | | | | | | |
| | | March 31,
2022 | | December 31,
2021 |
| Gross receivables | | $ | 3,490 | | | $ | 3,568 | |
| Unearned income | | (365) | | | (380) | |
| Subtotal | | 3,125 | | | 3,188 | |
| Residual values | | — | | | — | |
| Allowance for doubtful accounts | | (120) | | | (118) | |
| Finance receivables, net | | 3,005 | | | 3,070 | |
| Less: Billed portion of finance receivables, net | | 89 | | | 94 | |
| Less: Current portion of finance receivables not billed, net | | 1,023 | | | 1,042 | |
| Finance receivables due after one year, net | | $ | 1,893 | | | $ | 1,934 | |
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 doubtful credit losses is principally determined 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 3.8% at March 31, 2022 and 3.7% at December 31, 2021. In determining the level of reserve required, we critically assessed 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.
Our allowance for doubtful finance receivables is effectively determined by geography. The risk characteristics in our finance receivable portfolio segments are generally 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.
Although actual finance receivable write-offs incurred to date continue to lag expectations, we believe our current reserve position remains sufficient to cover expected future losses that may result from current and future macro-economic conditions. We continue to believe that uncertainties remain as economies continue to recover from the impacts of the COVID-19 pandemic including the cessation of government support as well as labor, interest rate and inflation risks and the potential for higher taxes. In addition, there is also considerable uncertainty regarding the impact the Russia/Ukraine war and related global sanctions will have on the macro or global economy. As a result of these uncertainties, our reserves as a percent of receivables have remained elevated and fairly consistent subsequent to the first quarter 2020 increase to initially record expected losses from the COVID-19 pandemic. We continue to monitor developments in future economic conditions, and as a result, our reserves may need to be updated in future periods.
The allowance for doubtful accounts as well as the related investment in finance receivables were as follows:
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| | United States | | Canada | | EMEA(1) | | | | Total |
Balance at December 31, 2021 | | $ | 77 | | | $ | 11 | | | $ | 30 | | | | | $ | 118 | |
| Provision | | 3 | | | — | | | 3 | | | | | 6 | |
| Charge-offs | | (2) | | | (1) | | | (1) | | | | | (4) | |
Recoveries and other(2) | | — | | | 1 | | | (1) | | | | | — | |
| Balance at March 31, 2022 | | $ | 78 | | | $ | 11 | | | $ | 31 | | | | | $ | 120 | |
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Finance receivables as of March 31, 2022 collectively evaluated for impairment (3) | | $ | 1,863 | | | $ | 246 | | | $ | 1,016 | | | | | $ | 3,125 | |
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Balance at December 31, 2020 | | $ | 77 | | | $ | 15 | | | $ | 41 | | | | | $ | 133 | |
| Provision | | 2 | | | 1 | | | 3 | | | | | 6 | |
| Charge-offs | | (2) | | | — | | | (1) | | | | | (3) | |
Recoveries and other(2) | | 1 | | | — | | | (2) | | | | | (1) | |
| Balance at March 31, 2021 | | $ | 78 | | | $ | 16 | | | $ | 41 | | | | | $ | 135 | |
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Finance receivables as of March 31, 2021 collectively evaluated for impairment(3) | | $ | 1,806 | | | $ | 288 | | | $ | 1,118 | | | | | $ | 3,212 | |
_____________
(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 $120 and $135 at March 31, 2022 and 2021, 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 and 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 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 2% to 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 7% to 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.
Details about our finance receivables portfolio based on geography, origination year and credit quality indicators are as follows:
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| | | March 31, 2022 |
| | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total
Finance
Receivables |
| United States (Direct) | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 43 | | | $ | 128 | | | $ | 110 | | | $ | 85 | | | $ | 54 | | | $ | 15 | | | $ | 435 | |
| Average Credit Risk | | 24 | | | 47 | | | 39 | | | 52 | | | 20 | | | 7 | | | 189 | |
| High Credit Risk | | 12 | | | 86 | | | 66 | | | 27 | | | 12 | | | 5 | | | 208 | |
| Total | | $ | 79 | | | $ | 261 | | | $ | 215 | | | $ | 164 | | | $ | 86 | | | $ | 27 | | | $ | 832 | |
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| United States (Indirect) | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 66 | | | $ | 205 | | | $ | 124 | | | $ | 83 | | | $ | 30 | | | $ | 7 | | | $ | 515 | |
| Average Credit Risk | | 55 | | | 200 | | | 99 | | | 69 | | | 31 | | | 6 | | | 460 | |
| High Credit Risk | | 8 | | | 24 | | | 14 | | | 6 | | | 3 | | | 1 | | | 56 | |
| Total | | $ | 129 | | | $ | 429 | | | $ | 237 | | | $ | 158 | | | $ | 64 | | | $ | 14 | | | $ | 1,031 | |
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| Canada | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 5 | | | $ | 30 | | | $ | 26 | | | $ | 20 | | | $ | 11 | | | $ | 3 | | | $ | 95 | |
| Average Credit Risk | | 8 | | | 33 | | | 32 | | | 25 | | | 13 | | | 5 | | | 116 | |
| High Credit Risk | | 1 | | | 8 | | | 12 | | | 6 | | | 5 | | | 3 | | | 35 | |
| Total | | $ | 14 | | | $ | 71 | | | $ | 70 | | | $ | 51 | | | $ | 29 | | | $ | 11 | | | $ | 246 | |
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EMEA(1) | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 107 | | | $ | 190 | | | $ | 120 | | | $ | 90 | | | $ | 49 | | | $ | 11 | | | $ | 567 | |
| Average Credit Risk | | 76 | | | 126 | | | 86 | | | 69 | | | 30 | | | 8 | | | 395 | |
| High Credit Risk | | 9 | | | 15 | | | 13 | | | 11 | | | 5 | | | 1 | | | 54 | |
| Total | | $ | 192 | | | $ | 331 | | | $ | 219 | | | $ | 170 | | | $ | 84 | | | $ | 20 | | | $ | 1,016 | |
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| Total Finance Receivables | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 221 | | | $ | 553 | | | $ | 380 | | | $ | 278 | | | $ | 144 | | | $ | 36 | | | $ | 1,612 | |
| Average Credit Risk | | 163 | | | 406 | | | 256 | | | 215 | | | 94 | | | 26 | | | 1,160 | |
| High Credit Risk | | 30 | | | 133 | | | 105 | | | 50 | | | 25 | | | 10 | | | 353 | |
| Total | | $ | 414 | | | $ | 1,092 | | | $ | 741 | | | $ | 543 | | | $ | 263 | | | $ | 72 | | | $ | 3,125 | |
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| | | December 31, 2021 |
| | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total
Finance
Receivables |
| United States (Direct) | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 148 | | | $ | 121 | | | $ | 98 | | | $ | 68 | | | $ | 21 | | | $ | 3 | | | $ | 459 | |
| Average Credit Risk | | 60 | | | 40 | | | 57 | | | 23 | | | 8 | | | 2 | | | 190 | |
| High Credit Risk | | 91 | | | 73 | | | 31 | | | 16 | | | 6 | | | 1 | | | 218 | |
| Total | | $ | 299 | | | $ | 234 | | | $ | 186 | | | $ | 107 | | | $ | 35 | | | $ | 6 | | | $ | 867 | |
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| United States (Indirect) | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 235 | | | $ | 145 | | | $ | 100 | | | $ | 43 | | | $ | 11 | | | $ | — | | | $ | 534 | |
| Average Credit Risk | | 201 | | | 103 | | | 74 | | | 35 | | | 10 | | | — | | | 423 | |
| High Credit Risk | | 24 | | | 15 | | | 8 | | | 4 | | | 1 | | | — | | | 52 | |
| Total | | $ | 460 | | | $ | 263 | | | $ | 182 | | | $ | 82 | | | $ | 22 | | | $ | — | | | $ | 1,009 | |
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| Canada | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 32 | | | $ | 27 | | | $ | 22 | | | $ | 13 | | | $ | 3 | | | $ | 1 | | | $ | 98 | |
| Average Credit Risk | | 34 | | | 34 | | | 27 | | | 15 | | | 6 | | | 1 | | | 117 | |
| High Credit Risk | | 8 | | | 12 | | | 7 | | | 5 | | | 4 | | | — | | | 36 | |
| Total | | $ | 74 | | | $ | 73 | | | $ | 56 | | | $ | 33 | | | $ | 13 | | | $ | 2 | | | $ | 251 | |
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EMEA(1) | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 229 | | | $ | 143 | | | $ | 121 | | | $ | 71 | | | $ | 22 | | | $ | 6 | | | $ | 592 | |
| Average Credit Risk | | 156 | | | 109 | | | 84 | | | 45 | | | 15 | | | 3 | | | 412 | |
| High Credit Risk | | 18 | | | 15 | | | 13 | | | 8 | | | 3 | | | — | | | 57 | |
| Total | | $ | 403 | | | $ | 267 | | | $ | 218 | | | $ | 124 | | | $ | 40 | | | $ | 9 | | | $ | 1,061 | |
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| Total Finance Receivables | | | | | | | | | | | | | | |
| Low Credit Risk | | $ | 644 | | | $ | 436 | | | $ | 341 | | | $ | 195 | | | $ | 57 | | | $ | 10 | | | $ | 1,683 | |
| Average Credit Risk | | 451 | | | 286 | | | 242 | | | 118 | | | 39 | | | 6 | | | 1,142 | |
| High Credit Risk | | 141 | | | 115 | | | 59 | | | 33 | | | 14 | | | 1 | | | 363 | |
| Total | | $ | 1,236 | | | $ | 837 | | | $ | 642 | | | $ | 346 | | | $ | 110 | | | $ | 17 | | | $ | 3,188 | |
_____________
(1)Includes developing market countries.
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:
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| | | March 31, 2022 |
| | | Current | | 31-90 Days Past Due | | >90 Days Past Due | | Total Billed | | Unbilled | | Total Finance Receivables | | >90 Days and Accruing |
| Direct | | $ | 26 | | | $ | 6 | | | $ | 7 | | | $ | 39 | | | $ | 793 | | | $ | 832 | | | $ | 50 | |
| Indirect | | 23 | | | 6 | | | 4 | | | 33 | | | 998 | | | 1,031 | | | — | |
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| Total United States | | 49 | | | 12 | | | 11 | | | 72 | | | 1,791 | | | 1,863 | | | 50 | |
| Canada | | 6 | | | 2 | | | — | | | 8 | | | 238 | | | 246 | | | 10 | |
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EMEA(1) | | 8 | | | 2 | | | 1 | | | 11 | | | 1,005 | | | 1,016 | | | 9 | |
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| Total | | $ | 63 | | | $ | 16 | | | $ | 12 | | | $ | 91 | | | $ | 3,034 | | | $ | 3,125 | | | $ | 69 | |
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| | | December 31, 2021 |
| | | Current | | 31-90 Days Past Due | | >90 Days Past Due | | Total Billed | | Unbilled | | Total Finance Receivables | | >90 Days and Accruing |
| Direct | | $ | 28 | | | $ | 7 | | | $ | 7 | | | $ | 42 | | | $ | 825 | | | $ | 867 | | | $ | 61 | |
| Indirect | | 28 | | | 5 | | | 4 | | | 37 | | | 972 | | | 1,009 | | | — | |
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| Total United States | | 56 | | | 12 | | | 11 | | | 79 | | | 1,797 | | | 1,876 | | | 61 | |
| Canada | | 6 | | | 1 | | | — | | | 7 | | | 244 | | | 251 | | | 9 | |
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EMEA(1) | | 9 | | | 2 | | | 1 | | | 12 | | | 1,049 | | | 1,061 | | | 13 | |
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| Total | | $ | 71 | | | $ | 15 | | | $ | 12 | | | $ | 98 | | | $ | 3,090 | | | $ | 3,188 | | | $ | 83 | |
_____________
(1)Includes developing market countries
Secured Borrowings and Collateral
In January 2022, we sold $789 of U.S. based finance receivables to a consolidated special purpose entity (SPE). At March 31, 2022, the SPE held $758 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for a secured loan.
In September 2021, we sold $331 of U.S. based finance receivables to a consolidated SPE. At March 31, 2022 and December 31, 2021, the SPE held $272 and $308, respectively, of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for a secured loan.
Refer to Note 13 - Debt, for additional information related to these arrangements.
Note 10 – Inventories and Equipment on Operating Leases, Net
The following is a summary of Inventories by major category: | | | | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Finished goods | | $ | 586 | | | $ | 568 | |
| Work-in-process | | 42 | | | 43 | |
| Raw materials | | 104 | | | 85 | |
| Total Inventories | | $ | 732 | | | $ | 696 | |
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:
| | | | | | | | | | | | | | |
| | | March 31,
2022 | | December 31,
2021 |
| Equipment on operating leases | | $ | 1,256 | | | $ | 1,266 | |
| Accumulated depreciation | | (1,002) | | | (1,013) | |
| Equipment on operating leases, net | | $ | 254 | | | $ | 253 | |
Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $15 and $15 for the three months ended March 31, 2022 and 2021, respectively.
Secured Borrowings and Collateral
In September 2021, we sold the rights to payments under operating leases with an equipment net book value of $9 to a consolidated SPE. The SPE held Equipment on operating leases, net of $7 and $8 as of March 31, 2022 and December 31, 2021, respectively, which are included in our Condensed Consolidated Balance Sheets as collateral for the secured loan agreement.
Refer to Note 13 - Debt, for additional information related to this arrangement.
Note 11 – Lessee
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.
The components of lease expense are as follows:
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| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| Operating lease expense | | | | | | $ | 25 | | | $ | 27 | |
| Short-term lease expense | | | | | | 4 | | | 5 | |
Variable lease expense(1) | | | | | | 12 | | | 12 | |
| Sublease income | | | | | | (2) | | | (1) | |
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| Total Lease expense | | | | | | $ | 39 | | | $ | 43 | |
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(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, 2022, operating leases that had not yet commenced were not material.
Operating lease ROU assets, net and operating lease liabilities were reported in the Condensed Consolidated Balance Sheets as follows:
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| | March 31,
2022 | | December 31,
2021 |
| Other long-term assets | | $ | 252 | | | $ | 264 | |
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| Accrued expenses and other current liabilities | | $ | 79 | | | $ | 79 | |
| Other long-term liabilities | | 191 | | | 204 | |
| Total Operating lease liabilities | | $ | 270 | | | $ | 283 | |
Note 12 – Restructuring Programs
We engage in restructuring actions, including 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 and/or outsourcing of certain operations, services and other functions, as well as reducing our real estate footprint.
During the three months ended March 31, 2022, we recorded net restructuring and asset impairment charges of $20, which included $22 of severance costs related to headcount reductions of approximately 450 employees worldwide and $1 of asset impairment charges, both of which were partially offset by $3 of net reversals. The net reversals primarily resulted from changes in estimated reserves from prior period initiatives. Charges were primarily related to the Print and Other segment as amounts related to the Financing (FITTLE) segment were immaterial for all periods presented.
Information related to restructuring program activity is outlined below:
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| | Severance and Related Costs | | Other Contractual Termination Costs(2) | | Asset Impairments(3) | | Total |
| Balance at December 31, 2021 | | $ | 25 | | | $ | 2 | | | $ | — | | | $ | 27 | |
| Provision | | 22 | | | — | | | 1 | | | 23 | |
| Reversals | | (3) | | | — | | | — | | | (3) | |
Net current period charges(1) | | 19 | | | — | | | 1 | | | 20 | |
| Charges against reserve and currency | | (7) | | | — | | | (1) | | | (8) | |
| Balance at March 31, 2022 | | $ | 37 | | | $ | 2 | | | $ | — | | | $ | 39 | |
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(1)Represents net amount recognized within the Condensed Consolidated Statements of (Loss) Income 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 charges include the accelerated write-off of $1 for leased ROU assets upon exit from the facilities, net of any potential sublease income and other recoveries, including potential sales.
The following table summarizes the reconciliation to the Condensed Consolidated Statements of Cash Flows:
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| | | | | Three Months Ended
March 31, |
| | | | | | | 2022 | | 2021 |
| Charges against reserve and currency | | | | | | $ | (8) | | | $ | (40) | |
| Asset impairments | | | | | | 1 | | | — | |
| Effects of foreign currency and other non-cash items | | | | | | — | | | 13 | |
| Restructuring cash payments | | | | | | $ | (7) | | | $ | (27) | |
In connection with our restructuring programs, we also incurred certain related costs as follows:
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| | | | Three Months Ended
March 31, | | |
| | | | | | 2022 | | 2021 | | |
Retention related severance/bonuses(1) | | | | | | $ | (2) | | | $ | (4) | | | |
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| Total | | | | | | $ | (2) | | | $ | (4) | | | |
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(1)Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. The credit for the three months ended March 31, 2022 and 2021 reflects a change in estimate.
Cash paid for restructuring related costs were $1 and $3 for the three months ended March 31, 2022 and 2021, respectively. The restructuring related costs reserve was $15 and $18 at March 31, 2022 and December 31, 2021, respectively. The balance at March 31, 2022 is expected to be paid over the next twelve months.
Note 13 – Debt
Xerox Holdings Corporation / Xerox Corporation Intercompany Loan
In February 2021, Xerox Holdings Corporation and Xerox Corporation entered into an Intercompany Loan agreement for the net proceeds of $1,494 contributed by Xerox Holdings Corporation to Xerox Corporation in 2020. 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, 2022 and December 31, 2021, the balance of the Intercompany Loan reported in Xerox Corporation’s Condensed Consolidated Balance Sheet was $1,495 and $1,494, respectively, which is net of related debt issuance costs, and the intercompany interest payable was $10 and $30, respectively. Xerox Corporation’s interest expense included interest expense associated with this Intercompany Loan of $20 and $20 for the three months ended March 31, 2022 and 2020, respectively.
Credit Facility
In March 2022, Xerox and Xerox Holdings entered into Amendment No. 4 to the Credit Facility. The Amendment, which became effective on March 24, 2022, included the following changes:
(1)reduced the aggregate amount of the revolving credit commitments under the Credit Agreement from $1.8 billion to $1.5 billion; and
(2)modified the financial covenants in the Credit Agreement to now require that, during a specified Covenant Modification Period, which began on January 1, 2022 and ends on the earlier of (a) June 30, 2022 and (b) the date on which Xerox Corp. delivers a written notice to the Administrative Agent electing to end such period:
a.Xerox Corporation maintain unrestricted cash (as defined in the Amendment) at the end of each fiscal quarter in an amount not less than $500.
b.With respect to each fiscal quarter ending during the Covenant Modification Period, Xerox Corporation maintain a ratio of Net Debt for Borrowed Money to consolidated EBITDA of not greater than 4.25x with Net Debt for Borrowed Money including a cash netting with a cap of $1,250 for the quarter ending March 31, 2022 and $1,000 for the quarter ending June 30, 2022. This covenant is in lieu of the 4.25x Net Debt for Borrowed Money to consolidated EBITDA ratio requirement without cash netting applicable prior to the Amendment.
As of March 31, 2022, we were in full compliance with the covenants and other provisions of our Credit Facility.
Secured Borrowings and Collateral
In January 2022, we entered into a secured loan agreement with financial institutions where we sold $789 of U.S. based finance receivables to a special purpose entity (SPE). The purchase by the SPE was funded through a $668 amortizing secured loan to the SPE from the financial institutions. The SPE is fully consolidated in our financial statements. The secured loan was an amendment of the December 2020 secured borrowing, which had a remaining balance of $248, and we received the incremental net cash. The transaction was accounted for as an extinguishment of debt and the issuance of new debt and associated collateral. The new loan has a variable interest rate based on the financial institutions' cost of funds plus a spread (current rate of 1.71% at March 31, 2022) and an expected life of approximately 2.5 years, with half of the loan projected to be repaid within the first year based on collections of the underlying portfolio of receivables.
In September 2021, we entered into a secured loan agreement with a financial institution where we sold $331 of U.S. based finance receivables and the rights to payments under operating leases with an equipment net book value of $9 to a SPE. The purchase by the SPE was funded through a $311 amortizing secured loan to the SPE from the financial institution. The debt has a variable interest rate based on LIBOR plus a spread (current rate of 1.75% at March 31, 2022). In October 2021, we entered into an interest rate hedge agreement to cap LIBOR over the life of the loan.
The sales of the receivables to the SPEs were structured as "true sales at law," and we have received opinions to that effect from outside legal counsel. However, the transactions were accounted for as secured borrowings as we consolidate the SPEs since we have both the power to direct the activities that most significantly impact the SPEs' economic performance through our role as servicer of all the receivables held by the SPEs, and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the
SPEs. As a result, the assets of the SPEs are not available to satisfy any of our other obligations. Conversely, the credit holders of these SPEs do not have legal recourse to the Company’s general credit.
Below are the assets and liabilities held by the consolidated SPEs, which are included in our Condensed Consolidated Balance Sheets.
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| | March 31,
2022 | | December 31,
2021 |
| Assets held by SPEs | | | | |
| Billed portion of finance receivables, net | | $ | 31 | | | $ | 27 | |
| Finance receivables, net | | 402 | | 299 |
| Finance receivables due after one year, net | | 597 | | 362 |
| Equipment on operating leases, net | | 7 | | 8 |
Restricted cash(1) | | 37 | | | 32 | |
| Total Assets | | $ | 1,074 | | | $ | 728 | |
| Liabilities held by SPEs | | | | |
Current portion of long-term debt, net(2) | | $ | 451 | | | $ | 350 | |
Long term debt, net(2) | | 432 | | 210 |
| Total Liabilities | | $ | 883 | | | $ | 560 | |
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(1)Restricted cash is included in Other current assets in our Condensed Consolidated Balance Sheet.
(2)Net of debt issuance costs of $2 and $1 as of March 31, 2022 and December 31, 2021, respectively.
Interest Expense and Income
Interest expense and income were as follows:
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| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
Interest expense(1)(2) | | | | | | $ | 53 | | | $ | 52 | |
Interest income(3) | | | | | | 54 | | | 56 | |
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(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 (Loss) Income.
(2)Interest expense of Xerox Corporation included intercompany interest expense associated with the Xerox Holdings Corporation / Xerox Corporation Intercompany Loan of $20 and $20 for the three months ended March 31, 2022 and 2021, respectively.
(3)Includes Financing revenue as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of (Loss) Income.
Note 14 – 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, 2022, there was one interest rate cap contract 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, 2022 and December 31, 2021, we had outstanding forward exchange and purchased option contracts with gross notional values of $1,126 and $1,113 respectively, with terms of less than 12 months. Approximately 77% of the contracts at March 31, 2022 mature within three months, 13% mature in three to six months and 10% in six to twelve months. There have not been any material changes 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 fair value of these contracts were $18 and $3 as of March 31, 2022 and December 31, 2021, respectively.
Summary of Derivative Instruments Fair Value
The following table provides a summary of the fair value amounts of our derivative instruments:
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| Designation of Derivatives | | Balance Sheet Location | | March 31,
2022 | | December 31,
2021 |
| Derivatives Designated as Hedging Instruments | | | | |
| Foreign exchange contracts - forwards | | Other current assets | | $ | 1 | | | $ | 3 | |
| | Accrued expenses and other current liabilities | | (19) | | | (6) | |
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| Interest rate cap | | Other long-term assets | | 3 | | | 1 | |
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| | Net designated derivative liabilities | | $ | (15) | | | $ | (2) | |
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| Derivatives NOT Designated as Hedging Instruments | | | | |
| Foreign exchange contracts – forwards | | Other current assets | | $ | 3 | | | $ | 1 | |
| | Accrued expenses and other current liabilities | | (13) | | | (5) | |
| | Net undesignated derivative liabilities | | $ | (10) | | | $ | (4) | |
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| Summary of Derivatives | | Total Derivative assets | | $ | 7 | | | $ | 5 | |
| | Total Derivative liabilities | | (32) | | | (11) | |
| | Net Derivative liabilities | | $ | (25) | | | $ | (6) | |
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:
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| | | | Three Months Ended
March 31, |
| Loss on Derivative Instruments | | | | | | 2022 | | 2021 |
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| Cash Flow Hedges - Foreign Exchange Forward Contracts and Options | | | | | | |
| Derivative loss recognized in OCI (effective portion) | | | | | | $ | (15) | | | $ | (10) | |
| Derivative loss reclassified from AOCL to income - Cost of sales (effective portion) | | | | | | (2) | | | (1) | |
During the three months ended March 31, 2022 and 2021, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of (Loss) Income 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, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.
As of March 31, 2022, a net after-tax loss of $13 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:
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| Derivatives NOT Designated as Hedging Instruments | | Location of Derivative Gain (Loss) | | | | Three Months Ended
March 31, |
| | | | | 2022 | | 2021 |
| Foreign exchange contracts – forwards | | Other expense – Currency losses, net | | | | | | $ | (9) | | | $ | (18) | |
Currency losses, net were $0 and $2 for three months ended March 31, 2022 and 2021, 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.
Note 15 – 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.
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| | March 31,
2022 | | December 31,
2021 |
| Assets | | | | |
| Foreign exchange contracts - forwards | | $ | 4 | | | $ | 4 | |
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| Interest rate cap | | 3 | | | 1 | |
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| Deferred compensation plan investments in mutual funds | | 17 | | | 18 | |
| Total | | $ | 24 | | | $ | 23 | |
| Liabilities | | | | |
| Foreign exchange contracts - forwards | | $ | 32 | | | $ | 11 | |
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| Deferred compensation plan liabilities | | 16 | | | 18 | |
| Total | | $ | 48 | | | $ | 29 | |
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: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 | | December 31, 2021 |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Cash and cash equivalents | | $ | 1,681 | | | $ | 1,681 | | | $ | 1,840 | | | $ | 1,840 | |
| Accounts receivable, net | | 807 | | | 807 | | | 818 | | | 818 | |
| Short-term debt and current portion of long-term debt | | 1,450 | | | 1,459 | | | 650 | | | 653 | |
| Long-term Debt | | | | | | | | |
| Xerox Holdings Corporation | | 1,495 | | | 1,489 | | | 1,494 | | | 1,579 | |
| Xerox Corporation | | 894 | | | 864 | | | 1,892 | | | 1,987 | |
Xerox - Other Subsidiaries(1) | | 432 | | | 433 | | | 210 | | | 210 | |
| Long-term debt | | $ | 2,821 | | | $ | 2,786 | | | $ | 3,596 | | | $ | 3,776 | |
____________ (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.
Note 16 – Employee Benefit Plans
The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Three Months Ended March 31, |
| | Pension Benefits | | | | |
| | U.S. Plans | | Non-U.S. Plans | | Retiree Health |
| Components of Net Periodic Benefit Costs: | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | | $ | — | | | $ | — | | | $ | 4 | | | $ | 5 | | | $ | — | | | $ | 1 | |
| Interest cost | | 20 | | | 18 | | | 29 | | | 22 | | | 2 | | | 2 | |
| Expected return on plan assets | | (27) | | | (28) | | | (55) | | | (52) | | | — | | | — | |
| Recognized net actuarial loss | | 4 | | | 5 | | | 6 | | | 15 | | | — | | | — | |
| Amortization of prior service credit | | — | | | — | | | — | | | — | | | (4) | | | (17) | |
| Recognized settlement loss | | 18 | | | 15 | | | — | | | — | | | — | | | — | |
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| Defined benefit plans | | 15 | | | 10 | | | (16) | | | (10) | | | (2) | | | (14) | |
| Defined contribution plans | | 5 | | | — | | | 4 | | | 5 | | | n/a | | n/a |
| Net Periodic Benefit Cost (Credit) | | 20 | | | 10 | | | (12) | | | (5) | | | (2) | | | (14) | |
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| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Loss) Income: | | | | | | | | | | | | |
Net actuarial loss (gain)(1) | | 14 | | | (44) | | | — | | | 1 | | | (7) | | | — | |
| Prior service credit | | — | | | — | | | — | | | — | | | (23) | | | — | |
| Amortization of net actuarial loss | | (22) | | | (20) | | | (6) | | | (15) | | | — | | | — | |
| Amortization of prior service credit | | — | | | — | | | — | | | — | | | 4 | | | 17 | |
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Total Recognized in Other Comprehensive (Loss) Income(2) | | (8) | | | (64) | | | (6) | | | (14) | | | (26) | | | 17 | |
| Total Recognized in Net Periodic Benefit Cost (Credit) and Other Comprehensive (Loss) Income | | $ | 12 | | | $ | (54) | | | $ | (18) | | | $ | (19) | | | $ | (28) | | | $ | 3 | |
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(1)The net actuarial loss (gain) for U.S. Plans primarily reflects the remeasurement of our primary U.S. pension plans as a result of the payment of periodic settlements. The Retiree Health net actuarial gain reflects remeasurement related to the first quarter 2022 Plan Amendment.
(2)Amounts represent the pre-tax effect included within Other Comprehensive (Loss) Income. Refer to Note 19 - Other Comprehensive (Loss) Income 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, |
| | 2022 | | 2021 | | Estimated 2022 | | 2021 |
| U.S. plans | | $ | 6 | | | $ | 6 | | | $ | 25 | | | $ | 24 | |
| Non-U.S. plans | | 26 | | | 29 | | | 110 | | | 111 | |
| Total Pension plans | | 32 | | | 35 | | | 135 | | | 135 | |
| Retiree Health | | 6 | | | 6 | | | 25 | | | 25 | |
| Total Retirement plans | | $ | 38 | | | $ | 41 | | | $ | 160 | | | $ | 160 | |
There are no mandatory contributions required in 2022 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements.
Retiree Health Plan Amendment
During the first quarter of 2022, we amended our U.S. Retiree Health Plan to reduce certain benefits for existing union retirees through the reduction or elimination of coverage or cost-sharing subsidies for retiree health care and life insurance costs. This negative plan amendment resulted in a reduction of approximately $23 in the Company's postretirement benefit obligation. The amount for the plan amendment will be amortized to future net periodic benefit costs as a prior service credit.
Note 17 – Shareholders’ Equity of Xerox Holdings
(shares in thousands)
The shareholders' equity information presented below reflects the consolidated activity of Xerox Holdings.
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| 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, 2021 | $ | 168 | | | $ | 1,802 | | | $ | (177) | | | $ | 5,631 | | | $ | (2,988) | | | $ | 4,436 | | | $ | 7 | | | $ | 4,443 | |
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| Comprehensive loss, net | — | | | — | | | — | | | (56) | | | (44) | | | (100) | | | (1) | | | (101) | |
Cash dividends declared - common(3) | — | | | — | | | — | | | (39) | | | — | | | (39) | | | — | | | (39) | |
Cash dividends declared - preferred(4) | — | | | — | | | — | | | (4) | | | — | | | (4) | | | — | | | (4) | |
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| Stock option and incentive plans, net | — | | | 4 | | | — | | | — | | | — | | | 4 | | | — | | | 4 | |
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| Payments to acquire treasury stock, including fees | — | | | — | | | (113) | | | — | | | — | | | (113) | | | — | | | (113) | |
| Cancellation of treasury stock | (12) | | | (246) | | | 258 | | | — | | | — | | | — | | | — | | | — | |
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| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
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Balance at March 31, 2022 | $ | 156 | | | $ | 1,560 | | | $ | (32) | | | $ | 5,532 | | | $ | (3,032) | | | $ | 4,184 | | | $ | 5 | | | $ | 4,189 | |
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| 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 | $ | 198 | | | $ | 2,445 | | | $ | — | | | $ | 6,281 | | | $ | (3,332) | | | $ | 5,592 | | | $ | 4 | | | $ | 5,596 | |
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| Comprehensive income (loss), net | — | | | — | | | — | | | 39 | | | (3) | | | 36 | | | — | | | 36 | |
Cash dividends declared - common(3) | — | | | — | | | — | | | (49) | | | — | | | (49) | | | — | | | (49) | |
Cash dividends declared - preferred(4) | — | | | — | | | — | | | (4) | | | — | | | (4) | | | — | | | (4) | |
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| Stock option and incentive plans, net | 1 | | | 11 | | | — | | | — | | | — | | | 12 | | | — | | | 12 | |
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| Payments to acquire treasury stock, including fees | — | | | — | | | (162) | | | — | | | — | | | (162) | | | — | | | (162) | |
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Balance at March 31, 2021 | $ | 199 | | | $ | 2,456 | | | $ | (162) | | | $ | 6,267 | | | $ | (3,335) | | | $ | 5,425 | | | $ | 4 | | | $ | 5,429 | |
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| | | | | | | | | | | | | | | |
_____________
(1)Common Stock has a par value of $1 per share.
(2)Refer to Note 19 - Other Comprehensive (Loss) Income for the components of AOCL.
(3)Cash dividends declared on common stock for the three months ended March 31, 2022 and 2021 were $0.25 per share, respectively.
(4)Cash dividends declared on preferred stock for the three months ended March 31, 2022 and 2021 were $20.00 per share, respectively.
Common Stock and Treasury Stock
The following is a summary of the changes in Common and Treasury stock shares:
| | | | | | | | | | | | | | |
| | Common Stock Shares | | Treasury Stock Shares |
| Balance at December 31, 2021 | | 168,069 | | | 8,675 | |
| Stock based compensation plans, net | | 630 | | | — | |
| Acquisition of Treasury stock | | — | | | 5,174 | |
| Cancellation of Treasury stock | | (12,341) | | | (12,341) | |
| Balance at March 31, 2022 | | 156,358 | | | 1,508 | |
Note 18 – 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, 2021 | | | $ | 3,202 | | | | | $ | 4,476 | | | $ | (2,988) | | | $ | 4,690 | | | $ | 7 | | | $ | 4,697 | |
| | | | | | | | | | | | | | | |
| Comprehensive loss, net | | | — | | | | | (56) | | | (44) | | | (100) | | | (1) | | | (101) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Dividends declared to parent | | | — | | | | | (549) | | | — | | | (549) | | | — | | | (549) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Transfers from parent | | | 390 | | | | | — | | | — | | | 390 | | | — | | | 390 | |
| | | | | | | | | | | | | | | |
| Distributions to noncontrolling interests | | | — | | | | | — | | | — | | | — | | | (1) | | | (1) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at March 31, 2022 | | | $ | 3,592 | | | | | $ | 3,871 | | | $ | (3,032) | | | $ | 4,431 | | | $ | 5 | | | $ | 4,436 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Additional Paid-in Capital | | | | Retained Earnings | | AOCL(1) | | Xerox Shareholder's Equity | | Non- controlling Interests | | Total Equity |
| Balance at December 31, 2020 | | | $ | 4,888 | | | | | $ | 5,834 | | | $ | (3,332) | | | $ | 7,390 | | | $ | 4 | | | $ | 7,394 | |
| | | | | | | | | | | | | | | |
| Comprehensive income (loss), net | | | — | | | | | 39 | | | (3) | | | 36 | | | — | | | 36 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Dividends declared to parent | | | — | | | | | (201) | | | — | | | (201) | | | — | | | (201) | |
| | | | | | | | | | | | | | | |
| Intercompany loan capitalization | | | (1,494) | | | | | — | | | — | | | (1,494) | | | — | | | (1,494) | |
| Transfers to parent | | | (34) | | | | | — | | | — | | | (34) | | | — | | | (34) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at March 31, 2021 | | | $ | 3,360 | | | | | $ | 5,672 | | | $ | (3,335) | | | $ | 5,697 | | | $ | 4 | | | $ | 5,701 | |
_____________
(1)Refer to Note 19 - Other Comprehensive (Loss) Income for the components of AOCL.
Note 19 - Other Comprehensive (Loss) Income
Other Comprehensive (Loss) Income is comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| | | | | | | | | | Pre-tax | | Net of Tax | | Pre-tax | | Net of Tax |
| Translation Adjustments Losses | | | | | | | | | | $ | (71) | | | $ | (72) | | | $ | (52) | | | $ | (51) | |
| Unrealized (Losses) Gains | | | | | | | | | | | | | | | | |
| Changes in fair value of cash flow hedges losses | | | | | | | | | | (15) | | | (13) | | | (10) | | | (8) | |
Changes in cash flow hedges reclassed to earnings(1) | | | | | | | | | | 2 | | | 2 | | | 1 | | | 1 | |
| | | | | | | | | | | | | | | | |
| Net Unrealized Losses | | | | | | | | | | (13) | | | (11) | | | (9) | | | (7) | |
| | | | | | | | | | | | | | | | |
| Defined Benefit Plans Gains (Losses) | | | | | | | | | | | | | | | | |
| Net actuarial/prior service gains | | | | | | | | | | 16 | | | 12 | | | 43 | | | 32 | |
Prior service amortization(2) | | | | | | | | | | (4) | | | (3) | | | (17) | | | (12) | |
Actuarial loss amortization/settlement(2) | | | | | | | | | | 28 | | | 21 | | | 35 | | | 26 | |
| | | | | | | | | | | | | | | | |
Other gains(3) | | | | | | | | | | 9 | | | 9 | | | 9 | | | 9 | |
| Changes in Defined Benefit Plans Gains | | | | | | | | | | 49 | | | 39 | | | 70 | | | 55 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Other Comprehensive (Loss) Income Attributable to Xerox Holdings/Xerox | | | | | | | | | | $ | (35) | | | $ | (44) | | | $ | 9 | | | $ | (3) | |
____________
(1)Reclassified to Cost of sales - refer to Note 14 - Financial Instruments for additional information regarding our cash flow hedges.
(2)Reclassified to Total Net Periodic Benefit Cost - refer to Note 16 - 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: | | | | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Cumulative translation adjustments | | $ | (1,933) | | | $ | (1,861) | |
| Other unrealized losses, net | | (13) | | | (2) | |
| Benefit plans net actuarial losses and prior service credits | | (1,086) | | | (1,125) | |
| Total Accumulated Other Comprehensive Loss Attributable to Xerox Holdings/Xerox | | $ | (3,032) | | | $ | (2,988) | |
Note 20 – (Loss) Earnings per Share
(shares in thousands)
The following table sets forth the computation of basic and diluted earnings per share of Xerox Holdings Corporation's common stock:
| | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended
March 31, |
| | | | | | | 2022 | | 2021 |
| Basic (Loss) Earnings per Share | | | | | | | | |
| Net (Loss) Income Attributable to Xerox Holdings | | | | | | $ | (56) | | | $ | 39 | |
| Accrued dividends on preferred stock | | | | | | (4) | | | (4) | |
| | | | | | | | |
| | | | | | | | |
| Adjusted Net (loss) income available to common shareholders | | | | | | $ | (60) | | | $ | 35 | |
| | | | | | | | |
| Weighted average common shares outstanding | | | | | | 156,362 | | | 195,985 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Basic (Loss) Earnings per Share | | | | | | $ | (0.38) | | | $ | 0.18 | |
| | | | | | | | |
| Diluted (Loss) Earnings per Share | | | | | | | | |
| Net (Loss) Income Attributable to Xerox Holdings | | | | | | $ | (56) | | | $ | 39 | |
| Accrued dividends on preferred stock | | | | | | (4) | | | (4) | |
| | | | | | | | |
| | | | | | | | |
| Adjusted Net (loss) income available to common shareholders | | | | | | $ | (60) | | | $ | 35 | |
| | | | | | | | |
| Weighted average common shares outstanding | | | | | | 156,362 | | | 195,985 | |
| Common shares issuable with respect to: | | | | | | | | |
| Stock options | | | | | | — | | | — | |
| Restricted stock and performance shares | | | | | | — | | | 2,181 | |
| Convertible preferred stock | | | | | | — | | | — | |
| | | | | | | | |
| Adjusted weighted average common shares outstanding | | | | | | 156,362 | | | 198,166 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Diluted (Loss) Earnings per Share | | | | | | $ | (0.38) | | | $ | 0.18 | |
| | | | | | | | |
| 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 | | | | | | 612 | | | 693 | |
| Restricted stock and performance shares | | | | | | 6,470 | | | 5,327 | |
| Convertible preferred stock | | | | | | 6,742 | | | 6,742 | |
| Total Anti-Dilutive Securities | | | | | | 13,824 | | | 12,762 | |
| | | | | | | | |
| Dividends per Common Share | | | | | | $ | 0.25 | | | $ | 0.25 | |
Note 21 – 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. Below is a summary of our Brazilian tax contingencies:
| | | | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Tax contingency - unreserved | | $ | 368 | | | $ | 292 | |
| Escrow cash deposits | | 39 | | | 32 | |
| Surety bonds | | 69 | | | 96 | |
| Letters of credit | | 93 | | | 74 | |
| Liens on Brazilian assets | | — | | | — | |
The increase in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily due to currency, as well as 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 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 of March 31, 2022 and December 31, 2021. We routinely assess all these matters as to the 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.
Litigation Against the Company
Miami Firefighters’ Relief & Pension Fund v. Icahn, et al.:
On December 13, 2019, alleged shareholder Miami Firefighters’ Relief & Pension Fund (“Miami Firefighters”) filed a purported derivative complaint in New York State Supreme Court, New York County on behalf of Xerox Holdings Corporation ("Xerox Holdings") (as nominal defendant) against Carl Icahn and his affiliated entities High River Limited Partnership and Icahn Capital LP (the "Icahn defendants"), Xerox Holdings, and all then-current Xerox Holdings directors (the "Directors"). Plaintiff made no demand on the Board before bringing the action, but instead alleges that doing so would be futile because the Directors lack independence due to alleged direct or indirect relationships with Icahn. Among other things, the complaint alleges that Icahn controls and dominates Xerox Holdings and therefore owes a fiduciary duty of loyalty to Xerox Holdings, which he breached by acquiring HP stock at a time when he knew that Xerox Holdings was considering an offer to acquire HP or had knowledge of the "obvious merits" of such potential acquisition, and that the Icahn defendants’ holdings of HP common stock have risen in market value by approximately $128 since disclosure of the offer. The complaint includes four causes of action: breach of fiduciary duty of loyalty against the Icahn defendants; breach of contract against the Icahn
defendants (for purchasing HP stock in violation of Icahn’s confidentiality agreement with Xerox Holdings); unjust enrichment against the Icahn defendants; and breach of fiduciary duty of loyalty against the Directors (for any consent to the Icahn defendants’ purchases of HP common stock while Xerox Holdings was considering acquiring HP). The complaint seeks a judgment of breach of fiduciary duties against the Icahn defendants and the Directors; a declaration that Icahn breached his confidentiality agreement with Xerox Holdings; a constructive trust on Icahn Capital and High River's investments in HP securities; disgorgement to Xerox Holdings of profits Icahn Capital and High River earned from trading in HP stock; payment of unspecified damages by the Directors for breaching fiduciary duties; and attorneys' fees, costs, and other relief the Court deems just and proper. On January 15, 2020, the Court entered an order granting plaintiff’s unopposed motion to consolidate with Miami Firefighters a similar action filed on December 26, 2019 by alleged shareholder Steven J. Reynolds against the same parties in the same court, and designating Miami Firefighters’ counsel as lead counsel in the consolidated action.
Discovery commenced. On August 10, 2020, the Xerox defendants and the Icahn defendants filed separate motions to dismiss. Briefing on the motions was completed on October 21, 2020. On December 14, 2020, following oral argument, the Court issued a decision and order granting defendants’ motions and dismissing the action in its entirety as to all defendants. Dismissal as to the Icahn defendants was conditioned on the filing of an affidavit, which the Icahn defendants filed on December 16, 2020, indicating whether defendant Icahn gained a profit or incurred a loss on purchases of HP stock during the relevant time period.
On December 23, 2020, plaintiff filed a motion seeking discovery related to the Icahn defendants’ losses resulting from their investment in HP. The motion was fully briefed on January 7, 2021. On January 15, 2021, the Court issued a decision and order denying the motion.
Also on January 15, 2021, plaintiff filed a notice of appeal of the December 14, 2020 dismissal order to the Appellate Division, First Department. On January 20, 2021, plaintiff filed a notice of appeal of the January 15, 2021 order denying its motion for discovery to the Appellate Division, First Department. On July 15, 2021, plaintiff filed its brief in connection with the appeals of the December 14, 2020 dismissal order and the January 15, 2021 discovery order.
On November 18, 2021, the Appellate Division issued its decision. The Court reversed the lower court’s ruling to the extent that it dismissed the claims asserted against the Icahn defendants. The claims asserted against the Directors remain dismissed. On December 8, 2021, the Xerox Board approved the formation of a Special Litigation Committee to investigate and evaluate the claims and allegations asserted in the Miami Firefighters’ case and determine the course of action that would be in the best interests of the Company and its shareholders. The Special Litigation Committee moved to stay the litigation pending its investigation and on January 25, 2022, the Court issued an order staying all discovery until February 28, 2022, except as related to the issue of the alleged damages sustained by Xerox.
On March 18, 2022, following the conclusion of its investigation, the Special Litigation Committee filed a motion to dismiss plaintiffs’ claims on the grounds that the derivative claims are without merit and pursuing the claims would not be in the best interest of Xerox or its shareholders. One week later the Icahn Defendants filed a motion for summary judgment. On April 4, 2022, Miami Firefighters filed papers in opposition to the pending motions and cross-moved to, among other things, seek discovery regarding the Special Litigation Committee’s investigation. Miami Firefighters also cross-moved seeking an order granting partial summary judgment against the Icahn Defendants for disgorgement of alleged unrealized profits in the amount of $18.12. Oral argument on the pending motions is scheduled for May 26, 2022.
Xerox Holdings Corporation v. Factory Mutual Insurance Company and Related Actions:
On March 10, 2021, Xerox Holdings Corporation (“Xerox Holdings”) filed a complaint for breach of contract and declaratory judgment against Factory Mutual Insurance Company in Rhode Island Superior Court, Providence County seeking insurance coverage for business interruption losses resulting from the coronavirus/COVID-19 pandemic. The complaint alleges that defendant agreed to provide Xerox Holdings with up to $1 billion in per-occurrence coverage for losses resulting from pandemic-related loss or damage to certain real and other property, including business interruption loss resulting from insured property damage; that the pandemic had inflicted significant physical loss or damage to property of Xerox Holdings and its direct and indirect customers; that Xerox Holdings’ worldwide actual and projected losses through the end of 2020 totaled in excess of $300 (and is still increasing); and that following Xerox Holdings' timely and proper claim in March 2020 for coverage under the “all risk” commercial property insurance policy it had purchased from defendant, defendant improperly denied and rejected coverage for most of the claim. The complaint seeks a jury trial, a declaratory judgment against defendant declaring that Xerox is entitled to full coverage of costs and losses under defendant’s policy and declaring that defendant is required to pay for such costs and losses, subject to any applicable limits; damages in an amount to be
determined at trial; consequential damages; attorneys’ fees and costs; pre- and post-judgment interest; and other relief the Court deems just and proper. Also on March 10, 2021, subsidiaries of Xerox Holdings filed similar complaints and related requests for arbitration in Toronto, London, and Amsterdam for Canadian, UK and European losses.
Xerox Holdings consented to defendant’s request for an extension of its time in which to answer or otherwise respond to the complaint. On May 6, 2021, FMG filed its answer to the complaint. The parties thereafter agreed to stay all non-U.S. proceedings pending the outcome of the U.S. litigation.
Guarantees
We have issued or provided approximately $279 of guarantees as of March 31, 2022 in the form of letters of credit or surety bonds issued to i) support certain insurance programs; ii) support our obligations related to the Brazil contingencies; and iii) support certain contracts, primarily with public sector customers, which require us to provide a surety bond as a guarantee of our performance of contractual obligations.
In general, we would only be liable for the amount of these guarantees in the event we defaulted in performing our obligations under each contract, the probability of which we believe is remote. We believe that our capacity in the surety markets as well as under various credit arrangements (including our Credit Facility) is sufficient to allow us to respond to future requests for proposals that require such credit support.
Note 22 – Subsequent Events
Pension
In April 2022, our U.K. defined benefit pension plan was amended, at the sole discretion of the Plan Trustees as legally allowed, to increase the capped inflation indexation for the April 2022 pension increase award to 7.5% in line with the December 2021 UK Retail Price Index (RPI). This plan amendment is expected to result in an increase of approximately $53 (GBP 40 million) in the projected benefit obligation (PBO) for this plan (approximately 1.4% of the plan PBO as of December 31, 2021). However, at this stage, we are still evaluating the full impact of this amendment including the associated impacts from the required remeasurement of the plan assets and obligations for updates to discount rates, actual returns and actuarial experience as of the effective date of the amendment. Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements included in the 2021 Annual Report for additional information regarding our U.K. defined benefit pension plan including its funding status as of December 31, 2021.
Secured Borrowing
In April 2022, we entered into a secured loan agreement with a financial institution where we sold $94 (119 million CAD) of finance receivables of our Canadian subsidiary to a special purpose entity (SPE). The purchase by the SPE was funded through an $85 (108 million CAD) amortizing secured loan to the SPE from the financial institution. The transaction was accounted for as a secured borrowing and the SPE is fully consolidated in our financial statements. As a result, the assets of the SPE are not available to satisfy any of our other obligations. Conversely, the credit holder of this SPE does not have legal recourse to the Company’s general credit.
The loan has a variable interest rate that was swapped to a fixed interest rate of 3.32% and it has an expected life of less than 3 years, with half of the loan projected to be repaid within the first year based on collections of the underlying portfolio of receivables.