Xerox Releases Fourth-Quarter and Full-Year Results

Xerox Holdings Corporation (NYSE: XRX) today announced 2020 fourth-quarter and full-year results and guidance for 2021.

“Times of adversity require working in unison, and I couldn’t be prouder of the way our team came together. We put our strategy to the test in 2020, delivering positive earnings per share and free cash flow, while returning capital to shareholders and continuing to invest in our future. The team’s discipline allowed us to turn on a dime, tightly controlling expenses while steadfastly supporting clients,” said Xerox Vice Chairman and CEO John Visentin. “Though the impact of the pandemic continues in 2021, we expect to return to growth this year as we increase the breadth of offerings and reach new customers in existing and new businesses.”

Fourth-Quarter Key Financial Results - Continuing Operations:

(in millions, except per share data)	Q4 2020	Q4 2019	B/(W) YOY	% Change YOY
Revenue	$1,930	$2,444	$(514)	(21.0)% AC (22.3)% CC1
Gross Margin	36.2%	41.6%	(540) bps
RD&E %	3.9%	3.8%	(10) bps
SAG %	22.8%	20.9%	(190) bps
Pre-Tax Income	$103	$336	$(233)	(69.3)%
Pre-Tax Income Margin	5.3%	13.7%	(840) bps
Operating Income - Adjusted1	$184	$411	$(227)	(55.2)%
Operating Margin - Adjusted1	9.5%	16.8%	(730) bps
GAAP EPS	$0.36	$1.17	$(0.81)	(69.2)%
EPS - Adjusted1	$0.58	$1.33	$(0.75)	(56.4)%

Full-Year Key Financial Results - Continuing Operations:

(in millions, except per share data)	FY 2020	FY 2019	B/(W) YOY	% Change YOY
Revenue	$7,022	$9,066	$(2,044)	(22.5)% AC (22.7)% CC1
Gross Margin	37.4%	40.3%	(290) bps
RD&E %	4.4%	4.1%	(30) bps
SAG %	26.4%	23.0%	(340) bps
Pre-Tax Income	$252	$822	$(570)	(69.3)%
Pre-Tax Income Margin	3.6%	9.1%	(550) bps
Operating Income - Adjusted1	$464	$1,192	$(728)	(61.1)%
Operating Margin - Adjusted1	6.6%	13.1%	(650) bps
GAAP EPS	$0.84	$2.78	$(1.94)	(69.8)%
EPS - Adjusted1	$1.41	$3.55	$(2.14)	(60.3)%

^___________

^{(1) Refer to the “Non-GAAP Financial Measures” section of this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measures.}

New Businesses to Deliver Continuous Growth

Xerox announced its intention to stand up its Software, Financing and Innovation organizations as separate and distinct businesses by 2022.

• The Software business will include a growing portfolio comprised of: DocuShare^®, a cloud-based content management system; XMPie, software that supports multichannel marketing campaigns; and CareAR, an augmented reality business Xerox acquired in late 2020. CareAR has signed agreements with a number of major companies.

• Xerox Financial Services (XFS) will become a global payment solutions business, offering leasing for Xerox and third-party technology and office equipment. This will expand the company’s customer base, create cross-selling opportunities and provide more leasing options for small and medium-sized businesses.

• The Palo Alto Research Center (PARC) has been central in advancing the company’s innovation portfolio including 3D Printing and Digital Manufacturing, IoT Sensors and Services, and Clean Technology. Xerox installed its first 3D printer for a client in December, and IoT solutions are at work with the U.S. Defense Advanced Research Projects Agency and other clients.

In the coming months, Xerox will establish a $250 million corporate venture capital fund to invest in start-ups and early and mid-stage growth companies aligned with the company’s innovation pillars and targeted adjacencies. The corporate venture capital fund will further enhance the company’s existing innovation ecosystem and drive growth through investment, commercial partnerships and co-development of new technologies.

2021 Guidance

Despite the high-level of economic uncertainty, the company expects continued progress on its strategic initiatives as projected in its 2021 financial guidance:

• Revenue of at least $7.2 billion in constant currency or approximately 2.5 percent growth
• Operating cash flow from continuing operations of at least $600 million and free cash flow of at least $500 million

About Xerox

Xerox Holdings Corporation (NYSE: XRX) makes every day work better. We are a workplace technology company building and integrating software and hardware for enterprises large and small. As customers seek to manage information across digital and physical platforms, Xerox delivers a seamless, secure and sustainable experience. Whether inventing the copier, the ethernet, the laser printer or more, Xerox has long defined the modern work experience. Learn how that innovation continues at xerox.com.

Non-GAAP Measures

This release refers to the following non-GAAP financial measures:

• Adjusted EPS, which excludes restructuring and related costs, the amortization of intangible assets, non-service retirement-related costs, transaction and related costs, net and other discrete adjustments from GAAP-EPS from continuing operations.
• Adjusted operating margin and income, which exclude the EPS adjustments noted above as well as the remainder of other expenses, net from pre-tax income and margin.
• Constant currency (CC) revenue change, which excludes the effects of currency translation.
• Free cash flow, which is cash flow from continuing operations less capital expenditures.

Refer to the “Non-GAAP Financial Measures” section of this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measures.

Forward-Looking Statements

This release, and other written or oral statements made from time to time by management contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “will”, “should”, "targeting", "projecting", "driving" and similar expressions, as they relate to us, our performance and/or our technology, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. Such factors include but are not limited to: the effects of the COVID-19 pandemic on our and our customers' businesses and the duration and extent to which this will impact our future results of operations and overall financial performance; our ability to address our business challenges in order to reverse revenue declines, reduce costs and increase productivity so that we can invest in and grow our business; our ability to attract and retain key personnel; changes in economic and political conditions, trade protection measures, licensing requirements and tax laws in the United States and in the foreign countries in which we do business; the imposition of new or incremental trade protection measures such as tariffs and import or export restrictions; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; the risk that partners, subcontractors and software vendors will not perform in a timely, quality manner; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions; the risk that confidential and/or individually identifiable information of ours, our customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems due to cyber attacks or other intentional acts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; the exit of the United Kingdom from the European Union; our ability to manage changes in the printing environment and expand equipment placements; interest rates, cost of borrowing and access to credit markets; funding requirements associated with our employee pension and retiree health benefit plans; the risk that our operations and products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives and anti-corruption laws; the outcome of litigation and regulatory proceedings to which we may be a party; any impacts resulting from the restructuring of our relationship with Fujifilm Holdings Corporation; and the shared services arrangements entered into by us as part of Project Own It. Additional risks that may affect Xerox’s operations and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of Xerox Holdings Corporation’s and Xerox Corporation's 2019 Annual Report on Form 10-K, as well as in Xerox Holdings Corporation's and Xerox Corporation's Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

These forward-looking statements speak only as of the date of this release or as of the date to which they refer, and Xerox assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

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Xerox^® and DocuShare^® are trademarks of Xerox in the United States and/or other countries.

XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
		Three Months Ended December 31,								Year Ended December 31,
(in millions, except per-share data)		2020				2019				2020				2019
Revenues
Sales		$	773			$	919			$	2,449			$	3,227
Services, maintenance and rentals		1,101				1,465				4,347				5,595
Financing		56				60				226				244
Total Revenues		1,930				2,444				7,022				9,066
Costs and Expenses
Cost of sales		541				605				1,742				2,097
Cost of services, maintenance and rentals		658				790				2,533				3,188
Cost of financing		32				33				121				131
Research, development and engineering expenses		75				93				311				373
Selling, administrative and general expenses		440				512				1,851				2,085
Restructuring and related costs		29				53				93				229
Amortization of intangible assets		22				10				56				45
Transaction and related costs, net		—				4				18				12
Other expenses, net		30				8				45				84
Total Costs and Expenses		1,827				2,108				6,770				8,244
Income before Income Taxes & Equity Income(1)		103				336				252				822
Income tax expense		28				73				64				179
Equity in net income of unconsolidated affiliates		2				3				4				8
Income from Continuing Operations		77				266				192				651
Income from discontinued operations, net of tax		—				553				—				710
Net Income		77				819				192				1,361
Less: Income from continuing operations attributable to noncontrolling interests		—				—				—				3
Less: Income from discontinued operations attributable to noncontrolling interests		—				1				—				5
Net Income Attributable to Xerox Holdings		$	77			$	818			$	192			$	1,353
Amounts Attributable to Xerox Holdings:
Net income from continuing operations		$	77			$	266			$	192			$	648
Net income from discontinued operations		—				552				—				705
Net Income Attributable to Xerox Holdings		$	77			$	818			$	192			$	1,353
Basic Earnings per Share:
Continuing operations		$	0.37			$	1.22			$	0.85			$	2.86
Discontinued operations		—				2.56				—				3.17
Total Basic Earnings per Share		$	0.37			$	3.78			$	0.85			$	6.03
Diluted Earnings per Share:
Continuing operations		$	0.36			$	1.17			$	0.84			$	2.78
Discontinued operations		—				2.44				—				3.02
Total Diluted Earnings per Share		$	0.36			$	3.61			$	0.84			$	5.80

___________________________

⁽¹⁾ Referred to as “Pre-Tax Income” throughout the remainder of this document.

XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
		Three Months Ended December 31,								Year Ended December 31,
(in millions)		2020				2019				2020				2019
Net Income		$	77			$	819			$	192			$	1,361
Less: Income from continuing operations attributable to noncontrolling interests		—				—				—				3
Less: Income from discontinued operations attributable to noncontrolling interests		—				1				—				5
Net Income Attributable to Xerox Holdings		77				818				192				1,353
Other Comprehensive Income (Loss), Net
Translation adjustments, net		234				184				241				62
Unrealized (losses) gains, net		—				(9)				4				(6)
Changes in defined benefit plans, net		27				28				69				(10)
Other Comprehensive Income, Net		261				203				314				46
Less: Other comprehensive loss, net from continuing operations attributable to noncontrolling interests		—				(1)				—				—
Other Comprehensive Income, Net Attributable to Xerox Holdings		261				204				314				46
Comprehensive Income (Loss), Net		338				1,022				506				1,407
Less: Comprehensive (loss) income, net from continuing operations attributable to noncontrolling interests		—				(1)				—				3
Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests		—				1				—				5
Comprehensive Income, Net Attributable to Xerox Holdings		$	338			$	1,022			$	506			$	1,399

XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)		December 31, 2020				December 31, 2019
Assets
Cash and cash equivalents		$	2,625			$	2,740
Accounts receivable (net of allowances of $69 and $55, respectively)		883				1,236
Billed portion of finance receivables (net of allowances of $4 and $3, respectively)		99				111
Finance receivables, net		1,082				1,158
Inventories		843				694
Other current assets		251				201
Total current assets		5,783				6,140
Finance receivables due after one year (net of allowances of $129 and $86, respectively)		1,984				2,082
Equipment on operating leases, net		296				364
Land, buildings and equipment, net		407				426
Intangible assets, net		237				199
Goodwill		4,071				3,900
Deferred tax assets		508				598
Other long-term assets		1,455				1,338
Total Assets		$	14,741			$	15,047
Liabilities and Equity
Short-term debt and current portion of long-term debt		$	394			$	1,049
Accounts payable		983				1,053
Accrued compensation and benefits costs		261				349
Accrued expenses and other current liabilities		840				984
Total current liabilities		2,478				3,435
Long-term debt		4,050				3,233
Pension and other benefit liabilities		1,566				1,707
Post-retirement medical benefits		340				352
Other long-term liabilities		497				512
Total Liabilities		8,931				9,239
Convertible Preferred Stock		214				214
Common stock		198				215
Additional paid-in capital		2,445				2,782
Treasury stock, at cost		—				(76)
Retained earnings		6,281				6,312
Accumulated other comprehensive loss		(3,332)				(3,646)
Xerox Holdings shareholders’ equity		5,592				5,587
Noncontrolling interests		4				7
Total Equity		5,596				5,594
Total Liabilities and Equity		$	14,741			$	15,047
Shares of common stock issued		198,386				214,621
Treasury stock		—				(2,031)
Shares of Common Stock Outstanding		198,386				212,590

XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		Three Months Ended December 31,								Year Ended December 31,
(in millions)		2020				2019				2020				2019
Cash Flows from Operating Activities
Net Income		$	77			$	819			$	192			$	1,361
Income from discontinued operations, net of tax		—				(553)				—				(710)
Income from continuing operations		77				266				192				651
Adjustments required to reconcile Net income to Cash flows from operating activities
Depreciation and amortization		96				98				368				430
Provisions		23				15				147				73
Net gain on sales of businesses and assets		(1)				(1)				(30)				(21)
Stock-based compensation		10				9				42				50
Restructuring and asset impairment charges		40				47				87				127
Payments for restructurings		(18)				(22)				(81)				(93)
Defined benefit pension cost		12				20				58				109
Contributions to defined benefit pension plans		(42)				(34)				(139)				(141)
Decrease (increase) in accounts receivable and billed portion of finance receivables		37				(50)				369				10
Decrease (increase) in inventories		140				78				(134)				109
Increase in equipment on operating leases		(32)				(40)				(118)				(153)
(Increase) decrease in finance receivables		(38)				(23)				183				101
Decrease (increase) in other current and long-term assets		6				(15)				8				(14)
Decrease in accounts payable		(54)				(23)				(123)				(47)
(Decrease) increase in accrued compensation		(40)				5				(189)				(94)
(Decrease) increase in other current and long-term liabilities		(19)				21				(165)				40
Net change in income tax assets and liabilities		19				60				32				90
Net change in derivative assets and liabilities		2				(4)				1				11
Other operating, net		17				(9)				40				6
Net cash provided by operating activities of continuing operations		235				398				548				1,244
Net cash provided by operating activities of discontinued operations		—				40				—				89
Net cash provided by operating activities		235				438				548				1,333
Cash Flows from Investing Activities
Cost of additions to land, buildings, equipment and software		(14)				(17)				(74)				(65)
Proceeds from sales of businesses and assets		1				—				30				21
Acquisitions, net of cash acquired		(10)				—				(203)				(42)
Other investing, net		—				—				1				1
Net cash used in investing activities of continuing operations		(23)				(17)				(246)				(85)
Net cash provided by investing activities of discontinued operations		—				2,233				—				2,233
Net cash (used in) provided by investing activities		(23)				2,216				(246)				2,148
Cash Flows from Financing Activities
Net (payments) proceeds on debt		(636)				(551)				133				(950)
Dividends		(54)				(60)				(230)				(243)
Payments to acquire treasury stock, including fees		(150)				(232)				(300)				(600)
Other financing, net		—				(8)				(19)				(41)
Net cash used in financing activities		(840)				(851)				(416)				(1,834)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		22				13				10				—
(Decrease) increase in cash, cash equivalents and restricted cash		(606)				1,816				(104)				1,647
Cash, cash equivalents and restricted cash at beginning of period		3,297				979				2,795				1,148
Cash, Cash Equivalents and Restricted Cash at End of Period		$	2,691			$	2,795			$	2,691			$	2,795

Impact of COVID-19 on Our Business Operations

In response to the COVID-19 pandemic, we have prioritized the health and safety of our employees, customers and partners to support their needs in the current hybrid environment so work can be done flawlessly, migrating between the workplace and the home-office. The pandemic has significantly impacted our sales of equipment and unbundled supplies as businesses hold off or delay purchases; due to their transactional nature, we expect that these sales will continue to fluctuate and gradually improve concurrent with office building reopenings and the roll-out of vaccinations, which is anticipated to allow more of our customers' employees to return to the office. Our bundled services contracts, on average, include a significant variable component based on print volumes, and a minimum fixed charge. The variable charges are impacted by our customers' employees not being in the office using our equipment and services due to lock-downs or capacity restrictions in office buildings; we expect that this contractual relationship will continue to enable us to ramp up and support our customers' needs as businesses resume operations.

We have a strong balance sheet and sufficient liquidity, including access to our undrawn $1.8 billion revolver. We further strengthened our liquidity with the early-redemption of all of our 2021 senior unsecured debt maturities during fourth quarter 2020, with the proceeds from the issuance of new senior unsecured notes and from finance receivables securitizations. With our Project Own It transformation and cost savings, we built a leaner and more flexible cost structure, and have also focused our efforts on incremental actions to prioritize and preserve cash as we manage through the pandemic. These actions include the use of available temporary government assistance measures and furlough programs, and the reduction of discretionary spend such as near-term targeted marketing programs, the use of contract employees, and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results.

The recent resurgence of the virus in several European countries and U.S. regions contributes to the remaining uncertainty around the trajectory, duration and economic impact of the pandemic in the near term, however we expect that measures to control the infection rate and expand economic activity will result in a moderate economic improvement in 2021. We expect to continue our actions to mitigate the effects of the pandemic on our business operations and financial performance.

Government Assistance and Furlough Programs

In response to the COVID-19 pandemic, various governments have enacted temporary measures to provide aid and economic stimulus directly to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees.

In March 2020, in response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). In addition to including temporary changes to income and non-income-based tax laws, the CARES Act provides refundable employee retention credits and defers the requirement to remit the employer-paid portion of social security payroll taxes. Similar pay protection programs were enacted in Canada and Europe that primarily provide direct grants to companies to cover the salary and wages of employees (retained or temporarily furloughed). During fourth quarter 2020, we recognized savings of approximately $12 million from these temporary measures in the U.S., Canada and Europe. Through the use of these programs, we have thus far been able to provide an offset to our costs, without further use of cash, while minimizing the financial impact to our employees.

Consistent with prior quarters, there were no material impacts to our income tax expense in the fourth quarter 2020 as a result of the temporary changes included in the CARES Act. In addition, we deferred payment of the employer-paid portion of social security payroll taxes through the end of calendar year 2020 to the extent not reduced by employee retention credits earned during 2020. This deferral ended in 2020 and we expect to pay 50% of the net deferred amount in 2021 and the remaining 50% in 2022 together with amounts normally due for the employer-paid portion of social security payroll taxes in those years.

The savings of approximately $12 million were recorded as follows in the Condensed Consolidated Statements of Income:

(in millions)		Three Months Ended December 31, 2020
Cost of services, maintenance and rentals		$	8
Selling, administrative and general expenses		4
Total Estimated Savings		$	12

We continue to monitor government programs and actions being implemented or expected to be implemented to counter the economic impacts of the COVID-19 pandemic. In December 2020, an additional $900 billion stimulus package, the Consolidated Appropriations Act, 2021, was approved in the U.S. extending the refundable employee retention credits into 2021. Other governments are likewise considering new programs or the extension of existing programs.

Revenues

		Three Months Ended December 31,												% of Total Revenue
(in millions)		2020				2019				% Change		CC % Change		2020		2019
Equipment sales		$	510			$	616			(17.2)%		(18.8)%		26%		25%
Post sale revenue		1,420				1,828				(22.3)%		(23.5)%		74%		75%
Total Revenue		$	1,930			$	2,444			(21.0)%		(22.3)%		100%		100%
Reconciliation to Condensed Consolidated Statements of Income:
Sales		$	773			$	919			(15.9)%		(17.1)%
Less: Supplies, paper and other sales		(263)				(303)				(13.2)%		(13.6)%
Equipment Sales		$	510			$	616			(17.2)%		(18.8)%
Services, maintenance and rentals		$	1,101			$	1,465			(24.8)%		(26.1)%
Add: Supplies, paper and other sales		263				303				(13.2)%		(13.6)%
Add: Financing		56				60				(6.7)%		(9.0)%
Post Sale Revenue		$	1,420			$	1,828			(22.3)%		(23.5)%
Americas		$	1,208			$	1,561			(22.6)%		(22.5)%		63%		64%
EMEA		675				756				(10.7)%		(15.1)%		35%		31%
Other		47				127				(63.0)%		(63.0)%		2%		5%
Total Revenue(1)		$	1,930			$	2,444			(21.0)%		(22.3)%		100%		100%
Memo:
Xerox Services		$	715			$	871			(17.9)%		(19.4)%		37%		36%

____________________________

CC - Constant Currency (see Non-GAAP Financial Measures section).

⁽¹⁾Refer to Appendix II for our Geographic Sales Channels and Products and Offerings Definitions.

Fourth quarter 2020 total revenue decreased 21.0% as compared to fourth quarter 2019, including a 1.3-percentage point favorable impact from currency and an approximate 1.5-percentage point favorable impact from 2020 partner dealer acquisitions, partially offset by a 2.5-percentage point unfavorable impact from a one-time OEM license fee of $77 million received in the prior year. See the Sales of Ownership Interests in Fuji Xerox Co., Ltd. and Xerox International Partners section for further details.

The COVID-19 pandemic significantly impacted our fourth quarter 2020 revenues due to business closures and office building capacity restrictions that slowed our customers' purchasing decisions and caused lower printing volumes on our devices. Earlier in the fourth quarter, our business continued a moderation of the rate of revenue decline, consistent with business reopenings that had started during the third quarter. However, the resurgence of the virus in several European countries and U.S. regions during the fourth quarter halted the recovery in the latter part of the period, and as a result, our rate of revenue decline during the fourth quarter remained virtually unchanged as compared to the third quarter after excluding the one-time OEM license fee received in the prior year described above.

Geographically, the revenue declines from our EMEA Operations were smaller, primarily as a result of the favorable impact from recent acquisitions in the region and higher installations of mono devices associated with our hybrid workplace initiatives and large government deals, as well as demand for our recently launched PrimeLink light production mono devices. Fourth quarter 2020 total revenue reflected the following:

• Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which are affected by installs and removals, but also by the page volumes generated from the usage of such devices and the revenue per printed page. Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization. Post sale revenue decreased 22.3% as compared to fourth quarter 2019, including a 1.2-percentage point favorable impact from currency. The COVID-19 pandemic significantly impacted our post sale revenue during the fourth quarter 2020, and the decrease also reflects a 3.4-percentage point unfavorable impact from the one-time OEM license fee in the prior year described above. The decline in post sale revenue reflected the following:
  • Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings. These revenues decreased 24.8% as compared to fourth quarter 2019, including a 1.3-percentage point favorable impact from currency and an approximate 4.1-percentage point unfavorable impact from the one-time OEM license fee received in the prior year described above. The decline at constant currency¹ reflected a lower population of devices (which is partially associated with lower installs in prior and current periods), an ongoing competitive price environment, and lower page volumes (including a higher mix of lower average-page-volume products) that were worse than pre-COVID-19 decline trends due to the impact of business closures during the quarter. While these revenues are contractual in nature, on average, our bundled services contracts include a minimum fixed charge and a significant variable component based on print volumes. The rate of decline of these revenues increased slightly during the quarter as compared to the prior quarter, as a second wave of the COVID-19 virus drove new business shutdowns in certain geographical areas in the U.S. and EMEA.
  • Supplies, paper and other sales includes unbundled supplies and other sales. These revenues decreased 13.2% as compared to fourth quarter 2019, including a 0.4-percentage point favorable impact from currency and reflected primarily lower supplies revenues associated with lower page volume trends partially offset by higher IT revenues from our XBS channel and from recently acquired IT dealers outside of the U.S. The decrease in supplies was significantly impacted by lower sales through indirect channels, as resellers, in response to the lower demand caused by the pandemic, have reduced their inventory purchases to manage liquidity. We expect that such resellers will maintain low purchase levels and lower inventories until there is a stable recovery in sales activity.
  • Financing revenue is generated from financed equipment sale transactions. The 6.7% decline in these revenues reflected a continued decline in the finance receivables balance due to lower equipment sales in prior periods and included a 2.3-percentage point favorable impact from currency.

		Three Months Ended December 31,												% of Equipment Sales
(in millions)		2020				2019				% Change		CC % Change		2020		2019
Entry		$	59			$	63			(6.3)%		(8.8)%		12%		10%
Mid-range		325				408				(20.3)%		(21.7)%		64%		66%
High-end		115				139				(17.3)%		(19.3)%		22%		23%
Other		11				6				83.3%		83.3%		2%		1%
Equipment Sales		$	510			$	616			(17.2)%		(18.8)%		100%		100%

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CC - Constant Currency (see Non-GAAP Financial Measures section).

• Equipment sales revenue decreased 17.2% as compared to fourth quarter 2019, including a 1.6-percentage point favorable impact from currency as well as the impact of price declines of approximately 5%. The COVID-19 pandemic significantly impacted our equipment sales revenue during the fourth quarter 2020 as a result of business closures and office building capacity restrictions that slowed our customers' purchasing decisions. In addition, our mix of revenues from lower-end and black-and-white devices has increased as a result of hybrid workplace trends associated with the COVID-19 pandemic. The decline at constant currency¹ reflected the following:
  • Entry - The decrease was driven primarily by lower sales of color devices and product constraints with our black and white devices as a result of high demand for lower-end printers and MFPs (primarily of black-and-white devices) in part associated with hybrid-workplace trends and promotions, partially offset by higher sales of mono personal printers and MFPs in our developing regions in EMEA and Latin America.
  • Mid-range - The decrease was driven primarily by the COVID-19 pandemic and related office closures, which slowed sales of this group of products due to their prevalence in office-team settings. School closures in the U.S. also impacted sales of our PrimeLink light production mono devices. Higher sales to government accounts as well as demand for our new-generation of ConnectKey multi-function devices and successful demand campaigns in EMEA for our recently launched PrimeLink mono devices provided a partial offset.
  • High-end - The decrease reflected primarily lower installs of our Iridesse, iGen and Versant entry-production color presses, partially offset by higher demand for our larger Baltoro cut-sheet inkjet press and higher sales in the U.S. of our continuous-feed color systems, as well as higher installs of our Nuvera mono production presses in North America as a result of cyclical account refreshes. The decrease in our equipment sales revenue from production color systems was greater for sales of our Iridesse and Versant systems in the SMB segment, where production printing applications depend on business reopenings.

Total Installs

Installs reflect new placement of devices only (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations). Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our Xerox Services revenues (which are both reported within our post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity from Xerox Services and Xerox and non-Xerox branded products installed by our XBS sales unit.² Detail by product group (see Appendix II) is shown below:

Entry

• 22% decrease in color multifunction devices reflecting lower installs of ConnectKey devices through our indirect channels in the U.S. and in EMEA.
• 28% increase in black-and-white multifunction devices reflecting higher activity primarily from indirect channels in the U.S and from developing regions in EMEA. The increase is primarily driven by higher sales of low-end devices associated with large order government deals from Eurasia and work-from-home sales programs.

Mid-Range³

• 20% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our new-generation of ConnectKey multi-function devices.
• 16% decrease in mid-range black-and-white installs reflecting in part global market trends partially offset by strong demand for our recently launched PrimeLink light-production devices and our new-generation of ConnectKey multi-function devices.

High-End³

• 26% decrease in high-end color installs reflecting primarily lower installs of our lower-end Versant devices and of our Iridesse and iGen productions systems, partially offset by higher installs of our Baltoro cut-sheet inkjet press and higher installs in the U.S. of our continuous-feed color systems .
• 6% decrease in high-end black-and-white systems reflecting lower installs of our Nuvera devices in EMEA, partially offset by higher activity related to cyclical account refreshes in the U.S.

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(1)	See the Non-GAAP Financial Measures section for an explanation of the non-GAAP financial measure.
(2)	During fourth quarter 2020, we revised the measurement of Total Installs to include installations of Xerox and non-Xerox branded devices directly by our XBS business Unit. Previously, Total Installs were based on intercompany transfers of devices to XBS and was limited to Xerox-branded devices only. Although the overall impact from the change was not material, we believe the new measurement basis provides a stronger connection between equipment sale revenues and installations. See APPENDIX II, Equipment Installs - Measurement Methodology Update, for the revision of prior quarters in 2020 based on the new methodology.
(3)	Mid-range and High-end color installations exclude Fuji Xerox digital front-end sales; including Fuji Xerox digital front-end sales, Mid-range color devices decreased 20%, and High-end color systems decreased 27%.

Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:

		Three Months Ended December 31,
(in millions)		2020				2019				B/(W)
Gross Profit		$	699			$	1,016			$	(317)
RD&E		75				93				18
SAG		440				512				72
Equipment Gross Margin		28.9		%		32.0		%		(3.1)			pts.
Post sale Gross Margin		38.8		%		44.8		%		(6.0)			pts.
Total Gross Margin		36.2		%		41.6		%		(5.4)			pts.
RD&E as a % of Revenue		3.9		%		3.8		%		(0.1)			pts.
SAG as a % of Revenue		22.8		%		20.9		%		(1.9)			pts.
Pre-tax Income		$	103			$	336			$	(233)
Pre-tax Income Margin		5.3		%		13.7		%		(8.4)			pts.
Adjusted(1) Operating Profit		$	184			$	411			$	(227)
Adjusted(1) Operating Margin		9.5		%		16.8		%		(7.3)			pts.

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⁽¹⁾ See the Non-GAAP Financial Measures section for an explanation of the non-GAAP financial measure.

Pre-tax Income Margin

Fourth quarter 2020 pre-tax income margin of 5.3% decreased by 8.4-percentage points as compared to fourth quarter 2019. The decrease primarily reflected the impact of lower adjusted¹ operating margin (see below) of 7.3-percentage points as well as higher Amortization of intangible assets and Other expenses, net, partially offset by lower Restructuring and related costs and Transaction and related costs, net.

Adjusted¹ Operating Margin

Fourth quarter 2020 adjusted¹ operating margin of 9.5% decreased by 7.3-percentage points as compared to fourth quarter 2019 reflecting the impact of lower revenues, primarily due to the significant effect of the COVID-19 pandemic on our business, partially offset by cost and expense reductions associated with our Project Own It transformation actions as well as additional savings from various cost reduction actions to mitigate the impact of the pandemic. These actions include approximately $12 million from temporary government assistance measures and furlough programs (see the Government Assistance and Furlough Programs section for further details) and other reductions in discretionary spend such as near term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions for the year 2020, as well as lower compensation incentives consistent with lower sales and operating results. The decrease was also affected by an approximate 2.7-percentage point unfavorable impact from the one-time OEM license fee received in the prior year described above.

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⁽¹⁾ Refer to the Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Gross Margin

Fourth quarter 2020 gross margin of 36.2% decreased by 5.4-percentage points as compared to fourth quarter 2019, reflecting the impact of lower revenues, (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures, as well as price promotion programs. The decrease was also affected by an approximate 1.9-percentage point unfavorable impact from the one-time OEM license fee received in the prior year described above. These headwinds were partially offset by the cost savings from our Project Own It transformation actions as well as the additional cost reduction actions to mitigate the impact of the pandemic, including savings of approximately $8 million from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions.

Fourth quarter 2020 equipment gross margin of 28.9% decreased by 3.1-percentage points as compared to fourth quarter 2019, reflecting lower revenues (primarily as a result of COVID-19 related business closures) and an unfavorable mix of growth in low-end and mono devices as well as the adverse impact of price promotion programs partially offset by the benefit of cost reductions from Project Own It and a 1.5-percentage point favorable impact from the net impact of lower tariff costs and higher transaction currency.

Fourth quarter 2020 post sale gross margin of 38.8% decreased by 6.0-percentage points as compared to fourth quarter 2019, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures impacting page volumes) and price erosion on contract renewals, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate the impact of the pandemic. These actions include approximately $8 million of savings from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions. The decrease was also affected by an approximate 2.4-percentage point unfavorable impact from the one-time OEM license fee received in the prior year described above.

Research, Development and Engineering Expenses (RD&E)

Fourth quarter 2020 RD&E as a percentage of revenue of 3.9% increased by 0.1-percentage points as compared to fourth quarter 2019, due to revenue declines partially offset by the benefit of cost reductions.

RD&E of $75 million decreased $18 million as compared to fourth quarter 2019 reflecting savings from Project Own It simplification and rationalization in core technology, and other temporary cost actions, as well as a favorable impact from the timing of investments, partially offset by higher spend in our innovation areas.

Selling, Administrative and General Expenses (SAG)

SAG as a percentage of revenue of 22.8% increased by 1.9-percentage points as compared to fourth quarter 2019, primarily due the impact of lower revenues, partially offset by the benefits from cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the pandemic. These actions include approximately $4 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results.

SAG of $440 million decreased by $72 million as compared to fourth quarter 2019, reflecting cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic, as described above, partially offset by expenses from recent acquisitions, an increase in bad debt expenses and an approximate $5 million impact from translation currency.

During first quarter 2020, our bad debt provision was $61 million higher than the prior year period, primarily reflecting the expected impact on our customer base and related outstanding receivables portfolio as a result of the economic disruption caused by the COVID-19 pandemic. Bad debt expense increased by $5 million in fourth quarter 2020 as compared to fourth quarter 2019 primarily related to trade receivables. Overall, write-offs and the current bad debt reserves for our trade and finance receivables portfolios are in line with our projections and consistent with future expectations regarding the impacts from the COVID-19 pandemic. We continue to monitor developments regarding the pandemic, including business closures and mitigating government support actions, and, as a result, our reserve estimates may need to be updated in future periods. Bad debt expense of approximately 2.7 percent of total gross receivables on a trailing-twelve-month basis reflects the significant increase in first quarter 2020 which remained higher than the 2019 trend of less than one percent.

Restructuring and Related Costs

We incurred restructuring and related costs of $29 million for the fourth quarter 2020 as compared to $53 million for fourth quarter 2019. These costs were primarily related to the implementation of initiatives under our business transformation projects including Project Own It. The following is a breakdown of those costs:

		Three Months Ended December 31,
(in millions)		2020				2019
Restructuring Severance (1)		$	50			$	44
Asset Impairments (2)		—				13
Other contractual termination costs (3)		1				1
Net reversals (4)		(11)				(11)
Restructuring and asset impairment costs		40				47
Retention related severance/bonuses (5)		(5)				8
Contractual severance costs (6)		(6)				2
Consulting and other costs (7)		—				(4)
Total		$	29			$	53

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(1)	Reflects headcount reductions of approximately 750 and 550 employees worldwide in fourth quarter of 2020 and 2019, respectively.
(2)	Primarily related to the exit and abandonment of leased and owned facilities. The charge for the fourth quarter 2019 includes the accelerated write-off of $3 million for leased right-of-use assets and $10 million for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries.
(3)	Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs.
(4)	Reflects net reversals for changes in estimated reserves from prior period initiatives.
(5)	Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination.
(6)	Amounts primarily reflect estimated severance and other related costs we were contractually required to pay in connection with employees transferred as part of the shared service arrangement entered into with HCL Technologies in the first quarter 2019. The credit in the fourth quarter 2020 reflects the refund of amounts paid to HCL due to changes in employees transferred.
(7)	Represents professional support services associated with our restructuring initiatives. The credit in the fourth quarter 2019 reflects adjustments of prior period estimated accruals for services.

Fourth quarter 2020 actions impacted several functional areas, with approximately 55% focused on gross margin improvements and approximately 45% focused on SAG reductions.

Fourth quarter 2019 actions impacted several functional areas, with approximately 47% focused on gross margin improvements, approximately 47% focused on SAG reductions and the remainder focused on RD&E optimization.

The restructuring and related costs reserve balance as of December 31, 2020 for all programs was $101 million, which is expected to be paid over the next twelve months.

Transaction and Related Costs, Net

Transaction and related costs, net primarily reflect costs from third party providers for professional services associated with certain strategic M&A projects. There were no Transaction and related costs, net incurred during fourth quarter 2020 as compared to $4 million incurred during fourth quarter 2019.

Amortization of Intangible Assets

Fourth quarter 2020 Amortization of intangible assets of $22 million increased by $12 million compared to fourth quarter 2019 primarily due to the accelerated write-off of certain XBS tradenames as part of our continued efforts to realign and consolidate this business unit as part of Project Own It, as well as the impact from 2020 partner dealer acquisitions.

Worldwide Employment

Worldwide employment was approximately 24,700 as of December 31, 2020 and decreased by approximately 2,300 from December 31, 2019. The reduction resulted from net attrition (attrition net of gross hires), of which a large portion is not expected to be back filled, as well as the impact of organizational changes.

Other Expenses, Net

		Three Months Ended December 31,
(in millions)		2020				2019
Non-financing interest expense		$	25			$	24
Interest income		(2)				(7)
Non-service retirement-related costs		(9)				(3)
Gains on sales of businesses and assets		(1)				(1)
Currency (gains) losses, net		(1)				1
Loss on early extinguishment of debt		26				—
Contract termination costs - IT services		—				(4)
Tax Indemnification from Conduent		(7)				—
All other expenses, net		(1)				(2)
Other expenses, net		$	30			$	8

Non-financing interest expense

Fourth quarter 2020 non-financing interest expense of $25 million was $1 million higher than fourth quarter 2019. When combined with financing interest expense (Cost of financing), total interest expense was flat as compared to fourth quarter 2019 primarily reflecting a higher average debt balance partially offset by lower interest rates.

Interest Income

Fourth quarter 2020 interest income was $5 million lower than fourth quarter 2019, primarily due to lower interest rates.

Non-service retirement-related costs

Fourth quarter 2020 non-service retirement-related costs were $6 million lower than fourth quarter 2019, primarily driven by lower losses from pension settlements in the U.S. and lower discount rates.

Loss on early extinguishment of debt

During fourth quarter 2020 we recorded a $26 million loss associated with the early extinguishment of $1,062 million of the Senior Notes due May 2021. The net loss included the payment of a redemption premium of $24 million as well as the write-off of unamortized debt issuance costs and other debt carrying value adjustments. See Debt Activity section for additional information.

Contract termination costs - IT services

Contract termination costs - IT services was a $4 million credit in fourth quarter 2019 reflecting an adjustment to a $43 million penalty recorded in fourth quarter 2018, associated with the termination of an IT services arrangement. There were no contract termination charges during fourth quarter 2020.

Tax indemnification from Conduent

Represents indemnification payment expected to be received from Conduent as part of the settlement of a pre-separation unrecognized tax position related to Conduent when part of our consolidated return. The equal and offsetting charge to this receipt is recorded in Income Tax expense, as part of our obligation to pay the taxing authorities.

Income Taxes

Fourth quarter 2020 effective tax rate was 27.2%. On an adjusted¹ basis, fourth quarter 2020 effective tax rate was 29.8%. This rate was higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of earnings which includes non-deductible items on lower pre-tax income. The adjusted¹ effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.

Fourth quarter 2019 effective tax rate was 21.7%. On an adjusted¹ basis, fourth quarter 2019 effective tax rate was 25.0%. These rates were higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of earnings. The adjusted¹ effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.

Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable.

______________

⁽¹⁾ Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section.

Net Income from Continuing Operations

Fourth quarter 2020 net income from continuing operations attributable to Xerox Holdings was $77 million, or $0.36 per diluted share. On an adjusted¹ basis, net income from continuing operations attributable to Xerox Holdings was $122 million, or $0.58 per diluted share. Fourth quarter 2020 adjustments to net income from continuing operations included Restructuring and related costs, Amortization of intangible assets and Non-service retirement-related costs as well as Other discrete, unusual or infrequent items, which included a loss on the early extinguishment of debt (see Non-GAAP Financial Measures).

Fourth quarter 2019 net income from continuing operations attributable to Xerox Holdings was $266 million, or $1.17 per diluted share. On an adjusted¹ basis, net income from continuing operations attributable to Xerox Holdings was $300 million, or $1.33 per diluted share. Fourth quarter 2019 adjustments to net income from continuing operations included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and Non-service retirement-related costs as well as Other discrete, unusual or infrequent items (see Non-GAAP Financial Measures).

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⁽¹⁾ Refer to the "Non-GAAP Financial Measures" section for the calculation of adjusted EPS. The calculations of basic and diluted earnings per share are included in Appendix I.

Discontinued Operations

In November 2019, Xerox Holdings completed a series of transactions to restructure its relationship with FUJIFILM Holdings Corporation (“FH”), including the sale of its indirect 25% equity interest in Fuji Xerox Co., Ltd. ("FX") for approximately $2.2 billion as well as the sale of its indirect 51% partnership interest in Xerox International Partners ("XIP") for approximately $23 million (collectively the “Sales”). As a result of the Sales and the related strategic shift in our business, the historical financial results of our equity method investment in FX and our XIP business (which was consolidated) for the periods prior to the Sales are reflected as a discontinued operation and as such, their impact is excluded from continuing operations for all periods presented.

Summarized financial information for our Discontinued operations is as follows:

		Three Months Ended December 31,
(in millions)		2020				2019
Revenue		$	—			$	6
Income from operations(1)		$	—			$	17
Gain on disposal		—				629
Income before income taxes		—				646
Income tax expense		—				93
Income from discontinued operations, net of tax		—				553
Less: Income from discontinued operations attributable to noncontrolling interests, net of tax		—				1
Income from discontinued operations, attributable to Xerox Holdings, net of tax		$	—			$	552

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⁽¹⁾ Includes equity income from FX of $15 million for the three months ended December 31, 2019.

Capital Resources and Liquidity

Our fourth quarter