XEROX HOLDINGS CORPORATION Throughout the Management's Discussion and Analysis (MD&A) that follows, references to "Xerox Holdings " refer toXerox Holdings Corporation and its consolidated subsidiaries, while references to "Xerox" refer toXerox Corporation and its consolidated subsidiaries. References herein to "we," "us," "our," and the "Company" refer collectively to bothXerox Holdings and Xerox unless the context suggests otherwise. References to "Xerox Holdings Corporation " refer to the stand-alone parent company and do not include its subsidiaries. References to "Xerox Corporation " refer to the stand-alone company and do not include its subsidiaries. Currently,Xerox Holdings' primary direct operating subsidiary is Xerox and Xerox reflects nearly all ofXerox Holdings' operations. Accordingly, the following MD&A primarily focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and its results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, the Condensed Consolidated Financial Statements and the accompanying notes. Throughout this MD&A, references are made to various notes in the Condensed Consolidated Financial Statements which appear in Item 1 of this combined Quarterly Report on Form 10-Q (this Form 10-Q), and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.Xerox Holdings' other direct subsidiary isXerox Ventures LLC , which was established in 2021 solely to invest in startups and early/mid-stage growth companies aligned with the Company's innovation focus areas and targeted adjacencies. In January of 2023, allXerox Ventures LLC investments were transferred and are held byXerox Ventures Fund I, LLC , a subsidiary ofXerox Ventures LLC .Xerox Ventures Fund I, LLC had investments of approximately$24 million atMarch 31, 2023 . Due to its immaterial nature, and for ease of discussion,Xerox Ventures LLC's results are included within the following discussion.
Currency Impact
To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies intoU.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency," "currency impact" or "the impact from currency." This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates.
Overview
Balanced execution drove growth in revenue and profits for the first quarter. Amid a challenging operating environment, Xerox remains focused on the execution of our 2023 priorities and the goal of delivering client success through products and services that address the productivity challenges of today's hybrid workplace. Demand for our print equipment and related services remains resilient despite continued economic uncertainty, as evidenced by another quarter of growth in both equipment revenue and constant currency1 Post sale revenue, which included a benefit from prior year acquisitions. Consistent with recent quarters, we are seeing isolated pockets of softer installation activity - often the result of delays in project deployments rather than order reductions. This softness, however, is being offset by continued strength in our office print business, particularly for state and local government, education and mid-market accounts, as well as strength in our print and digital service offerings. As a result, we continue to expect a stable revenue and demand outlook for the full year. Equipment sales revenue of$391 million in first quarter 2023 increased 24.5% in actual currency and 27.0% in constant currency1 as compared to the prior year. Growth was driven by better availability of product in both theAmericas and EMEA, particularly for our higher margin A3 devices and production equipment. Backlog2 declined for the third consecutive quarter as supply chain conditions further normalized. Post-sale revenue declined 2.2% in actual currency and increased 0.5% in constant currency1. Post-sale growth in constant currency1 was driven by growth in consumables and contractual print and digital services3, including the acquisition of Go Inspire, partially offset by lower sales of IT Hardware. Pre-tax income and adjusted1 operating income were both higher year-over-year, primarily due to increased revenues as well the benefits from continued cost reduction actions, supply chain-related cost improvements, price increases and lower bad debt expense due to reserve releases. We expect to deliver low-to-mid single digit gross operating cost efficiencies for the year, driven by continuous productivity improvement and specific cost reductions. Xerox 2023 Form 10-Q 39 --------------------------------------------------------------------------------
Donation of
OnApril 29, 2023 , Xerox completed the donation of itsPalo Alto Research Center (PARC) subsidiary toSRI International (SRI), a nonprofit research institute. Refer to Note 21 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information regarding this donation.
____________________________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure. (2)Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT services offerings. First quarter 2023 backlog of$179 million excludes sales orders fromRussia andPowerland Computers Ltd. (3)Includes revenue from Services, maintenance and rentals.
First Quarter 2023 Review
Total revenue of$1.72 billion for first quarter 2023 increased 2.8% from first quarter 2022, which included a 2.2-percentage point benefit from acquisitions, offset by a 2.7-percentage point adverse impact from currency. Total revenue reflected a decrease of 2.2% in Post sale revenue, which included a 2.7-percentage point adverse impact from currency, offset by a 2.8-percentage point benefit from acquisitions. Equipment sales revenue increased 24.5%, which included a 2.5-percentage point adverse impact from currency.
Net income (loss) attributable to
Three Months Ended March 31,
(in millions) 2023 2022 B/(W)
Net Income (Loss) Attributable to Xerox Holdings $ 71 $ (56) $ 127
Adjusted(1) Net income (loss) attributable to
Xerox Holdings 82 (14) 96
____________________________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure.
First quarter 2023 Net income attributable toXerox Holdings of$71 million was an increase of$127 million as compared to first quarter 2022 Net loss attributable toXerox Holdings of$56 million . The increase primarily reflects higher revenues and gross margin, as well as the impact of lower supply chain-related costs, a lower rate of investments in new businesses, lower bad debt provisions, primarily due to reserve releases, lower Restructuring and related costs, net, and lower Other expenses, net, all of which were partially offset by higher Income tax expense. First quarter 2023 Adjusted1 Net income attributable toXerox Holdings of$82 million increased$96 million as compared to the prior year period, primarily due to higher revenues and gross margin, as well as the impact of lower supply chain-related costs, a lower rate of investments in new businesses, and lower bad debt provisions, primarily due to reserve releases, all of which were partially offset by higher Income tax expense. A summary of our segments - Print and Other and Financing (FITTLE) - is as follows: Three Months Ended March 31, % of Total (in millions) 2023 2022 % Change 2023 2022 Revenue Print and Other$ 1,613 $ 1,550 4.1 % 94 % 93 % FITTLE 154 158 (2.5) % 9 % 9 % Intersegment Elimination(1) (52) (40) 30.0 % (3) % (2) % Total Revenue$ 1,715 $ 1,668 2.8 % 100 % 100 % Profit Print and Other$ 106 $ (20) nm 90 % nm FITTLE 12 17 (29.4) % 10 % nm Total Profit$ 118 $ (3) nm 100 % nm
____________________________
(1)Reflects revenue, primarily commissions and other payments, made by the
FITTLE segment to the Print and Other segment for the lease of Xerox equipment
placements.
nm - Change is not meaningful.
Xerox 2023 Form 10-Q 40
--------------------------------------------------------------------------------
Cash flows from operating activities during the three months ended March 31,
2023 was a source of $78 million and increased $12 million as compared to the
prior year period, primarily related to higher net income as well as proceeds
from the on-going sales of finance receivables under the Receivable Funding
Agreement, partially offset by higher finance receivable originations, and an
increased use of cash for working capital1. Cash used in investing activities
during the three months ended March 31, 2023 was $17 million reflecting capital
expenditures of $8 million , acquisitions of $7 million and $3 million of
noncontrolling investments as part of our corporate venture capital fund. Cash
used in financing activities during the three months ended March 31, 2023 was
$505 million reflecting $300 million for Senior Notes that matured in 2023,
payments of $152 million on existing secured financing arrangements and dividend
payments of $45 million .
____________________________
(1)Working capital, net reflects Accounts receivable, Billed portion of finance receivables, Inventories and Accounts payable.
We continue to expect total Revenue to be flat to down low-single-digits in constant currency1 in 2023. We also continue to expect pre-tax and adjusted1 operating income and margin to increase over 2022 levels, with a slightly higher increase expected for adjusted1 operating margin reflecting better than expected profitability in the first quarter of 2023 and the success of ongoing efficiency programs. Lastly, we continue to expect Operating cash flows to be at least$550 million , which reflects the benefits of FITTLE's finance receivables funding agreement, and capital expenditures to be approximately$50 million . Our capital allocation policy of returning at least 50% of free cash flow2 to shareholders remains unchanged.
____________________________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of the
non-GAAP financial measure.
(2)Free cash flow is Net cash provided by operating activities less capital
expenditures.
Xerox 2023 Form 10-Q 41--------------------------------------------------------------------------------
Financial Review
Revenues
Three Months Ended
March 31, % of Total Revenue
(in millions) 2023 2022 % Change CC % Change 2023 2022
Equipment sales $ 391 $ 314 24.5 % 27.0 % 23 % 19 %
Post sale revenue 1,324 1,354 (2.2) % 0.5 % 77 % 81 %
Total Revenue $ 1,715 $ 1,668 2.8 % 5.5 % 100 % 100 %
Reconciliation to Condensed Consolidated Statements of Income (Loss): Sales
$ 659 $ 592 11.3 % 13.1 % Less: Supplies, paper and other sales (268) (278) (3.6) % (2.6) % Equipment sales$ 391 $ 314 24.5 % 27.0 % Services, maintenance and rentals$ 1,004 $ 1,023 (1.9) % 1.4 % Add: Supplies, paper and other sales 268 278 (3.6) % (2.6) % Add: Financing 52 53 (1.9) % 0.3 % Post sale revenue$ 1,324 $ 1,354 (2.2) % 0.5 % Segments Print and Other$ 1,613 $ 1,550 4.1 % 94 % 93 % FITTLE 154 158 (2.5) % 9 % 9 % Intersegment elimination(1) (52) (40) 30.0 % (3) % (2) % Total Revenue(2)$ 1,715 $ 1,668 2.8 % 100 % 100 % Go-To-Market Operations Americas$ 1,114 $ 1,071 4.0 % 4.6 % 65 % 64 % EMEA 556 554 0.4 % 7.3 % 32 % 33 % Other 45 43 4.7 % 4.7 % 3 % 3 % Total Revenue(3)$ 1,715 $ 1,668 2.8 % 5.5 % 100 % 100 % _____________ CC - See "Currency Impact" section for a description of Constant Currency. (1)Reflects revenue, primarily commissions and other payments, made by the FITTLE segment to the Print and Other segment for the lease of Xerox equipment placements. (2)Refer to Note 4 - Segment Reporting in the Condensed Consolidated Financial Statements for additional information regarding our reportable segments. (3)Refer to the "Geographic Sales Channels" section. First quarter 2023 total revenue increased 2.8% as compared to first quarter 2022, which included a 2.2-percentage point benefit from acquisitions, as well as a 2.7-percentage point adverse impact from currency. The increase in constant currency1 revenue reflected growth in equipment sales revenue, primarily due to stable order flows, improved product supply and pricing actions taken in 2022. Post sale revenue also increased at constant currency1, primarily reflecting growth in outsourcing revenues and consumables, as well as the benefits from acquisitions. Geographically, revenue increased 4.0% in ourAmericas region as compared to first quarter 2022, primarily reflecting higher equipment sales resulting from increased product availability, and the benefits from recent acquisitions, partially offset by a 0.6-percentage point adverse impact from currency. Revenue in our EMEA operations increased 0.4%, as compared to first quarter 2022 and included a 6.9-percentage point adverse impact from currency. On a constant currency1 basis, revenue increased 7.3% driven by strength in equipment sales revenue and the benefits from recent acquisitions.
Total revenue for the three months ended
Post sale revenue
Post sale revenue primarily reflects contracted services, equipment maintenance,
supplies and financing. These revenues are associated not only with the
population of devices in the field, which is affected by installs and removals,
but also by the page volumes generated from the usage of such devices and the
revenue per printed page. Post sale revenue also includes transactional IT
hardware sales and implementation services.
Xerox 2023 Form 10-Q 42
--------------------------------------------------------------------------------
Post sale revenue decreased 2.2% for the three months ended March 31, 2023 as
compared to the prior year period and included a 2.7-percentage point adverse
impact from currency, offset by a 2.8-percentage point benefit from
acquisitions. Post sale revenue reflected the following:
•Services, maintenance and rentals revenue includes maintenance revenue
(including bundled supplies), print and digital services revenue from our
Services offerings and rentals. These revenues decreased 1.9% as compared to
first quarter 2022, including a 3.3-percentage point adverse impact from
currency. In constant currency1, revenue growth was primarily driven by
contractual print and digital services, including the acquisition of Go Inspire.
Contractual print and digital services2 revenue grew as compared to first
quarter 2022, due in large part to the expansion of our digital services
offerings and price increases, which were partially offset by overall page
volume declines associated with lower device placements in prior years.
•Supplies, paper and other sales includes unbundled supplies, IT services and
other sales. These revenues decreased 3.6% as compared to first quarter 2022,
including a 1.0-percentage point adverse impact from currency, and primarily
reflected lower IT hardware sales, partially offset by higher paper sales.
•Financing revenue is generated from financed Xerox equipment sale transactions
and third-party equipment placements. These revenues decreased 1.9% as compared
to first quarter 2022, including a 2.2-percentage point adverse impact from
currency. The essentially flat financing revenue at constant currency1 reflects
a steady average finance receivable portfolio as increased new originations for
Xerox and third-party equipment were offset by ongoing sales under FITTLE's
finance receivables funding agreement entered into in the fourth quarter 2022.
Equipment sales revenue
Equipment sales revenue increased 24.5% as compared to the first quarter 2022, including a 2.5-percentage point adverse impact from currency. The increase in both actual and constant currency1 reflected improvement in product availability in both theAmericas and EMEA regions, particularly for our higher margin mid-range devices and high-end entry production equipment. Backlog3 declined 27.1% on a sequential basis and 58.8% on a year-over-year basis but remained above pre-pandemic levels. Approximately 50% of the backlog is related to mid-range devices.
See Segment Review - Print and Other below for additional discussion on Equipment sales revenue.
____________________________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure. (2)Includes revenues from Services, maintenance and rentals. (3)Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT service offerings. First quarter 2023 backlog of$179 million excludes sales orders fromRussia andPowerland Computers, Ltd.
Geographic Sales Channels
We also operate a matrix organization that includes a geographic focus that is primarily organized from a sales perspective on the basis of "go-to-market" (GTM) sales channels as follows:
•Americas, which includes our sales channels in theU.S. andCanada , as well asMexico ,Brazil and Central andSouth America . •EMEA, which includes our sales channels inEurope , theMiddle East ,Africa andIndia . •Other, which includes royalties and licensing revenue. These GTM sales channels are structured to serve a range of customers for our products and services, including financing. Accordingly, we will continue to provide information, primarily revenue related, with respect to our principal GTM sales channels. Xerox 2023 Form 10-Q 43 --------------------------------------------------------------------------------
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 March 31,
(in millions) 2023 2022 B/(W)
Gross Profit $ 589 $ 530 $ 59
RD&E 64 78 14
SAG 407 455 48
Equipment Gross Margin 36.5 % 20.4 % 16.1 pts.
Post sale Gross Margin 33.7 % 34.4 % (0.7) pts.
Total Gross Margin 34.3 % 31.8 % 2.5 pts.
RD&E as a % of Revenue 3.7 % 4.7 % 1.0 pts.
SAG as a % of Revenue 23.7 % 27.3 % 3.6 pts.
Pre-tax Income (Loss) $ 85 $ (89) $ 174
Pre-tax Income (Loss) Margin 5.0 % (5.3) % 10.3 pts.
Adjusted(1) Operating Profit (Loss) $ 118 $ (3) $ 121
Adjusted(1) Operating Income (Loss) Margin 6.9 % (0.2) % 7.1 pts.
____________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure.
Pre-tax Income (Loss) Margin First quarter 2023 pre-tax income margin of 5.0% increased 10.3-percentage points as compared to first quarter 2022 pre-tax (loss) margin of (5.3)%. The increase primarily reflected higher adjusted1 operating margin (see below) and revenues, as well as lower Restructuring and related cost, net and Other expenses, net.
Adjusted1 Operating Margin
First quarter 2023 adjusted1 operating income margin of 6.9% increased by 7.1-percentage points as compared to first quarter 2022 primarily reflecting higher revenue and gross margin, which includes the impact of lower supply chain-related costs, a lower rate of investments in new businesses and lower bad debt provisions due primarily to reserve releases (a 1.4-percentage point favorable impact). Adjusted1 operating margin also benefited from pricing actions and cost and productivity savings.
______________
(1)Refer to the Adjusted Operating Income (Loss) and Margin reconciliation table in the "Non-GAAP Financial Measures" section.
Gross Margin
First quarter 2023 gross margin of 34.3% increased by 2.5-percentage points as
compared to first quarter 2022, reflecting higher revenue, lower supply
chain-related costs, benefits associated with pricing actions and cost and
productivity savings as well as a favorable product mix, and currency. These
impacts were partially offset by higher product costs.
First quarter 2023 equipment gross margin of 36.5% increased by 16.1-percentage
points as compared to first quarter 2022, primarily reflecting higher revenue, a
favorable product and channel mix, lower supply chain-related costs, pricing
benefits and favorable currency. These impacts were partially offset by higher
product costs.
First quarter 2023 Post sale gross margin of 33.7% decreased by 0.7-percentage
points as compared to first quarter 2022, reflecting lower revenue, higher
component costs, a competitive pricing environment and the impacts from recent
acquisitions and IT hardware/services revenue that have a lower gross margin.
Financing margin also declined due to higher borrowing costs. These impacts were
partially offset by lower supply chain-related costs and benefits associated
with pricing actions and cost and productivity savings.
Xerox 2023 Form 10-Q 44
--------------------------------------------------------------------------------Research, Development and Engineering Expenses (RD&E)
Three Months Ended
March 31,
(in millions) 2023 2022 Change
R&D $ 52 $ 64 $ (12)
Sustaining engineering 12 14 (2)
Total RD&E Expenses $ 64 $ 78 $ (14) First quarter 2023 RD&E as a percentage of revenue of 3.7% decreased by 1.0-percentage point as compared to first quarter 2022, primarily due to a lower rate of investments in new businesses, including the spin-off of Innovation businesses within PARC Innovation, and higher revenues.
RD&E of
Selling, Administrative and General Expenses (SAG)
First quarter 2023 SAG as a percentage of revenue of 23.7% decreased by 3.6-percentage points as compared to first quarter 2022, primarily due to lower selling and administrative expenses and higher revenues, as well as a 1.4 percentage-point favorable impact from lower bad debt expense.
First quarter 2023 SAG of$407 million decreased by$48 million as compared to first quarter 2022, reflecting lower selling and administrative expenses, which benefited from productivity and cost savings as well as lower labor costs associated with a higher-than-expected number of open positions. Additionally, SAG benefited from a favorable impact of currency, and lower bad debt expense primarily due to reserve releases. Our bad debt provision for three months endedMarch 31, 2023 was an$8 million credit, a decrease of$23 million as compared to first quarter 2022, primarily related to a reserve release of approximately$12 million due to the favorable reassessment of the credit exposure on a large customer receivable balance after a contract amendment which improved our credit position, and a reserve release of approximately$5 million related to the sale of finance receivables on a non-recourse basis as part of the on-going FITTLE finance receivables funding agreement. The remainder of the decrease is related to the prior year, which includes an increase in reserves related toRussia , as well an assessment of lower expected write-offs in our finance receivables portfolio, particularly in theAmericas region, due to an overall improvement in credit exposures during the quarter. We believe our current reserve position remains sufficient to cover expected future losses that may result from current and future macro-economic conditions including higher inflation and interest rates. We continue to monitor developments in future economic conditions, and as a result, our reserves may need to be updated in future periods. On a trailing twelve-month basis (TTM), bad debt expense was approximately 1.0% of total receivables (excluding the reserve releases in the first quarter 2023). Refer to Note 7 - Accounts Receivable, Net and Note 8 - Finance Receivables, Net in the Condensed Consolidated Financial Statements for additional information regarding our bad debt provision. Xerox 2023 Form 10-Q 45 --------------------------------------------------------------------------------
Restructuring and Related Costs, Net
We incurred Restructuring and related costs, net of$2 million for the first quarter 2023, as compared to$18 million for first quarter 2022. These costs were primarily related to the implementation of initiatives under our business transformation projects, including Project Own It in prior years. The following is a breakdown of those costs: Three Months Ended March 31, (in millions) 2023 2022 Severance(1)$ 5 $ 22 Asset impairments - leased right-of-use assets(2) - 1 Other credits(3) (4) (3) Restructuring and asset impairment costs 1 20 Retention-related severance/bonuses(4) 1 (2) Total$ 2 $ 18 _____________ (1)Reflects headcount reductions of approximately 100 and 450 employees worldwide in first quarter 2023 and 2022, respectively. (2)Primarily related to the exit and abandonment of leased and owned facilities net of any potential sublease income and other recoveries. (3)Reflects net reversals for changes in estimated reserves from prior period initiatives. (4)Includes retention-related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. The reversals in 2022 reflect a change in estimates. First quarter 2023 actions impacted several functional areas, with approximately 30% focused on gross margin improvements and approximately 70% focused on SAG reductions.
First quarter 2022 actions impacted several functional areas, with approximately 30% focused on gross margin improvements, approximately 60% focused on SAG reductions, and the remainder focused on RD&E optimization.
The Restructuring and related costs, net reserve balance for all programs as ofMarch 31, 2023 was$50 million , of which$46 million is expected to be paid over the next twelve months.
Refer to Note 11 - Restructuring Programs in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.
Worldwide Employment
Worldwide employment was approximately 20,300 as of
Other Expenses, Net
Three Months Ended
March 31,
(in millions) 2023 2022
Non-financing interest expense $ 14 $ 29
Interest income (5) (1)
Non-service retirement-related costs (1) (7)
Currency losses, net 11 -
Contract termination costs - product supply - 33
All other expenses, net 1 3
Other expenses, net $ 20 $ 57 Non-Financing Interest Expense
First quarter 2023 non-financing interest expense of$14 million was$15 million lower than first quarter 2022. The decrease was primarily related to lower non-financing debt as a result of the repayment of Senior Notes in 2022 and the first quarter 2023. When non-financing interest is combined with financing interest expense (Cost of financing), total interest expense of$50 million decreased by$3 million as compared to first quarter 2022, primarily reflecting a lower average debt balance, partially offset by higher average interest rates.
Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity and interest expense.
Xerox 2023 Form 10-Q 46
--------------------------------------------------------------------------------Interest Income
First quarter 2023 interest income was
Non-Service Retirement-Related Costs
First quarter 2023 non-service retirement-related costs were$6 million higher than first quarter 2022, primarily due to higher interest cost driven by higher discount rates, partially offset by lower settlement losses.
NOTE: Service retirement-related costs, which are included in operating
expenses, were
Refer to Note 15 - Employee Benefit Plans in the Condensed Consolidated Financial Statements for additional information regarding service and non-service retirement-related costs.
Currency Losses, Net
First quarter 2023 currency losses, net were
Contract Termination Costs
First quarter 2022 reflects a
Income Taxes First quarter 2023 effective tax rate was 16.5%. On an adjusted1 basis, first quarter 2023 effective tax rate was 15.5%. The difference between these rates and theU.S. federal statutory tax rate of 21% primarily reflects the benefits from the redetermination of certain unrecognized tax positions of approximately 10% partially offset by the geographical mix of earnings. First quarter 2022 effective tax rate was 34.8% and included benefits from additional tax incentives as well as a change in our indefinite reinvestment tax liability, due to an acquisition, of approximately 10%. On an adjusted1 basis, first quarter 2022 effective tax rate was 52.9%. The adjusted1 effective tax rate was higher than theU.S. federal statutory tax rate of 21% primarily due to benefits from additional tax incentives as well as a change in our indefinite reinvestment tax liability, due to an acquisition, of approximately 25% and the geographical mix of earnings. 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 Adjusted Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section. Xerox 2023 Form 10-Q 47 --------------------------------------------------------------------------------
Equity in Net Income of Unconsolidated Affiliates
Investment in Affiliates, at Equity largely consists of several minor
investments in entities in the
Net Income (Loss)
First quarter 2023 Net Income Attributable toXerox Holdings was$71 million , or$0.43 per diluted share. On an adjusted1 basis, Net Income Attributable toXerox Holdings was$82 million , or$0.49 per diluted share. First quarter 2022 Net (Loss) Attributable toXerox Holdings was$(56) million , or$(0.38) per diluted share. On an adjusted1 basis, Net (Loss) Attributable toXerox Holdings was$(14) million , or$(0.12) per diluted share. Refer to Note 19 - Earnings (Loss) per Share in the Condensed Consolidated Financial Statements for additional information regarding the calculation of basic and diluted earnings per share. _____________ (1)Refer to the Adjusted Net Income (Loss) and EPS reconciliation table in the "Non-GAAP Financial Measures" section.
Other Comprehensive Income (Loss)
First quarter 2023 Other Comprehensive Income, Net Attributable toXerox Holdings was$83 million and included the following: i) net translation adjustment gains of$92 million reflecting the strengthening of our major foreign currencies against theU.S. Dollar during the quarter; ii)$4 million of net unrealized gains; and iii)$14 million of net losses from the changes in defined benefit plans primarily due to the adverse impact of currency partially offset by net actuarial gains and amortization of actuarial losses and settlement losses. This compares to Other Comprehensive Loss, Net Attributable toXerox Holdings of$44 million for the first quarter 2022, which reflected the following: i) net translation adjustment losses of$72 million reflecting the weakening of our major foreign currencies against theU.S. Dollar during the quarter; ii)$11 million of net unrealized losses; and iii)$39 million of net gains from the changes in defined benefit plans primarily due to a prior service credit as well as amortization of actuarial losses and settlement losses and the positive impact of currency.
Refer to Note 18 - Other Comprehensive Income (Loss) in the Condensed Consolidated Financial Statements for the components of Other Comprehensive Income (Loss), Note 13 - Financial Instruments in the Condensed Consolidated Financial Statements for additional information regarding unrealized gains (losses), net, and Note 15 - Employee Benefit Plans in the Condensed Consolidated Financial Statements for additional information regarding net changes in our defined benefit plans.
Xerox 2023 Form 10-Q 48
--------------------------------------------------------------------------------Reportable Segments
Our business is organized to ensure we focus on efficiently managing operations while serving our customers and the markets in which we operate. We have two operating and reportable segments - Print and Other and FITTLE.
Refer to Note 4 - Segment Reporting in the Condensed Consolidated Financial Statements for additional information regarding our reportable segments.
Segment Review
Three Months Ended March 31,
Total
Intersegment Segment % of Total Segment Profit
(in millions) External Revenue Revenue(1) Revenue Revenue (Loss) Segment Margin(2)
2023
Print and Other $ 1,564 $ 49 $ 1,613 91 % $ 106 6.8 %
FITTLE 151 3 154 9 % 12 7.9 %
Total $ 1,715 $ 52 $ 1,767 100 % $ 118 6.9 %
2022
Print and Other $ 1,513 $ 37 $ 1,550 91 % $ (20) (1.3) %
FITTLE 155 3 158 9 % 17 11.0 %
Total $ 1,668 $ 40 $ 1,708 100 % $ (3) (0.2) %
___________
(1)Reflects revenue, primarily commissions and other payments, made by the
FITTLE segment to the Print and Other segment for the lease of Xerox equipment
placements.
(2)Segment margin based on external revenue only.
Print and Other
Print and Other includes 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.
Revenue
Three Months Ended
March 31,
%
(in millions) 2023 2022 Change
Equipment sales $ 385 $ 309 24.6%
Post sale revenue 1,179 1,204 (2.1)%
Intersegment revenue (1) 49 37 32.4%
Total Print and Other Revenue $
1,613
_____________
(1)Reflects revenue, primarily commissions and other payments, made by the FITTLE segment to the Print and Other segment for the lease of Xerox equipment placements.
First quarter 2023 Print and Other segment revenue increased 4.1% as compared to
first quarter 2022, driven primarily by Equipment sales revenue growth as
compared to the first quarter 2022. Print and Other segment revenues included
the following:
Equipment sales revenue increased 24.6% during the first quarter 2023 as
compared to first quarter 2022 due to improvement in product availability and
favorable mix towards mid-range devices. Equipment backlog declined 27.1% on a
sequential basis and 58.8% on a year-over-year basis due to better availability
of product but remained above pre-pandemic levels.
Post sale revenue decreased by 2.1% during the first quarter 2023 as compared to
first quarter 2022, primarily due to IT hardware revenue declines, currency and
lower page volumes associated with lower installations in prior periods. These
decreases were partially offset by growth in outsourcing revenues, which
included the acquisition of Go Inspire, and paper sales.
Xerox 2023 Form 10-Q 49
--------------------------------------------------------------------------------Detail by product group is shown below.
Three Months Ended
March 31, % of Equipment Sales
(in millions) 2023 2022 % Change CC % Change 2023 2022
Entry $ 62 $ 61 1.6% 2.3% 16% 19%
Mid-range 252 194 29.9% 32.4% 64% 62%
High-end 73 54 35.2% 38.3% 19% 17%
Other 4 5 (20.0)% (20.0)% 1% 2%
Equipment sales(1)(2) $ 391 $ 314 24.5% 27.0% 100% 100%
_____________
CC - See "Currency Impact" section for a description of constant currency.
(1)Refer to the Products and Offerings Definitions section.
(2)Includes equipment sales related to the FITTLE segment of
The change at constant currency1 reflected the following:
•Entry - The increase was driven by strength in color devices and overall price increases.
•Mid-range - The increase was primarily driven by our higher margin A3 devices due to improved product availability, price increases, and a strong backlog going into the quarter.
•High-end - The increase was driven by strong performance in entry production color, improved product availability, as well as benefits from price increases.
_____________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure.
Total Installs Installs reflect new placements 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 services revenues (which are both reported within our Post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity for Xerox and non-Xerox branded products installed by our XBS sales unit. Detail by product group (see Products and Offerings Definitions) is shown below.
Installs for the three months ended
Entry1
•9% decrease in entry color installs primarily due to declines in entry color printers, partially offset by growth in A4 Color multi-function printers. •1% decrease in entry black-and-white installs primarily driven by A4 mono multi-function printer (MFP) activity declines, partially offset by entry mono printer installs, and increased product availability.
Mid-Range
•26% increase in mid-range color installs primarily reflecting increased product availability. •160% increase in mid-range black-and-white installs, primarily reflecting increased product availability.
High-End
•84% increase in high-end color installs primarily reflecting increased product availability and strong demand for entry production color devices. •23% decrease in high-end black-and-white installs reflecting lower demand.
_____________
(1)Reflects install activity for total Entry product group.
Xerox 2023 Form 10-Q 50
--------------------------------------------------------------------------------Products and Offerings Definitions
Our product groupings range from:
•"Entry", which include A4 devices and desktop printers and multifunction devices that primarily serve small and medium workgroups/work teams.
•"Mid-Range", which include A3 devices that generally serve large workgroup/work teams environments as well as products in the Light Production product groups serving centralized print centers, print for pay and lower volume production print establishments.
•"High-End", which include production printing and publishing systems that generally serve the graphic communications marketplace and print centers in large enterprises.
Segment Margin
Print and Other segment margin of 6.8% for the three months endedMarch 31, 2023 increased by 8.1-percentage points as compared to first quarter 2022 primarily due to higher revenue, lower supply chain-related costs, lower RD&E expense as well as lower selling and administrative expense, which reflect the benefits of cost and productivity savings. This activity was partially offset by higher product costs.
FITTLE
FITTLE represents a global financing solutions business, primarily enabling the sale of our equipment and services.
Revenue
Three Months Ended
March 31,
%
(in millions) 2023 2022 Change
Equipment sales $ 6 $ 5 20.0%
Financing 52 53 (1.9)%
Other Post sale revenue(1) 93 97 (4.1)%
Intersegment revenue(2) 3 3 -%
Total FITTLE Revenue $ 154 $ 158 (2.5)%
_____________
(1)Other Post sale revenue includes operating lease/rental revenues as well as
lease renewal and fee income.
(2)Reflects revenue, primarily commissions and other payments, made by the
FITTLE segment to the Print and Other segment for the lease of Xerox equipment
placements.
First quarter 2023 FITTLE segment revenue decreased 2.5% as compared to first quarter 2022 and included the following:
Financing Income decreased by 1.9% for the three months endedMarch 31, 2023 as compared to first quarter 2022, primarily due to currency as financing revenue was essentially flat on a constant currency1 basis reflecting a stable average finance receivable portfolio. Other Post sale revenue decreased 4.1% for the three months endedMarch 31, 2023 as compared to first quarter 2022 due to a decline in operating lease income, which reflects lower equipment installs in prior periods. This decline was partially offset by higher fees, including those associated with the new receivable sales/funding agreement.
_____________
(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure.
Segment Margin FITTLE segment margin of 7.9% for the three months endedMarch 31, 2023 decreased 3.1-percentage points as compared to first quarter 2022 due to higher inter-segment commissions and the impact of higher borrowing costs, which was partially offset by lower bad debt expense. Xerox 2023 Form 10-Q 51 --------------------------------------------------------------------------------
Capital Resources and Liquidity
The following is a summary of our liquidity position:
•As ofMarch 31, 2023 andDecember 31, 2022 , total cash, cash equivalents and restricted cash were$697 million and$1,139 million , respectively, and apart from restricted cash of$106 million and$94 million atMarch 31, 2023 andDecember 31, 2022 , respectively, was readily accessible for use. The decrease in total cash, cash equivalents and restricted cash of$442 million primarily reflects net payments on debt of$452 million and dividend payments to shareholders of$45 million , which were partially offset by net cash flow from operations of$78 million . Net cash flows from operations included a$160 million benefit from a decrease in finance receivables, which reflected the sale of approximately$260 million of finance receivables under the FITTLE Receivables Funding Agreement, partially offset by new originations. •Total debt atMarch 31, 2023 was$3,279 million , of which$2,826 million is allocated to and supports the Company's finance assets. The remaining debt of$453 million is attributable to the non-financing business and declined from$806 million atDecember 31, 2022 . Debt consists of Senior Unsecured Notes and secured borrowings through the securitization of finance assets. No amounts are due under our Senior Unsecured Note borrowings for the next twelve months. •As ofMarch 31, 2023 , there were no borrowings or letters of credit outstanding under our$250 million Credit Facility and we were in full compliance with the covenants and other provisions of the Credit Facility.
•We expect Operating cash flows to be approximately
Cash Flow Analysis
The following summarizes our cash, cash equivalents and restricted cash:
Three Months Ended
March 31,
(in millions) 2023 2022 Change
Net cash provided by operating activities $ 78 Net cash used in investing activities (17) (75) 58 Net cash used in financing activities (505) (149) (356) Effect of exchange rate changes on cash, cash equivalents and restricted cash 2 10 (8) Decrease in cash, cash equivalents and restricted cash (442) (148) (294) Cash, cash equivalents and restricted cash at beginning of period 1,139 1,909 (770)
Cash, Cash Equivalents and Restricted Cash at End of Period
$ 697
Cash Flows from Operating Activities
Net cash provided by operating activities was$78 million for the three months endedMarch 31, 2023 . The$12 million increase in operating cash from the prior year period was primarily due to the following: •$137 million increase in pre-tax income before depreciation and amortization, provisions, restructuring and related costs, net and non-service retirement-related costs. •$119 million increase from finance receivables reflecting the sale of approximately$260 million of finance receivables under the FITTLE Receivables Funding Agreement partially offset by higher originations from increased equipment sales. Refer to Note 8 - Finance Receivables, Net in the Condensed Consolidated Financial Statements for additional information regarding the sale of finance receivables. •$26 million increase from accounts receivable primarily due to a higher year-over-year decline in revenues partially offset by the timing of collections. •$21 million increase from lower contributions to pension benefit plans. •$152 million decrease from accounts payable primarily due to the timing of supplier and vendor payments including the extension of payment terms on certain suppliers in the prior year. •$88 million decrease from other current and long-term liabilities primarily due to the timing of payment of higher year-end accruals. •$38 million decrease from accrued compensation primarily related to the year-over-year timing of payments. •$33 million decrease from inventory primarily due to higher equipment inventory levels in anticipation of increased sales activity in 2023 as the Company continues to work down its backlog. Xerox 2023 Form 10-Q 52 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net cash used in investing activities was$17 million for the three months endedMarch 31, 2023 . The$58 million decrease in the use of cash from the prior year period was primarily due to the following: •$47 million decrease from acquisitions. •$8 million decrease reflecting lower capital expenditures.
Cash Flows from Financing Activities
Net cash used in financing activities was
•$474 million increase from net debt activity. 2023 reflects payments of$300 million on Senior Notes and$152 million on secured financing arrangements. 2022 reflects proceeds of$668 million on a new secured financing arrangement offset by payments of$346 million on existing secured financing arrangements and$300 million on Senior Notes. •$113 million decrease due to no share repurchases in the current year.
Cash, Cash Equivalents and Restricted Cash
Refer to Note 6 - Supplementary Financial Information in the Condensed Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash.
Operating Leases
We have operating leases for real estate and vehicles in our domestic and international operations and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to twelve years and a variety of renewal and/or termination options. As ofMarch 31, 2023 andDecember 31, 2022 , total operating lease liabilities were$214 million and$229 million , respectively.
Refer to Note 10 - Lessee in the Condensed Consolidated Financial Statements for additional information regarding our leases accounted for under lessee accounting.
Debt and Customer Financing Activities
The following summarizes our debt:
(in millions) March 31, 2023 December 31, 2022 Xerox Holdings Corporation$ 1,500 $ 1,500 Xerox Corporation 900 1,200 Xerox - Other Subsidiaries(1) 893 1,042 Subtotal - Principal debt balance 3,293 3,742 Debt issuance costs Xerox Holdings Corporation (8) (9) Xerox Corporation (4) (4) Xerox - Other Subsidiaries(1) (4)
(5)
Subtotal - Debt issuance costs (16) (18) Net unamortized premium 2 2 Total Debt$ 3,279 $ 3,726 _____________
(1)Represents secured debt issued by subsidiaries of
Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt.
Xerox 2023 Form 10-Q 53
--------------------------------------------------------------------------------Finance Assets and Related Debt
The following represents our total finance assets, net associated with our lease and finance operations: (in millions) March 31, 2023 December 31, 2022 Total finance receivables, net(1)$ 2,980 $
3,102
Equipment on operating leases, net 250 235 Total Finance Assets, net(2)$ 3,230 $ 3,337 _____________
(1)Includes (i) Billed portion of finance receivables, net, (ii) Finance
receivables, net and (iii) Finance receivables due after one year, net as
included in our Condensed Consolidated Balance Sheets.
(2)The change from
Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in Total finance assets, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets.
Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt:
(in millions) March 31, 2023 December 31,
2022
Finance receivables debt(1)$ 2,607 $
2,714
Equipment on operating leases debt 219 206 Financing debt 2,826 2,920 Core debt 453 806 Total Debt$ 3,279 $ 3,726 __________________
(1)Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of Income (Loss).
Sales of Accounts Receivable
Activity related to sales of accounts receivable is as follows:
Three Months Ended
March 31,
(in millions) 2023 2022
Estimated decrease to net operating cash flows(1) _____________
(1)Represents the difference between current and prior period accounts receivable sales adjusted for the effects of currency.
Refer to Note 7 - Accounts Receivable, Net in the Condensed Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements.
Xerox 2023 Form 10-Q 54
--------------------------------------------------------------------------------Liquidity and Financial Flexibility
We manage our worldwide liquidity using internal cash management practices,
which are subject to i) the statutes, regulations and practices of each of the
local jurisdictions in which we operate, ii) the legal requirements of the
agreements to which we are a party, and iii) the policies and cooperation of the
financial institutions we utilize to maintain and provide cash management
services.
Our principal debt maturities are spread over the next five years as follows:
Xerox Holdings Xerox - Other
(in millions) Corporation Xerox Corporation Subsidiaries(1) Total
2023 Q2 $ - $ - $ 151 $ 151
2023 Q3 - - 144 144
2023 Q4 - - 135 135
2024 - 300 387 687
2025 750 - 76 826
2026 - - - -
2027 - - - -
2028 and thereafter 750 600 - 1,350
Total(2) $ 1,500 $ 900 $ 893 $ 3,293
_____________
(1)Represents secured debt issued by subsidiaries of Xerox Corporation as part
of securitization of Finance Receivables.
(2)Includes fair value adjustments.
Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt.
Treasury Stock
Xerox 2023 Form 10-Q 55
--------------------------------------------------------------------------------Financial Risk Management
We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, interest rate caps, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the Japanese Yen, Euro and U.K. Pound Sterling . The fair market values of all our derivative contracts change with fluctuations in interest rates and/or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. We are required to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. As permitted, certain of these derivative contracts have been designated for hedge accounting treatment. Certain of our derivatives that do not qualify for hedge accounting are effective as economic hedges. These derivative contracts are likewise required to be recognized each period at fair value and therefore do result in some level of volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.
The current market events have not required us to materially modify or change our financial risk management strategies with respect to our exposures to interest rate and foreign currency risk. Refer to Note 13 - Financial Instruments in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies.
Xerox 2023 Form 10-Q 56
--------------------------------------------------------------------------------Non-GAAP Financial Measures
We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with GAAP.
Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below.
Adjusted Earnings Measures
•Adjusted Net Income (Loss) and EPS
•Adjusted Effective Tax Rate
The above measures were adjusted for the following items:
Restructuring and related costs, net: Restructuring and related costs, net include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance, nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance. Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods. Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the Company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in Other expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans. Discrete, unusual or infrequent items: We exclude these item(s), when applicable, given their discrete, unusual or infrequent nature and their impact on the comparability of our results for the period to prior periods and future expected trends.
•Contract termination costs - product supply
Xerox 2023 Form 10-Q 57
--------------------------------------------------------------------------------Adjusted Operating Income (Loss) and Margin
We calculate and utilize adjusted operating income (loss) and margin measures by adjusting our reported pre-tax income (loss) and margin amounts. In addition to the costs and expenses noted above as adjustments for our adjusted earnings measures, adjusted operating income (loss) and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business.
Constant Currency (CC)
Refer to "Currency Impact" for a discussion of this measure and its use in our analysis of revenue growth.
Adjusted Net Income (Loss) and EPS reconciliation:
Three
Months Ended
2023 2022
(in millions, except per share amounts) Net Income Diluted EPS Net (Loss) Diluted EPS
Reported(1) $ 71 $ 0.43 $ (56) $ (0.38)
Adjustments:
Restructuring and related costs, net 2 18
Amortization of intangible assets 11 11
Non-service retirement-related costs (1) (7)
Contract termination costs - product supply - 33
Income tax on adjustments(2) (1) (13)
Adjusted $ 82 $ 0.49 $ (14) $ (0.12)
Dividends on preferred stock used in adjusted
EPS calculation(3) $ 4 $ 4
Weighted average shares for adjusted EPS(3) 158
156
Fully diluted shares atMarch 31, 2023 (4) 158
____________________________
(1)Net Income (Loss) and EPS attributable toXerox Holdings . (2)Refer to Adjusted Effective Tax Rate reconciliation. (3)For those periods that include the preferred stock dividend, the average shares for the calculations of diluted EPS exclude the 7 million shares associated with our Series A convertible preferred stock. (4)Reflects common shares outstanding atMarch 31, 2023 , plus potential dilutive common shares used for the calculation of adjusted diluted EPS for the first quarter 2023. The amount excludes shares associated with our Series A convertible preferred stock, which were anti-dilutive for the first quarter 2023.
Adjusted Effective Tax Rate reconciliation:
Three Months Ended March 31,
2023 2022
Pre-Tax Income Tax Effective Pre-Tax Income Tax Effective
(in millions) Income Expense Tax Rate (Loss) (Benefit) Tax Rate
Reported(1) $ 85 $ 14 16.5 % $ (89) $ (31) 34.8 %
Non-GAAP Adjustments(2) 12 1 55 13
Adjusted(3) $ 97 $ 15 15.5 % $ (34) $ (18) 52.9 %
____________________________
(1)Pre-tax income (loss) and Income tax expense (benefit).
(2)Refer to Adjusted Net Income (Loss) and EPS reconciliation for details.
(3)The tax impact on Adjusted Pre-tax income (loss) is calculated under the same
accounting principles applied to the Reported Pre-tax income (loss) under ASC
740, which employs an annual effective tax rate method to the results.
Xerox 2023 Form 10-Q 58
--------------------------------------------------------------------------------Adjusted Operating Income (Loss) and Margin reconciliation:
Three Months Ended March 31,
2023 2022
(in millions) Profit Revenue Margin (Loss) Revenue Margin
Reported(1) $ 85 $ 1,715 5.0 % $ (89) $ 1,668 (5.3) %
Adjustments:
Restructuring and related costs, net 2 18
Amortization of intangible assets 11 11 Other expenses, net 20 57 Adjusted$ 118 $ 1,715 6.9 %$ (3) $ 1,668 (0.2) % ____________________________ (1)Pre-tax income (loss). Xerox 2023 Form 10-Q 59
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