XRX

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2026, for Xerox Holdings Corporation and its primary operating subsidiary, Xerox Corporation. The filing reflects the integration of the Lexmark International II, LLC acquisition (completed July 1, 2025) and the formation of a new joint venture (IPCo Holdings) in February 2026 to monetize intellectual property assets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 26.7% year-over-year, driven primarily by the Lexmark acquisition (31.9 percentage point benefit) and favorable currency impacts (3.1 percentage points). On a pro forma basis, revenue declined 3.7%.
• Segment Performance:
  • Print and Other: Revenue rose 30.8% to $1,692 million, with equipment sales up 33.1% and post-sale revenue up 30.1%.
  • IT Solutions: Revenue declined 4.9% to $156 million due to revenue deferrals and component cost increases.
• Profitability: While GAAP net loss widened to $(105) million, Adjusted Operating Income improved significantly to $72 million (3.9% margin) from $22 million (1.5% margin) in Q1 2025. This improvement was driven by cost reductions from "Transformation" initiatives and the Lexmark acquisition, partially offset by higher restructuring costs and amortization.
• Debt Activity: Total debt increased to $4,446 million. This includes $450 million in new financing from the IPCo Holdings joint venture and the early repurchase of approximately $101 million of 5.50% Senior Unsecured Notes, which generated a $56 million gain on extinguishment.
• Restructuring: Restructuring and related costs, net, were $45 million in Q1 2026 compared to a net benefit of $(1) million in Q1 2025, reflecting ongoing integration and workforce reduction efforts.

Guidance, Outlook, and Risks

• Guidance Update: Management lowered full-year 2026 operating cash flow guidance to approximately $350 million (previously $360 million), citing higher interest expense related to the new Joint Venture Financing.
• Outlook: Management expects the February 2026 Supreme Court ruling on tariffs to have a net positive impact on cost structure, though this may be offset by higher memory and oil prices. The company anticipates sustained operational improvements from the unified go-to-market model and Lexmark integration.
• Key Risks and Contingencies:
  • Goodwill Impairment: Management noted that while no triggering event occurred in Q1 2026, future declines in market capitalization or performance could trigger impairment charges.
  • Brazil Tax Contingencies: Unreserved tax contingencies in Brazil totaled $367 million, with $20 million in escrow deposits. Management believes the ultimate resolution will not materially impact results.
  • Joint Venture Covenants: The new IPCo Holdings arrangement includes covenants requiring specific asset coverage ratios and limits on debt incurrence and asset sales.

Investor Verification Checklist

• Pro Forma vs. GAAP: Verify the distinction between reported results (which include Lexmark only from July 2025) and pro forma results (which model Lexmark as acquired Jan 1, 2025) to understand organic growth trends.
• Joint Venture Structure: Review the terms of the IPCo Holdings joint venture, specifically the 2.0% royalty fee on consolidated revenue and the impact of the $450 million debt on future interest expenses.
• Restructuring Reserves: Confirm the $148 million restructuring reserve balance and the expectation that $81 million will be paid in the next 12 months.
• Debt Maturities: Assess the debt maturity schedule, noting significant principal payments due in 2028 ($845 million) and 2029 ($1,177 million).
• Warrant Distribution: Note the distribution of 77.3 million warrants to shareholders and note holders in February 2026, exercisable at $8.00 per share, and their potential dilutive impact.