Xerox Holdings Corporation and Xerox Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The combined filing reports both registrants; Xerox Corporation accounts for nearly all of Xerox Holdings’ operations. Financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2023 | Prior-year comparison |
|---|---|---|
| Revenue | $1.754 billion | Up 0.4% reported; equipment sales rose 14.8%, while post-sale revenue fell 3.4% |
| Gross margin | 34.0% | Up 2.1 percentage points |
| GAAP net loss attributable to Xerox Holdings | $61 million; $(0.41) per diluted share | Compared with a $4 million loss; includes the PARC donation charge |
| Adjusted net income attributable to Xerox Holdings | $72 million; $0.44 per diluted share | Compared with $24 million; non-GAAP measure |
| Adjusted operating income and margin | $107 million; 6.1% | Compared with $35 million; 2.0%; non-GAAP measures |
For the first half, revenue was $3.469 billion, up 1.6%. GAAP net income attributable to Xerox Holdings was $10 million, versus a $60 million loss a year earlier; adjusted net income was $154 million versus $10 million. Adjusted operating income was $225 million and adjusted margin 6.5%, compared with $32 million and 0.9%. The filing’s adjusted measures exclude specified items and should not be treated as GAAP results.
Cash flow: Operating cash flow was $173 million for the first half, versus cash used of $19 million in 2022. The improvement included about $630 million of proceeds from finance-receivable sales, partly offset by originations and working-capital uses. Investing used $22 million and financing used $725 million. Cash, cash equivalents and restricted cash declined $570 million to $569 million, including $92 million restricted; balance-sheet cash and cash equivalents were $477 million.
Debt and liquidity: Total debt was $3.116 billion at June 30, down from $3.726 billion at year-end 2022. The company reported $891 million of short-term debt and current maturities and $2.225 billion of long-term debt. It had $200 million drawn on a new $300 million asset-based revolving facility, due in 2028, and intended to repay the draw within six months. Approximately $300 million of senior notes were due within twelve months. The company reported compliance with facility covenants.
Material changes and unusual items
- Equipment sales growth reflected improved product availability, pricing and favorable mix, particularly in higher-margin devices. Post-sale revenue declined, reflecting lower paper and IT hardware sales, lower finance income, and the cessation of Fuji royalty income and PARC revenue.
- The April 2023 donation of Palo Alto Research Center (PARC) to SRI generated a $132 million pre-tax charge, including $115 million of allocated goodwill, and a $92 million after-tax loss. Xerox retained most PARC patents and granted SRI a perpetual license to use them.
- Finance-receivable sales under a funding agreement generated approximately $630 million of first-half proceeds. The agreement was amended to expand eligible receivables and include underlying leased equipment. These sales help cash flow but reduce the finance-receivable base and related financing revenue.
- Xerox entered a five-year asset-based revolving credit facility in May and terminated its prior $250 million facility. It also repaid debt, including a $185 million secured borrowing early.
- FITTLE segment measures were recast to reflect a strategic shift toward funding growth through finance-receivable sales; prior-period segment figures were revised for comparison.
Outlook, commentary and risks
Management expects 2023 revenue to be flat to down low-single-digits in constant currency, with results now expected at the upper end of that range. It expects pre-tax and adjusted operating income and margins to increase over 2022, operating cash flow of at least $650 million (raised from at least $550 million), and capital expenditures of approximately $50 million. The target for gross operating cost efficiencies is low-to-mid-single digits. The company maintained its policy of returning at least 50% of free cash flow to shareholders.
Management cited resilient demand, improved product availability, pricing and cost efficiencies, while noting macroeconomic uncertainty. Risks include inflation and interest rates, potential recession and customer credit losses, foreign-exchange volatility, and continued pressure on post-sale revenue. Management said finance-receivable reserves were considered sufficient but may need updating as conditions change.
The filing describes Brazilian tax disputes with $379 million of unreserved exposure, most of which management assessed as remote; related escrow deposits were $40 million. Other matters include COVID-19 business-interruption insurance litigation and shareholder litigation. The company also reported approximately $236 million of guarantees, generally believed unlikely to be called. Adverse litigation outcomes could affect results, cash flows or financial position.
Important facts for investors to verify
- Whether operating cash flow and the full-year target remain supported by ongoing operations, rather than relying materially on receivable sales and related timing effects.
- Progress in stabilizing post-sale revenue and finance income as the finance-receivable portfolio declines.
- Liquidity, repayment of the $200 million ABL draw, and the ability to meet near-term debt maturities while maintaining dividends.
- Delivery against the 2023 revenue, profitability, cash-flow and cost-efficiency outlook, including the effects of macroeconomic and currency changes.
- Developments in Brazilian tax matters and other litigation, and any changes to credit-loss reserves or goodwill impairment assumptions.