Xerox Holdings Corporation / Xerox Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in millions of dollars unless otherwise noted. The filing presents combined reports for Xerox Holdings and Xerox Corporation; their consolidated operating results are substantially the same.
Business context and reporting period
Xerox sells document systems, supplies, print and managed services, IT and software services, and equipment financing. Beginning in 2022, it reported two segments: Print and Other, and Financing (FITTLE). The company said demand remained strong, but supply-chain constraints and freight disruptions limited equipment deliveries; its equipment order backlog reached $440 million at quarter-end, more than double the prior-year level.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,747 | $1,793 | $3,415 | $3,503 |
| GAAP net income (loss) attributable to Xerox Holdings | $(4) | $91 | $(60) | $130 |
| GAAP diluted EPS | $(0.05) | $0.46 | $(0.43) | $0.64 |
| Adjusted net income attributable to Xerox Holdings (non-GAAP) | $24 | $94 | $10 | $141 |
| Operating cash flow | Not provided separately | Not provided separately | $(19) | $331 |
Q2 revenue declined 2.6% year over year; currency reduced growth by 3.7 percentage points, while acquisitions contributed 2.0 points. Equipment sales fell 14.7%, while post-sale revenue increased 1.2%. For the first half, revenue declined 2.5%; equipment sales fell 16.0%, while post-sale revenue rose 1.6%.
Q2 gross margin was 31.9%, down 3.7 percentage points year over year; adjusted operating margin was 2.0%, down 5.0 points. For the first half, gross margin was 31.8% and adjusted operating margin was 0.9%. The Print and Other segment earned $18 in Q2, versus $111 a year earlier, and recorded a $2 segment loss for the first half. Financing (FITTLE) earned $17 in Q2 and $34 for the first half.
At June 30, cash and cash equivalents were $1,151; including restricted cash, total cash was $1,227, down $682 from year-end 2021. Total debt was $3,872, compared with $4,246 at December 31, 2021. Current assets were $4,102 and current liabilities $3,415. First-half investing cash use was $62 and financing cash use was $587. Capital expenditures were $29.
Material changes and unusual items
- Profitability deteriorated substantially from the prior-year period, principally reflecting lower gross margins from product mix, higher freight and supply-chain costs, lower royalty revenue, and weaker equipment sales. Higher selling, administrative and general expense also included $21 of accelerated stock compensation following the death of the former CEO.
- First-half operating cash flow fell by $350 year over year. The company cited lower cash earnings, working-capital investment (including higher inventory), lower royalty receipts, timing of collections and bonuses, and a $41 cash payment related to a product-supply agreement termination.
- A $33 charge was recorded in Q1 for terminating a product-supply agreement. In Q2, Xerox recorded a $4 loss on early redemption of $350 of 2023 notes. The six-month results also included a $16 refund of excess employer contributions to a defined-contribution plan.
- Other comprehensive loss attributable to Xerox Holdings was $302 in Q2 and $342 for the first half, driven primarily by foreign-currency translation losses.
- Xerox acquired Powerland, a Canadian IT services provider, for approximately $52 in Q1. After quarter-end, it acquired U.K.-based Go Inspire for approximately $48.
Outlook, liquidity and risks
Management maintained its 2022 outlook: revenue of $7.1 billion in actual currency, full-year operating cash flow of at least $475 million excluding payments associated with the Q1 contract-termination charge, and capital expenditures of at least $75 million. It expected sequential profitability improvement in each remaining quarter, citing expected easing of supply constraints and freight costs, pricing actions, and Project Own It savings. The company targeted $450 million of gross cost savings in 2022, with most expected in the second half. It also planned to return at least 50% of annual free cash flow to shareholders.
In July 2022, Xerox Corporation replaced its prior $1.5 billion revolving facility with a $500 million facility maturing July 7, 2024. It includes quarterly financial covenants, a minimum unrestricted-cash requirement of $500, and a condition that no more than $300 of the $650 million 2023 Senior Notes remain outstanding as of December 15, 2022. The filing lists $1,056 of debt principal maturities in 2023. The facility restricts dividends and repurchases subject to leverage and free-cash-flow conditions.
Key risks include persistent supply constraints, inflation and freight costs, return-to-office and print-volume trends, foreign exchange and interest rates, geopolitical developments and sanctions, customer credit conditions, pension funding, and litigation. Management said rising interest rates may reduce goodwill valuation headroom; it identified no June 30 triggering event requiring a new quantitative impairment test. Brazilian tax contingencies included $343 unreserved, although management assessed most as remote; the company also reported ongoing shareholder litigation and insurance-coverage litigation related to COVID-19 business-interruption losses.
Important facts for investors to verify
- Whether equipment supply and freight conditions improved enough to convert the $440 million backlog into revenue and restore equipment margins.
- Whether second-half cost savings and pricing actions delivered the stated profitability recovery and $7.1 billion revenue outlook.
- Whether operating cash flow reached the stated target, given first-half cash use, working-capital needs, and the exclusion for the termination-related payment.
- The company’s compliance with the new revolver’s cash, leverage, interest-coverage, and 2023-note requirements, and its ability to address upcoming debt maturities.
- Whether macroeconomic and market changes reduced goodwill headroom or increased receivable losses, pension costs, or litigation and contingency exposure.
- How adjusted, non-GAAP results reconcile to GAAP results; adjusted figures exclude specified items and should not be treated as substitutes for GAAP measures.