Xerox Holdings Corporation — Q1 2023 Form 10-Q
Business context and reporting period. This combined filing covers Xerox Holdings Corporation and Xerox Corporation for the three months ended March 31, 2023. Xerox Corporation accounts for nearly all of Xerox Holdings’ operations. The business reports two segments: Print and Other, and FITTLE (financing).
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Revenue | $1.715 billion | $1.668 billion; up 2.8% reported and 5.5% constant currency |
| Pre-tax income (loss) | $85 million; 5.0% margin | $(89) million; (5.3)% margin |
| Net income (loss) attributable to Xerox Holdings | $71 million; $0.43 diluted EPS | $(56) million; $(0.38) diluted EPS |
| Adjusted net income and diluted EPS | $82 million; $0.49 | $(14) million; $(0.12) |
| Gross margin | 34.3% | 31.8% |
| Operating cash flow | $78 million | $66 million |
| Cash and cash equivalents | $591 million | $1.045 billion at December 31, 2022 |
| Total debt | $3.279 billion | $3.726 billion at December 31, 2022 |
Reported revenue growth reflected equipment sales growth partly offset by lower post-sale revenue and adverse currency effects. Equipment sales increased 24.5% to $391 million; post-sale revenue declined 2.2% to $1.324 billion. Print and Other segment profit was $106 million, versus a $20 million loss a year earlier; FITTLE profit fell to $12 million from $17 million. Capital expenditures were $8 million. Net cash used in investing and financing activities was $17 million and $505 million, respectively; financing outflows included debt repayments and dividends.
At March 31, total cash, cash equivalents and restricted cash were $697 million, of which $106 million was restricted. Debt included $2.826 billion allocated to financing assets and $453 million of core debt. No borrowings or letters of credit were outstanding under the $250 million credit facility, and the company reported compliance with its covenants. It reported $553 million of short-term debt and current maturities; management stated no Senior Unsecured Note borrowings were due in the next 12 months.
Material changes versus the prior comparable period
- Profitability rebounded from the prior-year loss, supported by higher equipment revenue, improved supply availability and mix, pricing, lower supply-chain costs, cost savings, and lower bad-debt expense.
- Equipment gross margin rose to 36.5% from 20.4%; post-sale gross margin edged down to 33.7% from 34.4%. Higher product costs, component costs and financing costs offset some gains.
- Operating cash flow increased by $12 million, with proceeds from finance-receivable sales contributing to cash generation. Cash balances declined mainly because of debt repayments and dividends.
- Backlog was $179 million, down 27.1% sequentially and 58.8% year over year, but remained above pre-pandemic levels. Improved product availability contributed to the decline.
Outlook, commentary and risks
Management maintained its 2023 outlook for revenue flat to down low-single-digits in constant currency, with pre-tax and adjusted operating income and margin expected to increase from 2022. It expected adjusted operating margin to improve somewhat more than previously anticipated. The company expected operating cash flow of at least $550 million and capital expenditures of approximately $50 million, and reiterated its policy of returning at least 50% of free cash flow to shareholders. Management also targeted low-to-mid single-digit gross operating cost efficiencies.
Management described demand as stable overall, while noting isolated delays in customer installations, continued page-volume declines and uncertainty in the macroeconomic environment. It cited higher inflation and interest rates and possible regional recessions as risks to customer credit and finance-receivable losses. The company said finance-receivable reserves were considered sufficient but may require updates as conditions change. Other exposures include currency volatility, debt and borrowing costs, goodwill impairment risk, and Brazilian tax disputes. The filing reports $361 million of unreserved Brazilian tax contingencies, which management assessed mostly as remote; related escrow deposits were $38 million.
On April 29, 2023, Xerox completed the donation of its PARC subsidiary to SRI International. Xerox was still evaluating the accounting impact, including goodwill allocation and tax effects; a material non-cash disposal loss, net of any tax benefit, could result. The donation was not expected to materially affect future operating results or cash flows.
Most important facts for investors to verify
- Whether equipment demand, installations and backlog stabilize as supply conditions normalize, and whether post-sale revenue and page volumes recover.
- How much reported cash generation depends on ongoing finance-receivable sales under FITTLE’s funding agreement, including the agreement’s planned approximately $600 million of sales during its initial term.
- Whether cost savings and margin improvement persist after favorable bad-debt reserve releases and lower supply-chain costs.
- The final financial and tax-accounting impact of the PARC donation, including any disposal loss.
- Developments in debt maturities, liquidity, financing costs, Brazilian contingencies and customer credit-loss reserves.