Xerox Holdings Corporation and Xerox Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The combined filing presents separate statements for both registrants; Xerox Corporation accounts for nearly all of Xerox Holdings’ operations. Amounts below are in millions of dollars unless noted.
Business context and financial performance
Xerox operates in Print and Other, including equipment, supplies, managed print, digital and IT services, and Xerox Financial Services (XFS), which provides equipment financing. Management continued its “Reinvention” program, including organizational redesign, workforce reductions, geographic simplification and exit from certain production-print manufacturing operations.
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $1,502 | $1,715 |
| Gross profit / gross margin | $443 / 29.5% | $589 / 34.3% |
| Pre-tax income (loss) | $(150) | $85 |
| Net income (loss) | $(113) | $71 |
| GAAP diluted EPS | $(0.94) | $0.43 |
| Adjusted net income / diluted EPS | $11 / $0.06 | $82 / $0.49 |
| Adjusted operating income / margin | $33 / 2.2% | $118 / 6.9% |
| Operating cash flow | $(79) | $78 |
| Capital expenditures | $10 | $8 |
Revenue fell 12.4% (13.2% in constant currency). Equipment sales declined 25.8% to $290; post-sale revenue declined 8.5% to $1,212. Print and Other revenue fell 12.6%, with segment profit down to $33 from $100. XFS revenue declined 10.8% to $91 and segment profit was zero, versus $18 a year earlier. Total gross margin decreased 4.8 percentage points. Management cited lower revenue and associated gross profit, higher product and transportation costs, lower page volumes, and Reinvention-related charges.
Balance sheet, debt and liquidity
At March 31, cash and cash equivalents were $685; cash, cash equivalents and restricted cash totaled $772, of which $87 was restricted. Total assets were $9,944 and total liabilities were $7,339. Debt was $3,604, up from $3,277 at year-end 2023; management classified $2,200 as financing debt supporting finance assets and $1,404 as core debt. Current debt was $405 and long-term debt was $3,199.
Q1 financing cash flow was $261, largely reflecting new debt proceeds, partly offset by debt repayments, dividends and capped-call purchases. Xerox issued $500 of 8.875% senior notes due 2029 and $400 of 3.75% convertible notes due 2030. Proceeds were partly used to repay approximately $445 of 2024 and 2025 notes and $103 of secured financing. Approximately $217 of 3.80% notes remained due in May 2024. No borrowings or letters of credit were outstanding under the $300 ABL facility, and the company reported compliance with its covenants.
Finance receivables, net, were $2,258, down from $2,510 at year-end; the company reported they were approximately $720 lower year over year. The filing attributes lower financing revenue partly to receivable sales and lower originations.
Changes, outlook and risks
- Material year-over-year changes: GAAP results shifted from profit to loss, operating cash flow turned negative, and adjusted operating margin fell 4.7 percentage points. Management attributed weaker results mainly to revenue and gross-profit declines, prior-year backlog reduction effects, lower Fuji royalty income and the absence of PARC revenue.
- Unusual items: Argentina and Chile operations were sold in March for total consideration of $16, resulting in a $54 pre-tax disposal loss, including a $40 currency translation loss; a $19 tax benefit reduced the after-tax loss to $35. The exit from certain production-print manufacturing operations generated a $36 inventory-related charge. Restructuring and related costs were $39 versus $2 a year ago. The restructuring reserve was $123, with $113 expected to be paid within twelve months.
- Management outlook: For 2024, Xerox continues to expect total revenue to decline 3%–5% in constant currency, while core business revenue is expected to be roughly flat. Management expects pre-tax income and adjusted operating margin to improve, operating cash flow of at least $650, and capital expenditures of approximately $50. The cash-flow outlook assumes benefit from a lower finance-receivables balance and is partly offset by approximately $50 of higher pension contributions.
- Risks and contingencies: Management identifies macroeconomic uncertainty, including inflation, interest rates and possible recession, as relevant to credit losses and goodwill valuations. The company reported $370 of unreserved Brazilian tax contingencies, with management assessing most as remote; it also reported approximately $238 of guarantees. Litigation includes Brazilian tax disputes, a shareholder derivative case and COVID-19 insurance-coverage proceedings. Management cautions that adverse outcomes in legal matters could materially affect results, cash flows or financial position.
Investor verification points
- Track equipment installations, backlog, Entry A4 supply constraints and whether revenue trends meet the 2024 outlook.
- Assess whether restructuring and cost actions restore gross and adjusted operating margins, and distinguish recurring performance from the quarter’s divestiture and inventory charges.
- Verify progress toward at least $650 of full-year operating cash flow, including working-capital needs, finance-receivable sales and pension contributions.
- Review the May 2024 note repayment and subsequent debt maturities, total borrowing costs, and the impact of the new senior and convertible notes.
- Monitor finance-receivable credit quality, bad-debt expense and the company’s reliance on receivable funding and sales.
- Follow the resolution and potential cash or security requirements of Brazilian tax matters and other disclosed litigation and contingencies.