Business context and reporting period
Xerox Holdings Corporation’s combined Form 10-Q with Xerox Corporation covers the quarter and nine months ended September 30, 2022. Xerox Corporation accounts for nearly all of Holdings’ operating activity. The business reports two segments: Print and Other, and Financing (FITTLE).
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.751 billion | $1.758 billion | $5.166 billion | $5.261 billion |
| GAAP net income attributable to Xerox Holdings | $(383) million | $90 million | $(443) million | $220 million |
| GAAP diluted EPS | $(2.48) | $0.48 | $(2.91) | $1.10 |
| Adjusted net income attributable to Xerox Holdings | $33 million | $90 million | $43 million | $231 million |
| Adjusted operating income margin | 3.7% | 4.2% | 1.9% | 5.5% |
Adjusted measures are non-GAAP. The Q3 GAAP loss included a $412 million pre-tax ($395 million after-tax), non-cash goodwill impairment charge. Reported gross margin was 31.8% in Q3, down 0.6 percentage points year over year, and 31.8% for the nine months, down 2.8 points.
- Revenue mix and trends: Q3 equipment sales rose 0.8% reported (6.7% in constant currency); post-sale revenue fell 0.7% reported. Nine-month equipment sales declined 10.6%, while post-sale revenue increased 0.8%. Foreign exchange reduced Q3 revenue growth by 5.1 percentage points; acquisitions partly offset the impact.
- Cash flow: Operating cash flow was a use of $27 million for the first nine months, versus $431 million provided in 2021. Investing used $95 million and financing used $755 million. Cash, cash equivalents and restricted cash fell $908 million to $1.001 billion; $69 million was restricted.
- Debt and liquidity: Total debt was $3.746 billion in principal, down from $4.261 billion at year-end 2021. Holdings’ balance sheet reported $1.070 billion of short-term/current debt and $2.676 billion of long-term debt. Xerox Corporation separately reports $1.496 billion of related-party debt to Holdings; do not add that intercompany amount again to consolidated debt. A new $500 million revolving facility replaced the prior $1.5 billion facility; it had no borrowings at quarter-end.
- Other balance-sheet items: Total assets were $11.420 billion, down from $13.223 billion at year-end, including goodwill of $2.753 billion versus $3.287 billion. Inventory increased to $777 million from $696 million. Holdings shareholders’ equity was $3.243 billion versus $4.436 billion.
Material changes versus the prior comparable period
- Q3 revenue was broadly flat reported, but the nine-month decrease reflected supply constraints, freight disruptions and currency; acquisitions partially offset those pressures.
- Profitability weakened materially year to date: adjusted operating margin fell to 1.9% from 5.5%, and GAAP results included the goodwill impairment. Management cited unfavorable product and service mix, higher supply-chain and labor costs, and lower royalty revenue.
- Operating cash flow swung to negative $27 million from positive $431 million, reflecting lower earnings, working-capital needs, lower royalty receipts and higher finance-receivable originations.
- Goodwill declined following the $412 million impairment. The assessment reflected weaker forecasts and higher discount rates, including a 10.75% discount rate for the Print and Other reporting unit.
- The company paid down debt, including $300 million of 2022 notes and early redemption of $350 million of 2023 notes, while issuing $753 million from secured financing arrangements. Xerox Holdings repurchased $113 million of shares during the nine months; there were no board-authorized repurchases in Q3.
Guidance, outlook, risks and unusual items
- 2022 outlook: Revenue guidance was revised to $7.0–$7.1 billion from at least $7.1 billion. Operating cash flow guidance was reduced to at least $180 million, excluding a $41 million one-time product-supply termination payment. Capital expenditure guidance was reduced to $55 million from $75 million.
- Management expected operating results to improve in Q4 2022 and 2023 as backlog is worked down and price increases and cost actions take effect, but anticipated results below earlier forecasts. Supply constraints were easing more slowly than expected; inflation, slower return-to-office activity, lower page volumes, longer project deployments and currency volatility remained concerns.
- The new revolving credit facility requires at least $500 million of unrestricted cash and includes leverage and interest-coverage covenants that tighten over time. It also requires no more than $300 million of the remaining $650 million 2023 notes to be outstanding by December 15, 2022 for the facility to remain in effect—implying at least $350 million must be repaid or otherwise addressed.
- Other unusual items included a $33 million product-supply contract termination charge, $21 million of accelerated stock compensation following the former CEO’s death, restructuring charges, and a $4 million loss on early debt extinguishment. Restructuring actions included reductions affecting approximately 1,600 employees in the first nine months.
- Key risks include persistent supply and inflation pressures, weaker demand or print volumes, higher interest rates, foreign exchange movements, cybersecurity and third-party performance, pension funding, and potential future goodwill impairment. The company also disclosed ongoing litigation, including a shareholder derivative case and insurance-coverage litigation related to COVID-19 losses.
- Brazil tax disputes included $331 million of unreserved contingencies; management said most of the unreserved exposure was considered remote and did not expect the matters to materially affect results, financial position or cash flows. The company had approximately $253 million of guarantees, primarily letters of credit and surety bonds.
Important facts an investor should verify
- Progress against the revised cash-flow guidance, particularly working-capital use, inventory levels and FITTLE originations.
- Compliance with the revolving-credit-facility covenants and the required reduction of 2023 notes outstanding by December 15, 2022.
- Whether supply availability, backlog conversion, pricing and cost actions deliver the expected recovery in margins and earnings.
- Assumptions underlying goodwill valuation and the possibility of further impairment if forecasts or market conditions deteriorate.
- Developments in the disclosed litigation and Brazil tax matters, including any change in estimated exposure or required cash collateral.