Xerox Holdings Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The combined filing reports Xerox Holdings Corporation and Xerox Corporation; Xerox Corporation comprises nearly all of Xerox Holdings’ operations. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,652 | $1,751 | $5,121 | $5,166 |
| GAAP net income (loss) attributable to Xerox Holdings | $49 | $(383) | $59 | $(443) |
| Diluted EPS | $0.28 | $(2.48) | $0.30 | $(2.91) |
| Adjusted net income | $77 | $33 | $231 | $43 |
| Adjusted diluted EPS | $0.46 | $0.19 | $1.39 | $0.21 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $297 | $(27) |
Q3 revenue fell 5.7% year over year (7.4% in constant currency); nine-month revenue declined 0.9% (0.6% in constant currency). Q3 equipment sales were $386, down 1.0%, while post-sale revenue was $1,266, down 7.0%. The post-sale decline reflected weaker paper and IT endpoint-device sales, lower financing revenue, and the termination of Fuji royalty and PARC revenue.
Q3 gross margin was 32.4%, up from 31.8%; adjusted operating margin was 4.1%, up from 3.7%. GAAP pre-tax income was $63, versus a $380 loss a year earlier; the prior-year comparison included a $412 goodwill impairment. For the first nine months, gross margin was 33.6% versus 31.8%, and adjusted operating margin was 5.7% versus 1.9%. Adjusted measures are non-GAAP and should be considered alongside GAAP results.
Operating cash flow improved by $324 year over year to $297 for the first nine months. The company cited approximately $850 of finance-receivable sale proceeds as a major contributor, partly offset by higher originations and working-capital uses. Investing activities provided $3; financing activities used $819, including $544 for the Icahn share repurchase and $131 of dividends. Cash, cash equivalents and restricted cash were $617 at September 30, including $85 restricted; balance-sheet cash and cash equivalents were $532.
Debt, liquidity and material changes
- Total debt was $3,609 at September 30, compared with $3,726 at December 31, 2022. Management classified $2,492 as financing debt supporting finance assets and $1,117 as core debt. The filing identifies $300 of senior notes due within 12 months.
- The new $300 asset-based revolving facility had $220 drawn at quarter-end, bearing an average 7.61% through October 30. Management intended to repay it by year-end; the company reported compliance with its covenants.
- A separate $555 five-year loan, fully drawn in September, funded the approximately $542 repurchase of 34.2 million shares from Carl Icahn and affiliates at $15.84 per share. The loan starts at 8.50% interest, increases 0.25 percentage points every 90 days, and is capped at 11%. Xerox said it anticipates refinancing it in the near term.
- Finance-receivable sales to HPS generated $848 of net proceeds in the first nine months. These transactions reduce receivables and financing needs but also contributed to lower financing revenue. The agreement was expanded to include leased equipment sales; HPS has no recourse to Xerox for uncollectible receivables.
- Xerox donated PARC in April. The donation generated a $132 pre-tax charge, including $115 of allocated goodwill, and a $92 after-tax loss. Xerox said it was not expected to materially affect projected results or cash flows. The company completed the sale of its Canadian research center in July and its Russian subsidiary sale in October; Q3 restructuring-related impairment included the Russia transaction.
Outlook, commentary and risks
Management maintained its 2023 outlook for revenue flat to down low-single-digits in constant currency, but expected results near the lower end of that range. It cited softer European demand, a difficult Q4 equipment-sales comparison against prior-year backlog reductions, and continued post-sale revenue headwinds. Management expected full-year pre-tax income and adjusted operating income and margin to exceed 2022 levels, and continued to expect at least $650 of operating cash flow and approximately $50 of capital expenditures.
Management attributed improved profitability to pricing, cost efficiencies and productivity actions, while noting that lower revenue, incentive compensation and bad-debt expense pressured results. Risks include macroeconomic weakness, inflation and interest rates, foreign-exchange volatility, customer credit losses, and potential future goodwill impairment if performance or valuation assumptions weaken. The filing reports $360 of unreserved Brazilian tax contingencies, most assessed by management as remote; it also describes a COVID-19 insurance coverage dispute seeking coverage for claimed losses, with U.S. litigation in abeyance. Outcomes are uncertain.
Investor verification priorities
- Track whether Xerox repays or refinances the $220 ABL borrowing and the $555 Icahn-repurchase loan, including the latter’s rising interest rate and planned refinancing.
- Assess whether the revenue and cash-flow outlook is met, particularly given Europe’s softer demand, Q4 equipment comparisons and post-sale weakness.
- Evaluate the sustainability of operating cash flow, separating recurring business cash generation from receivable-sale proceeds and working-capital movements.
- Review the impact of receivable sales on financing revenue, finance assets, credit exposure and future funding needs.
- Monitor the $360 unreserved Brazilian tax contingencies, significant litigation, pension obligations and goodwill impairment indicators.
- Confirm the effects of the 34.2 million-share repurchase on outstanding shares, leverage and per-share results; quarter-end common shares outstanding were approximately 122.9 million.