Xerox Holdings Corporation — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter report. Xerox Holdings’ primary operating subsidiary is Xerox Corporation, which represents nearly all consolidated operations. Xerox is a workplace technology company spanning print hardware and services, IT and digital services, and equipment financing through FITTLE.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $7.107 billion | $7.038 billion |
| GAAP net income (loss) attributable to Xerox Holdings | $(322) million; $(2.15) per diluted share | $(455) million; $(2.56) per diluted share |
| Adjusted net income, non-GAAP | $189 million; $1.12 per diluted share | $293 million; $1.51 per diluted share |
| GAAP gross margin | 32.6% | 34.1% |
| Adjusted operating profit and margin, non-GAAP | $275 million; 3.9% | $375 million; 5.3% |
| Cash provided by operating activities | $159 million | $629 million |
| Capital expenditures | $57 million | $68 million |
| Total debt at year-end | $3.726 billion | $4.246 billion |
- Revenue rose 1.0% reported and 4.8% in constant currency. Acquisitions contributed 2.6 percentage points; currency reduced growth by 3.8 points, and halting shipments to Russia reduced it by 1.3 points.
- Equipment sales increased 2.7%; post-sale revenue increased 0.5%. Post-sale revenue represented 77% of total revenue.
- Gross margin contracted 1.5 percentage points, primarily reflecting supply-chain costs and unfavorable product and services mix. Adjusted operating margin fell 1.4 points.
- Operating cash flow declined $470 million, mainly because of lower cash flow from earnings, higher inventory and increased finance receivables. Operating cash flow less capital expenditures was approximately $102 million.
- Year-end cash, cash equivalents and restricted cash totaled $1.139 billion, including $94 million restricted. The company had no borrowings or letters of credit outstanding under its $250 million revolving credit facility.
- Debt included $2.7 billion of senior unsecured debt and $1.0 billion of secured borrowings. About $2.920 billion was allocated to financing assets and $806 million to the core business. Finance receivables, net, were $3.102 billion.
Material changes versus prior year
- Revenue improved modestly, with fourth-quarter revenue up 9.2% year over year as supply availability improved and backlog declined 43% sequentially to $246 million. The filing does not provide a clear fourth-quarter net income value in the supplied text.
- GAAP net loss narrowed by $133 million, but both years included substantial noncash goodwill impairment charges: $412 million pre-tax in 2022 and $781 million in 2021. Adjusted net income fell $104 million.
- FITTLE revenue declined 12.2% to $610 million and segment profit fell to $37 million from $82 million. Print and Other revenue increased 1.8% to $6.667 billion, while segment profit declined to $238 million from $293 million.
- The company’s year-end cash balance fell to $1.139 billion from $1.909 billion. Total debt declined, including repayment of $1.0 billion of senior notes and increased use of secured financing.
Outlook, management commentary and risks
- For 2023, management expected revenue to be flat to down low-single-digits in constant currency; pre-tax and adjusted operating income and margin to increase; operating cash flow of approximately $550 million; and capital expenditures of approximately $50 million. The outlook assumes lower logistics costs and benefits from pricing and cost actions, including FITTLE receivables sales.
- The company planned to return at least 50% of free cash flow to shareholders. Its $500 million share-repurchase authorization was fully used by year-end 2022; no program repurchases occurred in the fourth quarter. Common dividends declared in 2022 totaled $159 million.
- A December 2022 receivables funding agreement with an HPS affiliate contemplates approximately $600 million of lease-receivable sales during its initial term through January 2024. Xerox sold about $60 million of receivables under the agreement in 2022. Management expects the arrangement to support FITTLE growth and improve operating cash flow without additional debt.
- Management cited inflation, higher interest rates, currency volatility, supply-chain disruption, geopolitical uncertainty and the Russia-Ukraine conflict as pressures on performance. It halted shipments to Russia and Belarus after sanctions were imposed.
- Key risks include non-investment-grade credit ratings and debt-service and refinancing needs; access to affordable funding for FITTLE; competitive and technology shifts; supply-chain and partner dependence; pension funding; cybersecurity and privacy; and regulatory, climate and foreign-exchange exposure. The $250 million revolving credit facility matures in July 2024 and includes quarterly leverage and interest-coverage tests.
- Goodwill impairment was $412 million pre-tax in 2022, following $781 million in 2021. The fourth-quarter 2022 qualitative review found no further impairment was required, but management said future performance, interest rates and valuation assumptions could prompt additional testing.
- Other notable items included $33 million of product-supply agreement termination costs, $43 million of bad-debt provisions, and $65 million of restructuring and related costs. Management reported approximately $2.2 billion of cumulative gross savings from Project Own It since 2018.
- Brazilian tax contingencies included $340 million unreserved at year-end; management assessed the majority as remote and stated it did not expect a material impact based on counsel’s advice and recorded reserves. The filing also describes ongoing litigation, including a COVID-19 business-interruption insurance coverage case and shareholder litigation; outcomes are uncertain.
Important facts for investors to verify
- Whether 2023 revenue, margin and operating-cash-flow targets were achieved, particularly the approximately $550 million cash-flow forecast and the expected contribution from receivables sales.
- Whether improving supply availability and lower freight costs translated into stronger margins, sustainable revenue growth and continued backlog normalization.
- FITTLE’s originations, profitability, credit losses and funding costs, including the scale and terms of receivable sales and the company’s financing-debt exposure.
- Debt maturities, covenant headroom, refinancing access and the effect of non-investment-grade ratings and higher interest rates on liquidity.
- Goodwill valuation assumptions and any new impairment indicators, alongside pension-plan asset performance and future funding requirements.
- Developments in Brazilian tax matters and other litigation, and any changes to management’s contingency assessments or required accruals.
The financial statements received unqualified audit opinions, and management and the auditor reported effective internal control over financial reporting as of December 31, 2022. Adjusted earnings and margins are non-GAAP measures and should be assessed alongside GAAP results.