XRX

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2025, for Xerox Holdings Corporation and Xerox Corporation. The reporting period includes the results of the Lexmark International II, LLC acquisition, which closed on July 1, 2025, and the ITSavvy acquisition, which closed in November 2024. The Company reorganized its reportable segments in Q1 2025 to Print and Other and IT Solutions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Q3 2025 revenue increased 28.3% year-over-year, driven primarily by the Lexmark acquisition (29.3 percentage point benefit) and ITSavvy (8.0 percentage point benefit). On a pro forma basis, revenue declined 7.8% due to legacy Xerox declines in equipment and post-sale revenue.
• Profitability Improvement: The Net Loss improved by $445 million in Q3 2025 compared to Q3 2024. This improvement is largely attributable to the absence of the $1.058 billion non-cash goodwill impairment charge recorded in Q3 2024.
• Acquisition Impact: The Lexmark acquisition contributed $447 million in revenue and $114 million in net loss for the three months ended September 30, 2025. Significant purchase accounting adjustments included a $102 million inventory write-up and $16 million fixed asset adjustment.
• Debt Increase: Total debt increased to $4.4 billion from $3.4 billion year-over-year, reflecting new borrowings ($1.2 billion in Senior Notes and $327 million in Term Loans) to fund the Lexmark acquisition and refinance existing debt.
• Valuation Allowance: The Company recorded a $478 million valuation allowance against deferred tax assets in Q3 2025, contributing to a reported tax expense of $460 million despite a pre-tax loss.

Guidance, Outlook, and Risks

• 2025 Guidance Update:
  • Revenue: Expected to grow 13% in constant currency.
  • Operating Cash Flow: Guidance lowered to approximately $245 million (excluding $70 million of one-time Lexmark items), down from the previous $345 million guidance, due to higher tariff expenses and synergy implementation costs.
  • Capital Expenditures: Expected to be approximately $95 million.
• Management Commentary: Management notes that while profitability is expected to improve, margins will be modestly lower due to tariff-related expenses (~$35 million) partially offset by Lexmark contributions ($100-$110 million). Page volume trends remain consistent, but transactional equipment sales face delays due to government funding uncertainty and tariffs.
• Risks and Contingencies:
  • Tariffs and Geopolitics: Ongoing uncertainty regarding federal tariff policies and government funding is delaying client purchasing decisions.
  • Goodwill Impairment: While no impairment was triggered in Q3 2025, management notes that sustained declines in market capitalization or future performance variances could trigger future impairment charges.
  • Litigation: Significant tax contingencies in Brazil ($357 million unreserved) and ongoing shareholder derivative litigation regarding the HP acquisition proposal.

Investor Verification Checklist

• Lexmark Integration: Verify the realization of projected synergies and the impact of purchase accounting adjustments on future margins.
• Tax Position: Assess the sustainability of the deferred tax asset valuation allowance and its impact on future effective tax rates.
• Debt Service: Review the ability to service the increased debt load ($4.4 billion) given the current operating cash flow of $16 million for the nine-month period.
• Tariff Exposure: Monitor the actual financial impact of proposed tariffs on Lexmark's manufacturing operations in Mexico and U.S. imports.
• Legacy Decline: Confirm the trajectory of legacy Xerox equipment and post-sale revenue declines on a pro forma basis.