Xerox Holdings Corp quarterly report, Q1 FY2022

Xerox Holdings Corp. — Q1 2022 Form 10-Q

Business context and reporting period. The combined filing covers Xerox Holdings Corporation and Xerox Corporation for the three months ended March 31, 2022. Xerox Corporation accounts for nearly all of Xerox Holdings’ operating activity. Amounts below are in U.S. dollars; financial figures are in millions unless noted.

Financial performance

Metric	Q1 2022	Q1 2021
Revenue	$1,668	$1,710
Gross profit / gross margin	$530 / 31.8%	$611 / 35.7%
Pre-tax income (loss)	$(89)	$53
Net income (loss) attributable to Xerox Holdings	$(56); $(0.38) per diluted share	$39; $0.18 per diluted share
Adjusted net income (loss), non-GAAP	$(14); $(0.12) per diluted share	$47; $0.22 per diluted share
Operating cash flow	$66	$117

Revenue declined 2.5% reported and 0.7% at constant currency. Equipment sales fell 17.6%; post-sale revenue increased 1.9%.
Adjusted operating loss was $3, or a negative 0.2% margin, versus adjusted operating profit of $89, or a 5.2% margin, a non-GAAP measure.
Cash used in investing activities was $75, including $54 for the Powerland acquisition; cash used in financing activities was $149. Cash, cash equivalents and restricted cash ended the quarter at $1,761, including $80 restricted.
At March 31, total debt was $4,271, compared with $4,246 at year-end 2021. Current debt was $1,450 and long-term debt $2,821. Total assets were $13,082 and total current liabilities were $3,769.
Xerox Holdings repurchased 5.2 million shares for $113 and paid $46 in dividends. Its common dividend was $0.25 per share; no repurchase authority remained at quarter-end.

Material changes versus the prior comparable period

Net income swung from $39 profit to a $56 loss. Lower gross profit, higher selling, administrative and general expenses, and higher other expenses drove the decline.
Gross margin fell 3.9 percentage points. Management cited unfavorable product and service mix, supply-related freight and production costs, constrained availability of higher-margin equipment, competitive pricing, and the prior-year benefit of temporary government assistance.
Operating cash flow decreased $51. Lower earnings and collections-related effects were partly offset by a $142 favorable change in accounts payable, primarily reflecting payment timing and extended supplier terms.
Print and Other reported a $20 segment loss, compared with $71 profit; Financing (FITTLE) earned $17, compared with $18. The company changed from one reportable segment to two, and recast comparative segment information.

Outlook, management commentary and risks

Management maintained its 2022 outlook: revenue of $7.1 billion in actual currency, operating cash flow of at least $475 (excluding payments associated with the Q1 contract-termination charge), and capital expenditures of at least $75. Profitability is expected to be weighted to the second half of the year. The company plans to return at least 50% of annual free cash flow to shareholders.
Management expects supply constraints and return-to-office trends to improve in the second half. Q1 equipment backlog was $422, up 21% sequentially and nearly three times the prior-year level. Price increases and additional Project Own It savings are intended to counter inflation; the company planned a 50% increase in targeted savings for the year.
Key pressures include supply-chain shortages and freight disruption, inflation in logistics and labor, pandemic-related uncertainty, and geopolitical uncertainty. Xerox halted shipments to Russia after sanctions; management said the financial impact to date was minimal.
Other expenses included a $33 charge ($25 after tax) to terminate a product-supply agreement. Xerox also recorded $18 of restructuring and related costs and reported headcount reductions of approximately 450 employees during the quarter.
The revolving credit facility was amended: commitments fell from $1.8 billion to $1.5 billion, and temporary covenant terms applied through June 30, 2022 unless ended earlier. Xerox reported compliance at March 31. The facility was scheduled to terminate in August 2022; the filing notes that replacement financing could carry higher costs or more restrictive covenants.
Goodwill was $3.3 billion. A January 2022 impairment test following the segment change identified no impairment; management reported estimated fair value 15%–20% above carrying value for the reporting unit with goodwill. Further impairment could result if performance or assumptions deteriorate.
Brazilian tax contingencies included $368 of unreserved claims at March 31; management assessed most of that exposure as remote and did not expect the matters to materially affect results, financial position or cash flows. A shareholder derivative case against Carl Icahn and affiliated parties remained in litigation; the claims against Xerox directors remained dismissed. Xerox also has pending insurance-coverage litigation related to COVID-19 business-interruption losses.
Subsequent events included an April U.K. pension amendment expected to increase the plan obligation by approximately $53; the full remeasurement impact was still being evaluated. In April, Xerox also entered into an $85 secured borrowing backed by Canadian finance receivables.

Important facts for investors to verify

Whether supply availability, freight costs and workplace returns improve as management expects, and whether the $422 backlog converts into shipped revenue.
Progress against the $7.1 billion revenue, at least $475 operating cash flow and at least $75 capital expenditure outlook, including the specified exclusion from the cash-flow target.
Liquidity and refinancing plans for the $1.5 billion revolving facility scheduled to mature in August 2022, and compliance with the amended covenants.
Whether price increases and Project Own It savings offset inflation and restore Print and Other profitability and margins.
Developments in the product-supply termination, Brazil tax matters, shareholder litigation, insurance-coverage claims, and pension remeasurement.