What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2021-11-03 · 405 added, 464 removed, 302 unchanged (74% of the section changed)

7 unchanged sentences

The MD&A is provided as a supplement to, and should be read in conjunction with, the Condensed Consolidated Financial Statements and the accompanying notes.

Throughout this MD&A, references are made to various notes in the Condensed Consolidated Financial Statements which appear in Item 1 of this Quarterly Report on Form 10-Q, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.

In connection with Xerox Holdings Corporation's announcement of the formation of the CareAR software business in the third quarter 2021, the ownership of CareAR Holdings LLC was transferred from Xerox Holdings Corporation to Xerox Corporation.

Refer to Note 1 - Basis of Presentation in the Condensed Consolidated Financial Statements for additional information regarding the change in ownership of CareAR Holdings LLC.

Throughout this MD&A, references are made to various notes in the Condensed Consolidated Financial Statements which appear in Item 1 of this Combined Quarterly Report on Form 10-Q, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.

Xerox Holdings' other direct subsidiary is Xerox Ventures LLC, which was established in 2021 solely to invest in startups and early/mid-stage growth companies aligned with the Company’s innovation focus areas and targeted adjacencies.

Xerox Ventures LLC had investments of approximately $13 million at March 31, 2022.

Due to its immaterial nature, and for ease of discussion, Xerox Ventures LLC's results are included within the following discussion.

Currency Impact

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Currency impact can be determined as the difference between actual growth rates and constant currency growth rates.

Xerox 2021 Form 10-Q 41

Impact of COVID-19 on Our Business Operations

In response to the COVID-19 pandemic, we continue to prioritize the health and safety of our employees, customers and partners and support their needs so they can perform their work flawlessly, whether in the workplace or a remote location.

During the third quarter 2021, our business continued to be impacted by the COVID-19 pandemic.

The prolonged and extensive impact of the Delta variant drove many of our customers to delay their plans to return employees to workplaces.

As a result, while we continued to see a correlation between the roll-out of vaccinations, the return of employees to the workplace, and the gradual recovery of our post sale revenues, the marginal improvement in our page-volume-driven post sale revenues was less than previously anticipated.

In addition, global supply chain issues, created in part by the COVID-19 pandemic, have resulted in an unprecedented level of disruption that has led to shortages and transportation delays of our products and third-party IT hardware.

This has resulted in lower than anticipated equipment and IT sales, higher transportation and logistics costs and growth of our order backlog 1 at the end of the quarter, as our customers continued to invest in our print technology and services.

We expect the ongoing effects of the COVID-19 pandemic, including the potential emergence of new variants, as well as global supply chain disruptions, to delay economic recovery and continue to affect our revenues and margins into 2022.

We have a strong balance sheet and sufficient liquidity, including approximately $2.3 billion of cash and cash equivalents and access to our undrawn $1.8 billion revolver.

With our Project Own It transformation and cost savings, we have built a leaner and more flexible cost structure.

In addition, in response to the COVID-19 pandemic, various governments continued to employ temporary measures to provide aid and economic stimulus directly to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees.

We recognized savings from the use of such measures in the U.S., Canada and Europe.

We continue to monitor government programs and actions being implemented, or expected to be implemented, to counter the economic impacts of the COVID-19 pandemic.

The savings from temporary government assistance were recorded as follows in the Condensed Consolidated Statements of Income:

(in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Cost of sales $ — $ 1 $ — $ 1

Cost of services, maintenance and rentals 4 25 17 65

Research, development and engineering expenses — — — 1

Selling, administrative and general expenses 5 9 12 28

Total Estimated savings $ 9 $ 35 $ 29 $ 95

Third Quarter 2021 Review

Total revenue of $1.76 billion for third quarter 2021 decreased 0.5% from third quarter 2020, including a 1.1-percentage point favorable impact from currency.

Total revenue reflected an increase of 1.7% in Post sale revenue, including a 1.2-percentage point favorable impact from currency and a decrease of 7.6% in Equipment sales revenue, including a 0.8-percentage point favorable impact from currency.

Total revenue of $5.26 billion for the nine months ended September 30, 2021 increased 3.3% as compared to the prior year period, including a 2.5-percentage point favorable impact from currency.

Total revenue reflected an increase of 0.6% in Post sale revenue, including a 2.4-percentage point favorable impact from currency and an increase of 13.6% in Equipment sales revenue, including a 2.6-percentage point favorable impact from currency.

As the third quarter 2021 progressed, we saw an increase in the supply chain challenges we experienced in the second quarter 2021.

Specifically, raw material and component shortages limited the availability of certain of our products, particularly with respect to our mid-range devices.

Transportation constraints and labor shortages extended delivery times and increased unit shipping costs above normal levels.

These challenges caused equipment revenue to fall short of our expectations.

However, demand for our products remains strong, resulting in further growth of our order backlog 1 for equipment and I/T hardware.

Post sale revenue in the third quarter fell below our expectations, as the Delta variant disrupted many companies’ plans to return workers to the workplace.

While business closures and limited office occupancy as a result of the COVID-19 pandemic continue to affect our

Xerox 2021 Form 10-Q 42

revenues, the progress of vaccinations and the gradual reopening of workplaces resulted in higher sequential and year-over-year page volumes in third quarter 2021.

Net income attributable to Xerox Holdings and adjusted 2 Net income attributable to Xerox Holdings were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(in millions) 2021 2020 B/(W) 2021 2020 B/(W)

Net income attributable to Xerox Holdings $ 90 $ 90 $ — $ 220 $ 115 $ 105

Adjusted (2) Net income attributable to Xerox Holdings

90 105 (15) 231 191 40

Third quarter 2021 Net income attributable to Xerox Holdings was flat as compared to third quarter 2020 reflecting lower Income tax expense, as well as lower Selling, administrative and general expenses, in part due to lower bad debt expense, as well as lower Restructuring and related costs, net and Other expenses, net.

These benefits were all offset by lower gross profit reflecting lower revenues and higher logistics costs associated with product supply constraints as well as the reduction of benefits from temporary government assistance and furlough measures.

Third quarter 2021 A djusted 2 net income attributable to Xerox Holdings decreased $15 million as compared to the prior year, primarily reflecting lower gross profit due to lower revenues and higher logistics costs associated with product supply constraints as well as the reduction of benefits from temporary government assistance and furlough measures, which were partially offset by lower Income tax expense and Selling, administrative and general expenses, in part due to lower bad debt expense, as well as lower Other expenses, net.

Net income attributable to Xerox Holdings for the nine months ended September 30, 2021 increased $105 million as compared to the prior year period primarily reflecting higher revenues and lower bad debt expense, as well as lower non-service retirement-related costs, Restructuring and related costs, net, Transaction and related costs, net and Income tax expense.

These benefits were partially offset by reduced temporary government assistance and furlough measures, as well as higher freight costs, which reduced gross profit.

A djusted 2 net income attributable to Xerox Holdings for the nine months ended September 30, 2021 increased $40 million as compared to the prior year, primarily due to higher revenue, lower bad debts expense and Income tax expense.

These benefits were partially offset by reduced temporary government assistance and furlough measures as well higher freight costs, which reduced gross profit.

Cash flows provided by operating activities for the nine months ended September 30, 2021 were $431 million, as compared to $313 million in the prior year period, which includes the receipt of an upfront prepaid fixed royalty from FUJIFILM Business Innovation Corp.

(formerly Fuji Xerox) (FX) of $100 million and higher cash from working capital, net 3 , partially offset by a lower run-off of finance receivables.

Cash used in investing activities for the nine months ended September 30, 2021 was $54 million reflecting capital expenditures of $52 million and acquisitions of $38 million, which were partially offset by proceeds from sales of assets of $39 million.

Cash used in financing activities for the nine months ended September 30, 2021 was $793 million reflecting $500 million for repurchases of our Common Stock, payments of $444 million on secured financing arrangements, partially offset by proceeds of $311 million on a secured financing arrangement and dividend payments of $157 million.

Given the continued uncertainty associated with global supply chains and a delay in many companies’ plans to return to workplaces until 2022, we are lowering our revenue guidance to approximately $7.1 billion, or $7.0 billion at constant currency 2 .

However, our focus on cash gives us confidence to reaffirm our free cash flow guidance and we plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders, as disclosed in our 2020 Annual Report.

We expect operating cash flows to be approximately $580 million, with capital expenditures of approximately $80 million.

Additionally, a new share repurchase authorization of $500 million was approved by our Board of Directors in October 2021, which will be used opportunistically to repurchase shares.

During the first quarter 2022, our business faced several challenges.

Supply constraints continued to inhibit our ability to fulfill demand, negatively impacting our Equipment Sales Revenue but resulting in the growth of our backlog 1 to $422 million, a 21% sequential increase and nearly three times the prior year period’s levels.

As demand and backlog grow, we are focused on maintaining our level of client satisfaction.

We continue to expect supply chain constraints to begin easing in the second half of the year and we did see slight improvements in page volumes and volume-driven post sale revenue in the first quarter 2022, particularly in March, as the Omicron variant waned and more employees returned to the office.

Third-party 2 data points to gathering momentum in return to office trends.

Progressive improvement in workplace attendance is expected each month, with a broader return of employees to the office in the second half of the year.

Lastly, in the first quarter 2022, we also saw an acceleration of inflationary pressure on costs throughout our business, particularly for logistics and labor.

The Company is enacting a series of price increases with the intent to offset these inflation-related cost increases over time as price adjustments are enforced within our contractual business and we further rationalize our cost base.

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It includes printing devices as well as IT hardware associated with our IT services

First quarter 2022 backlog of $422 million excludes sales orders from Russia and Powerland, which was acquired in the first quarter of 2022.

(2) Third party data is Kastle Systems U.S.

offices badge swipe data metric.

Xerox 2022 Form 10-Q 40

Russia-Ukraine Conflict

With respect to the war in Ukraine, in the first quarter 2022, we halted shipments to Russia when sanctions were imposed.

The resulting financial impact has thus far been minimal.

The Eurasian region in total comprised a low single digit percentage of our revenue and operating profits in 2021.

As of March 31, 2022 the net assets of our Eurasian operations were approximately $20 million (approximately $35 million of assets) and comprised approximately 0.5% of consolidated net assets.

Reportable Segment Change

During the first quarter of 2022, the Company made a change to its reportable segments from one reportable segment to two reportable segments - Print and Other, and Financing (FITTLE) to align with a change in how the Chief Operating Decision Maker (CODM), our Chief Executive Officer (CEO) allocates resources and assesses performance against the Company’s key growth strategies.

As such, prior period reportable segment results and related disclosures have been conformed to reflect the Company’s current reportable segments.

First Quarter 2022 Review

Total revenue of $1.67 billion for first quarter 2022 decreased 2.5% from first quarter 2021, including a 1.8-percentage point adverse impact from currency.

Total revenue reflected an increase of 1.9% in Post sale revenue, including a 1.8-percentage point adverse impact from currency, and a decrease of 17.6% in Equipment sales revenue, including a 1.5-percentage point adverse impact from currency.

The benefits from slightly higher page volumes on post-sale revenues were offset by the continued impacts from a constrained supply chain.

Print and Other segment revenues of $1.55 billion, which represented 93% of total revenue, decreased 2.0%.

Print and Other segment loss of $20 million, decreased $91 million as compared to the first quarter 2021.

Financing segment (FITTLE) revenues of $158 million, which represented 9% of total revenue, decreased 12.2%.

Financing segment (FITTLE) profit of $17 million, decreased $1 million as compared to the first quarter of 2021.

Net (loss) income attributable to Xerox Holdings and adjusted 1 Net (loss) income attributable to Xerox Holdings were as follows:

Three Months Ended March 31,

(in millions) 2022 2021 B/(W)

Net (loss) income attributable to Xerox Holdings $ (56) $ 39 $ (95)

Adjusted (1) Net (loss) income attributable to Xerox Holdings

First quarter 2022 Net loss attributable to Xerox Holdings of $(56) million decreased $95 million as compared to first quarter 2021 primarily reflecting lower gross margin, as a result of unfavorable mix as well as higher logistics costs associated with product supply constraints and higher Selling, administrative and general expenses.

Other expenses, net were $53 million higher primarily due to a $33 million charge ($25 million after-tax) associated with the termination of a product supply agreement, higher non-financing interest expense, and a lower benefit from non-service retirement costs.

These negative impacts were partially offset by income tax benefits.

First quarter 2022 A djusted 1 net loss attributable to Xerox Holdings of $14 million decreased $61 million as compared to the prior year, primarily reflecting lower gross margin, as a result of unfavorable mix as well as higher logistics costs associated with product supply constraints, and higher Selling, administrative and general expenses, and Other expenses, net.

These negative impacts were partially offset by income tax benefits.

Cash flows provided by operating activities during the first quarter 2022 were $66 million, as compared to $117 million in the prior year period, as lower earnings, which included investments in our new businesses, and lower royalty payments, were offset by decreased working capital 2 and lower restructuring payments.

Working capital 2 was a source of cash of $93 million this quarter, $50 million higher than the prior year, entirely driven by accounts payable.

Cash used in investing activities during the first quarter 2022 was $75 million reflecting capital expenditures of $16 million, acquisitions of $54 million and $5 million of noncontrolling investments as part of our corporate venture capital fund.

Cash used in financing activities during the first quarter 2022 was $149 million reflecting $113 million for repurchases of our Common Stock, proceeds of $668 million on a new secured financing arrangement, partially offset by payments of $346 million on existing secured financing arrangements and $300 million on Senior Notes, and dividend payments of $46 million.

Xerox 2022 Form 10-Q 41

Despite the continuing uncertainties encountered in the first quarter 2022, we are maintaining our revenue and cash flow outlook, as we continue to expect supply chain constraints and office trends to improve in the second half of the year, and we are implementing counteractive measures in response to geopolitical uncertainty and inflationary pressures.

These measures include generating additional savings through Project Own It, which may include additional restructuring actions, with a planned 50% increase in our targeted savings amount for the year.

Accordingly, we continue to expect revenue to grow to $7.1 billion in actual currency, and expect that profitability will be weighted to the second half of the year.

We are confident in our ability to generate cash and plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders and expect full year Operating cash flows to be at least $475 million (excluding the payments associated with the first quarter 2022 contract termination charge), and capital expenditures of at least $75 million.

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(1) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure.

(2) Working capital, net reflects Accounts receivable, net, Inventories and Accounts payable.

Critical Accounting Policies and Estimates - Update

Goodwill - Interim Impairment Evaluation – Change in Segments

Our goodwill balance was $3.3 billion at March 31, 2022 and December 31, 2021, respectively.

The balance at December 31, 2021 reflects a pre-tax impairment charge of $781 million recorded in the fourth quarter 2021 after completion of our fourth quarter annual goodwill impairment assessment.

We assess goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

During the first quarter 2022, the Company made a change to its operating and reportable segments from one operating/reportable segment - Printing - to two operating/reportable segments - Print and Other, and Financing (FITTLE).

As a result of the new operating and reportable segments, we also reassessed our reporting units for the evaluation of goodwill.

Prior to this change, consistent with the determination that we had one operating/reportable segment, we determined that we had one reporting unit for goodwill assessment purposes.

Our reassessment during the first quarter of 2022 determined that likewise consistent with the determination that we had two operating/reportable segments, we now have two reporting units for goodwill assessment purposes – Print and Other, and Financing (FITTLE).

As a result of the change in reporting units, effective January 1, 2022, we estimated the fair value of our new reporting units and, based on an assessment of the relative fair values of our new reporting units after the change, we determined that no goodwill was allocable to the Financing (FITTLE) segment.

This determination was largely based on the fact that at this stage in the stand-up of the Financing (FITTLE) business, its separate valuation is constrained and limited because the operation is significantly integrated with the Print and Other segment and is primarily an extension or enabler to facilitate the sale of the Company’s products.

The change in reporting units was also considered a triggering event indicating a test for goodwill impairment was required as of January 1, 2022 before and after the change in reporting units.

The Company performed those impairment tests, which did not result in the identification of an impairment loss as of January 1, 2022.

We perform an assessment of goodwill, utilizing either a qualitative or quantitative impairment test.

As a result of our impairment charge in the fourth quarter 2021, we elected to bypass the qualitative impairment test and proceed to the quantitative test for the assessment of the recoverability of our Goodwill balance effective January 1, 2022 before and after the change in segments.

In estimating the fair value of our single reporting unit before the change in segments, our analysis reflected a 75/25 allocation between the income and market approach and the application of a discount rate applied to our projected cash flows of approximately 7.50%.

The weighting between the income and market approach was consistent with our assessment in the fourth quarter 2021.

The applied discount rate was 25 basis points lower than the rate applied in the fourth quarter 2021 assessment largely due to changes in market inputs with respect to the Cost of Equity as well as a slightly higher Cost of Debt weighting, which carries a lower cost.

We continue to believe that the discount rate applied was reasonable based on the estimated capital costs of applicable market participants and an appropriate company-specific risk premium that reflected current market and industry conditions.

In estimating the fair value of our reporting unit with goodwill after the change in segments (Print and Other), our analysis likewise reflected a 75/25 allocation between the income and market approach but the discount rate applied to our projected cash flows was increased to approximately 8.75%.

The increase in the discount rate was largely due to an increase in the Company Specific Risk Premium to balance the overall Company valuation and to

Xerox 2022 Form 10-Q 42

reflect an increased risk to Print and Other as a result of the removal of a portion of the steadier annuity financing revenues to the Financing (FITTLE) reporting unit.

As with the assessment before the segment change, we continue to believe that the discount rate applied was reasonable based on the estimated capital costs of applicable market participants and an appropriate company-specific risk premium that reflected current market and industry conditions.

Based on our forecast model, which we believe reflects the inherent uncertainty of the future, we estimated that the excess of fair value over carrying value for the reporting unit with goodwill ranged between 15% and 20%.

In performing its assessment, the Company believes it has made reasonable estimates based on the facts and circumstances available as of the assessment date and taking into consideration the macro-economic and industry factors existing at that point.

However, the determination of fair value includes assumptions that are subject to risk and uncertainty.

The discounted cash flow calculations are dependent on subjective factors including the timing and amount of future cash flows and the discount rate.

If assumptions or estimates used in the fair value calculations change, including assumptions related to future cash flows as well as the impact of future macro-economic and industry conditions and our ability to initiate management actions to recover from those issues, it may result in a further decline in our estimated fair value and trigger future impairment charges.

We will continue to monitor developments in 2022 including updates to our forecasts as well as our market capitalization, and an update of our assessment and related estimates may be required in the future.

Financial Review

Three Months Ended

September 30, Nine Months Ended

September 30, % of Total Revenue

(in millions) 2021 2020 % Change CC % Change 2021 2020 % Change CC % Change 2021 2020

March 31, % of Total Revenue

(in millions) 2022 2021 % Change CC % Change 2022 2021

Equipment sales $ 314 $ 381 (17.6) % (16.1) % 19 % 22 %

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Total Revenue $ 1,668 $ 1,710 (2.5) % (0.7) % 100 % 100 %

Reconciliation to Condensed Consolidated Statements of Income:

Reconciliation to Condensed Consolidated Statements of (Loss) Income:

Sales $ 592 $ 602 (1.7) % 0.1 %

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$ 1,354 $ 1,329 1.9 % 3.7 %

Print and Other $ 1,550 $ 1,581 (2.0) % 93 % 92 %

Financing (FITTLE) 158 180 (12.2) % 9 % 11 %

Intersegment elimination (1)

(40) (51) (21.6) % (2) % (3) %

Total Revenue (2)

$ 1,668 $ 1,710 (2.5) % 100 % 100 %

Americas $ 1,071 $ 1,076 (0.5) % (0.4) % 64 % 63 %

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CC - See "Currency Impact" section for a description of Constant Currency.

(1) Refer to the "Geographic Sales Channels and Products and Offerings Definitions" section.

Third quarter 2021 total revenue decreased 0.5% as compared to third quarter 2020, including a 1.1-percentage point favorable impact from currency, while total revenue for the nine months ended September 30, 2021 increased 3.3% as compared to the prior year period, including a 2.5-percentage point favorable impact from currency and an approximate 0.5-percentage point favorable impact from recent partner dealer acquisitions.

Total revenue for both the three and nine months ended September 30, 2021 reflected global product supply constraints and freight disruptions (as a result of container shortages and transportation congestion) which limited our ability to fulfill orders and resulted in growth of our order backlog.

While business closures and limited office occupancy as a result of the COVID-19 pandemic (particularly the Delta variant) continue to affect our revenues, the progress of vaccinations and the gradual reopening of workplaces resulted in higher sequential and year-over-year page volumes in the third quarter 2021.

Geographically, revenue increased more significantly in our EMEA operations for both the three and nine months ended September 30, 2021, where we have a larger presence across SMB businesses which have had a faster recovery and greater resiliency against pandemic resurgences.

Revenue decreased in our North American operations, which were more significantly impacted by freight disruptions that were further amplified by labor shortages within the transportation industry.

North America also has a higher proportion of large enterprise customers, who are generally experiencing a slower pace of return to workplaces.

Total revenue for the three and nine months ended September 30, 2021 reflected the following:

(1) Reflects net revenue, primarily commissions and other payments, made by the Financing segment (FITTLE) to the Print and Other segment for the lease of Xerox equipment placements.

(2) Refer to the "Reportable Segments and Geographic Sales Channels" section.

Xerox 2022 Form 10-Q 43

Total revenue for the three months ended March 31, 2022 decreased 2.5% as compared to first quarter 2021, including a 1.8-percentage point benefit from acquisitions as well as a 1.8-percentage point adverse impact from currency.

The decrease in organic revenue reflected continued global product supply constraints and freight disruptions, which limited our ability to fulfill orders and resulted in growth of our order backlog.

In March, we saw a modest increase in page volumes and page volume-driven post sale revenue as the Omicron variant waned in our key markets and businesses welcomed employees back to the office.

We continue to expect supply constraints and return to office trends to improve beginning in the second half of the year.

Geographically, revenue in our EMEA operations decreased 5.6% as compared to first quarter 2021, including a 4.8-percentage point adverse impact from currency.

Revenue decreased 0.5% in our Americas operations with relatively no impact from currency.

Both regions were negatively affected by product supply shortages and global freight disruptions.

First quarter 2022 page volumes grew slightly faster in EMEA than in the Americas when compared to first quarter 2021 as Omicron-related closures affected the EMEA operations earlier than in the Americas.

Total revenue for the three months ended March 31, 2022 reflected the following:

Post sale revenue

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Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization in the U.S.

For the three months ended September 30, 2021, Post sale revenue increased 1.7% as compared to third quarter 2020, including a 1.2-percentage point favorable impact from currency, while Post sale revenue increased 0.6% for

Xerox 2021 Form 10-Q 44

the nine months ended September 30, 2021, including a 2.4-percentage point favorable impact from currency.

For the three months ended March 31, 2022, Post sale revenue increased 1.9% as compared to first quarter 2021, including a 1.8-percentage point adverse impact from currency.

Post sale revenue reflected the following:

• Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of our managed print and document services offerings.

While these revenues are contractual in nature, our bundled services contracts generally include a fixed minimum charge and a significant variable component based on print volumes.

◦ For the three months ended September 30, 2021, these revenues decreased 1.4% as compared to third quarter 2020, including a 1.1-percentage point favorable impact from currency, reflecting the impact of lower royalty revenue and lower third-party financing commissions (resulting from higher XFS lease penetration of our XBS operations), as well as a lower net population of devices, and an ongoing competitive price environment, partially offset by modestly higher page volumes corresponding with the gradual reopening of workplaces.

◦ For the nine months ended September 30, 2021, these revenues decreased 2.5% as compared to the prior year period, including a 2.4-percentage point favorable impact from currency, reflecting the impact of lower royalty revenue and lower third-party financing commissions (resulting from higher XFS lease penetration of our XBS operations), a lower population of devices (which is partially associated with lower installs in prior periods), an ongoing competitive price environment, and lower page volumes during first quarter 2021 (including a higher mix of lower average-page-volume products).

• Supplies, paper and other sales includes unbundled supplies and other sales.

◦ For the three months ended September 30, 2021, these revenues increased 16.4% as compared to third quarter 2020, including a 1.3-percentage point favorable impact from currency and primarily reflected higher supplies and paper revenues consistent with the gradual reopening of workplaces, which drove higher demand.

We also saw a marginal improvement in inventories carried by channel partners, as confidence in the recovery continued to moderately improve.

The increase also reflected higher IT revenues, driven by higher demand for our offerings, but partially dampened by IT hardware product constraints.

◦ For the nine months ended September 30, 2021, these revenues increased 17.7% as compared to the prior year period, including a 2.5-percentage point favorable impact from currency, reflecting primarily higher supplies revenues, as well as higher paper sales, consistent with the gradual reopening of workplaces, which drove higher demand.

• Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services offerings from our Xerox Services offerings.

For the three months ended March 31, 2022, these revenues decreased 2.8% as compared to first quarter 2021, including a 1.7-percentage point adverse impact from currency, reflecting the impact of lower royalty revenues from FUJIFILM Business Innovation Systems (formerly Fuji Xerox), lower third-party leasing commissions (resulting from higher XFS lease penetration of our XBS operations), a lower net population of devices and an ongoing competitive price environment.

Declines were partially offset by modestly higher page volumes, particularly in the last month of the quarter, corresponding with the gradual reopening of workplaces.

• Supplies, paper and other sales includes unbundled supplies, IT services and other sales.

For the three months ended March 31, 2022, these revenues increased 25.8% as compared to first quarter 2021, including a 2.2-percentage point adverse impact from currency, and primarily reflected higher IT Services sales, which increased more than 20% year-over-year excluding revenue from our recent acquisition of Powerland, as well as higher sold supplies and paper revenues.

The higher supplies revenues reflects higher channel demand and is consistent with the gradual reopening of workplaces.

• Financing revenue is generated from financed equipment sale transactions.

For the three months ended September 30, 2021, these revenues were flat as compared to third quarter 2020, including a 2.3-percentage point favorable impact from currency, while Financing revenue for the nine months ended September 30, 2021 decreased 2.4%, including a 2.4-percentage point favorable impact from currency.

The decrease at constant currency 1 reflected a lower finance receivables balance due to the pace of run-off of our lease portfolio and lower equipment sales in prior periods, as well as the impact of lower equipment sales in the third quarter 2021.

However, lease originations increased for both the three and nine months ended September 30, 2021 as compared to the respective prior year periods primarily as a result of higher XFS lease penetration from our XBS sales unit.

(1) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure.

For the three months ended March 31, 2022, these revenues decreased 3.6% as compared to first quarter 2021, including a 1.1-percentage point adverse impact from currency.

The decrease reflected a lower finance receivables balance due to the pace of run-off of our lease portfolio and lower equipment sales in prior periods, as well as the impact of lower equipment sales in the current period.

Lease originations decreased in the quarter as compared to first quarter 2021.

Xerox channel originations declined due primarily to supply constraints.

These declines were partially offset by an increase in originations from third-party dealers and non-Xerox equipment providers.

Equipment sales revenue

Three Months Ended September 30, Nine Months Ended

September 30, % of Equipment Sales

(in millions) 2021 2020 %

CC % Change 2021 2020 % Change CC % Change 2021 2020

Entry $ 69 $ 66 4.5% 3.9% $ 206 $ 158 30.4% 27.6% 17% 15%

Mid-range 244 276 (11.6)% (12.2)% 758 677 12.0% 9.7% 64% 64%

High-end 68 72 (5.6)% (6.5)% 218 206 5.8% 3.1% 18% 20%

Other 6 5 20.0% 20.0% 15 13 15.4% 15.4% 1% 1%

Equipment sales $ 387 $ 419 (7.6)% (8.4)% $ 1,197 $ 1,054 13.6% 11.0% 100% 100%

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CC - See "Currency Impact" section for a description of Constant Currency.

During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit.

Refer to the Equipment Sales Revenue - Classification Update section, for the revision of prior periods based on the new classification.

Xerox 2021 Form 10-Q 45

Equipment sales revenue decreased 7.6% for the three months ended September 30, 2021 as compared to third quarter 2020, including a 0.8-percentage point favorable impact from currency partially offset by the impact of price declines of less than 5%, while for the nine months ended September 30, 2021, Equipment sales revenue increased 13.6% as compared to the prior year period, including a 2.6-percentage point favorable impact from currency partially offset by the impact of price declines of less than 5%.

The decrease in Equipment sales revenue in the third quarter 2021 reflected the adverse impact of product supply constraints (consistent with market-wide shortages of computer chips and resins) and global freight disruptions that were further amplified by labor shortages within the transportation industry.

Equipment sales revenue decreased 17.6% for the three months ended March 31, 2022 as compared to first quarter 2021, including a 1.5-percentage point adverse impact from currency.

The decrease reflected the adverse impact of product supply constraints (consistent with market-wide shortages of computer chips and resins) and global freight disruptions.

Demand continued to increase as businesses reopened, resulting in a backlog of orders at the end of the quarter that increased sequentially and was above both prior year and pre-pandemic levels.

Equipment sales revenue increased in EMEA, as the impact of supply chain disruptions was offset by higher demand from our indirect channels serving SMB, and from large government deals (in Europe and certain developing market regions).

Equipment sales revenue decreased in our Americas operations as freight disruptions (from container shortages and transportation congestion) were more prevalent in the U.S.

The supply chain disruption impacted the availability of our mid-range devices most significantly.

The increase in Equipment sales revenue for the nine months ended September 30, 2021 is partially the result of a favorable compare to the respective prior year period, as businesses were extensively shut down in 2020 due to the COVID-19 pandemic.

Equipment sales revenue increased at a higher pace through our indirect channels primarily in EMEA, as well as in the U.S.

Sales of office-centric devices led the increase of these revenues (as businesses re-open and prepare for a broader return to workplaces), while sales of high-end production systems, which demand larger capital investments, had a more moderate increase.

Equipment sales were significantly impacted by global freight disruptions and product supply constraints (the result of market-wide shortages of computer chips and resins).

The change at constant currency 1 reflected the following:

• Entry - The increase for the three months ended September 30, 2021 as compared to third quarter 2020, was driven by higher demand for our printers and MFPs through our indirect channels in EMEA and the Americas.

The increase for the nine months ended September 30, 2021 as compared to the prior year period, was driven by higher demand for our lower-end printers and MFPs through our indirect channels primarily in EMEA as well as in the Americas, which included markedly higher installs related to government deals in the developing regions of EMEA.

While sales increased across this portfolio, we experienced an unfavorable mix from significantly higher sales of our lower-end black-and-white devices.

• Mid-range - The decrease for the three months ended September 30, 2021 as compared to third quarter 2020, was primarily driven by the significant impact of global product supply constraints and freight disruptions that had a more severe effect on our U.S.

The decrease also reflected unfavorable mix from growth in black-and-white devices.

The increase for the nine months ended September 30, 2021 as compared to the prior year period, was driven by higher demand primarily from EMEA and our indirect channels in the U.S., consistent with the gradual reopening of workplaces, as compared to business shutdowns that reduced purchases of office devices in the prior year period.

• High-end - The decrease for the three months ended September 30, 2021 as compared to third quarter 2020, primarily reflected the impact of global product supply constraints and freight disruptions, resulting in lower sales of color systems in the U.S., partially offset by higher sales of black-and-white systems corresponding with our customers' refresh cycles.

The increase for the nine months ended September 30, 2021 as compared to the prior year period, reflected primarily improvement in sales of devices in the lower-end of the range and to SMB customers, as well as sales of black-and-white systems corresponding with our customers' refresh cycles, while sales of larger color production engines continued to be depressed as a result of our customers' delayed capital investment decisions as well as the impact of global product supply constraints and freight disruptions, resulting in lower sales of color systems in the U.S.

Xerox 2021 Form 10-Q 46

Total Installs

Installs reflect only new placements of devices (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations).

Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our services revenues (which are both reported within our Post sale revenues), depending on the terms and conditions of our agreements with customers.

Installs include activity for Xerox and non-Xerox branded products installed by our XBS sales unit.

Detail by product group (see Geographic Sales Channels and Products and Offerings Definitions ) is shown below.

Installs for the three months ended September 30, 2021:

• 17% increase in color multifunction devices reflecting higher installs of ConnectKey devices through our indirect channels primarily in EMEA, as well as in North America.

• 7% decrease in black-and-white multifunction devices reflecting lower installs as a result of product constraints and a larger number of installs of black-and-white devices in the prior year, primarily associated with work-from-home demand associated with the COVID-19 pandemic.

• 1% increase in mid-range color installs primarily reflecting higher installs of our recently launched new-generation of ConnectKey multi-function printers, and the impact of freight disruption and product constraints.

• 20% increase in mid-range black-and-white installs primarily in EMEA, reflecting higher installs of our recently launched new-generation of ConnectKey multi-function devices.

• 7% decrease in high-end color installs primarily reflecting the impact of global product constraints and freight disruption that resulted in lower installations of color systems in the U.S.

• 34% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices related to cyclical account refreshes.

Installs for the nine months ended September 30, 2021:

• 13% increase in color multifunction devices reflecting higher installs of ConnectKey devices through our indirect channels in EMEA and North America.

• 40% increase in black-and-white multifunction devices reflecting higher activity primarily from low-end devices through indirect channels in the Americas, and from developing regions in EMEA, which included large order government deals.

Mid-Range (2)

• 22% increase in mid-range color installs primarily in EMEA, reflecting higher installs of our recently launched new-generation of ConnectKey multi-function printers, as well as our PrimeLink entry-production color devices.

• 22% increase in mid-range black-and-white installs reflecting higher installs of our recently launched new-generation of ConnectKey multi-function devices, as well as our PrimeLink entry-production color devices.

• 19% increase in high-end color installs reflecting primarily growth from our lower-end Versant devices as well as our Iridesse and iGen production systems partially offset by lower installs of our higher-end production presses.

• 33% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices primarily related to cyclical account refreshes in the U.S.

_____________

(1) Refer to the Non-GAAP Financial Measures section for an explanation of the non-GAAP financial measure.

(2) Mid-range and High-end color installations exclude FX digital front-end sales through the second quarter of 2020.

When we include these sales in 2020, installs of Mid-range color devices increased 22% and High-end color systems increased 18% for the nine months ended September 30, 2021.

Xerox 2021 Form 10-Q 47

Geographic Sales Channels and Products and Offerings Definitions

Our business is aligned to a geographic focus and is primarily organized on the basis of go-to-market sales channels, which are structured to serve a range of customers for our products and services.

In 2019 we changed our geographic structure to create a more streamlined, flatter and more effective organization, as follows:

• Americas, which includes our sales channels in the U.S.

and Canada, as well as Mexico, and Central and South America.

• EMEA, which includes our sales channels in Europe, the Middle East, Africa and India.

• Other, primarily includes sales to and royalties from FX, and our licensing revenue.

Our products and offerings include:

• “Entry”, which includes A4 devices and desktop printers.

Prices in this product group can range from approximately $150 to $3,000.

• “Mid-Range”, which includes A3 Office and Light Production devices that generally serve workgroup environments in mid to large enterprises.

Prices in this product group can range from approximately $2,000 to $75,000+.

• “High-End”, which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.

Prices for these systems can range from approximately $30,000 to $1,000,000+.

Equipment Sales Revenue - Classification Update

During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit to conform the classification of devices across Xerox sales channels.

The revision had no impact on reported total equipment sales revenue.

2020 Equipment Sales Revenue As Reported

(in millions) Q1 Q2 Q3 Q4 FY

Entry $ 40 $ 34 $ 55 $ 59 $ 188

Mid-range 218 209 291 325 1,043

High-end 64 64 69 115 312

Other 3 3 4 11 21

Equipment Sales Revenue $ 325 $ 310 $ 419 $ 510 $ 1,564

(in millions) Q1 Q2 Q3 Q4 FY

Entry $ 8 $ 10 $ 11 $ 11 $ 40

Mid-range (12) (14) (15) (16) (57)

High-end 3 3 3 4 13

Other 1 1 1 1 4

Equipment Sales Revenue $ — $ — $ — $ — $ —

2020 Equipment Sales Revenue As Revised

(in millions) Q1 Q2 Q3 Q4 FY

Entry $ 48 $ 44 $ 66 $ 70 $ 228

Mid-range 206 195 276 309 986

High-end 67 67 72 119 325

Other 4 4 5 12 25

Equipment Sales Revenue $ 325 $ 310 $ 419 $ 510 $ 1,564

Equipment sales revenue decreased in EMEA and the Americas due to supply chain disruptions, which impacted all product categories (Entry, Mid-Range, and High-End).

See Segment Review - Print and Other below for additional discussion on Equipment sales revenue.

Xerox 2022 Form 10-Q 44

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The following is a summary of key financial ratios used to assess our performance:

Three Months Ended September 30, Nine Months Ended September 30,

(in millions) 2021 2020 B/(W) 2021 2020 B/(W)

Three Months Ended March 31,

(in millions) 2022 2021 B/(W)

Gross Profit $ 530 $ 611 $ (81)

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Equipment Gross Margin 20.4 % 27.9 % (7.5) pts.

24.9 % 26.7 % (1.8) pts.

Post sale Gross Margin 34.4 % 38.0 % (3.6) pts.

37.5 % 40.7 % (3.2) pts.

Total Gross Margin 31.8 % 35.7 % (3.9) pts.

34.6 % 37.8 % (3.2) pts.

RD&E as a % of Revenue 4.7 % 4.3 % (0.4) pts.

4.5 % 4.6 % 0.1 pts.

SAG as a % of Revenue 27.3 % 26.2 % (1.1) pts.

24.6 % 27.7 % 3.1 pts.

Pre-tax Income $ 84 $ 119 $ (35) $ 236 $ 149 $ 87

Pre-tax Income Margin 4.8 % 6.7 % (1.9) pts.

4.5 % 2.9 % 1.6 pts.

Adjusted (1) Operating Profit

Pre-tax (Loss) Income $ (89) $ 53 $ (142)

Pre-tax (Loss) Income Margin (5.3) % 3.1 % (8.4) pts.

Adjusted (1) Operating (Loss) Profit

$ (3) $ 89 $ (92)

Adjusted (1) Operating Margin

4.2 % 7.4 % (3.2) pts.

Adjusted (1) Operating (Loss) Income Margin

(0.2) % 5.2 % (5.4) pts.

____________ _

(1) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure.

Pre-tax Income Margin

Third quarter 2021 pre-tax income margin of 4.8% decreased 1.9-percentage points as compared to third quarter 2020.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), partially offset by lower Restructuring and related costs, net and Other expenses, net.

Pre-tax income margin for the nine months ended September 30, 2021 of 4.5% increased 1.6-percentage points as compared to the prior year period.

The increase primarily reflected the impact of lower Restructuring and related costs, net, Transaction and related costs, net and Other expenses, net, while adjusted 1 operating margin was flat as compared to the prior year period.

Pre-tax (Loss) Income Margin

First quarter 2022 pre-tax loss margin of (5.3)% decreased 8.4-percentage points as compared to first quarter 2021.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), as well as higher Other expenses, net, which included a $33 million charge ($25 million after-tax) associated with the termination of a product supply agreement.

Adjusted 1 Operating Margin

Third quarter 2021 adjusted 1 operating margin of 4.2% decreased by 3.2-percentage points as compared to third quarter 2020, reflecting the impact of higher freight costs and lower revenues associated with product supply constraints, as well as a reduction of temporary government assistance and furlough measures, lower royalty revenues and third-party lease commissions, partially offset by lower bad debt expenses and cost and expense reductions associated with our Project Own It transformation actions.

Adjusted 1 operating margin for the nine months ended September 30, 2021 of 5.5% was flat as compared to the prior year period, reflecting an approximate 1.8-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic.

Additionally, cost and expense reductions associated with our Project Own It transformation actions as well as higher revenues, primarily due to the significant effect of the COVID-19 pandemic on our business during the prior year period, favorably impacted adjusted 1 operating margin.

These favorable factors were partially offset by a $66 million reduction of temporary government assistance and furlough measures and higher freight costs associated with product supply constraints, which lowered gross profit.

First quarter 2022 adjusted 1 operating loss margin of (0.2)% decreased by 5.4-percentage points as compared to first quarter 2021, primarily reflecting lower revenues and lower gross margin, which includes the impact of higher freight costs associated with product supply constraints, as well as higher expenses reflecting increased investments in new businesses, higher bad debt expense, and benefits from temporary government assistance and furlough measures in the prior year.

These impacts were partially offset by lower selling expenses resulting from lower sales volumes as well as productivity and cost savings associated with our Project Own It transformation actions.

______________

(1) Refer to the Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section.

(1) Refer to the Operating (Loss) Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section.

First quarter 2022 gross margin of 31.8% decreased by 3.9-percentage points as compared to first quarter 2021, reflecting unfavorable mix to Entry products and IT services as well as the unfavorable impacts of approximately 2.5-percentage points associated with supply chain costs and capacity restrictions, which reflects significantly higher freight and shipping costs and constrained availability of higher margin equipment.

In addition, gross margin was negatively impacted by lower third-party financing commissions, lower royalty revenue, benefits from temporary government assistance and furlough measures in the prior year, and a competitive pricing environment.

First quarter 2022 equipment gross margin of 20.4% decreased by 7.5-percentage points as compared to first quarter 2021, primarily reflecting an unfavorable mix of mid-range products and the impact of higher freight costs associated with product supply constraints and higher product costs.

First quarter 2022 Post sale gross margin of 34.4% decreased by 3.6-percentage points as compared to first quarter 2021, reflecting higher component and logistics costs associated with supply chain disruption, benefits from temporary government assistance and furlough measures in the prior year, a competitive pricing environment, and lower royalty revenues and third-party financing commissions.

In addition, a higher mix of IT services revenues also contributed to the decrease in margins.

These impacts were partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions.

Xerox 2022 Form 10-Q 45

Third quarter 2021 gross margin of 32.4% decreased by 4.4-percentage points as compared to third quarter 2020, reflecting unfavorable impacts of approximately 2.9-percentage points associated with supply chain costs and capacity restrictions (including significantly higher freight and shipping costs and constrained availability of higher margin equipment), and 0.6-percentage points associated with investments to support future growth.

The remainder of the decline reflects the impact of lower savings from temporary government assistance and furlough measures, net of Project Own It savings, as well as the impact from an ongoing competitive price environment and lower royalty revenues.

Gross margin for the nine months ended September 30, 2021 of 34.6% decreased by 3.2-percentage points as compared to the prior year period, reflecting unfavorable impacts of approximately 1.5-percentage points associated with supply chain costs and capacity restrictions (including significantly higher freight and shipping costs and constrained availability of higher margin equipment) and 0.5-percentage points associated with investments to support future growth.

The remainder of the decline reflects the impact of lower savings from temporary government assistance and furlough measures and from an ongoing competitive price environment.

These headwinds were partially offset by the cost savings from our Project Own It transformation actions.

Third quarter 2021 equipment gross margin of 18.3% decreased by 7.2-percentage points as compared to third quarter 2020, reflecting the impact of higher freight costs and lower revenues associated with product supply constraints and an unfavorable mix of sales through our EMEA channel and of lower margin Entry products, as well as the impacts of price declines.

Equipment gross margin for the nine months ended September 30, 2021 of 24.9% decreased by 1.8-percentage points as compared to the prior year period, primarily reflecting the impact of higher freight costs associated with product supply constraints, as well as the impact of price declines and an unfavorable mix of growth in low-end devices, partially offset by higher revenues and favorable transaction currency.

Third quarter 2021 Post sale gross margin of 36.4% decreased by 3.9-percentage points as compared to third quarter 2020, reflecting the impact of contracted service and maintenance revenues, and lower savings from temporary government assistance and furlough measures, as well as pricing pressure on contract renewals and lower royalty revenues and third-party lease commissions, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions.

Post sale gross margin for the nine months ended September 30, 2021 of 37.5% decreased by 3.2-percentage points as compared to the prior year period, reflecting the impact of contracted service and maintenance revenues, and lower savings from temporary government assistance and furlough measures and the impact of pricing pressure on contract renewals, as well as lower royalty revenues and third-party lease commissions, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions.

Research, Development and Engineering Expenses (RD&E)

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020 Change 2021 2020 Change

(in millions) 2022 2021 Change

R&D $ 64 $ 59 $ 5

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Total RD&E Expenses $ 78 $ 74 $ 4

Third quarter 2021 RD&E as a percentage of revenue of 4.7% increased by 0.4-percentage points as compared to third quarter 2020, as a result of revenue declines that outpaced the rate of investments.

RD&E of $82 million increased $6 million as compared to third quarter 2020 primarily reflecting investments in our innovation portfolio and the reversal of 401(k) matching contributions in the third quarter 2020, partially offset by savings from restructuring and productivity as well as benefits from the timing of program development cycles.

RD&E as a percentage of revenue for the nine months ended September 30, 2021 of 4.5% decreased by 0.1-percentage points as compared to the prior year period, as a result of higher revenues and Project Own It cost reductions, that outpaced the rate of investments.

RD&E for the nine months ended September 30, 2021 of $235 million decreased $1 million as compared to the prior year period, primarily reflecting the benefits from the timing of program development cycles, as well as savings from restructuring and productivity, partially offset by investments in our innovation portfolio.

Xerox 2021 Form 10-Q 50

First quarter 2022 RD&E as a percentage of revenue of 4.7% increased by 0.4-percentage points as compared to first quarter 2021, as a result of revenue declines that outpaced the rate of investments.

RD&E of $78 million increased $4 million as compared to first quarter 2021 primarily reflecting investments in our innovation portfolio and software, partially offset by savings from restructuring and productivity as well as lower RD&E for our print business.

Selling, Administrative and General Expenses (SAG)

Third quarter 2021 SAG as a percentage of revenue of 23.5% decreased by 1.6-percentage points as compared to third quarter 2020, primarily as a result of a lower bad debt provision and lower selling and administrative expenses which more than offset lower revenues.

Third quarter 2021 SAG of $413 million decreased by $31 million as compared to third quarter 2020, including a $20 million benefit from a lower bad debt provision.

The remaining decrease reflected the impact of productivity and cost savings from our Project Own It transformation actions, partially offset by lower benefits from temporary government assistance and furlough measures, higher compensation related accruals (corresponding with higher expected operating results) and other investments in the business to support future growth, as well as the reversal of the accrual for 401(k) matching contributions in the third quarter 2020 and the adverse impact from translation currency.

SAG as a percentage of revenue for the nine months ended September 30, 2021 of 24.6% decreased by 3.1-percentage points as compared to the prior year period, primarily as a result of an approximate 1.8-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic.

The remaining decrease was primarily due to the impact of higher revenues and lower selling expenses as a result of cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs).

SAG for the nine months ended September 30, 2021 of $1,295 million decreased by $116 million as compared to the prior year period, primarily reflecting lower bad debt expenses, as well as cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs), partially offset by an approximate $30 million adverse impact from translation currency, higher compensation related accruals (corresponding with higher expected operating results) and other investments in the business to support future growth, as well as the impact of lower benefits from temporary government assistance and furlough measures and higher expenses from prior year acquisitions.

Our bad debt provision for the nine months ended September 30, 2021 of $9 million decreased by $94 million as compared to the prior year period, primarily due to the prior year reflecting an approximate $60 million incremental provision to cover estimated write-offs on our trade and finance receivable portfolio from the COVID-19 pandemic, while 2021 reflected finance receivable reserve reductions, in the second quarter and third quarter 2021 of approximately $6 million and $14 million, respectively, and lower reserves for trade receivables.

The 2021 reductions in our Finance and Trade reserves reflect improvements in the macroeconomic environment as well as lower write-offs.

Although actual finance receivable write-offs incurred to date continued to lag expectations, we believe our current reserve position remains sufficient to cover expected future losses that may result from future economic conditions.

Despite the improvement in the global economy, significant uncertainties remain as local economies continue to recover from the impacts of the COVID-19 pandemic including the cessation of government support as well as labor, interest rate and inflation risks and the potential for higher taxes.

As a result of these uncertainties, we continue to consider various adverse macroeconomic scenarios in our models.

Accordingly, our reserves as a percent of receivables have remained fairly consistent subsequent to the first quarter 2020 charge of approximately $60 million to initially record expected losses from the COVID-19 pandemic.

We continue to monitor developments regarding the pandemic, including business closures and reopenings and mitigating government support actions as well as future economic conditions, and as a result our reserves may need to be updated in future periods.

On a trailing twelve-month basis (TTM), bad debt expense was approximately 1.0% of total receivables (excluding the second and third quarter 2021 reductions of $6 million and $14 million, respectively), which is consistent with the pre-pandemic trend and reflects the consistent level of reserves subsequent to the first quarter 2020 charge.

First quarter 2022 SAG as a percentage of revenue of 27.3% increased by 1.1-percentage points as compared to first quarter 2021, due to higher administrative and bad debt expenses, as well as the impact of lower revenues, partially offset by lower selling expenses as a result of lower sales volumes and lower marketing costs.

First quarter 2022 SAG of $455 million increased $7 million as compared to first quarter 2021, primarily reflecting investments in new businesses, higher bad debt expense and acquisitions as well as, benefits from temporary government assistance and furlough measures in the prior year.

These actions were partially offset by lower sales and marketing expenses resulting from lower sales volumes as well as productivity and cost savings associated with our Project Own It transformation actions and the favorable impact from currency.

Our bad debt provision for the three months ended March 31, 2022 of $15 million increased by $5 million as compared to the first quarter 2021, primarily related to reserves for trade receivables in our Eurasia operations, primarily in Russia.

Although actual finance receivable write-offs incurred to date continue to lag expectations, we believe our current reserve position remains sufficient to cover expected future losses that may result from current and future macro-economic conditions.

We continue to believe that uncertainties remain as economies continue to recover from the impacts of the COVID-19 pandemic including the cessation of government support as well as labor, interest rate and inflation risks and the potential for higher taxes.

In addition, there is also considerable uncertainty regarding the impact the Russia/Ukraine war and related global sanctions will have on the macro or global economy.

As a result of these uncertainties, our reserves as a percent of receivables have remained fairly consistent subsequent to the first quarter 2020 increase to initially record expected losses from the COVID-19 pandemic.

We continue to monitor developments in future economic conditions, and as a result, our reserves may need to be updated in future periods.

On a trailing twelve-month basis (TTM), bad debt expense was approximately 1.0% of total receivables (excluding the 2021 reserve reductions of approximately $31 million), which is consistent with the pre-pandemic trend and reflects the consistent level of reserves subsequent to the first quarter 2020 charge.

Refer to Note 8 - Accounts Receivable, Net and Note 9 - Finance Receivables, Net in the Condensed Consolidated Financial Statements for additional information regarding our bad debt provision.

1 unchanged sentence

Restructuring and Related Costs, Net

We incurred Restructuring and related costs, net of $10 million for the third quarter 2021 , as compared to $20 million for third quarter 2020, and $39 million for the nine months ended September 30, 2021, as compared to $64 million in the prior year period.

We incurred Restructuring and related costs, net of $18 million for the first quarter 2022 , as compared to $17 million for first quarter 2021.

These costs were primarily related to the implementation of initiatives under our business transformation projects including Project Own It.

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2022 2021

Severance (1)

$ 5 $ 18 $ 25 $ 57

Asset impairments - leased right-of-use assets (2)

2 unchanged sentences

Net reversals (4)

(3) (3) (12) (18)

Restructuring and asset impairment costs 20 21

Retention-related severance/bonuses (5)

Contractual severance costs (6)

Consulting and other costs (7)

Total $ 18 $ 17

_____________

(1) Reflects headcount reductions of approximately 35 and 650 employees worldwide in third quarter 2021 and 2020, respectively and 435 and 1,100 employees worldwide for the nine months ended September 30, 2021 and 2020, respectively.

(2) Primarily related to the exit and abandonment of leased and owned facilities net of any potential sublease income and other recoveries, including potential sales.

(1) Reflects headcount reductions of approximately 450 and 350 employees worldwide in first quarter 2022 and 2021, respectively.

(2) Primarily related to the exit and abandonment of leased and owned facilities net of any potential sublease income and other recoveries.

(3) Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs.

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(5) Includes retention-related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination.

(6) Amounts primarily reflect severance and other related costs we are contractually required to pay in connection with employees transferred as part of the shared service arrangement entered into with HCL Technologies.

(7) Represents professional support services associated with our business transformation initiatives.

Third quarter 2021 actions impacted several functional areas, with approximately 35% focused on gross margin improvements, approximately 50% focused on SAG reductions and the remainder focused on RD&E optimization.

Third quarter 2020 actions impacted several functional areas, with approximately 30% focused on gross margin improvements, approximately 65% focused on SAG reductions and the remainder focused on RD&E optimization.

The Restructuring and related costs, net reserve balance as of September 30, 2021 for all programs was $58 million, which is expected to be paid over the next twelve months.

The reversals in first quarter 2022 and 2021, respectively, reflect a change in estimates.

First quarter 2022 actions impacted several functional areas, with approximately 30% focused on gross margin improvements, approximately 60% focused on SAG reductions and the remainder focused on RD&E optimization.

First quarter 2021 actions impacted several functional areas, with approximately 30% focused on gross margin improvements, approximately 65% focused on SAG reductions and the remainder focused on RD&E optimization.

The Restructuring and related costs, net reserve balance for all programs as of March 31, 2022 was $53 million, which is expected to be paid over the next twelve months.

Refer to Note 12 - Restructuring Programs in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.

Transaction and Related Costs, Net

Transaction and related costs, net primarily reflect costs from third party providers for professional services associated with certain major and strategic M&A projects.

There were no Transaction and related costs, net incurred during 2021.

For the three months ended September 30, 2020, we recognized a credit of $6 million, primarily related to adjustments to costs from third party providers of professional services, while for the nine months ended September 30, 2020 we incurred $18 million of costs primarily related to legal and other professional costs associated with the terminated proposal to acquire HP Inc.

Amortization of Intangible Assets

Third quarter 2021 Amortization of intangible assets of $13 million was flat as compared to the third quarter 2020.

Amortization of intangible assets for the nine months ended September 30, 2020 was $42 million, an increase of $8 million as compared to the prior year period primarily due to intangible assets associated with our 2020 and 2021 acquisitions.

Xerox 2021 Form 10-Q 52

First quarter 2022 Amortization of intangible assets of $11 million was $4 million lower as compared to the first quarter 2021, primarily related to the write-off of certain XBS tradenames in first quarter 2022 as part of our continued efforts to realign and consolidate this sales unit as part of Project Own It.

Worldwide Employment

Worldwide employment was approximately 23,600 as of September 30, 2021 and decreased by approximately 1,500 1 from December 31, 2020.

The reduction resulted from net attrition (attrition net of gross hires), of which a large portion is not expected to be backfilled, as well as the impact of organizational changes.

_____________

(1) Decrease based on revised headcount at December 31, 2020 of 25,100 from 24,700 due to the change in definition of full-time equivalent employee.

Worldwide employment was approximately 23,400 as of March 31, 2022, an increase of approximately 100 from December 31, 2021.

The increase resulted from net hires (gross hires net of attrition), as well as the impact of organizational changes.

Other Expenses, Net

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2022 2021

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Non-service retirement-related costs (7) (20)

Gains on sales of businesses and assets (39) (28) (40) (29)

Currency losses, net — 2

Contract termination costs - IT services — — — 3

Contract termination costs - product supply 33 —

All other expenses, net 3 (1)

Other expenses, net $ 57 $ 4

Xerox 2022 Form 10-Q 47

Non-Financing Interest Expense

Third quarter 2021 non-financing interest expense of $23 million was $7 million lower than third quarter 2020.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $7 million as compared to third quarter 2020, primarily reflecting a lower average interest rate and average debt balance.

Non-financing interest expense for the nine months ended September 30, 2021 of $71 million was $2 million higher than the prior year period.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $2 million from the prior year period reflecting a lower average interest rate and average debt balance.

Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements, for additional information regarding debt activity and the interest expense.

Interest Income

Interest income for the nine months ended September 30, 2021 was $9 million lower than the prior year period, primarily due to lower interest rates and a lower cash balance.

First quarter 2022 non-financing interest expense of $29 million was $5 million higher than first quarter 2021.

When combined with financing interest expense (Cost of financing), total interest expense remained relatively flat as compared to first quarter 2021.

Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements, for additional information regarding debt activity and interest expense.

Non-Service Retirement-Related Costs

Non-service retirement-related costs for the three and nine months ended September 30, 2021 were $9 million and $44 million lower than the respective prior year periods, primarily driven by lower discount rates and higher expected returns on plan assets due to higher asset balances.

Refer to Note 15 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding non-service retirement-related costs.

Gains on Sales of Businesses and Assets

Gains on sales of businesses and assets increased $11 million for both the three and nine months ended September 30, 2021 as compared to the respective prior year periods, reflecting higher proceeds from the sale of non-core business assets.

Third quarter 2021 effective tax rate was (4.8)%.

On an adjusted 1 basis, third quarter 2021 effective tax rate was (3.5)%.

Both rates include the benefits from additional incentives as a result of changes in elections made with the filed tax returns, as well as a decrease in the deferred tax valuation allowances of approximately 26%.

The adjusted 1 effective tax rate was lower than the U.S.

federal statutory tax rate of 21% primarily due to additional incentives as a result of changes in elections made with the filed tax returns, decrease in deferred tax valuation allowances, and the geographical mix of earnings.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, net, Amortization of intangible assets, non-

Xerox 2021 Form 10-Q 53

service retirement-related costs and other discrete, unusual or infrequent items (as applicable) as described in our Non-GAAP Financial Measures section.

Third quarter 2020 effective tax rate was 24.4%.

On an adjusted 1 basis, third quarter 2020 effective tax rate was 21.1%.

This rate was higher than the U.S.

federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of earnings which includes non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by the impact from various tax law changes.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, as well as non-service retirement-related costs and other discrete, unusual or infrequent items (as applicable), as described in our Non-GAAP Financial Measures section.

The effective tax rate for the nine months ended September 30, 2021 was 8.1%.

On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2021 was 9.9%.

Both rates include the benefits from tax law changes, additional incentives as a result of changes in elections made with the filed tax returns, as well as a decrease in the deferred tax valuation allowances of approximately 15%.

The adjusted 1 effective tax was lower than the U.S.

federal statutory tax rate of 21% primarily due to benefits from tax law changes, additional incentives as a result of changes in elections made with the filed tax returns, decrease in deferred tax valuation allowances and partially offset by state taxes and the geographical mix of earnings.

First quarter 2022 non-service retirement-related costs were $13 million higher as compared to the first quarter 2021, primarily driven by an increase in interest costs due to higher discount rates and higher settlement losses.

First quarter 2022 service retirement-related costs, which are included in operating expenses, were $4 million and $6 million in the first quarter 2022 and 2021, respectively.

Refer to Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding service and non-service retirement-related costs.

Contract termination costs

In the first quarter 2022, we recorded a $33 million charge ($25 million after-tax) associated with the termination of a product supply agreement.

The charge primarily reflects the payment of the contractual cancellation fee plus interest and related legal fees.

First quarter 2022 effective tax rate was 34.8% and included benefits from additional tax incentives as well as a change in our indefinite reinvestment tax liability due to a recent acquisition of approximately 10%.

On an adjusted 1 basis, first quarter 2022 effective tax rate was 52.9%.

The adjusted 1 effective tax rate was higher than the U.S.

federal statutory tax rate of 21% primarily due to benefits from additional tax incentives and a change in our indefinite reinvestment tax liability due to a recent acquisition of approximately 25% as well as the geographical mix of earnings.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, net, Amortization of intangible assets, non-service retirement-related costs and other discrete, unusual or infrequent items (as applicable), as described in our Non-GAAP Financial Measures section.

The effective tax rate for the nine months ended September 30, 2020 was 24.2%.

On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2020 was 23.8%.

First quarter 2021 effective tax rate was 26.4%.

On an adjusted 1 basis, first quarter 2021 effective tax rate was 27.7%.

This rate was higher than the U.S.

federal statutory tax rate of 21% primarily due to state taxes, the geographical mix of earnings which includes non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by a benefit of approximately 6.0% for the impact from various tax law changes.

federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of earnings.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income.

4 unchanged sentences

Investment in Affiliates, at Equity largely consists of several minor investments in entities in the Middle East region.

Equity in net income of unconsolidated affiliates for the nine months ended September 30, 2021 of $2 million was flat as compared to the prior year period.

Third quarter 2021 Net income attributable to Xerox Holdings was $90 million, or $0.48 per diluted share.

On an adjusted 1 basis, Net income attributable to Xerox Holdings was $90 million, or $0.48 per diluted share.

Third quarter 2021 adjustments to Net income attributable to Xerox Holdings included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures ).

Net income attributable to Xerox Holdings for the nine months ended September 30, 2021 was $220 million, or $1.10 per diluted share and included the benefit from a change in tax law (see Income Taxes above).

On an adjusted 1 basis, Net income attributable to Xerox Holdings was $231 million, or $1.16 per diluted share.

Adjustments to Net income attributable to Xerox Holdings for the nine months ended September 30, 2021 included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures ).

Third quarter 2020 Net income attributable to Xerox Holdings was $90 million, or $0.41 per diluted share.

On an adjusted 1 basis, Net income attributable to Xerox Holdings was $105 million, or $0.48 per diluted share.

Third quarter 2020 adjustments to Net income attributable to Xerox Holdings included Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs (see Non-GAAP Financial Measures ).

Equity in net income of unconsolidated affiliates for the three months ended March 31, 2022 was $1 million higher as compared to the prior year period.

Net (Loss) Income

First quarter 2022 Net Loss Attributable to Xerox Holdings was $56 million, or $(0.38) per diluted share.

On an adjusted 1 basis, Net Loss Attributable to Xerox Holdings was $14 million, or $(0.12) per diluted share.

First quarter 2022 adjustments to Net Loss Attributable to Xerox Holdings included Restructuring and related costs, net, Amortization of intangible assets, non-service retirement-related costs and other discrete items (see Non-GAAP Financial Measures ).

Xerox 2022 Form 10-Q 48

Net income attributable to Xerox Holdings for the nine months ended September 30, 2020 was $115 million, or $0.49 per diluted share.

First quarter 2021 Net Income Attributable to Xerox Holdings was $39 million, or $0.18 per diluted share.

On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $47 million, or $0.22 per diluted share.

Both amounts included the impact of the approximately $60 million pre-tax increase in bad debt expense (approximately $43 million after-tax) as compared to the prior year period, primarily reflecting the expected impact to our customer base and related outstanding receivable portfolio from the COVID-19 pandemic.

Adjustments to Net income attributable to Xerox Holdings for the nine months ended September 30, 2020 included Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items (see Non-GAAP Financial Measures ).

Refer to Note 19 - Earnings per Share in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.

First quarter 2021 adjustments to Net Income Attributable to Xerox Holdings included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures ).

Refer to Note 20 - (Loss) Earnings per Share in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.

_____________

(1) Refer to the Net Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section.

(1) Refer to the Net (Loss) Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section.

Other Comprehensive (Loss) Income

Third quarter 2021 Other Comprehensive Loss, Net Attributable to Xerox was $70 million and included the following:

First quarter 2022 Other Comprehensive Loss, Net Attributable to Xerox was $44 million and included the following:

i) net translation adjustment losses of $72 million reflecting the weakening of our major foreign currencies against the U.S.

Dollar during the quarter;

ii) $4 million of net unrealized gains;

and iii) $51 million of net gains from the changes in defined benefit plans primarily due to net actuarial gains as a result of better than expected investment returns and higher discount rates as well as the positive impact of currency.

This compares to Other Comprehensive Income, Net Attributable to Xerox of $88 million for the third quarter 2020, which reflected the following:

i) net translation adjustment gains of $179 million reflecting the significant strengthening of our major foreign currencies against the U.S.

ii) $1 million of net unrealized gains;

and iii) $92 million of net losses from the changes in defined benefit plans primarily due to net actuarial losses as a result of lower discount rates in the U.S.

and the negative impacts from currency, partially offset by settlements.

Other Comprehensive Loss, Net Attributable to Xerox for the nine months ended September 30, 2021 was $3 million and included the following:

i) net translation adjustment losses of $122 million reflecting the weakening of our major foreign currencies against the U.S.

ii) $11 million of net unrealized losses;

and iii) $122 million of net gains from the changes in defined benefit plans primarily due to remeasurement in the second quarter of 2021 and net actuarial gains as a result of higher discount rates, as well as the positive impact of currency.

This compares to Other Comprehensive Income, Net Attributable to Xerox for the nine months ended September 30, 2020 of $53 million, which reflected the following:

i) $42 million of net gains from the changes in defined benefit plans primarily due to the amortization and recognition of net actuarial losses from AOCL 1 ;

ii) net translation adjustment gains of $7 million reflecting the strengthening of our major foreign currencies against the U.S.

and iii) $4 million of net unrealized gains.

Refer to Note 18 - Other Comprehensive (Loss) Income in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive (Loss) Income, Note 13 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized (losses) gains, net, and Note 15 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans.

and iii) $39 million of net gains from the changes in defined benefit plans primarily due to a prior service credit as well as the amortization of actuarial losses and settlement losses and the positive impact of currency.

This compares to Other Comprehensive Loss, Net Attributable to Xerox of $3 million for the first quarter 2021, which reflected the following:

i) net translation adjustment losses of $51 million reflecting the weakening of the Euro against the U.S.

Dollar that was only partially offset by the strengthening of the GBP and CAD;

ii) $7 million of net unrealized losses;

and iii) $55 million of net gains from the changes in defined benefit plans primarily due to net actuarial gains as a result of higher discount rates in the U.S.

Refer to Note 19 - Other Comprehensive (Loss) Income in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive (Loss) Income, Note 14 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized losses, net, and Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans.

Reportable Segments and Geographic Sales Channels

Our business is organized to ensure we focus on efficiently managing operations while serving our customers and the markets in which we operate.

During 2021 we progressed with the standing up of three new businesses:

Software (CareAR), Financing (FITTLE) and Innovation (PARC).

As a result of this effort, during the first quarter of 2022, we reassessed our operating and reportable segments and determined that, based on the financial information reviewed by our chief operating decision maker (CODM), who is the Chief Executive Officer (CEO), as well as the CEO’s management and assessment of the Company’s operations, we had two operating and reportable segments - Print and Other and Financing.

• Print and Other - the design, development and sale of document management systems, solutions and services as well as associated technology offerings including IT and software products and services.

• Financing (FITTLE) – a financing solutions business primarily providing financing for the sales of Xerox equipment.

We also determined that the other businesses – Software and Innovation - did not meet the requirements to be considered separate operating segments largely due to their continued management through the Print and Other segment as well as their immateriality to our results at this stage.

Accordingly, those groups will continue to be reported as part of the Print and Other Segment.

We also operate a matrix organization that includes a geographic focus that is primarily organized from a sales perspective on the basis of “go-to-market” (GTM) sales channels as follows:

• Americas , which includes our sales channels in the U.S.

and Canada, as well as Mexico, and Central and South America.

• EMEA , which includes our sales channels in Europe, the Middle East, Africa and India.

• Other , primarily includes sales to Fuji Xerox as well as royalties and licensing revenue.

These GTM sales channels are structured to serve a range of customers for our products and services, including financing.

Accordingly, we will continue to provide information, primarily revenue related, with respect to our principal GTM sales channels.

Xerox 2022 Form 10-Q 49

Segment Review

Three Months Ended March 31,

(in millions) External Net Revenue Intersegment Net Revenue (1)

Total Segment Revenue % of Total Revenue Segment (Loss) Profit Segment Margin (2)

Print and Other $ 1,513 $ 37 $ 1,550 91 % $ (20) (1.3) %

Financing (FITTLE) 155 3 158 9 % 17 11.0 %

Total $ 1,668 $ 40 $ 1,708 100 % $ (3) (0.2) %

Print and Other $ 1,533 $ 48 $ 1,581 90 % $ 71 4.6 %

Financing (FITTLE) 177 3 180 10 % 18 10.2 %

Total $ 1,710 $ 51 $ 1,761 100 % $ 89 5.2 %

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(1) AOCL - Accumulated other comprehensive loss.

New Business Strategy

As disclosed in our 2020 Annual Report, in January 2021 we announced our intention to stand up our Software, Financing and Innovation businesses as separate units by 2022.

At this stage, the operations and financial results for these units continue to be primarily managed by and reported in our “go-to-market” (GTM) sales channels.

We have begun the process of reorganizing these new units from the GTM units but we have not progressed to the point where we have discrete and complete financial information for these new businesses.

Accordingly, the chief operating decision maker (CODM) and management continue to manage the Company’s operations, including the products and services from these units, through the GTM sales channels and as result, we continue to have one operating and reportable segment.

We expect that the business and financial information for these new units, as well as the operational management of these businesses, will continue to be refined and improved during the fourth quarter 2021.

Accordingly, a reassessment of our operating segments may be required beginning in 2022.

(1) Reflects net revenue, primarily commissions and other payments, made by the Financing segment (FITTLE) to the Print and Other segment for the lease of Xerox equipment placements.

(2) Segment margin based on external net revenue only.

Print and Other

Print and Other includes the design, development and sale of document management systems, solutions and services as well as associated technology offerings including IT and software products and services.

Three Months Ended

(in millions) 2022 2021 %

Equipment sales $ 309 $ 373 (17.2)%

Post-sale revenue 1,204 1,160 3.8%

Intersegment net revenue (1)

37 48 (22.9)%

Total Print and Other Revenue $ 1,550 $ 1,581 (2.0)%

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(1) Reflects net revenue, primarily commissions and other payments, made by the Financing segment (FITTLE) to the Print and Other segment for the lease of Xerox equipment placements.

First quarter 2022 Print and Other revenue decreased 2.0% as compared to first quarter 2021 primarily due to supply shortages, which caused a 17.2% decline in Equipment sales revenue as compared to first quarter 2021.

This decline was partially offset by an increase in Post sale revenue of 3.8% as compared to first quarter 2021.

Print and Other segment revenue results included the following:

Equipment sales revenue decreased 17.2% as compared to first quarter 2021 due to the adverse impact of product supply constraints (consistent with market-wide shortages of computer chips and resins) and global freight disruptions.

Demand continued to increase as businesses reopened, resulting in a backlog of orders at the end of the quarter that increased sequentially and was above both prior year and pre-pandemic levels.

Post-sale revenue increased by 3.8% as compared to first quarter 2021 primarily due to growth in supplies, paper and other revenue, and includes growth from our IT Services business, which included two months of revenue from our recent acquisition of Powerland.

We also experienced growth in page volume-driven service revenues, reflecting modest growth in page volumes during the quarter.

These increases were partially offset by a decline in royalty income and third-party leasing commissions.

Xerox 2022 Form 10-Q 50

Detail by product group is shown below.

Three Months Ended

March 31, % of Equipment Sales

(in millions) 2022 2021 % Change CC % Change 2022 2021

Entry $ 61 $ 68 (10.3)% (7.6)% 19% 18%

Mid-range 194 238 (18.5)% (17.1)% 62% 63%

High-end 54 70 (22.9)% (21.0)% 17% 18%

Other 5 5 —% —% 2% 1%

Equipment sales (1)(2)

$ 314 $ 381 (17.6)% (16.1)% 100% 100%

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CC - See "Currency Impact" section for a description of constant currency.

(1) Refer to the Products and Offerings Definitions section.

(2) The three months ended March 31, 2022 and 2021, includes $5 million and $8 million, respectively, of equipment sales related to the Financing (FITTLE) segment.

The change at constant currency 1 reflected the following:

• Entry - The decrease for the three months ended March 31, 2022 as compared to first quarter 2021, was driven by supply constraints, which most significantly affected our black-and-white devices.

• Mid-range - The decrease for the three months ended March 31, 2022 as compared to first quarter 2021, was primarily driven by the impact of global product supply constraints and freight disruptions, which had a slightly more pronounced effect on our U.S.

operations and availability of our black-and-white devices.

• High-end - The decrease for the three months ended March 31, 2022 as compared to first quarter 2021, primarily reflected the impact of global product supply constraints and freight disruptions, partially offset by a more favorable mix.

_____________

(1) Refer to the Non-GAAP Financial Measures section for an explanation of the non-GAAP financial measure.

Total Installs

Installs reflect only new placements of devices (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations).

Installs include activity for Xerox and non-Xerox branded products installed by our XBS sales unit.

Detail by product group (see Products and Offerings Definitions ) is shown below.

Installs for the three months ended March 31, 2022:

• Installs of color multifunction devices were flat reflecting supply constraints that offset strong demand for recently launched products.

• 39% decrease in black-and-white multifunction devices reflecting lower installs as a result of product constraints and a larger number of installs of black-and-white devices in the prior year, primarily associated with work-from-home demand associated with the COVID-19 pandemic.

• 9% decrease in mid-range color installs primarily reflecting the impact of freight disruption and product supply constraints, offsetting strong demand for recently launched products.

• 61% decrease in mid-range black-and-white installs reflecting the impact of freight disruption and product supply constraints.

• 29% decrease in high-end color installs primarily reflecting the impact of global product constraints and freight disruptions.

• 15% decrease in high-end black-and-white systems reflecting the impact of global product constraints and freight disruptions.

Xerox 2022 Form 10-Q 51

Products and Offerings Definitions

Our Equipment sale product groupings are as follows:

• “Entry”, which includes A4 devices and desktop printers.

Prices in this product group can range from approximately $150 to $3,000.

• “Mid-Range”, which includes A3 Office and Light Production devices that generally serve workgroup environments in mid to large enterprises.

Prices in this product group can range from approximately $2,000 to $75,000+.

• “High-End”, which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.

Prices for these systems can range from approximately $30,000 to $1,000,000+.

Segment Margin

First quarter 2022 Print and Other segment (loss) margin of (1.3)% decreased by 5.9-percentage points as compared to first quarter 2021 primarily due to the impact of higher freight and production costs associated with product supply constraints, investments in new businesses, benefits from temporary government assistance and furlough measures in the prior year, lower royalty revenues and third-party leasing commissions, partially offset by productivity and cost savings associated with Project Own It transformation actions.

Financing (FITTLE)

Financing (FITTLE) represents a global financing solutions business, providing financing for the sales of Xerox equipment .

Three Months Ended

(in millions) 2022 2021 %

Equipment sales $ 5 $ 8 (37.5)%

Financing income 53 55 (3.6)%

What changed 10-Q

Item 2. Management’s Discussion and Analysis