Xerox Holdings Corp 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Throughout the Management’s Discussion and Analysis (MD&A), references to “Xerox Holdings” refer to Xerox Holdings Corporation and its consolidated subsidiaries while references to “Xerox” refer to Xerox Corporation and its consolidated subsidiaries. References herein to “we,” “us,” “our,” the “Company” refer collectively to both Xerox Holdings and Xerox unless the context suggests otherwise. References to "Xerox Holdings Corporation" refer to the stand-alone parent company and do not include its subsidiaries. References to "Xerox Corporation" refer to the stand-alone company and do not include its subsidiaries. Currently, Xerox Holdings' primary direct operating subsidiary is Xerox and Xerox reflects nearly all of Xerox Holdings' operations. Accordingly, the following MD&A primarily focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and its results of operations and financial condition. 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 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 To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency", “currency impact” or “the impact from currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates. Overview 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. ____________________________ (1) Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT services offerings. 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 (14) 47 (61) 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 2022 Outlook 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. ____________________________ (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 Revenues Three Months Ended March 31, % of Total Revenue (in millions) 2022 2021 % Change CC % Change 2022 2021 Equipment sales $ 314 $ 381 (17.6) % (16.1) % 19 % 22 % Post sale revenue 1,354 1,329 1.9 % 3.7 % 81 % 78 % Total Revenue $ 1,668 $ 1,710 (2.5) % (0.7) % 100 % 100 % Reconciliation to Condensed Consolidated Statements of (Loss) Income: Sales $ 592 $ 602 (1.7) % 0.1 % Less: Supplies, paper and other sales (278) (221) 25.8 % 28.0 % Equipment sales $ 314 $ 381 (17.6) % (16.1) % Services, maintenance and rentals $ 1,023 $ 1,053 (2.8) % (1.1) % Add: Supplies, paper and other sales 278 221 25.8 % 28.0 % Add: Financing 53 55 (3.6) % (2.5) % Post sale revenue $ 1,354 $ 1,329 1.9 % 3.7 % Segments 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 % Go-To-Market Americas $ 1,071 $ 1,076 (0.5) % (0.4) % 64 % 63 % EMEA 554 587 (5.6) % (0.8) % 33 % 34 % Other 43 47 (8.5) % (8.5) % 3 % 3 % Total Revenue (2) $ 1,668 $ 1,710 (2.5) % (0.7) % 100 % 100 % _____________ CC - See "Currency Impact" section for a description of Constant Currency. (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 Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which are affected by installs and removals, but also by the page volumes generated from the usage of such devices and the revenue per printed page. 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 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 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 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 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 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 Costs, Expenses and Other Income Summary of Key Financial Ratios The following is a summary of key financial ratios used to assess our performance: Three Months Ended March 31, (in millions) 2022 2021 B/(W) Gross Profit $ 530 $ 611 $ (81) RD&E 78 74 (4) SAG 455 448 (7) Equipment Gross Margin 20.4 % 27.9 % (7.5) pts. Post sale Gross Margin 34.4 % 38.0 % (3.6) pts. Total Gross Margin 31.8 % 35.7 % (3.9) pts. RD&E as a % of Revenue 4.7 % 4.3 % (0.4) pts. SAG as a % of Revenue 27.3 % 26.2 % (1.1) pts. 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 (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 (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 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 (Loss) Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. Gross Margin 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 Research, Development and Engineering Expenses (RD&E) Three Months Ended March 31, (in millions) 2022 2021 Change R&D $ 64 $ 59 $ 5 Sustaining engineering 14 15 (1) Total RD&E Expenses $ 78 $ 74 $ 4 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) 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. Xerox 2022 Form 10-Q 46 Restructuring and Related Costs, Net 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. The following is a breakdown of those costs: Three Months Ended March 31, (in millions) 2022 2021 Severance (1) $ 22 $ 14 Asset impairments - leased right-of-use assets (2) 1 1 Asset impairments - owned assets (2) — 9 Other contractual termination costs (3) — 1 Net reversals (4) (3) (4) Restructuring and asset impairment costs 20 21 Retention-related severance/bonuses (5) (2) (4) Total $ 18 $ 17 _____________ (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. (4) Reflects net reversals for changes in estimated reserves from prior period initiatives. (5) Includes retention-related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. 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. Amortization of Intangible Assets 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 23,400 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 March 31, (in millions) 2022 2021 Non-financing interest expense $ 29 $ 24 Interest income (1) (1) Non-service retirement-related costs (7) (20) Currency losses, net — 2 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 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 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. NOTE: 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. Income Taxes 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. 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 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-service retirement-related costs and other discrete, unusual or infrequent items (as applicable), as described in our Non-GAAP Financial Measures section. Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable. _____________ (1) Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section. Equity in Net Income of Unconsolidated Affiliates 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 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 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. 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 (Loss) Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section. Other Comprehensive (Loss) Income 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) $11 million of net unrealized losses; 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) 2022 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) % 2021 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 % _____________ (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. Revenue Three Months Ended March 31, (in millions) 2022 2021 % Change 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)% _____________ (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% _____________ 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). 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 Products and Offerings Definitions ) is shown below. Installs for the three months ended March 31, 2022: Entry • 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. Mid-Range • 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. High-End • 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 . Revenue Three Months Ended March 31, (in millions) 2022 2021 % Change Equipment sales $ 5 $ 8 (37.5)% Financing income 53 55 (3.6)% Other Post-sale revenue (1) 97 114 (14.9)% Intersegment net revenue 3 3 —% Total Financing (FITTLE) Revenue $ 158 $ 180 (12.2)% _____________ (1) Other Post-sale revenue includes operating lease/rental revenues as well as lease renewal and fee income. First quarter 2022 Financing (FITTLE) segment revenue decreased 12.2% as compared to first quarter 2021, and included the following: Equipment Sales for the three months ended March 31, 2022 decreased 37.5% as compared to first quarter 2021 as reduced end of lease equipment inventory resulted in fewer opportunities. Financing Income for the three months ended March 31, 2022 decreased by 3.6% as compared to first quarter 2021 due to a lower finance receivables balance, as collections continue to outpace originations. Originations have been impacted by the global product supply constraints and freight disruptions. Other Post-sale revenue for the three months ended March 31, 2022 decreased 14.9% as compared to first quarter 2021 due to a decline in operating lease rental income, which is consistent with the overall decline of equipment installs. Segment Margin First quarter 2022 Financing (FITTLE) segment margin of 11% increased 0.8-percentage points as compared to first quarter 2021 due to a reduction in commissions paid to equipment suppliers (primarily the Print and Other segment), partially offset by incremental costs associated with standing up the business. Xerox 2022 Form 10-Q 52 2021 Segment Review The following are our 2021 results that correspond, for comparison purposes, to the new segment reporting in 2022. (in millions) External Net Revenue Intersegment Net Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) Q1 2021 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 % Q2 2021 Print and Other $ 1,619 $ 53 $ 1,672 90 % $ 111 6.9 % Financing (FITTLE) 174 3 177 10 % 15 8.6 % Total $ 1,793 $ 56 $ 1,849 100 % $ 126 7.0 % Q3 2021 Print and Other $ 1,590 $ 46 $ 1,636 91 % $ 50 3.1 % Financing (FITTLE) 168 3 171 9 % 24 14.3 % Total $ 1,758 $ 49 $ 1,807 100 % $ 74 4.2 % Q4 2021 Print and Other $ 1,613 $ 46 $ 1,659 91 % $ 61 3.8 % Financing (FITTLE) 164 3 167 9 % 25 15.2 % Total $ 1,777 $ 49 $ 1,826 100 % $ 86 4.8 % 2021 Print and Other $ 6,355 $ 193 $ 6,548 90 % $ 293 4.6 % Financing (FITTLE) 683 12 695 10 % 82 12.0 % Total $ 7,038 $ 205 $ 7,243 100 % $ 375 5.3 % _____________ (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. (in millions) Q1 2021 Q2 2021 Q3 2021 Q4 2021 Full Year 2021 Pre-tax Income (Loss) Total reported segments $ 89 $ 126 $ 74 $ 86 $ 375 Goodwill impairment — — — (781) (781) Restructuring and related costs, net (17) (12) (10) 1 (38) Amortization of intangible assets (15) (14) (13) (13) (55) Other expenses, net (4) (1) 33 (4) 24 Total Pre-tax income (loss) $ 53 $ 99 $ 84 $ (711) $ (475) Xerox 2022 Form 10-Q 53 Capital Resources and Liquidity The following is a summary of our liquidity position: • As of March 31, 2022 and December 31, 2021, total cash, cash equivalents and restricted cash were $1,761 million and $1,909 million, respectively, and apart from restricted cash of $80 million and $69 million, respectively, was readily accessible for use. The decrease in total cash, cash equivalents and restricted cashof $148 million primarily reflects payments to shareholders of $159 million (repurchases of $113 million and dividends of $46 million). • No amounts are due under our Senior Note borrowings for the remainder of 2022. • In March 2022, Xerox and Xerox Holdings entered into Amendment No. 4 to the Credit Facility, which became effective on March 24, 2022. As of March 31, 2022, we have access to an undrawn $1.5 billion Credit Facility that terminates in August 2022. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding our Credit Facility. • The Credit Facility, which as noted above terminates in August 2022, contains various investment grade covenants at a time when the Company is not investment grade rated. The Company may seek to renegotiate or replace such facility, including reducing the size of such facility, or may determine not to replace such facility at all and may instead pursue other forms of liquidity. Any new credit agreement may result in higher borrowing costs and may contain non-investment grade covenants, such as those that would place greater restrictions on how the Company can run its businesses and/or limit the Company from taking certain actions that might otherwise be beneficial to the Company and/or its shareholders, customers, suppliers, partners and/or lenders. Cash Flow Analysis The following summarizes our cash, cash equivalents and restricted cash: Three Months Ended March 31, Change (in millions) 2022 2021 Net cash provided by operating activities $ 66 $ 117 $ (51) Net cash used in investing activities (75) (17) (58) Net cash used in financing activities (149) (318) 169 Effect of exchange rate changes on cash, cash equivalents and restricted cash 10 (12) 22 Decrease in cash, cash equivalents and restricted cash (148) (230) 82 Cash, cash equivalents and restricted cash at beginning of period 1,909 2,691 (782) Cash, Cash Equivalents and Restricted Cash at End of Period $ 1,761 $ 2,461 $ (700) Cash Flows from Operating Activities Net cash provided by operating activities was $66 million in the first quarter 2022. The $51 million decrease in operating cash from the prior year period was primarily due to the following: • $109 million decrease in pre-tax income before depreciation and amortization, restructuring and related costs and non-service retirement-related costs. • $79 million decrease from accounts receivable primarily due to a lower sequential revenue decrease compared to the prior year as well as the timing of collections. • $13 million decrease from inventory primarily due to higher non-equipment inventories. • $142 million increase from accounts payable primarily due to the timing of supplier and vendor payments as payment terms were extended on multiple suppliers. • $22 million increase from lower payments for restructuring and related costs. Cash Flows from Investing Activities Net cash used in investing activities was $75 million in the first quarter 2022. The $58 million change from the prior year period was primarily due to one acquisition for $54 million in the current year compared to no acquisitions in the prior year. Other investing, net includes $5 million of noncontrolling investments as part of our corporate venture capital fund. Xerox 2022 Form 10-Q 54 Cash Flows from Financing Activities Net cash used in financing activities was $149 million in the first quarter 2022. The $169 million decrease in the use of cash from the prior year period was primarily due to the following: • $117 million decrease from net debt activity. 2022 reflects proceeds of $668 million on a new secured financing arrangement offset by payments of $346 million on existing secured financing arrangements 1 and $300 million on Senior Notes. 2021 reflects payments of $94 million on secured financing arrangements. • $49 million decrease due to share repurchases in the current year of $113 million compared to share repurchases of $162 million in the prior year. _____________ (1) The payments on existing secured financing arrangements of $346 million include $248 million associated with the early extinguishment of an existing arrangement that was funded through the new secured financing arrangement. Refer to Note 13 - Debt for further information. Cash, Cash Equivalents and Restricted Cash Refer to Note 7 - Supplementary Financial Information in the Condensed Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash. Operating Leases We have operating leases for real estate and vehicles in our domestic and international operations and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to eleven years and a variety of renewal and/or termination options. As of March 31, 2022 and December 31, 2021, total operating lease liabilities were $270 million and $283 million, respectively. Refer to Note 11 - Lessee in the Condensed Consolidated Financial Statements for additional information regarding our leases accounted for under lessee accounting. Debt and Customer Financing Activities The following summarizes our debt: (in millions) March 31, 2022 December 31, 2021 Xerox Holdings Corporation $ 1,500 $ 1,500 Xerox Corporation 1,900 2,200 Xerox - Other Subsidiaries (1) 885 561 Subtotal - Principal debt balance 4,285 4,261 Debt issuance costs Xerox Holdings Corporation (10) (11) Xerox Corporation (5) (6) Xerox - Other Subsidiaries (1) (1) (1) Subtotal - Debt issuance costs (16) (18) Net unamortized premium 2 3 Total Debt $ 4,271 $ 4,246 _____________ (1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of the securitization of Finance Receivables. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt. Finance Assets and Related Debt The following represents our total finance assets, net associated with our lease and finance operations: (in millions) March 31, 2022 December 31, 2021 Total finance receivables, net (1) $ 3,005 $ 3,070 Equipment on operating leases, net 254 253 Total Finance Assets, net (2) $ 3,259 $ 3,323 _____________ (1) Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Condensed Consolidated Balance Sheets. (2) The change from December 31, 2021 includes a decrease of $14 million due to currency. Xerox 2022 Form 10-Q 55 Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in Total finance assets, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets. Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt: (in millions) March 31, 2022 December 31, 2021 Finance receivables debt (1) $ 2,630 $ 2,687 Equipment on operating leases debt 222 221 Financing debt 2,852 2,908 Core debt 1,419 1,338 Total Debt $ 4,271 $ 4,246 __________________ (1) Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of (Loss) Income. Sales of Accounts Receivable Activity related to sales of accounts receivable is as follows: Three Months Ended March 31, (in millions) 2022 2021 Estimated decrease to net operating cash flows (1) $ (13) $ (27) _____________ (1) Represents the difference between current and prior period accounts receivable sales adjusted for the effects of currency. Refer to Note 8 - Accounts Receivable, Net in the Condensed Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements. Liquidity and Financial Flexibility We manage our worldwide liquidity using internal cash management practices, which are subject to i) the statutes, regulations and practices of each of the local jurisdictions in which we operate, ii) the legal requirements of the agreements to which we are a party and iii) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services. Our principal debt maturities are spread over the next five years as follows: (in millions) Xerox Holdings Corporation Xerox Corporation Xerox - Other Subsidiaries (1) Total 2022 Q2 $ — $ — $ 42 $ 42 2022 Q3 — — 39 39 2022 Q4 — — 339 339 2023 — 1,000 111 1,111 2024 — 300 25 325 2025 750 — 329 1,079 2026 — — — — 2027 and thereafter 750 600 — 1,350 Total (2) $ 1,500 $ 1,900 $ 885 $ 4,285 _____________ (1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of securitization of Finance Receivables. (2) Includes fair value adjustments. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt. Xerox 2022 Form 10-Q 56 Treasury Stock Xerox Holdings Corporation repurchased 5.2 million shares of its common stock for an aggregate $113 million, including fees, in first quarter 2022. The cumulative total of shares repurchased by Xerox Holdings Corporation under the current share repurchase program is 24.6 million shares for an aggregate cost of approximately $500 million, including fees. As of March 31, 2022, there was no repurchase authority remaining. Financial Risk Management We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, interest rate caps, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the Japanese Yen, Euro and U.K. Pound Sterling. The fair market values of all our derivative contracts change with fluctuations in interest rates and/or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. We are required to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. As permitted, certain of these derivative contracts have been designated for hedge accounting treatment. Certain of our derivatives that do not qualify for hedge accounting are effective as economic hedges. These derivative contracts are likewise required to be recognized each period at fair value and therefore do result in some level of volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties. The current market events have not required us to materially modify or change our financial risk management strategies with respect to our exposures to interest rate and foreign currency risk. Refer to Note 14 – Financial Instruments in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies. Xerox 2022 Form 10-Q 57 Non-GAAP Financial Measures We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below as well as in the first quarter 2022 presentation slides available at www.xerox.com/investor. These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Adjusted Earnings Measures • Net (Loss) Income and EPS • Effective Tax Rate The above measures were adjusted for the following items: Restructuring and related costs, net: Restructuring and related costs, net include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance. Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods. Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the Company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in Other expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans. Other discrete, unusual or infrequent items: We excluded these items, when applicable, given their discrete, unusual or infrequent nature and its impact on our results for the period. • Contract termination costs - product supply We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods and expected future trends in our business. Adjusted Operating (Loss) Income and Margin We calculate and utilize adjusted operating (loss) income and margin measures by adjusting our reported pre-tax (loss) income and margin amounts. In addition to the costs and expenses noted above as adjustments for our Xerox 2022 Form 10-Q 58 adjusted earnings measures, adjusted operating income and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business. Constant Currency (CC) Refer to "Currency Impact" for a discussion of this measure and its use in our analysis of revenue growth. Summary Management believes that all of these non-GAAP financial measures provide an additional means of analyzing the current period’s results against the corresponding prior period’s results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. Reconciliations of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with GAAP are set forth on the following tables: Net (Loss) Income and EPS reconciliation: Three Months Ended March 31, 2022 2021 (in millions, except per share amounts) Net Loss EPS Net Income EPS Reported (1) $ (56) $ (0.38) $ 39 $ 0.18 Adjustments: Restructuring and related costs, net 18 17 Amortization of intangible assets 11 15 Non-service retirement-related costs (7) (20) Contract termination costs - product supply 33 — Income tax on adjustments (2) (13) (4) Adjusted $ (14) $ (0.12) $ 47 $ 0.22 Dividends on preferred stock used in adjusted EPS calculation (3) $ 4 $ 4 Weighted average shares for adjusted EPS (3) 156 198 Fully diluted shares at March 31, 2022 (4) 155 ____________________________ (1) Net (Loss) Income and EPS attributable to Xerox Holdings. (2) Refer to Effective Tax Rate reconciliation. (3) For those periods that include the preferred stock dividend, the average shares for the calculations of diluted EPS exclude the 7 million shares associated with Xerox Holdings Corporation's Series A convertible preferred stock. (4) Represents common shares outstanding at March 31, 2022 and excludes potential dilutive common shares used for the calculation of adjusted diluted earnings per share for the first quarter 2022 as well as shares associated with Xerox Holdings Corporation's Series A convertible preferred stock, all of which were anti-dilutive for the first quarter 2022. Xerox 2022 Form 10-Q 59 Effective Tax Rate reconciliation: Three Months Ended March 31, 2022 2021 (in millions) Pre-Tax Loss Income Tax Benefit Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ (89) $ (31) 34.8 % $ 53 $ 14 26.4 % Non-GAAP Adjustments (2) 55 13 12 4 Adjusted (3) $ (34) $ (18) 52.9 % $ 65 $ 18 27.7 % ____________________________ (1) Pre-tax (loss) income and Income tax (benefit) expense. (2) Refer to Net (Loss) Income and EPS reconciliation for details. (3) The tax impact on Adjusted Pre-tax (loss) income is calculated under the same accounting principles applied to the Reported Pre-tax (loss) income under ASC 740, which employs an annual effective tax rate method to the results. Operating (Loss) Income and Margin reconciliation: Three Months Ended March 31, 2022 2021 (in millions) Loss Revenue Margin Profit Revenue Margin Reported (1) $ (89) $ 1,668 (5.3) % $ 53 $ 1,710 3.1 % Adjustments: Restructuring and related costs, net 18 17 Amortization of intangible assets 11 15 Other expenses, net 57 4 Adjusted $ (3) $ 1,668 (0.2) % $ 89 $ 1,710 5.2 % ____________________________ (1) Pre-tax (loss) income. Xerox 2022 Form 10-Q 60 ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the “Financial Risk Management” section of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this Item.