What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-05-03 · 387 added, 223 removed, 484 unchanged (56% of the section changed)

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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.

Xerox Ventures LLC had investments of approximately $15 million at June 30, 2022.

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

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

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.

During the first half of 2022, we continued to see strong demand for our products and services despite a challenging operating environment.

Supply constraints continued to inhibit our ability to fulfill demand, resulting in the growth of our backlog 1 to $440 million, a 4.3% sequential increase and more than double prior year period's levels.

Although backlog remains elevated, it is considered manageable and its growth rate did decline quarter over quarter reflecting a slowing increase as product supply improves.

Post sale revenue grew in actual and constant currency, due to growth in IT Services, which included the benefits from recent acquisitions, and print activity-driven revenue, such as consumables and services.

Consistent with prior quarters, we see a very strong correlation between return-to-office trends and page volumes.

Although return-to-office trends have been gradual, in the first half of 2022, service revenue growth outpaced page volumes growth as contractual price increases began to materialize.

We expect that trend to continue through the remainder of the year.

The Company expects profitability to improve sequentially for the remaining two quarters of the year as supply chain costs normalize, particularly freight costs, and through an easing of product supply constraints, which will not only improve equipment sales but equipment gross margins, as product mix normalizes.

Inflationary pressures are expected to continue in the near-term, but we expect to offset a large portion of inflation-related cost growth with price increases for our products and services.

The effects of our price increases will compound over time, particularly for our contractual business, where price increases are enacted at specific times throughout the year, or upon contract renewal.

Further offsetting these cost pressures will be savings generated through Project Own It.

The Company is targeting gross cost savings of $450 million in 2022, the vast majority of which will be realized in the second half of the year.

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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.

Second quarter 2022 backlog of $440 million excludes sales orders from Russia and Powerland Computers Ltd., which was acquired in the first quarter of 2022.

Xerox 2022 Form 10-Q 42

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.

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

As of June 30, 2022 the net assets of our Eurasian operations were approximately $15 million (approximately $35 million of assets) and comprised approximately 0.4% of consolidated net assets.

Reportable Segment Change

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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.

Second Quarter 2022 Review

Total revenue of $1.75 billion for second quarter 2022 decreased 2.6% from second quarter 2021, including a 3.7-percentage point adverse impact from currency and a 2.0-percentage point benefit from acquisitions.

Total revenue reflected an increase of 1.2% in Post sale revenue, including a 3.8-percentage point adverse impact from currency.

Post sale revenues improved sequentially from the first quarter 2022, reflecting increased IT services revenues, which benefited from recent acquisitions, as well as a modest increase in page volumes and the early benefits of pricing actions, particularly for our transactional goods and service agreements.

Equipment sales revenue decreased 14.7%, including a 3.3-percentage point adverse impact from currency, as supply chain constraints continue to limit our ability to fulfill demand, which remains strong, as evidenced by further growth in our equipment order backlog.

Total revenue of $3.42 billion for the six months ended June 30, 2022 decreased 2.5% as compared to the prior year period, including a 2.7-percentage point adverse impact from currency.

Total revenue reflected an increase of 1.6% in Post sale revenue, including a 2.7-percentage point adverse impact from currency, and a decrease of 16.0% in Equipment sales revenue, including a 2.4-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)

A summary of our segment information is as follows:

Three Months Ended June 30, Six Months Ended June 30, % of Total

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

Print and Other $1,633 $1,672 (2.3)% $3,183 $3,253 (2.2)% 93% 93%

Financing (FITTLE) 151 177 (14.7)% 309 357 (13.4)% 9% 10%

Intersegment Elimination (1)

(37) (56) (33.9)% (77) (107) (28.0)% (2)% (3)%

Total Revenue $1,747 $1,793 (2.6)% $3,415 $3,503 (2.5)% 100% 100%

Profit (Loss)

Print and Other $18 $111 (83.8)% $(2) $182 (101.1)% (6)% 85%

Financing (FITTLE)

17 15 13.3% 34 33 3.0% 106% 15%

Total Profit $35 $126 (72.2)% $32 $215 (85.1)% 100% 100%

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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.

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

Three Months Ended June 30, Six Months Ended June 30,

(in millions) 2022 2021 B/(W) 2022 2021 B/(W)

Net (loss) income attributable to Xerox Holdings $ (4) $ 91 $ (95) $ (60) $ 130 $ (190)

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.

Adjusted (1) Net income attributable to Xerox Holdings

24 94 (70) 10 141 (131)

Second quarter 2022 Net loss attributable to Xerox Holdings of $(4) million was a $95 million decrease as compared to second quarter 2021 primarily reflecting lower gross margin, as a result of unfavorable product and services mix and higher freight costs associated with product supply constraints, as well as higher Selling, administrative and general expenses due to higher stock compensation expense associated with the accelerated vesting of certain

Xerox 2022 Form 10-Q 43

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.

equity awards and higher Other expenses, net due to the lower benefit from non-service retirement costs.

These negative impacts were partially offset by lower Restructuring and related costs, net, Amortization of intangible assets and lower Income tax expense.

Second quarter 2022 A djusted 1 net income attributable to Xerox Holdings of $24 million decreased $70 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.

These negative impacts were partially offset by lower Other expenses, net and Income tax expense.

Net loss attributable to Xerox Holdings for the six months ended June 30, 2022 of $(60) million was a $190 million decrease as compared to the prior year period primarily reflecting lower gross margin, as a result of unfavorable product and services mix as well as higher freight costs associated with product supply constraints, as well as higher Selling, administrative and general expenses due to higher stock compensation expense associated with the accelerated vesting of certain equity awards.

Other expenses, net were $60 million higher primarily due to a $33 million charge in the first quarter 2022 associated with the termination of a product supply agreement (which was net of an $8 million previously recorded accrual), higher non-financing interest expense, and a lower benefit from non-service retirement costs.

These negative impacts were partially offset by income tax benefits.

A djusted 1 net income attributable to Xerox Holdings for the six months ended June 30, 2022 decreased $131 million as compared to the prior year period, primarily reflecting lower gross margin, as a result of unfavorable product and services mix as well as higher freight costs associated with product supply constraints, and higher Selling, administrative and general expenses.

These negative impacts were partially offset by income tax benefits and Other expenses, net.

Cash flows from operating activities during the six months ended June 30, 2022 was a use of $19 million and decreased $350 million as compared to the prior year period, primarily related to lower cash earnings, which included incremental investments in our new businesses, lower royalty payments and a $41 million one-time payment in the current quarter associated with the termination of a product supply agreement as well as an increase in working capital 2 and the timing of management bonus payments.

Cash used in investing activities during the six months ended June 30, 2022 was $62 million reflecting capital expenditures of $29 million, acquisitions of $52 million and $7 million of noncontrolling investments as part of our corporate venture capital fund, partially offset by $26 million related to the sale of surplus buildings and land in the U.S.

Cash used in financing activities during the six months ended June 30, 2022 was $587 million reflecting payments of $477 million on existing secured financing arrangements, $300 million on Senior Notes that matured in 2022 and $353 million for the early redemption of 2023 Senior Notes, which included a premium payment of $3 million, partially offset by proceeds of $753 million on a new secured financing arrangement, as well as $113 million for repurchases of our Common Stock, and dividend payments of $88 million.

Despite a challenging operating environment, we are maintaining our revenue and cash flow outlook, as we continue to expect supply chain constraints and return-to-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.

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

Our revenue outlook is also based on current exchange rates.

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

Xerox 2022 Form 10-Q 44

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.

Our goodwill balance was $3.2 billion and $3.3 billion at June 30, 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.

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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.

We 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.

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 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.

In performing its assessment, the Company believes it 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.

During the first half of 2022, the Company continued to encounter significant operational challenges due to supply chain constraints, inflationary pressure on product and labor costs, geopolitical uncertainty in Europe and the

Xerox 2022 Form 10-Q 45

continued impacts from additional COVID-19 variants.

Operating results did improve in the second quarter 2022 as compared to the first quarter 2022 and operating results are expected to improve further in the second half of 2022 .

The Company's latest projections for the full year 2022 as well as for 2023 and 2024 are still within the range of our sensitivity analysis performed as part of the January 1, 2022 interim impairment assessment.

Accordingly, based on our interim assessment as of June 30, 2022, we determined that it was more-likely-than-not that the fair value of the Print and Other reporting unit (the only reporting unit with goodwill) was still greater than its net book value and that we did not have a “triggering event” requiring a quantitative assessment of Goodwill.

However, given macroeconomic conditions, specifically rising interest rates and their impact on discount rates, our goodwill excess fair value over carrying value is likely reduced as compared to the impairment test as of January 1, 2022.

If assumptions or estimates with respect to the Company's future performance vary from what is expected, including those assumptions relating to the supply chain constraints, interest rates, inflationary pressure on product and labor costs, geopolitical uncertainty in Europe and the threat of additional COVID-19 variants, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may 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.

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Three Months Ended

March 31, % of Total Revenue

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

June 30, Six Months Ended

June 30, % of Total Revenue

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

Equipment sales $ 366 $ 429 (14.7) % (11.4) % $ 680 $ 810 (16.0) % (13.6) % 20 % 23 %

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Xerox 2022 Form 10-Q 46

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:

Second quarter 2022 total revenue decreased 2.6% as compared to second quarter 2021, including a 3.7-percentage point adverse impact from currency and a 2.0-percentage point benefit from acquisitions, while total revenue for the six months ended June 30, 2022 decreased 2.5%, including a 2.7-percentage point adverse impact from currency and a 1.9-percentage point benefit from acquisitions.

The decrease in 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.

At the end of the first quarter of 2022, and continuing in the second quarter of 2022, we began to see a modest increase in page volumes, as well as an increase in page volume-driven post sale revenue as workers gradually return to the workplace.

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

Geographically, second quarter 2022 revenue in EMEA decreased 10.7%, including a 9.6-percentage point adverse impact from currency, as compared to second quarter 2021, while for the six months ended June 30, 2022 revenue decreased 8.2%, including a 7.3-percentage point adverse impact from currency.

Second quarter 2022 r evenue increased 1.5% in our Americas operations, including a 0.5-percentage point adverse impact from currency, while for the six months ended June 30, 2022 revenue increased 0.5%, including a 0.3-percentage point adverse impact from currency, with both periods benefitting from recent acquisitions.

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

Page volumes during the first half of 2022 grew moderately faster in EMEA than in the Americas when compared to the prior year period as Europe's return to office measures post-pandemic has generally trended higher than in the U.S.

Total revenue for the three and six months ended June 30, 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 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.

For the three months ended June 30, 2022, Post sale revenue increased 1.2% as compared to second quarter 2021, including a 3.8-percentage point adverse impact from currency, while Post sale revenues increased 1.6% for the six months ended June 30, 2022 as compared to the prior year period, including a 2.7-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.

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

◦ For the three months ended June 30, 2022, these revenues decreased 3.7% as compared to second quarter 2021, including a 3.9-percentage point adverse impact from currency.

The resulting change in revenues reflected moderately higher page volumes, corresponding with the gradual return-to-office trends, which were partially offset by 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 environment.

◦ For the six months ended June 30, 2022, these revenues decreased 3.3% as compared to the prior year period, including a 2.9-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 environment.

Declines were partially offset by moderately higher page volumes, which began to increase towards the end of the first quarter of 2022, corresponding with return-to-office trends.

• 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.

◦ For the three months ended June 30, 2022, these revenues increased 24.9% as compared to second quarter 2021, including a 3.1-percentage point adverse impact from currency, and primarily reflected higher IT Services revenues which included revenues from the recent acquisition of Powerland in Canada.

The increase was also as a result of higher supplies and paper revenues driven by higher channel demand and the gradual return-to-office trends.

◦ For the six months ended June 30, 2022, these revenues increased 25.3% as compared to the prior year period, including a 2.7-percentage point adverse impact from currency, and primarily reflected higher IT Services revenues, which included revenues from the recent acquisition of Powerland in

Xerox 2022 Form 10-Q 47

The increase was also a result of higher supplies and paper revenues.

The higher supplies revenues reflects higher channel demand and is consistent with the gradual return-to-office trends.

• 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.

For the three months ended June 30, 2022, these revenues decreased 7.1% as compared to second quarter 2021, including a 2.6-percentage point adverse impact from currency, while Financing revenue for the six months ended June 30, 2022 decreased 5.4%, including a 1.9-percentage point adverse impact from currency, as compared to the prior year period.

The decrease for the three and six months ended June 30, 2022, as compared the respective prior year periods, 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.

Xerox channel originations declined 25% and 23% for the three and six months ended June 30, 2022, as compared the respective prior year periods, 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).

Equipment sales revenue decreased 14.7% for the three months ended June 30, 2022 as compared to second quarter 2021, including a 3.3-percentage point adverse impact from currency, while Equipment sales revenue for the six months ended June 30, 2022 decreased 16.0%, including a 2.4-percentage point adverse impact from currency.

The decrease in both periods reflected the adverse impact of product supply constraints and global freight disruptions.

Demand continued to outpace supply with return-to-office trends, 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, for both the three and six months ended June 30, 2022 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

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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)

Three Months Ended June 30, Six Months Ended June 30,

(in millions) 2022 2021 B/(W) 2022 2021 B/(W)

Gross Profit $ 557 $ 639 $ (82) $ 1,087 $ 1,250 $ (163)

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Equipment Gross Margin 23.5 % 28.1 % (4.6) pts.

22.1 % 28.0 % (5.9) pts.

Post sale Gross Margin 34.1 % 38.1 % (4.0) pts.

34.2 % 38.0 % (3.8) pts.

Total Gross Margin 31.9 % 35.6 % (3.7) pts.

31.8 % 35.7 % (3.9) pts.

RD&E as a % of Revenue 4.8 % 4.4 % (0.4) pts.

4.7 % 4.4 % (0.3) pts.

SAG as a % of Revenue 26.3 % 24.2 % (2.1) pts.

26.8 % 25.2 % (1.6) pts.

Pre-tax (Loss) Income $ (5) $ 99 $ (104) $ (94) $ 152 $ (246)

Pre-tax (Loss) Income Margin (0.3) % 5.5 % (5.8) pts.

Adjusted (1) Operating (Loss) Profit

(2.8) % 4.3 % (7.1) pts.

Adjusted (1) Operating Profit

$ 35 $ 126 $ (91) $ 32 $ 215 $ (183)

Adjusted (1) Operating (Loss) Income Margin

Adjusted (1) Operating Income Margin

2.0 % 7.0 % (5.0) pts.

0.9 % 6.1 % (5.2) 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.

Second quarter 2022 pre-tax (loss) margin of (0.3)% decreased 5.8-percentage points as compared to second quarter 2021.

These impacts were partially offset by lower Restructuring and related expense, net and Amortization of intangible assets.

Xerox 2022 Form 10-Q 48

Pre-tax (loss) margin for the six months ended June 30, 2022 of (2.8)% decreased 7.1-percentage points as compared to the prior year period.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), increased SAG due to the higher stock compensation expense associated with the accelerated vesting of certain equity awards, as well as higher Other expenses, net, which included a $33 million charge 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.

Second quarter 2022 adjusted 1 operating income margin of 2.0% decreased by 5.0-percentage points as compared to second quarter 2021, primarily reflecting lower revenues and lower gross margin, which includes the impact of unfavorable product and services mix and higher freight costs associated with product supply constraints, as well as lower royalty revenues.

The decrease was also the result of higher expenses reflecting increased investments in new businesses, and the benefits from temporary government assistance and furlough measures in the prior year.

These negative impacts were partially offset by favorable currency as well as productivity and cost savings associated with our Project Own It transformation actions.

Adjusted 1 operating margin for the six months ended June 30, 2022 of 0.9% decreased by 5.2-percentage points as compared to the prior year period, primarily reflecting lower revenues and lower gross margin, which includes the impact of higher freight costs associated with product supply constraints, as well as lower royalty revenues.

The decrease was also the result of 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 negative 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.

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.

Second quarter 2022 gross margin of 31.9% decreased by 3.7-percentage points as compared to second quarter 2021, primarily reflecting approximately 3.4-percentage points associated with the adverse impacts of higher supply chain costs and capacity restrictions (including higher freight and shipping costs and limited availability of higher margin equipment) and higher product and service costs, as well as unfavorable product and services mix and strategic investments.

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

Gross margin for the six months ended June 30, 2022 of 31.8% decreased by 3.9-percentage points as compared to the prior year period, primarily reflecting approximately 3.0-percentage points associated with the adverse impacts of higher supply chain costs and capacity restrictions (including higher freight and shipping costs and limited availability of higher margin equipment).

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

Second quarter 2022 equipment gross margin of 23.5% decreased by 4.6-percentage points as compared to second quarter 2021, primarily reflecting an unfavorable mix of mid-range products associated with continued product supply constraints and higher product costs as well as and the impact of higher inbound and outbound freight costs.

These impacts were partially offset by the early benefits of price increases and favorable currency.

Equipment gross margin for the six months ended June 30, 2022 of 22.1% decreased by 5.9-percentage points as compared to the prior year period, 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.

These impacts were partially offset by the early benefits of price increases and favorable transaction currency.

Second quarter 2022 Post sale gross margin of 34.1% decreased by 4.0-percentage points as compared to second 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 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.

These impacts were partially offset by favorable transaction currency as well as productivity and cost savings associated with Project Own It transformation actions.

Xerox 2022 Form 10-Q 49

Post sale gross margin for the six months ended June 30, 2022 of 34.2% decreased by 3.8-percentage points as compared to the prior year period, 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 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 favorable transaction currency as well as productivity and cost savings associated with Project Own It transformation actions.

Research, Development and Engineering Expenses (RD&E)

Three Months Ended

(in millions) 2022 2021 Change

June 30, Six Months Ended

(in millions) 2022 2021 Change 2022 2021 Change

R&D $ 70 $ 63 $ 7 $ 134 $ 122 $ 12

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Total RD&E Expenses $ 84 $ 79 $ 5 $ 162 $ 153 $ 9

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.

Second quarter 2022 RD&E as a percentage of revenue of 4.8% increased by 0.4-percentage points as compared to second quarter 2021, as a result of revenue declines that outpaced the rate of investments in new businesses.

RD&E as a percentage of revenue for the six months ended June 30, 2022 of 4.7% increased by 0.3-percentage points as compared to the prior year period, as a result of revenue declines that outpaced the rate of investments in new businesses.

RD&E of $84 million increased $5 million as compared to second quarter 2021 primarily reflecting investments in our innovation portfolio and software, partially offset by lower spending for our print business and modest savings from restructuring and productivity.

RD&E for the six months ended June 30, 2022 of $162 million increased $9 million as compared to the prior year period, primarily reflecting investments in our innovation portfolio and software, partially offset by lower spending for our print business as well as savings from restructuring and productivity.

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.

Second quarter 2022 SAG as a percentage of revenue of 26.3% increased by 2.1-percentage points as compared to second quarter 2021, primarily due to higher administrative expenses, as well as a modest increase in bad debt and the impact of lower revenues

Second quarter 2022 SAG of $459 million increased $25 million as compared to second quarter 2021, primarily reflecting stock compensation expense of $21 million associated with the accelerated vesting of all outstanding equity awards, according to the terms of the award agreement, in connection with the passing of Xerox Holding's former CEO, investments in new businesses, acquisitions, higher bad debt expense and benefits from temporary government assistance and furlough measures in the prior year.

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

SAG as a percentage of revenue for the six months ended June 30, 2022 of 26.8% increased by 1.6-percentage points as compared to the prior year period, 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.

SAG for the six months ended June 30, 2022 of $914 million increased by $32 million as compared to the prior year period, primarily reflecting stock compensation expense of $21 million associated with the accelerated vesting of all outstanding equity awards, according to the terms of the award agreement, in connection with the passing of Xerox Holding's former CEO, 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.

Our bad debt provision for the six months ended June 30, 2022 of $22 million increased by $9 million as compared to the prior year period, primarily related to reserves for trade receivables in our Russian operations, as well as due to the prior year reserve release of $6 million.

Although 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

Xerox 2022 Form 10-Q 50

and future macro-economic conditions including higher inflation and interest rates.

In addition, there continues to be uncertainty regarding the effects from the Russia/Ukraine war and its impact 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.

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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.

We incurred Restructuring and related costs, net of $1 million for the second quarter 2022 , as compared to $12 million for second quarter 2021, and $19 million for the six months ended June 30, 2022, as compared to $29 million in the prior year period.

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

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Three Months Ended

June 30, Six Months Ended

(in millions) 2022 2021 2022 2021

Severance (1)

$ 22 $ 6 $ 44 $ 20

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

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Other contractual termination costs (3)

Net reversals (4)

Other charges/credits (4)

(22) (5) (25) (9)

Restructuring and asset impairment costs 2 4 22 25

Retention-related severance/bonuses (5)

Contractual severance costs (6)

Consulting and other costs (7)

Total $ 1 $ 12 $ 19 $ 29

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

(1) Reflects headcount reductions of approximately 600 and 50 employees worldwide in second quarter 2022 and 2021, respectively, and 1,050 and 400 employees worldwide for the six months ended June 30, 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.

(4) Reflects a net gain on the sale of land and a facility of $20 million in the second quarter of 2022 as well as 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.

(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 third party providers.

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

Second quarter 2022 actions impacted several functional areas, with approximately 40% focused on gross margin improvements, approximately 55% focused on SAG reductions and the remainder focused on RD&E optimization.

Second quarter 2021 actions impacted several functional areas, with approximately 30% focused on gross margin improvement and approximately 70% focused on SAG reductions.

The Restructuring and related costs, net reserve balance for all programs as of June 30, 2022 was $59 million, of which $57 million 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.

Amortization of intangible assets for the three and six months ended June 30, 2022 of $10 million and $21 million was $4 million and $8 million lower, respectively, as compared to the respective prior year periods, 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.

Xerox 2022 Form 10-Q 51

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.

Worldwide employment was approximately 22,700 as of June 30, 2022, a decrease of approximately 600 from December 31, 2021.

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

Other Expenses, Net

Three Months Ended

June 30, Six Months Ended

(in millions) 2022 2021 2022 2021

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Non-service retirement-related costs (4) (22) (11) (42)

Currency losses, net — 2

Loss on early extinguishment of debt 4 — 4 —

Contract termination costs - product supply — — 33 —

Excess contribution refund (16) — (16) —

All other expenses, net 4 — 7 1

Other expenses, net $ 8 $ 1 $ 65 $ 5

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.

Second quarter 2022 non-financing interest expense of $23 million was relatively flat as compared to the second quarter 2021.

When combined with financing interest expense (Cost of financing), total interest expense of $49 million, likewise, remained relatively flat as compared to second quarter 2021.

Non-financing interest expense for the six months ended June 30, 2022 of $52 million was $4 million higher than the prior year period.

When combined with financing interest expense (Cost of financing), total interest expense of $102 million decreased by $2 million from the prior year period reflecting a lower average interest rate and average debt balance.

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.

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.

Second quarter 2022 non-service retirement-related costs were $18 million higher as compared to the second quarter 2021, while non-service retirement-related costs for the six months ended June 30, 2022 were $31 million higher than the prior year period, primarily driven by an increase in interest costs due to higher discount rates and higher losses from pension settlements in the U.S.

Service retirement-related costs, which are included in operating expenses, were $6 million and $6 million for the three months ended June 30, 2022 and 2021, respectively, and $10 million and $12 million, for the six months ended June 30, 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.

Loss on Early Extinguishment of Debt

In the second quarter 2022, we recorded a loss of $4 million related to the early redemption of $350 million of the $1 billion of Xerox Corporation 4.625% Senior Notes due March 2023.

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

Contract Termination Costs

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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%.

Excess Contribution Refund

In the second quarter 2022, we received a refund of $16 million which reflects the return of excess employer contributions to a defined contribution plan for one of our Latin American subsidiaries as a result of employee forfeitures.

The excess contributions accumulated over the past 20 plus years.

Xerox 2022 Form 10-Q 52

Second quarter 2022 effective tax rate was (20.0)% and includes tax expense associated with the non-deductible accelerated share vestings offset by additional tax incentives.

On an adjusted 1 basis, second quarter 2022 effective tax rate was 18.5%.

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

federal statutory tax rate of 21% primarily due to benefits from additional tax incentives offset by the geographical mix of earnings.

Second quarter 2021 effective tax rate was 9.1%.

On an adjusted 1 basis, second quarter 2021 effective tax rate was 9.7%.

Both rates include the benefit from a change in tax law, resulting in the remeasurement of deferred tax assets of approximately 16%.

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

federal statutory tax rate of 21% primarily due to the change in tax law, partially offset by state taxes and the geographical mix of earnings.

The effective tax rate for the six months ended June 30, 2022 was 31.9% and included benefits from additional tax incentives as well as a change in our indefinite reinvestment tax liability due to a recent acquisition offset by the non-deductible accelerated share vestings.

On an adjusted 1 basis, the effective tax rate for the six months ended June 30, 2022 was 185.7%.

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:

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 as well as the geographical mix of earnings.

The effective tax rate for the six months ended June 30, 2021 was 15.1%.

On an adjusted 1 basis, the effective tax rate for the six months ended June 30, 2021 was 16.7%.

Both rates include the benefit from a change in tax law, resulting in the remeasurement of deferred tax assets of approximately 10%.

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

federal statutory tax rate of 21% primarily due to the change in the tax law, partially offset by state taxes and the geographical mix of earnings.

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

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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.

Equity in net income of unconsolidated affiliates for the six months ended June 30, 2022 was relatively flat 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.

Second quarter 2022 Net Loss Attributable to Xerox Holdings was $(4) million, or $(0.05) per diluted share.

On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $24 million, or $0.13 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 ).

Second quarter 2021 Net Income Attributable to Xerox Holdings was $91 million, or $0.46 per diluted share and included the benefit from a change in tax law.

On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $94 million, or $0.47 per diluted share.

Net Loss Attributable to Xerox Holdings for the six months ended June 30, 2022 was $(60) million, or $(0.43) per diluted share.

On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $10 million, or $0.02 per diluted share.

Net Income Attributable to Xerox Holdings for the six months ended June 30, 2021 was $130 million, or $0.64 per diluted share and included the benefit from a change in tax law.

On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $141 million, or $0.69 per diluted share.

Refer to Note 21 - (Loss) Earnings per Share in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.

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Other Comprehensive (Loss) Income

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

Second quarter 2022 Other Comprehensive Loss, Net Attributable to Xerox Holdings was $298 million and included the following:

i) net translation adjustment losses of $287 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.

ii) $14 million of net unrealized losses primarily due to the weakening of the Yen during the quarter and the associated impact on our Yen based forward exchange contracts hedging forecasted purchases;

and iii) $3 million of net gains from the changes in defined benefit plans primarily

Xerox 2022 Form 10-Q 53

due to the positive impact of currency as well as the amortization of actuarial losses and settlement losses, which were partially offset by a UK pension plan amendment and remeasurement.

This compares to Other Comprehensive Income, Net Attributable to Xerox Holdings of $70 million for the second quarter 2021, which reflected the following:

i) net translation adjustment gains of $54 million reflecting the strengthening of our major foreign currencies against the U.S.

Dollar during the quarter;

and ii) $16 million of net gains from the changes in defined benefit plans primarily due to remeasurement and net actuarial gains as a result of higher discount rates.

Other Comprehensive Loss, Net Attributable to Xerox Holdings for the six months ended June 30, 2022 was $342 million and included the following:

i) net translation adjustment losses of $359 million reflecting the weakening of our major foreign currencies against the U.S.

ii) $25 million of net unrealized losses primarily due to the weakening of the Yen during the first half of 2022 and the associated impact on our Yen based forward exchange contracts hedging forecasted purchases;

and iii) $42 million of net gains from the changes in defined benefit plans primarily due to the positive impact of currency, a U.S.

retiree-health plan amendment and the amortization of actuarial losses and settlement losses, which were partially offset by a UK pension plan amendment and remeasurement.

This compares to Other Comprehensive Income, Net Attributable to Xerox Holdings for the six months ended June 30, 2021 of $67 million, which reflected the following:

i) $71 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;

ii) net translation adjustment gains of $3 million reflecting the strengthening of the GBP and CAD that was only partially offset by the weakening of the EUR against the U.S.

and iii) $7 million of net unrealized losses.

Refer to Note 20 - 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.

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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.

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Segment Review

Three Months Ended March 31,

Three Months Ended June 30,

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

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

Print and Other $ 1,599 $ 34 $ 1,633 92 % $ 18 1.1 %

Financing (FITTLE) 148 3 151 8 % 17 11.5 %

Total $ 1,747 $ 37 $ 1,784 100 % $ 35 2.0 %

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 %

Six Months Ended June 30,

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

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

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Three Months Ended

June 30, Six Months Ended

(in millions) 2022 2021 %

Change 2022 2021 %

Equipment sales $ 361 $ 422 (14.5)% $ 670 $ 795 (15.7)%

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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.

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

Second quarter 2022 Print and Other revenue decreased 2.3% as compared to second quarter 2021, primarily due to continued supply constraints, which contributed to the 14.5% decline in Equipment sales revenue as compared to second quarter 2021.

This decline was partially offset by an increase in Post sale revenue of 3.4% as compared to second quarter 2021, which was primarily due to the benefits from acquisitions as well as revenue from IT services, paper and supplies.

Print and Other revenue decreased 2.2% for the six months ended June 30, 2022 as compared to the prior year period, primarily due to continued supply constraints, which contributed to a 15.7% decline in Equipment sales

Xerox 2022 Form 10-Q 55

revenue for the six months ended June 30, 2022 as compared to the prior year period.

This decline was partially offset by an increase in Post sale revenue of 3.6% for the six months ended June 30, 2022 as compared to the prior year period, which was primarily due to the benefits from acquisitions as well as revenue from IT services, paper and supplies.

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.

Equipment sales revenue decreased 14.5% during the second quarter 2022 as compared to second quarter 2021, and decreased 15.7% during the six months ended June 30, 2022 as compared to the prior year period.

The decrease in both periods was attributed to the adverse impact of product supply constraints and global freight disruptions.

Supply constraints continued to inhibit our ability to fulfill demand, resulting in the growth of our backlog 1 to $440 million, a 4.3% sequential increase and more than double the prior year period's levels.

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(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

Second quarter 2022 backlog of $440 million excludes sales orders from Russia and Powerland Computers Ltd., which was acquired in the first quarter of 2022.

Post sale revenue increased by 3.4% during the second quarter 2022 as compared to second quarter 2021, and increased 3.6% during the six months ended June 30, 2022 as compared to the prior year period.

The increase in both periods was attributed primarily to growth in supplies, paper and other revenue, which includes growth from our IT Services business and our recent acquisition of Powerland.

We also experienced growth in page volume-driven service revenues, reflecting modest growth in page volumes during the first half of 2022.

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

June 30, Six Months Ended

June 30, % of Equipment Sales

(in millions) 2022 2021 %

CC % Change 2022 2021 % Change CC % Change 2022 2021

Entry $ 66 $ 69 (4.3)% (0.5)% $ 127 $ 137 (7.3)% (4.0)% 19% 17%

7 unchanged sentences

(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.

(2) Includes equipment sales related to the Financing (FITTLE) segment of $5 million and $7 million for the three months ended June 30, 2022 and 2021, respectively, and $10 million and $15 million for the six months ended June 30, 2022 and 2021, respectively.

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.

• Entry - The decrease for the three months ended June 30, 2022 as compared to second quarter 2021, was driven by supply constraints, which most significantly affected our black-and-white devices.

This was partially offset by growth in color devices and price increases.

The decrease for the six months ended June 30, 2022 as compared to the prior year period was driven by supply constraints, which most significantly affected our black-and-white devices.

This was partially offset by growth in color devices and price increases.

• Mid-range - The decrease for the three months ended June 30, 2022 as compared to second quarter 2021, was primarily driven by the impact of global product supply constraints and freight disruptions.

The decrease for the six months ended June 30, 2022 as compared to the prior year period was primarily driven by the impact of global product supply constraints and freight disruptions, which had a more pronounced effect on our U.S.

• High-end - The decrease for the three months ended June 30, 2022 as compared to second quarter 2021, primarily reflected the impact of global product supply constraints and freight disruptions, partially offset by a more favorable mix and increased product availability, particularly for our Iridesse and Baltoro products.

The decrease for the six months ended June 30, 2022 as compared to the prior year period primarily reflected the impact of global product supply constraints and freight disruptions, partially offset by a more favorable mix.

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

Xerox 2022 Form 10-Q 56

Total Installs

3 unchanged sentences

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.

Installs for the three months ended June 30, 2022:

• 66% increase in color multifunction devices reflecting higher demand and increased product availability.

• 34% decrease in black-and-white multifunction devices primarily due to higher prior year installs associated with work-from-home demand, resulting from the COVID-19 pandemic, as well as ongoing product constraints.

• 17% decrease in color installs primarily reflecting the impact of freight disruption and product supply constraints, offsetting strong demand.

• 22% decrease in black-and-white installs primarily in the Americas, reflecting the impact of freight disruption and product supply constraints.

• 13% increase in color installs primarily reflecting increased product availability, particularly for our Iridesse and Baltoro products.

• 29% decrease in high-end black-and-white systems reflecting the impact of global product constraints and freight disruptions.

Xerox 2022 Form 10-Q 51

Installs for the six months ended June 30, 2022:

• 31% increase in color multifunction devices reflecting higher demand, primarily in our EMEA region, and increased product availability.

• 37% decrease in black-and-white multifunction devices primarily due to higher prior year installs in our EMEA region associated with work-from-home demand, resulting from the COVID-19 pandemic, as well as ongoing product constraints.

• 13% decrease in color installs primarily reflecting the impact of freight disruption and product supply constraints, offsetting strong demand for recently launched products.

• 40% decrease in black-and-white installs, primarily in our Americas region, reflecting the impact of freight disruption and product supply constraints.

• 8% decrease in color installs primarily reflecting the impact of global product constraints and freight disruptions, more than offset higher installs due to increasing product availability.

• 23% decrease in black-and-white systems reflecting the impact of global product constraints and freight disruptions.

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+.

• “Entry” , which include A4 devices and desktop printers and multifunction devices that primarily serve small and medium workgroups/work teams.

• “Mid-Range” , which include A3 devices that generally serve large workgroup/work teams environments as well as products in the Light Production monochrome and color segments serving centralized print centers, print for pay and lower volume production print establishments.

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

Xerox 2022 Form 10-Q 57

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.

Print and Other segment margin of 1.1% for the three months ended June 30, 2022 decreased by 5.8-percentage points as compared to second quarter 2021, while the Print and Other segment margin of (0.1)% for the six months ended June 30, 2022 decreased 5.9-percentage points as compared to the prior year period.

The decrease in the segment margin for both periods is 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 .

Financing (FITTLE) represents a global financing solutions business, primarily enabling the sale of our equipment and services.

Three Months Ended

June 30, Six Months Ended

(in millions) 2022 2021 %

Change 2022 2021 %

Equipment sales $ 5 $ 7 (28.6)% $ 10 $ 15 (33.3)%

Financing income 53 55 (3.6)%

Financing 52 56 (7.1)% 105 111 (5.4)%

What changed 10-Q

Item 2. Management’s Discussion and Analysis