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 $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. 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 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. ____________________________ (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. 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 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 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 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. 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. 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 Revenue 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% _____________ (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 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 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. 2022 Outlook 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. ____________________________ (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. Xerox 2022 Form 10-Q 44 Critical Accounting Policies and Estimates - Update Goodwill - Interim Impairment Evaluation – Change in Segments 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. 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 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 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 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. 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. Financial Review Revenues Three Months Ended 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 % Post sale revenue 1,381 1,364 1.2 % 5.0 % 2,735 2,693 1.6 % 4.3 % 80 % 77 % Total Revenue $ 1,747 $ 1,793 (2.6) % 1.1 % $ 3,415 $ 3,503 (2.5) % 0.2 % 100 % 100 % Reconciliation to Condensed Consolidated Statements of (Loss) Income: Sales $ 667 $ 670 (0.4) % 2.8 % $ 1,259 $ 1,272 (1.0) % 1.5 % Less: Supplies, paper and other sales (301) (241) 24.9 % 28.0 % (579) (462) 25.3 % 28.0 % Equipment sales $ 366 $ 429 (14.7) % (11.4) % $ 680 $ 810 (16.0) % (13.6) % Services, maintenance and rentals $ 1,028 $ 1,067 (3.7) % 0.2 % $ 2,051 $ 2,120 (3.3) % (0.4) % Add: Supplies, paper and other sales 301 241 24.9 % 28.0 % 579 462 25.3 % 28.0 % Add: Financing 52 56 (7.1) % (4.5) % 105 111 (5.4) % (3.5) % Post sale revenue $ 1,381 $ 1,364 1.2 % 5.0 % $ 2,735 $ 2,693 1.6 % 4.3 % Segments 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 (2) $ 1,747 $ 1,793 (2.6) % $ 3,415 $ 3,503 (2.5) % 100 % 100 % Go-To-Market Americas $ 1,150 $ 1,133 1.5 % 2.0 % $ 2,221 $ 2,209 0.5 % 0.8 % 65 % 63 % EMEA 551 617 (10.7) % (1.1) % 1,105 1,204 (8.2) % (0.9) % 32 % 34 % Other 46 43 7.0 % 7.0 % 89 90 (1.1) % (1.1) % 3 % 3 % Total Revenue (2) $ 1,747 $ 1,793 (2.6) % 1.1 % $ 3,415 $ 3,503 (2.5) % 0.2 % 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 46 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 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 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 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 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 Canada. 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 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 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. 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 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) RD&E 84 79 (5) 162 153 (9) SAG 459 434 (25) 914 882 (32) 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. (2.8) % 4.3 % (7.1) pts. Adjusted (1) Operating Profit $ 35 $ 126 $ (91) $ 32 $ 215 $ (183) 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 Second quarter 2022 pre-tax (loss) margin of (0.3)% decreased 5.8-percentage points as compared to second quarter 2021. 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 and higher Other expenses, net. 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 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. Gross Margin 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. 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 environment. 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). 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 environment. 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 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 June 30, Six Months Ended June 30, (in millions) 2022 2021 Change 2022 2021 Change R&D $ 70 $ 63 $ 7 $ 134 $ 122 $ 12 Sustaining engineering 14 16 (2) 28 31 (3) Total RD&E Expenses $ 84 $ 79 $ 5 $ 162 $ 153 $ 9 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) 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. 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, as well as the favorable impact from currency. 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. 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. Restructuring and Related Costs, Net 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. The following is a breakdown of those costs: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 2022 2021 Severance (1) $ 22 $ 6 $ 44 $ 20 Asset impairments - leased right-of-use assets (2) — 2 1 2 Asset impairments - owned assets (2) 1 — 1 10 Other contractual termination costs (3) 1 1 1 2 Other charges/credits (4) (22) (5) (25) (9) Restructuring and asset impairment costs 2 4 22 25 Retention-related severance/bonuses (5) — 3 (2) (1) Contractual severance costs (6) (1) 3 (1) 3 Consulting and other costs (7) — 2 — 2 Total $ 1 $ 12 $ 19 $ 29 _____________ (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 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. (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 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 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 June 30, (in millions) 2022 2021 2022 2021 Non-financing interest expense $ 23 $ 24 $ 52 $ 48 Interest income (3) (1) (4) (2) Non-service retirement-related costs (4) (22) (11) (42) 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 Non-Financing Interest Expense 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 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. NOTE: 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 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. 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 Income Taxes 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 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. 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 six months ended June 30, 2022 was relatively flat as compared to the prior year period. Net (Loss) Income 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. 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. _____________ (1) Refer to the Net (Loss) Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section. Other Comprehensive (Loss) Income 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) $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. Dollar; 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. Dollar; 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. 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 (FITTLE). • 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 54 Segment Review 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) 2022 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 % 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 % 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) 2022 Print and Other $ 3,112 $ 71 $ 3,183 91 % $ (2) (0.1) % Financing (FITTLE) 303 6 309 9 % 34 11.2 % Total $ 3,415 $ 77 $ 3,492 100 % $ 32 0.9 % 2021 Print and Other $ 3,152 $ 101 $ 3,253 90 % $ 182 5.8 % Financing (FITTLE) 351 6 357 10 % 33 9.4 % Total $ 3,503 $ 107 $ 3,610 100 % $ 215 6.1 % _____________ (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 June 30, Six Months Ended June 30, (in millions) 2022 2021 % Change 2022 2021 % Change Equipment sales $ 361 $ 422 (14.5)% $ 670 $ 795 (15.7)% Post sale revenue 1,238 1,197 3.4% 2,442 2,357 3.6% Intersegment net revenue (1) 34 53 (35.8)% 71 101 (29.7)% Total Print and Other Revenue $ 1,633 $ 1,672 (2.3)% $ 3,183 $ 3,253 (2.2)% _____________ (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 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. ____________________________ (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. 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. Detail by product group is shown below. Three Months Ended June 30, Six Months Ended June 30, % of Equipment Sales (in millions) 2022 2021 % Change CC % Change 2022 2021 % Change CC % Change 2022 2021 Entry $ 66 $ 69 (4.3)% (0.5)% $ 127 $ 137 (7.3)% (4.0)% 19% 17% Mid-range 221 276 (19.9)% (17.0)% 415 514 (19.3)% (17.1)% 61% 63% High-end 76 80 (5.0)% (0.8)% 130 150 (13.3)% (10.3)% 19% 19% Other 3 4 (25.0)% (25.0)% 8 9 (11.1)% (11.1)% 1% 1% Equipment sales (1)(2) $ 366 $ 429 (14.7)% (11.4)% $ 680 $ 810 (16.0)% (13.6)% 100% 100% _____________ CC - See "Currency Impact" section for a description of constant currency. (1) Refer to the Products and Offerings Definitions section. (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 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. operations. • 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. _____________ (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 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 June 30, 2022: Entry • 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. Mid-Range • 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. High-End • 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. Installs for the six months ended June 30, 2022: Entry • 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. Mid-Range • 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. High-End • 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 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 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, primarily enabling the sale of our equipment and services. Revenue Three Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 % Change 2022 2021 % Change Equipment sales $ 5 $ 7 (28.6)% $ 10 $ 15 (33.3)% Financing 52 56 (7.1)% 105 111 (5.4)% Other Post sale revenue (1) 91 111 (18.0)% 188 225 (16.4)% Intersegment net revenue (2) 3 3 —% 6 6 —% Total Financing (FITTLE) Revenue $ 151 $ 177 (14.7)% $ 309 $ 357 (13.4)% _____________ (1) Other Post sale revenue includes operating lease/rental revenues as well as lease renewal and fee income. (2) 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 Financing (FITTLE) segment revenue decreased 14.7% as compared to second quarter 2021, while for the six months ended June 30, 2022 segment revenue decreased 13.4% as compared to the prior year period. Financing (FITTLE) segment revenues included the following: Equipment Sales for the three months ended June 30, 2022 decreased 28.6% as compared to second quarter 2021, and decreased 33.3% for the six months ended June 30, 2022 as compared to the prior year period. The decrease in both periods was attributed to reduced end of lease equipment inventory resulting in fewer opportunities. Financing Income for the three months ended June 30, 2022 decreased by 7.1% as compared to second quarter 2021, and decreased 5.4% for the six months ended June 30, 2022 as compared to the prior year period. The decrease in both periods was 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 June 30, 2022 decreased 18.0% as compared to second quarter 2021, and decreased 16.4% for the six months ended June 30, 2022 as compared to the prior year period. The decrease in both periods is due to a decline in operating lease rental income, which is consistent with the overall decline of equipment installs. Segment Margin Financing (FITTLE) segment margin of 11.5% and 11.2% for the three and six months ended June 30, 2022 increased 2.9-percentage points and 1.8-percentage points as compared to the respective prior year periods. The increase in segment profit for both periods was 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. We expect Financing (FITTLE)'s segment margin to normalize as Xerox lease volumes pick up, driving increases in intersegment commissions. Xerox 2022 Form 10-Q 58 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. The following are reconciliations of our segment profit to our pre-tax income (loss) for 2021: (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 59 Capital Resources and Liquidity The following is a summary of our liquidity position: • As of June 30, 2022 and December 31, 2021, total cash, cash equivalents and restricted cash were $1,227 million and $1,909 million, respectively, and apart from restricted cash of $76 million and $69 million, respectively, was readily accessible for use. The decrease in total cash, cash equivalents and restricted cash of $682 million primarily reflects net payments on debt of $379 million, payments to shareholders of $201 million (repurchases of $113 million and dividends of $88 million) and acquisitions of $52 million. • No amounts are due under our Senior Note borrowings for the remainder of 2022. • In July 2022, Xerox Corporation entered into an agreement for a new $500 million revolving Credit Facility. This new facility replaced our prior $1.5 billion Credit Facility. Refer to Note 23 - Subsequent Events in the Condensed Consolidated Financial Statements for additional information related to this Credit Facility. Cash Flow Analysis The following summarizes our cash, cash equivalents and restricted cash: Six Months Ended June 30, Change (in millions) 2022 2021 Net cash (used in) provided by operating activities $ (19) $ 331 $ (350) Net cash used in investing activities (62) (72) 10 Net cash used in financing activities (587) (747) 160 Effect of exchange rate changes on cash, cash equivalents and restricted cash (14) — (14) Decrease in cash, cash equivalents and restricted cash (682) (488) (194) 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 $ 1,227 $ 2,203 $ (976) Cash Flows from Operating Activities Net cash used in operating activities was $19 million for the six months ended June 30, 2022. The $350 million decrease in operating cash from the prior year period was primarily due to the following: • $235 million decrease in pre-tax income before depreciation and amortization, stock-based compensation, restructuring and related costs and non-service retirement-related costs. • $146 million decrease primarily due to the prior year receipts of an upfront prepaid fixed royalty from FX of $100 million for their continued use of the Xerox brand trademark after the termination of our technology agreement with them and $46 million of royalty payments under the technology agreement. • $99 million decrease from inventory primarily due to higher inventories in anticipation of higher second half revenues. • $86 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. • $25 million decrease from higher net tax payments. • $205 million increase from accounts payable primarily due to the timing of supplier and vendor payments and an associated increase in days payable as well as higher purchases. • $32 million increase due to the timing of payments associated with restructuring and related costs. Cash Flows from Investing Activities Net cash used in investing activities was $62 million for the six months ended June 30, 2022. The $10 million change from the prior year period was primarily due to the following: • $25 million increase primarily due to the sale of surplus buildings and land in the U.S. • $15 million decrease from acquisitions. • Other investing, net includes $7 million of noncontrolling investments as part of our corporate venture capital fund compared to $3 million in the prior year. Cash Flows from Financing Activities Net cash used in financing activities was $587 million for the six months ended June 30, 2022. The $160 million decrease in the use of cash from the prior year period was primarily due to the following: • $300 million decrease due to lower share repurchases in the current year. • $20 million decrease in common and preferred stock dividends due to a lower level of outstanding shares. Xerox 2022 Form 10-Q 60 • $170 million increase from net debt activity. 2022 reflects proceeds of $753 million on secured financing arrangements 1 offset by payments of $477 million, $300 million on maturing 2022 Senior Notes and $353 million for the early redemption of 2023 Senior Notes, which includes a premium payment of $3 million. 2021 reflects payments of $209 million on secured financing arrangements. _____________ (1) The payments on existing secured financing arrangements of $477 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 in the Condensed Consolidated Financial Statements for additional 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 ten years and a variety of renewal and/or termination options. As of June 30, 2022 and December 31, 2021, total operating lease liabilities were $250 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) June 30, 2022 December 31, 2021 Xerox Holdings Corporation $ 1,500 $ 1,500 Xerox Corporation 1,550 2,200 Xerox - Other Subsidiaries (1) 836 561 Subtotal - Principal debt balance 3,886 4,261 Debt issuance costs Xerox Holdings Corporation (9) (11) Xerox Corporation (5) (6) Xerox - Other Subsidiaries (1) (2) (1) Subtotal - Debt issuance costs (16) (18) Net unamortized premium 2 3 Total Debt $ 3,872 $ 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) June 30, 2022 December 31, 2021 Total finance receivables, net (1) $ 2,947 $ 3,070 Equipment on operating leases, net 226 253 Total Finance Assets, net (2) $ 3,173 $ 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 $95 million due to currency. Xerox 2022 Form 10-Q 61 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) June 30, 2022 December 31, 2021 Finance receivables debt (1) $ 2,579 $ 2,687 Equipment on operating leases debt 198 221 Financing debt 2,777 2,908 Core debt 1,095 1,338 Total Debt $ 3,872 $ 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: Six Months Ended June 30, (in millions) 2022 2021 Estimated decrease to net operating cash flows (1) $ (10) $ (26) _____________ (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 Q3 $ — $ — $ 116 $ 116 2022 Q4 — — 109 109 2023 — 650 406 1,056 2024 — 300 165 465 2025 750 — — 750 2026 — — 1 1 2027 and thereafter 750 600 39 1,389 Total (2) $ 1,500 $ 1,550 $ 836 $ 3,886 _____________ (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 62 Treasury Stock Xerox Holdings Corporation made no repurchases of its Common Stock in second quarter 2022. Xerox Holdings Corporation repurchased 5.2 million shares of our Common Stock for an aggregate cost of $113 million, including fees, during the six months ended June 30, 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 June 30, 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 63 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 second 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 • Accelerated share vesting - stock compensation expense 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. • Loss on extinguishment of debt 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. Xerox 2022 Form 10-Q 64 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 adjusted earnings measures, adjusted operating (loss) 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in millions, except per share amounts) Net (Loss) Income EPS Net Income EPS Net (Loss) Income EPS Net Income EPS Reported (1) $ (4) $ (0.05) $ 91 $ 0.46 $ (60) $ (0.43) $ 130 $ 0.64 Adjustments: Restructuring and related costs, net 1 12 19 29 Amortization of intangible assets 10 14 21 29 Non-service retirement-related costs (4) (22) (11) (42) Contract termination costs - product supply — — 33 — Accelerated share vesting 21 — 21 — Loss on early extinguishment of debt 4 — 4 — Income tax on adjustments (2) (4) (1) (17) (5) Adjusted $ 24 $ 0.13 $ 94 $ 0.47 $ 10 $ 0.02 $ 141 $ 0.69 Dividends on preferred stock used in adjusted EPS calculation (3) $ 3 $ 3 $ 7 $ 7 Weighted average shares for adjusted EPS (3) 156 189 157 194 Fully diluted shares at June 30, 2022 (4) 157 ____________________________ (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 June 30, 2022 and excludes potential dilutive common shares used for the calculation of adjusted diluted earnings per share for the second 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 second quarter 2022. Xerox 2022 Form 10-Q 65 Effective Tax Rate reconciliation: Three Months Ended June 30, 2022 2021 (in millions) Pre-Tax (Loss) Income Income Tax Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ (5) $ 1 (20.0) % $ 99 $ 9 9.1 % Non-GAAP Adjustments (2) 32 4 4 1 Adjusted (3) $ 27 $ 5 18.5 % $ 103 $ 10 9.7 % Six Months Ended June 30, 2022 2021 (in millions) Pre-Tax (Loss) Income Tax (Benefit) Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ (94) $ (30) 31.9 % $ 152 $ 23 15.1 % Non-GAAP Adjustments (2) 87 17 16 5 Adjusted (3) $ (7) $ (13) 185.7 % $ 168 $ 28 16.7 % ____________________________ (1) Pre-tax (loss) income and Income tax expense (benefit). (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 June 30, 2022 2021 (in millions) (Loss) Profit Revenue Margin Profit Revenue Margin Reported (1) $ (5) $ 1,747 (0.3) % $ 99 $ 1,793 5.5 % Adjustments: Restructuring and related costs, net 1 12 Amortization of intangible assets 10 14 Accelerated share vesting 21 — Other expenses, net 8 1 Adjusted $ 35 $ 1,747 2.0 % $ 126 $ 1,793 7.0 % Six Months Ended June 30, 2022 2021 (in millions) (Loss) Profit Revenue Margin Profit Revenue Margin Reported (1) $ (94) $ 3,415 (2.8) % $ 152 $ 3,503 4.3 % Adjustments: Restructuring and related costs, net 19 29 Amortization of intangible assets 21 29 Accelerated share vesting 21 — Other expenses, net 65 5 Adjusted $ 32 $ 3,415 0.9 % $ 215 $ 3,503 6.1 % ____________________________ (1) Pre-tax (loss) income. Xerox 2022 Form 10-Q 66 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.