Xerox Holdings Corp 10-Q

ITEM 1 — FINANCIAL STATEMENTS XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions, except per-share data) 2022 2021 2022 2021 Revenues Sales $ 690 $ 657 $ 1,949 $ 1,929 Services, maintenance and rentals 1,010 1,046 3,061 3,166 Financing 51 55 156 166 Total Revenues 1,751 1,758 5,166 5,261 Costs and Expenses Cost of sales 508 498 1,430 1,386 Cost of services, maintenance and rentals 659 662 2,015 1,971 Cost of financing 28 29 78 85 Research, development and engineering expenses 73 82 235 235 Selling, administrative and general expenses 418 413 1,332 1,295 Goodwill impairment 412 — 412 — Restructuring and related costs, net 22 10 41 39 Amortization of intangible assets 10 13 31 42 Other expenses, net 1 ( 33 ) 66 ( 28 ) Total Costs and Expenses 2,131 1,674 5,640 5,025 (Loss) Income before Income Taxes and Equity Income ( 380 ) 84 ( 474 ) 236 Income tax expense (benefit) 3 ( 4 ) ( 27 ) 19 Equity in net income of unconsolidated affiliates 1 1 3 2 Net (Loss) Income ( 382 ) 89 ( 444 ) 219 Less: Net income (loss) attributable to noncontrolling interests 1 ( 1 ) ( 1 ) ( 1 ) Net (Loss) Income Attributable to Xerox Holdings $ ( 383 ) $ 90 $ ( 443 ) $ 220 Basic (Loss) Earnings per Share $ ( 2.48 ) $ 0.48 $ ( 2.91 ) $ 1.12 Diluted (Loss) Earnings per Share $ ( 2.48 ) $ 0.48 $ ( 2.91 ) $ 1.10 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 3 XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2022 2021 2022 2021 Net (Loss) Income $ ( 382 ) $ 89 $ ( 444 ) $ 219 Less: Net income (loss) attributable to noncontrolling interests 1 ( 1 ) ( 1 ) ( 1 ) Net (Loss) Income Attributable to Xerox Holdings ( 383 ) 90 ( 443 ) 220 Other Comprehensive (Loss) Income, Net (1) Translation adjustments, net ( 277 ) ( 125 ) ( 636 ) ( 122 ) Unrealized gains (losses), net 6 4 ( 19 ) ( 3 ) Changes in defined benefit plans, net 54 51 96 122 Other Comprehensive Loss, Net Attributable to Xerox Holdings ( 217 ) ( 70 ) ( 559 ) ( 3 ) Comprehensive (Loss) Income, Net ( 599 ) 19 ( 1,003 ) 216 Less: Comprehensive income (loss), net attributable to noncontrolling interests 1 ( 1 ) ( 1 ) ( 1 ) Comprehensive (Loss) Income, Net Attributable to Xerox Holdings $ ( 600 ) $ 20 $ ( 1,002 ) $ 217 _____________ (1) Refer to Note 20 - Other Comprehensive (Loss) Income for gross components of Other comprehensive loss, net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 4 XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in millions, except share data in thousands) September 30, 2022 December 31, 2021 Assets Cash and cash equivalents $ 932 $ 1,840 Accounts receivable (net of allowance of $ 51 and $ 58 , respectively) 835 818 Billed portion of finance receivables (net of allowance of $ 4 and $ 4 , respectively) 91 94 Finance receivables, net 995 1,042 Inventories 777 696 Other current assets 265 211 Total current assets 3,895 4,701 Finance receivables due after one year (net of allowance of $ 113 and $ 114 , respectively) 1,814 1,934 Equipment on operating leases, net 216 253 Land, buildings and equipment, net 315 358 Intangible assets, net 216 211 Goodwill 2,753 3,287 Deferred tax assets 496 519 Other long-term assets 1,715 1,960 Total Assets $ 11,420 $ 13,223 Liabilities and Equity Short-term debt and current portion of long-term debt $ 1,070 $ 650 Accounts payable 1,213 1,069 Accrued compensation and benefits costs 250 239 Accrued expenses and other current liabilities 810 871 Total current liabilities 3,343 2,829 Long-term debt 2,676 3,596 Pension and other benefit liabilities 1,298 1,373 Post-retirement medical benefits 209 277 Other long-term liabilities 416 481 Total Liabilities 7,942 8,556 Commitments and Contingencies (See Note 22) Noncontrolling Interests 10 10 Convertible Preferred Stock 214 214 Common stock 156 168 Additional paid-in capital 1,577 1,802 Treasury stock, at cost — ( 177 ) Retained earnings 5,057 5,631 Accumulated other comprehensive loss ( 3,547 ) ( 2,988 ) Xerox Holdings shareholders’ equity 3,243 4,436 Noncontrolling interests 11 7 Total Equity 3,254 4,443 Total Liabilities and Equity $ 11,420 $ 13,223 Shares of common stock issued 155,570 168,069 Treasury stock — ( 8,675 ) Shares of Common Stock Outstanding 155,570 159,394 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 5 XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, (in millions) 2022 2021 Cash Flows from Operating Activities Net (Loss) Income $ ( 444 ) $ 219 Adjustments required to reconcile Net (loss) income to Cash flows (used in) provided by operating activities Depreciation and amortization 205 249 Provisions 48 38 Net gain on sales of businesses and assets ( 17 ) ( 40 ) Stock-based compensation 63 44 Goodwill impairment 412 — Restructuring and asset impairment charges 44 28 Payments for restructurings ( 38 ) ( 61 ) Non-service retirement-related costs (1) ( 18 ) ( 64 ) Contributions to retirement plans (1) ( 106 ) ( 119 ) Increase in accounts receivable and billed portion of finance receivables ( 48 ) ( 30 ) (Increase) decrease in inventories ( 136 ) 10 Increase in equipment on operating leases ( 74 ) ( 92 ) (Increase) decrease in finance receivables ( 10 ) 33 Decrease in other current and long-term assets 36 64 Increase in accounts payable 198 74 Increase in accrued compensation (1) 29 20 (Decrease) increase in other current and long-term liabilities ( 73 ) 80 Net change in income tax assets and liabilities ( 81 ) ( 11 ) Net change in derivative assets and liabilities ( 10 ) ( 1 ) Other operating, net ( 7 ) ( 10 ) Net cash (used in) provided by operating activities ( 27 ) 431 Cash Flows from Investing Activities Cost of additions to land, buildings, equipment and software ( 39 ) ( 52 ) Proceeds from sales of businesses and assets 49 39 Acquisitions, net of cash acquired ( 93 ) ( 38 ) Other investing, net ( 12 ) ( 3 ) Net cash used in investing activities ( 95 ) ( 54 ) Cash Flows from Financing Activities Net proceeds from short-term debt — 1 Proceeds from issuance of long-term debt 754 311 Payments on long-term debt ( 1,259 ) ( 445 ) Dividends ( 131 ) ( 157 ) Payments to acquire treasury stock, including fees ( 113 ) ( 500 ) Other financing, net ( 6 ) ( 3 ) Net cash used in financing activities ( 755 ) ( 793 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 31 ) ( 13 ) Decrease in cash, cash equivalents and restricted cash ( 908 ) ( 429 ) Cash, cash equivalents and restricted cash at beginning of period 1,909 2,691 Cash, Cash Equivalents and Restricted Cash at End of Period $ 1,001 $ 2,262 _____________ (1) Captions were changed in 2022 to reflect the inclusion of expense and contributions for our Retiree Health plans, which were previously reported as part of the Increase in accrued compensation. There was no change to Net cash (used in) provided by operating activities as a result of the reclassification. Prior year amounts have been revised to conform to this presentation. Refer to Note 16 - Employee Benefit Plans for additional information. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 6 XEROX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2022 2021 2022 2021 Revenues Sales $ 690 $ 657 $ 1,949 $ 1,929 Services, maintenance and rentals 1,010 1,046 3,061 3,166 Financing 51 55 156 166 Total Revenues 1,751 1,758 5,166 5,261 Costs and Expenses Cost of sales 508 498 1,430 1,386 Cost of services, maintenance and rentals 659 662 2,015 1,971 Cost of financing 28 29 78 85 Research, development and engineering expenses 73 82 235 235 Selling, administrative and general expenses 418 413 1,332 1,295 Goodwill impairment 412 — 412 — Restructuring and related costs, net 22 10 41 39 Amortization of intangible assets 10 13 31 42 Other expenses, net 1 ( 33 ) 66 ( 28 ) Total Costs and Expenses 2,131 1,674 5,640 5,025 (Loss) Income before Income Taxes and Equity Income ( 380 ) 84 ( 474 ) 236 Income tax expense (benefit) 3 ( 4 ) ( 27 ) 19 Equity in net income of unconsolidated affiliates 1 1 3 2 Net (Loss) Income ( 382 ) 89 ( 444 ) 219 Less: Net income (loss) attributable to noncontrolling interests 1 ( 1 ) ( 1 ) ( 1 ) Net (Loss) Income Attributable to Xerox $ ( 383 ) $ 90 $ ( 443 ) $ 220 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 7 XEROX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2022 2021 2022 2021 Net (Loss) Income $ ( 382 ) $ 89 $ ( 444 ) $ 219 Less: Net income (loss) attributable to noncontrolling interests 1 ( 1 ) ( 1 ) ( 1 ) Net (Loss) Income Attributable to Xerox ( 383 ) 90 ( 443 ) 220 Other Comprehensive (Loss) Income, Net (1) Translation adjustments, net ( 277 ) ( 125 ) ( 636 ) ( 122 ) Unrealized gains (losses), net 6 4 ( 19 ) ( 3 ) Changes in defined benefit plans, net 54 51 96 122 Other Comprehensive Loss, Net Attributable to Xerox ( 217 ) ( 70 ) ( 559 ) ( 3 ) Comprehensive (Loss) Income, Net ( 599 ) 19 ( 1,003 ) 216 Less: Comprehensive income (loss), net attributable to noncontrolling interests 1 ( 1 ) ( 1 ) ( 1 ) Comprehensive (Loss) Income, Net Attributable to Xerox $ ( 600 ) $ 20 $ ( 1,002 ) $ 217 _____________ (1) Refer to Note 20 - Other Comprehensive (Loss) Income for gross components of Other comprehensive loss, net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 8 XEROX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in millions) September 30, 2022 December 31, 2021 Assets Cash and cash equivalents $ 932 $ 1,840 Accounts receivable (net of allowance of $ 51 and $ 58 , respectively) 835 818 Billed portion of finance receivables (net of allowance of $ 4 and $ 4 , respectively) 91 94 Finance receivables, net 995 1,042 Inventories 777 696 Other current assets 265 211 Total current assets 3,895 4,701 Finance receivables due after one year (net of allowance of $ 113 and $ 114 , respectively) 1,814 1,934 Equipment on operating leases, net 216 253 Land, buildings and equipment, net 315 358 Intangible assets, net 216 211 Goodwill 2,753 3,287 Deferred tax assets 496 519 Other long-term assets 1,694 1,952 Total Assets $ 11,399 $ 13,215 Liabilities and Equity Short-term debt and current portion of long-term debt $ 1,070 $ 650 Accounts payable 1,213 1,069 Accrued compensation and benefits costs 250 239 Accrued expenses and other current liabilities 762 823 Total current liabilities 3,295 2,781 Long-term debt 1,180 2,102 Related party debt 1,496 1,494 Pension and other benefit liabilities 1,298 1,373 Post-retirement medical benefits 209 277 Other long-term liabilities 416 481 Total Liabilities 7,894 8,508 Commitments and Contingencies (See Note 22) Noncontrolling Interests 10 10 Additional paid-in capital 3,643 3,202 Retained earnings 3,388 4,476 Accumulated other comprehensive loss ( 3,547 ) ( 2,988 ) Xerox shareholder's equity 3,484 4,690 Noncontrolling interests 11 7 Total Equity 3,495 4,697 Total Liabilities and Equity $ 11,399 $ 13,215 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 9 XEROX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, (in millions) 2022 2021 Cash Flows from Operating Activities Net (Loss) Income $ ( 444 ) $ 219 Adjustments required to reconcile Net (loss) income to Cash flows (used in) provided by operating activities Depreciation and amortization 205 249 Provisions 48 38 Net gain on sales of businesses and assets ( 17 ) ( 40 ) Stock-based compensation 63 44 Goodwill impairment 412 — Restructuring and asset impairment charges 44 28 Payments for restructurings ( 38 ) ( 61 ) Non-service retirement-related costs (1) ( 18 ) ( 64 ) Contributions to retirement plans (1) ( 106 ) ( 119 ) Increase in accounts receivable and billed portion of finance receivables ( 48 ) ( 30 ) (Increase) decrease in inventories ( 136 ) 10 Increase in equipment on operating leases ( 74 ) ( 92 ) (Increase) decrease in finance receivables ( 10 ) 33 Decrease in other current and long-term assets 36 64 Increase in accounts payable 198 74 Increase in accrued compensation (1) 29 20 (Decrease) increase in other current and long-term liabilities ( 73 ) 80 Net change in income tax assets and liabilities ( 81 ) ( 11 ) Net change in derivative assets and liabilities ( 10 ) ( 1 ) Other operating, net ( 7 ) ( 10 ) Net cash (used in) provided by operating activities ( 27 ) 431 Cash Flows from Investing Activities Cost of additions to land, buildings, equipment and software ( 39 ) ( 52 ) Proceeds from sales of businesses and assets 49 39 Acquisitions, net of cash acquired ( 93 ) ( 38 ) Other investing, net 1 — Net cash used in investing activities ( 82 ) ( 51 ) Cash Flows from Financing Activities Net proceeds from short-term debt — 1 Proceeds from issuance of long-term debt 754 311 Payments on long-term debt ( 1,259 ) ( 445 ) Distributions to parent ( 267 ) ( 674 ) Other financing, net 4 11 Net cash used in financing activities ( 768 ) ( 796 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 31 ) ( 13 ) Decrease in cash, cash equivalents and restricted cash ( 908 ) ( 429 ) Cash, cash equivalents and restricted cash at beginning of period 1,909 2,691 Cash, Cash Equivalents and Restricted Cash at End of Period $ 1,001 $ 2,262 _____________ (1) Captions were changed in 2022 to reflect the inclusion of expense and contributions for our Retiree Health plans, which were previously reported as part of the Increase in accrued compensation. There was no change to Net cash (used in) provided by operating activities as a result of the reclassification. Prior year amounts have been revised to conform to this presentation. Refer to Note 16 - Employee Benefit Plans for additional information. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2022 Form 10-Q 10 XEROX HOLDINGS CORPORATION XEROX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in millions, except per-share data and where otherwise noted) Note 1 – Basis of Presentation 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,” and 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. The accompanying unaudited Condensed Consolidated Financial Statements and footnotes represent the respective, consolidated results and financial results of Xerox Holdings and Xerox and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of Xerox Holdings and Xerox, which includes separate unaudited Condensed Consolidated Financial Statements for each registrant. The accompanying unaudited Condensed Consolidated Financial Statements of both Xerox Holdings and Xerox have been prepared in accordance with the accounting policies described in the Combined 2021 Annual Report on Form 10-K (2021 Annual Report), except as noted herein, and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in the 2021 Annual Report. In our opinion, all adjustments necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year. For convenience and ease of reference, we refer to the financial statement caption “(Loss) Income before Income Taxes and Equity Income” as “pre-tax (loss) income”. Notes to the Condensed Consolidated Financial Statements reflect the activity for both Xerox Holdings and Xerox for all periods presented, unless otherwise noted. Segments 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. Refer to Note 4 - Segment Reporting for additional information regarding this change. Goodwill Interim Impairment Evaluation 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 2022, we had events and conditions in the first quarter and third quarter that required an interim assessment of Goodwill. As noted above, 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, consistent with the determination that we had two operating/reportable segments and two reporting units – Print and Other, and Financing (FITTLE). Xerox 2022 Form 10-Q 11 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. In 2022, the Company continued to encounter operational challenges due to unfavorable product and services mix associated with supply chain constraints as well the impacts of unfavorable macroeconomic conditions including inflationary pressure on product and labor costs, geopolitical uncertainty in Europe and the continued impacts from the COVID-19 recovery. Additionally, higher interest rates continue to put downward pressure on the Company’s valuation. Although the Company expects operating results to improve in the fourth quarter of 2022, and in full-year 2023 as the Company works down its backlog and realizes benefits from price increases and cost actions; operating results are expected to be below previous forecasts and will continue to be pressured as result of these unfavorable macroeconomic conditions. As a result of these negative financial impacts and a sustained market capitalization below our book value, in the third quarter 2022 we determined there was a triggering event requiring an interim quantitative assessment of Goodwill. After completing our interim impairment test, we concluded that the estimated fair value of the Print and Other reporting unit (the only reporting unit with Goodwill) had declined below its carrying value and we recognized an after-tax non-cash impairment charge of $ 395 ($ 412 pre-tax) related to our Goodwill in the third quarter 2022. The estimated fair value of the Print and Other reporting unit is based on estimates and assumptions that are considered Level 3 inputs under the fair value hierarchy. If the Company's future performance varies from current expectations, assumptions, or estimates, including those assumptions relating to the supply chain constraints, interest rates, inflationary pressure on product and labor costs, geopolitical uncertainty in Europe, or the continued impacts from the COVID-19 recovery, 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 throughout the remainder of 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. Note 2 – Recent Accounting Pronouncements Xerox Holdings and Xerox consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). The ASUs listed below apply to both registrants. ASUs not listed below were assessed and determined to be not applicable to the Condensed Consolidated Financial Statements of either registrant. Accounting Standard Updates to be Adopted: Liabilities In September 2022, the FASB issued ASU 2022-04 , Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations that requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The new standard’s requirements to disclose the key terms of the programs and information about obligations outstanding are effective for all interim and annual periods of our fiscal year beginning on January 1, 2023. The new standard’s requirement to disclose a rollforward of obligations outstanding will be effective for our fiscal year beginning on January 1, 2024. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on the Company's consolidated financial statements and related disclosures. Financial Instruments In March 2022, the FASB issued ASU 2022-02 , Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures - Gross Write-offs. The amendments in this update eliminate the accounting guidance for Troubled Debt Restructurings (TDRs) by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing Xerox 2022 Form 10-Q 12 receivables. The disclosure of current-period gross write-offs by year of origination is applicable for financing receivables and net investments in leases that are within the scope of ASC 326-20 , Financial Instruments - Credit Losses - Measured at Amortized Cost . This update is effective for our fiscal year beginning on January 1, 2023. The provisions of this amendment are to be applied on a prospective basis. We are currently evaluating the impact of the adoption of this standard on the Company's consolidated financial statements and related disclosures. Since this standard primarily relates to new disclosure, we do not expect the adoption to have a material impact on our financial condition, results of operations, and cash flows in future periods. Reference Rate Reform In March 2020, the FASB issued ASU 2020-04 , Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01 , Reference Rate Reform (Topic 848): Scope , which provided clarification guidance to ASU 2020-04. These ASUs were effective commencing with our quarter ended March 31, 2020 through December 31, 2022. There has been no impact to date as a result of ASU 2020-04 or ASU 2021-01 and subsequent amendments on reference rate reform. However, we continue to evaluate potential future impacts that may result from the discontinuation of LIBOR or other reference rates as well as the accounting provided in this update on our financial condition, results of operations, and cash flows. Accounting Standard Updates Adopted in 2022: Government Assistance In November 2021, the FASB issued ASU 2021-10 , Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. The update increases the transparency surrounding government assistance by requiring disclosure of 1) the types of assistance received, 2) an entity’s accounting for the assistance, and 3) the effect of the assistance on the entity’s financial statements. We adopted this update effective for our fiscal year beginning January 1, 2022. The impact of adoption was not material to our Consolidated Financial Statements. Impacts on future periods will depend on the amounts of government assistance received. Prior to the COVID pandemic, the amounts of government assistance the Company received were not material and since the update is limited to increased disclosures, we do not expect the adoption to have a material impact on our financial condition, results of operations, and cash flows in future periods. Business Combinations In October 2021, the FASB issued ASU 2021-08 , Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers . The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. We early adopted this update effective for our fiscal year beginning January 1, 2022. The impact of adopting the new standard will depend on the magnitude of future acquisitions. The standard will not impact contract assets or liabilities acquired in business combinations that occurred prior to the adoption date and the adoption has not had a material impact on acquisitions made year to date. Debt In August 2020, the FASB issued ASU 2020-06 , Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This update simplified the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amended the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and required the application of the if-converted method for calculating diluted earnings per share. We adopted this update effective for our fiscal year beginning January 1, 2022. The adoption of this update did not have a material impact on the Company’s consolidated financial statements and related disclosures. Xerox 2022 Form 10-Q 13 Other Updates In 2022 and 2021, the FASB also issued the following ASUs, which impact the Company but did not have, or are not expected to have, a material impact on our financial condition, results of operations or cash flows upon adoption. Those updates are as follows: • Fair Value Measurement: ASU 2022-03 , Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This update is effective for our fiscal year beginning January 1, 2024. • Derivatives and Hedging: ASU 2022-01 , Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method. This update is effective for our fiscal year beginning January 1, 2023. • Equity Instruments: ASU 2021-04 , Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options). This update was effective for our fiscal year beginning January 1, 2022. • Leases: ASU 2021-05 , Leases - Certain Lease Payments with Variable Lease Payments (ASC 842). This update is effective for our fiscal year beginning January 1, 2022. Note 3 – Revenue Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Primary geographical markets (1) : United States $ 986 $ 1,012 $ 2,918 $ 3,001 Europe 470 487 1,403 1,500 Canada 131 97 381 294 Other 164 162 464 466 Total Revenues $ 1,751 $ 1,758 $ 5,166 $ 5,261 Major product and services lines: Equipment $ 390 $ 387 $ 1,070 $ 1,197 Supplies, paper and other sales 300 270 879 732 Maintenance agreements (2) 420 447 1,295 1,330 Service arrangements (3) 487 493 1,451 1,490 Rental and other 103 106 315 346 Financing 51 55 156 166 Total Revenues $ 1,751 $ 1,758 $ 5,166 $ 5,261 Sales channels: Direct equipment lease (4) $ 146 $ 170 $ 425 $ 506 Distributors & resellers (5) 318 283 877 826 Customer direct 226 204 647 597 Total Sales $ 690 $ 657 $ 1,949 $ 1,929 _____________ (1) Geographic area data is based upon the location of the subsidiary reporting the revenue. (2) Includes revenues from maintenance agreements on sold equipment as well as revenues associated with service agreements sold through our channel partners as Xerox Partner Print Services (XPPS). (3) Primarily includes revenues from our Managed Services arrangements. Also includes revenues from embedded operating leases in our Managed Service arrangements, which were not significant. (4) Primarily reflects sales through bundled lease arrangements. (5) Primarily reflects sales through our two-tier distribution channels. Xerox 2022 Form 10-Q 14 Contract Assets and Liabilities: We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advance billings for maintenance and other services to be performed and were approximately $ 131 and $ 144 at September 30, 2022 and December 31, 2021, respectively. The majority of the balance at September 30, 2022 will be amortized to revenue over approximately the next 30 months. Contract Costs: Incremental direct costs of obtaining a contract primarily include sales commissions paid to sales people and agents in connection with the placement of equipment with associated post sale services arrangements. These costs are deferred and amortized on the straight-line basis over the estimated contract term, which is currently estimated to be approximately four years . We pay commensurate sales commissions upon customer renewals, therefore our amortization period is aligned to our initial contract term. Incremental direct costs are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Incremental direct costs of obtaining a contract $ 15 $ 14 $ 43 $ 44 Amortization of incremental direct costs 17 18 51 55 The balance of deferred incremental direct costs net of accumulated amortization at September 30, 2022 and December 31, 2021 was $ 121 and $ 132 , respectively. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately four years . We may also incur costs associated with our services arrangements to generate or enhance resources and assets that will be used to satisfy our future performance obligations included in these arrangements. These costs are considered contract fulfillment costs and are amortized over the contractual service period of the arrangement to cost of services. In addition, we provide inducements to certain customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. As of September 30, 2022 and December 31, 2021, amounts deferred associated with contract fulfillment costs and inducements were $ 11 and $ 15 , respectively, and the related amortization was $ 1 and $ 2 for the three months ended September 30, 2022 and 2021, respectively, and $ 4 and $ 5 for the nine months ended September 30, 2022 and 2021, respectively. Equipment and software used in the fulfillment of service arrangements, and where the Company retains control, are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific. Xerox 2022 Form 10-Q 15 Note 4 – Segment Reporting Our reportable segments are aligned with how we manage the business and view the markets we serve. During the first quarter of 2022, the Company changed 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. Our two reportable segments are based on the information reviewed by the CODM together with the Company’s management to evaluate performance of the business and allocate resources. As such, prior period reportable segment results and related disclosures have been conformed to reflect the Company’s current reportable segments. During 2021, we progressed with internally standing up 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 CODM 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) (see below). 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. Our Print and Other segment includes the sale of document systems, supplies and technical services and managed services. The segment also includes the delivery of managed services that involve a continuum of solutions and services that help our customers optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels of security. This segment also includes IT services and software. Our product groupings range from: • “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. Customers range from small and mid-sized businesses to large enterprises. Customers also include graphic communication enterprises as well as channel partners including distributors and resellers. Segment revenues also include commissions and other payments from the Financing (FITTLE) segment for the exclusive right to provide lease financing for Xerox products. These revenues are reported as part of Intersegment Revenues, which are eliminated in consolidated revenues. The Financing (FITTLE) segment provides leasing solutions through either bundled or unbundled lease agreements of Xerox and non-Xerox products. These leasing solutions support a wide range of customers, from government to graphic communications and SMB to Enterprise as well as financing for direct channel customer purchases of both Xerox and non-Xerox equipment. Segment revenues primarily includes financing income on sales-type leases, operating lease income (including month-to-month rentals and extensions) and leasing fees. Segment Policy We derive the results of our business segments directly from our internal management reporting system. The accounting policies that the Company uses to derive its segment results are substantially the same as those used by the Company in preparing its consolidated financial statements. The segment results include a significant level of management estimates regarding the allocation of revenues such as finance income in bundled lease arrangements and other leasing revenues and operating lease revenues embedded in our managed services contracts as well as the allocation of expenses for shared selling and administrative services. Accordingly, the financial results for the segments may not be indicative of the results the businesses would have as on a standalone basis or what might be presented for the businesses in stand-alone financial statements. The CODM measures the performance of each segment based on several metrics, including segment revenues and profit. The CODM uses these results, in part, to evaluate the performance of, and to allocate resources to each segment. The Financing (FITTLE) segment also includes interest expense associated with allocated debt of the Company in support of its Finance assets, while no interest expense is allocated to the Print and Other segment. Xerox 2022 Form 10-Q 16 Selected financial information for our reportable segments was as follows: Three Months Ended September 30, 2022 2021 Print and Other Financing (FITTLE) Total Print and Other Financing (FITTLE) Total External net revenue $ 1,604 $ 147 $ 1,751 $ 1,590 $ 168 $ 1,758 Intersegment net revenue (1) 37 3 40 46 3 49 Total Segment net revenue $ 1,641 $ 150 $ 1,791 $ 1,636 $ 171 $ 1,807 Segment profit $ 57 $ 8 $ 65 $ 50 $ 24 $ 74 Segment margin (2) 3.6 % 5.4 % 3.7 % 3.1 % 14.3 % 4.2 % Depreciation and amortization $ 28 $ 27 $ 55 $ 28 $ 38 $ 66 Interest income — 51 51 — 55 55 Interest expense (3) — 30 30 — 31 31 Nine Months Ended September 30, 2022 2021 Print and Other Financing (FITTLE) Total Print and Other Financing (FITTLE) Total External net revenue $ 4,716 $ 450 $ 5,166 $ 4,742 $ 519 $ 5,261 Intersegment net revenue (1) 108 9 117 147 9 156 Total Segment net revenue $ 4,824 $ 459 $ 5,283 $ 4,889 $ 528 $ 5,417 Segment profit $ 55 $ 42 $ 97 $ 232 $ 57 $ 289 Segment margin (2) 1.2 % 9.3 % 1.9 % 4.9 % 11.0 % 5.5 % Depreciation and amortization $ 85 $ 89 $ 174 $ 86 $ 121 $ 207 Interest income — 156 156 — 166 166 Interest expense (3) — 84 84 — 91 91 _____________ (1) Intersegment net revenue is primarily commissions and other payments made by the Financing (FITTLE) Segment to the Print and Other Segment for the lease of Xerox Equipment placements. (2) Segment margin based on External net revenue only. (3) Interest expense for the Financing (FITTLE) Segment includes non-financing interest expense on allocated debt associated with Equipment on operating lease of $ 2 and $ 2 for the three months ended September 30, 2022 and 2021, respectively, and $ 6 and $ 6 for the nine months ended September 30, 2022 and 2021, respectively. Xerox 2022 Form 10-Q 17 Selected financial information for our reportable segments was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Pre-tax (Loss) Income Total reported segments $ 65 $ 74 $ 97 $ 289 Goodwill impairment ( 412 ) — ( 412 ) — Restructuring and related costs, net ( 22 ) ( 10 ) ( 41 ) ( 39 ) Amortization of intangible assets ( 10 ) ( 13 ) ( 31 ) ( 42 ) Accelerated share vesting — — ( 21 ) — Other expenses, net ( 1 ) 33 ( 66 ) 28 Total Pre-tax (loss) income $ ( 380 ) $ 84 $ ( 474 ) $ 236 Depreciation and Amortization Total reported segments $ 55 $ 66 $ 174 $ 207 Amortization of intangible assets 10 13 31 42 Total Depreciation and amortization $ 65 $ 79 $ 205 $ 249 Interest Expense Total reported segments $ 30 $ 31 $ 84 $ 91 Corporate 19 21 67 65 Total Interest expense $ 49 $ 52 $ 151 $ 156 Interest Income Total reported segments $ 51 $ 55 $ 156 $ 166 Corporate 4 1 8 3 Total Interest income $ 55 $ 56 $ 164 $ 169 Note 5 – Lessor Revenue from sales-type leases is presented on a gross basis when the Company enters into a lease to realize value from a product that it would otherwise sell in its ordinary course of business, whereas in transactions where the Company enters into a lease for the purpose of generating revenue by providing financing, the profit or loss, if any, is presented on a net basis. In addition, we have elected to account for sales tax and other similar taxes collected from a lessee as lessee costs and therefore we exclude these costs from contract consideration and variable consideration and present revenue net of these costs. The components of lease income are as follows: Three Months Ended September 30, Nine Months Ended September 30, Location in Statements of (Loss) Income 2022 2021 2022 2021 Revenue from sales type leases Sales $ 146 $ 170 $ 425 $ 506 Interest income on lease receivables Financing 51 55 156 166 Lease income - operating leases Services, maintenance and rentals 40 54 132 172 Variable lease income Services, maintenance and rentals 16 15 47 46 Total Lease income $ 253 $ 294 $ 760 $ 890 Profit at lease commencement on sales-type leases was estimated to be $ 39 and $ 51 for the three months ended September 30, 2022 and 2021, respectively, and $ 127 and $ 152 for the nine months ended September 30, 2022 and 2021, respectively. Xerox 2022 Form 10-Q 18 Note 6 – Acquisitions and Investments Acquisition In the first quarter 2022, Xerox acquired Powerland, a leading IT services provider in Canada, for approximately $ 52 (CAD 66 million), net of cash. The acquisition also includes contingent consideration up to approximately $ 22 (CAD 28 million) based on future performance of the acquisition over the next two years . The acquisition strengthens Xerox’s IT services offerings in North America, which include cloud, cyber security, end user computing and managed services. The Goodwill associated with the acquisition of Powerland is included in our Print and Other segment. In July 2022, Xerox acquired Go Inspire, a U.K.-based print and digital marketing and communication services provider, for approximately $ 41 (GBP 34 million), net of cash. The acquisition strengthens Xerox’s strategy to grow its global Digital Services presence in EMEA. The Goodwill associated with the acquisition of Go Inspire is included in our Print and Other segment. The operating results of these acquisitions are not material to our financial statements and are included within our results from the acquisition date. The purchase prices for both acquisitions were all cash for 100 % ownership of the acquired company and were primarily allocated to Intangible assets, net (approximately $ 51 ) and Goodwill (approximately $ 64 ), with the remainder to tangible assets and assumed/recorded liabilities. The allocations are based on preliminary management estimates, which continue to be reviewed, and are expected to be finalized by the end of 2022 and may include input and support from third-party valuations. Any adjustments to the preliminary allocations are not expected to be material. Note 7 – Supplementary Financial Information Government Assistance In response to the COVID-19 pandemic, various governments employed temporary measures to provide aid and economic stimulus to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees. Estimated savings from these various government assistance programs are recorded as follows in the Condensed Consolidated Statements of (Loss) Income: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of services, maintenance and rentals $ — $ 4 $ — $ 17 Selling, administrative and general expenses — 5 — 12 Total Estimated savings $ — $ 9 $ — $ 29 Cash, Cash Equivalents and Restricted Cash Restricted cash primarily relates to escrow cash deposits made in Brazil associated with ongoing litigation as well as cash collections on finance receivables that were pledged for secured borrowings. As more fully discussed in Note 22 - Contingencies and Litigation, various litigation matters in Brazil require us to make cash deposits to escrow as a condition of continuing the litigation. Restricted cash amounts are classified in our Condensed Consolidated Balance Sheets based on when the cash will be contractually or judicially released. Cash, cash equivalents and restricted cash amounts are as follows: September 30, 2022 December 31, 2021 Cash and cash equivalents $ 932 $ 1,840 Restricted cash Litigation deposits in Brazil 37 34 Escrow and cash collections related to secured borrowing arrangements (1) 31 32 Other restricted cash 1 3 Total Restricted cash 69 69 Cash, cash equivalents and restricted cash $ 1,001 $ 1,909 _____________ (1) Represents collections on finance receivables pledged for secured borrowings that will be remitted to lenders in the following month. Xerox 2022 Form 10-Q 19 Restricted cash is reported in the Condensed Consolidated Balance Sheets as follows: September 30, 2022 December 31, 2021 Other current assets $ 31 $ 33 Other long-term assets 38 36 Total Restricted cash $ 69 $ 69 Supplemental Cash Flow Information Summarized cash flow information is as follows: Location in Statement of Cash Flows Nine Months Ended September 30, 2022 2021 Provision for receivables Operating $ 25 $ 13 Provision for inventory Operating 23 25 Provision for product warranties Operating 5 6 Depreciation of buildings and equipment Operating 51 57 Depreciation and obsolescence of equipment on operating leases Operating 89 120 Amortization of internal use software Operating 34 30 Amortization of acquired intangible assets Operating 31 42 Amortization of customer contract costs (1) Operating 55 60 Cost of additions to land, buildings and equipment Investing 24 21 Cost of additions to internal use software Investing 15 31 Payments to acquire noncontrolling interests Investing 13 3 Common stock dividends - Xerox Holdings Financing 120 146 Preferred stock dividends - Xerox Holdings Financing 11 11 Payments to noncontrolling interests Financing 1 — Proceeds from noncontrolling interests Financing 6 15 Repurchases related to stock-based compensation - Xerox Holdings Financing 10 14 _____________ (1) Amortization of customer contract costs is reported in Decrease in other current and long-term assets in the Condensed Consolidated Statements of Cash Flows. Refer to Note 3 - Revenue - Contract Costs for additional information. Xerox 2022 Form 10-Q 20 Note 8 – Accounts Receivable, Net Accounts receivable, net were as follows: September 30, 2022 December 31, 2021 Invoiced $ 679 $ 660 Accrued (1) 207 216 Allowance for doubtful accounts ( 51 ) ( 58 ) Accounts receivable, net $ 835 $ 818 _____________ (1) Accrued receivables include amounts to be invoiced in the subsequent quarter for current services provided. The allowance for doubtful accounts was as follows: 2022 2021 Balance at January 1 st $ 58 $ 69 Provision 9 4 Charge-offs ( 3 ) ( 5 ) Recoveries and other (1) ( 1 ) 0 Balance at March 31 st 63 68 Provision 3 1 Charge-offs ( 2 ) ( 2 ) Recoveries and other (1) ( 1 ) 1 Balance at June 30 th 63 68 Provision ( 1 ) 0 Charge-offs ( 5 ) ( 5 ) Recoveries and other (1) ( 6 ) ( 1 ) Balance at September 30 th $ 51 $ 62 _____________ (1) Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivable is determined based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment the allowance for doubtful accounts as a percent of gross accounts receivable was 5.8 % at September 30, 2022 and 6.6 % at December 31, 2021. The decrease in the allowance is primarily due to a reduction in estimated losses for customer accommodations and other billing adjustments. Accounts Receivable Sales Arrangements Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days. We have one facility in Europe that enables us to sell accounts receivable associated with our distributor network on an ongoing basis, without recourse. Under this arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser. Of the accounts receivable sold and derecognized from our balance sheet, $ 119 and $ 102 remained uncollected as of September 30, 2022 and December 31, 2021, respectively. Accounts receivable sales activity was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Accounts receivable sales (1) $ 164 $ 127 $ 400 $ 359 ____________ (1) Losses on sales were not material. Customers may also enter into structured-payable arrangements that require us to sell our receivables from that customer to a third-party financial institution, which then makes payments to us to settle the customer's receivable. In these instances, we ensure the sale of the receivables are bankruptcy-remote and the payment made to us is without recourse. The activity associated with these arrangements is not reflected in this disclosure, as payments under these arrangements have not been material and these are customer directed arrangements. Xerox 2022 Form 10-Q 21 Note 9 – Finance Receivables, Net Finance receivables include sales-type leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets. Finance receivables, net were as follows: September 30, 2022 December 31, 2021 Gross receivables $ 3,368 $ 3,568 Unearned income ( 351 ) ( 380 ) Subtotal 3,017 3,188 Residual values — — Allowance for doubtful accounts ( 117 ) ( 118 ) Finance receivables, net 2,900 3,070 Less: Billed portion of finance receivables, net 91 94 Less: Current portion of finance receivables not billed, net 995 1,042 Finance receivables due after one year, net $ 1,814 $ 1,934 Finance Receivables – Allowance for Credit Losses and Credit Quality Our finance receivable portfolios are primarily in the U.S., Canada and EMEA. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality. The allowance for doubtful credit losses is principally determined based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment, the allowance for doubtful credit losses as a percentage of gross finance receivables (net of unearned income) was 3.9 % at September 30, 2022 and 3.7 % and 4.0 % at December 31, 2021 and 2020, respectively. In determining the level of reserve required we critically assessed current and forecasted economic conditions and trends to ensure we objectively considered those expected impacts in the determination of our reserve. Our assessment also included a review of current portfolio credit metrics and the level of write-offs incurred over the past year. Our allowance for doubtful finance receivables is effectively determined by geography. The risk characteristics in our finance receivable portfolio segments are generally consistent with the risk factors associated with the economies of the countries/regions included in those geographies. Since EMEA is comprised of various countries and regional economies, the risk profile within that portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries. 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 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 largely consistent since 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 trends, and as a result, our reserves may need to be updated in future periods. Xerox 2022 Form 10-Q 22 The allowance for doubtful accounts as well as the related investment in finance receivables were as follows: United States Canada EMEA (1) Total Balance at December 31, 2021 $ 77 $ 11 $ 30 $ 118 Provision 3 — 3 6 Charge-offs ( 2 ) ( 1 ) ( 1 ) ( 4 ) Recoveries and other (2) — 1 ( 1 ) — Balance at March 31, 2022 78 11 31 120 Provision — 1 3 4 Charge-offs ( 3 ) ( 1 ) ( 2 ) ( 6 ) Recoveries and other (2) — — ( 2 ) ( 2 ) Balance at June 30, 2022 75 11 30 116 Provision 6 1 2 9 Charge-offs ( 4 ) ( 1 ) ( 1 ) ( 6 ) Recoveries and other (2) — — ( 2 ) ( 2 ) Balance at September 30, 2022 $ 77 $ 11 $ 29 $ 117 Finance receivables as of September 30, 2022 collectively evaluated for impairment (3) $ 1,883 $ 214 $ 920 $ 3,017 Balance at December 31, 2020 $ 77 $ 15 $ 41 $ 133 Provision 2 1 3 6 Charge-offs ( 2 ) — ( 1 ) ( 3 ) Recoveries and other (2) 1 — ( 2 ) ( 1 ) Balance at March 31, 2021 78 16 41 135 Provision 6 ( 1 ) ( 3 ) 2 Charge-offs ( 3 ) ( 1 ) ( 1 ) ( 5 ) Recoveries and other (2) — 1 — 1 Balance at June 30, 2021 81 15 37 133 Provision — ( 3 ) ( 1 ) ( 4 ) Charge-offs ( 1 ) ( 1 ) — ( 2 ) Recoveries and other (2) — — — — Balance at September 30, 2021 $ 80 $ 11 $ 36 $ 127 Finance receivables as of September 30, 2021 collectively evaluated for impairment (3) $ 1,866 $ 262 $ 1,074 $ 3,202 _____________ (1) Includes developing market countries. (2) Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. (3) Total Finance receivables exclude the allowance for credit losses of $ 117 and $ 127 at September 30, 2022 and 2021, respectively. In the U.S., customers are further evaluated by class based on the type of lease origination. The primary categories are direct, which primarily includes leases originated directly with end customers through bundled lease arrangements, and indirect, which primarily includes leases originated through our XBS sales channel and lease financing to end-user customers who purchased equipment we sold to distributors or resellers. Xerox 2022 Form 10-Q 23 We evaluate our customers based on the following credit quality indicators: • Low Credit Risk: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poor's (S&P) rating of BBB- or better. Loss rates in this category in the normal course are generally less than 1 %. • Average Credit Risk: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category in the normal course are generally in the range of 2 % to 5 %. • High Credit Risk: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from low and average credit risk evaluation when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category in the normal course are generally in the range of 7 % to 10 %. Credit quality indicators are updated at least annually, or more frequently to the extent required by economic conditions, and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on geography, origination year and credit quality indicators are as follows: September 30, 2022 2022 2021 2020 2019 2018 Prior Total Finance Receivables United States (Direct) Low Credit Risk $ 116 $ 115 $ 92 $ 64 $ 33 $ 4 $ 424 Average Credit Risk 53 39 30 36 11 3 172 High Credit Risk 50 76 55 21 8 3 213 Total $ 219 $ 230 $ 177 $ 121 $ 52 $ 10 $ 809 United States (Indirect) Low Credit Risk $ 183 $ 182 $ 101 $ 63 $ 18 $ 2 $ 549 Average Credit Risk 147 169 84 46 17 1 464 High Credit Risk 18 24 11 5 3 — 61 Total $ 348 $ 375 $ 196 $ 114 $ 38 $ 3 $ 1,074 Canada Low Credit Risk $ 18 $ 24 $ 18 $ 14 $ 7 $ 1 $ 82 Average Credit Risk 28 26 24 18 7 2 105 High Credit Risk 5 5 9 4 3 1 27 Total $ 51 $ 55 $ 51 $ 36 $ 17 $ 4 $ 214 EMEA (1) Low Credit Risk $ 170 $ 165 $ 93 $ 65 $ 32 $ 6 $ 531 Average Credit Risk 103 104 67 48 18 3 343 High Credit Risk 11 12 10 9 3 1 46 Total $ 284 $ 281 $ 170 $ 122 $ 53 $ 10 $ 920 Total Finance Receivables Low Credit Risk $ 487 $ 486 $ 304 $ 206 $ 90 $ 13 $ 1,586 Average Credit Risk 331 338 205 148 53 9 1,084 High Credit Risk 84 117 85 39 17 5 347 Total $ 902 $ 941 $ 594 $ 393 $ 160 $ 27 $ 3,017 Xerox 2022 Form 10-Q 24 December 31, 2021 2021 2020 2019 2018 2017 Prior Total Finance Receivables United States (Direct) Low Credit Risk $ 148 $ 121 $ 98 $ 68 $ 21 $ 3 $ 459 Average Credit Risk 60 40 57 23 8 2 190 High Credit Risk 91 73 31 16 6 1 218 Total $ 299 $ 234 $ 186 $ 107 $ 35 $ 6 $ 867 United States (Indirect) Low Credit Risk $ 235 $ 145 $ 100 $ 43 $ 11 $ — $ 534 Average Credit Risk 201 103 74 35 10 — 423 High Credit Risk 24 15 8 4 1 — 52 Total $ 460 $ 263 $ 182 $ 82 $ 22 $ — $ 1,009 Canada Low Credit Risk $ 32 $ 27 $ 22 $ 13 $ 3 $ 1 $ 98 Average Credit Risk 34 34 27 15 6 1 117 High Credit Risk 8 12 7 5 4 — 36 Total $ 74 $ 73 $ 56 $ 33 $ 13 $ 2 $ 251 EMEA (1) Low Credit Risk $ 229 $ 143 $ 121 $ 71 $ 22 $ 6 $ 592 Average Credit Risk 156 109 84 45 15 3 412 High Credit Risk 18 15 13 8 3 — 57 Total $ 403 $ 267 $ 218 $ 124 $ 40 $ 9 $ 1,061 Total Finance Receivables Low Credit Risk $ 644 $ 436 $ 341 $ 195 $ 57 $ 10 $ 1,683 Average Credit Risk 451 286 242 118 39 6 1,142 High Credit Risk 141 115 59 33 14 1 363 Total $ 1,236 $ 837 $ 642 $ 346 $ 110 $ 17 $ 3,188 _____________ (1) Includes developing market countries. Xerox 2022 Form 10-Q 25 The aging of our receivables portfolio is based upon the number of days an invoice is past due. Receivables that are more than 90 days past due are considered delinquent. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed and is generally based on individual credit evaluations, results of collection efforts and specific circumstances of the customer. Subsequent recoveries, if any, are credited to the allowance. We generally continue to maintain equipment on lease and provide services to customers that have invoices for finance receivables that are 90 days or more past due and, as a result of the bundled nature of billings, we also continue to accrue interest on those receivables. However, interest revenue for such billings is only recognized if collectability is deemed probable. The aging of our billed finance receivables is as follows: September 30, 2022 Current 31-90 Days Past Due >90 Days Past Due Total Billed Unbilled Total Finance Receivables >90 Days and Accruing Direct $ 29 $ 5 $ 6 $ 40 $ 769 $ 809 $ 48 Indirect 27 6 4 37 1,037 1,074 — Total United States 56 11 10 77 1,806 1,883 48 Canada 6 1 — 7 207 214 6 EMEA (1) 8 2 1 11 909 920 11 Total $ 70 $ 14 $ 11 $ 95 $ 2,922 $ 3,017 $ 65 December 31, 2021 Current 31-90 Days Past Due >90 Days Past Due Total Billed Unbilled Total Finance Receivables >90 Days and Accruing Direct $ 28 $ 7 $ 7 $ 42 $ 825 $ 867 $ 61 Indirect 28 5 4 37 972 1,009 — Total United States 56 12 11 79 1,797 1,876 61 Canada 6 1 — 7 244 251 9 EMEA (1) 9 2 1 12 1,049 1,061 13 Total $ 71 $ 15 $ 12 $ 98 $ 3,090 $ 3,188 $ 83 _____________ (1) Includes developing market countries Secured Borrowings and Collateral In 2022 and 2021, we sold certain finance receivables to consolidated special purpose entities included in our Condensed Consolidated Balance Sheet as collateral for secured loans. Refer to Note 13 - Debt for additional information related to these arrangements. Note 10 – Inventories and Equipment on Operating Leases, Net The following is a summary of Inventories by major category: September 30, 2022 December 31, 2021 Finished goods $ 617 $ 568 Work-in-process 47 43 Raw materials 113 85 Total Inventories $ 777 $ 696 The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Condensed Consolidated Statements of Cash Flows in the operating activities section. Equipment on operating leases and similar arrangements consists of our equipment rented to customers and depreciated to estimated salvage value at the end of the lease term. Xerox 2022 Form 10-Q 26 Equipment on operating leases and the related accumulated depreciation were as follows: September 30, 2022 December 31, 2021 Equipment on operating leases $ 1,142 $ 1,266 Accumulated depreciation ( 926 ) ( 1,013 ) Equipment on operating leases, net $ 216 $ 253 Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $ 16 and $ 15 for the three months ended September 30, 2022 and 2021, respectively, and $ 47 and $ 46 for the nine months ended September 30, 2022 and 2021, respectively. Secured Borrowings and Collateral In 2021, we sold the rights to payments under operating leases to a consolidated special purpose entity included in our Condensed Consolidated Balance Sheet as collateral for a secured loan. Refer to Note 13 - Debt for additional information related to this arrangement. Note 11 – Lessee 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. The components of lease expense are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Operating lease expense $ 25 $ 25 $ 74 $ 79 Short-term lease expense 4 5 12 16 Variable lease expense (1) 12 12 37 35 Sublease income ( 1 ) ( 1 ) ( 5 ) ( 3 ) Total Lease expense $ 40 $ 41 $ 118 $ 127 _____________ (1) Variable lease expense is related to our leased real estate for offices and warehouses and primarily includes labor and operational costs as well as taxes and insurance. As of September 30, 2022, operating leases that had not yet commenced were not material. Operating lease ROU assets, net and operating lease liabilities were reported in the Condensed Consolidated Balance Sheets as follows: September 30, 2022 December 31, 2021 Other long-term assets $ 215 $ 264 Accrued expenses and other current liabilities $ 71 $ 79 Other long-term liabilities 160 204 Total Operating lease liabilities $ 231 $ 283 Xerox 2022 Form 10-Q 27 Note 12 – Restructuring Programs We engage in restructuring actions, including Project Own It, as well as other transformation efforts in order to reduce our cost structure and realign it to the changing nature of our business. As part of our efforts to reduce costs, our restructuring actions may also include the off-shoring and/or outsourcing of certain operations, services and other functions, as well as reducing our real estate footprint. During the nine months ended September 30, 2022, we recorded net restructuring charges of $ 54 , which included $ 59 of severance costs related to headcount reductions of approximately 1,600 employees worldwide, and $ 1 of other contractual termination costs. These costs were partially offset by $ 6 of net reversals, which primarily reflect changes in estimated reserves from prior period initiatives. Charges were primarily related to the Print and Other segment as amounts related to the Financing (FITTLE) segment were immaterial for all periods presented. Information related to our restructuring programs is summarized below: Severance and Related Costs Other Contractual Termination Costs (2) Total Balance at December 31, 2021 $ 25 $ 2 $ 27 Provision 22 — 22 Reversals ( 3 ) — ( 3 ) Net current period charges (1) 19 — 19 Charges against reserve and currency ( 7 ) — ( 7 ) Balance at March 31, 2022 37 2 39 Provision 22 1 23 Reversals ( 1 ) ( 1 ) ( 2 ) Net current period charges (1) 21 — 21 Charges against reserve and currency ( 14 ) — ( 14 ) Balance at June 30, 2022 44 2 46 Provision 15 — 15 Reversals ( 1 ) — ( 1 ) Net current period charges (1) 14 — 14 Charges against reserve and currency ( 19 ) — ( 19 ) Balance at September 30, 2022 $ 39 $ 2 $ 41 _____________ _ (1) Represents net amount recognized within the Condensed Consolidated Statements of (Loss) Income for the period shown for restructuring charges. (2) Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs. The following table summarizes the reconciliation to the Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2022 2021 Charges against reserve and currency $ ( 40 ) $ ( 74 ) Effects of foreign currency and other non-cash items 2 13 Restructuring cash payments $ ( 38 ) $ ( 61 ) In connection with our restructuring programs, we also incurred certain related costs as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Retention related severance/bonuses (1) $ ( 1 ) $ 7 $ ( 3 ) $ 6 Contractual severance costs 1 — — 3 Consulting and other costs (2) — — — 2 Total $ — $ 7 $ ( 3 ) $ 11 ____________ _ (1) Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. The credit for the nine months ended September 30, 2022 and 2021 reflects a change in estimate. (2) Represents professional support services with our business transformation initiatives. Xerox 2022 Form 10-Q 28 Cash paid for restructuring related costs were $ 4 and $ 9 for the nine months ended September 30, 2022 and 2021, respectively. The restructuring related costs reserve was $ 10 and $ 18 at September 30, 2022 and December 31, 2021, respectively. The balance at September 30, 2022 is expected to be paid over the next twelve months. In connection with our restructuring programs, during the nine months ended September 30, 2022, we recorded a net gain of $ 10 associated with initiatives involving the Company's owned and leased facilities, including the exit, abandonment, sale and sublease of those facilities. Information related to our restructuring-related asset impairment activity is summarized below: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Lease right of use assets (1) $ 1 $ — $ 2 $ 2 Owned assets (1) 9 — 10 10 Asset impairments 10 — 12 12 Gain on sales of owned assets (2) ( 2 ) — ( 22 ) — Adjustments/Reversals — — — ( 1 ) Net asset impairment charge (credit) $ 8 $ — $ ( 10 ) $ 11 _____________ _ (1) Primarily related to the exit and abandonment of leased and owned facilities, net of any potential sublease income and recoveries. (2) Reflect gain on the sales of exited surplus facilities. Note 13 – Debt Early Extinguishment of Senior Notes In June 2022, we completed the early redemption of $ 350 of the $ 1 billion of Xerox Corporation 4.625 % Senior Notes due March 2023, for $ 353 in cash consideration, which included an early redemption premium over par of $ 3 . The early redemption resulted in a net loss of $ 4 , inclusive of fees and the write-off of debt carrying value adjustments. Xerox Holdings Corporation / Xerox Corporation Intercompany Loan In February 2021, Xerox Holdings Corporation and Xerox Corporation entered into an Intercompany Loan agreement for the net proceeds of $ 1,494 contributed by Xerox Holdings Corporation to Xerox Corporation in 2020. The intercompany loan was established to mirror the terms included in Xerox Holdings Corporation’s 2025 and 2028 Senior Notes, including interest rates and payment dates. The intercompany interest expense also includes a ratable amount to reimburse Xerox Holdings Corporation for its debt issuance costs and premium. At September 30, 2022 and December 31, 2021, the balance of the Intercompany Loan reported in Xerox Corporation’s Condensed Consolidated Balance Sheet was $ 1,496 and $ 1,494 , respectively, which is net of related debt issuance costs, and the intercompany interest payable was $ 10 and $ 30 , respectively. Xerox Corporation’s interest expense included interest expense associated with this Intercompany Loan of $ 20 and $ 21 for the three months ended September 30, 2022 and 2021, respectively, and $ 59 and $ 60 for the nine months ended September 30, 2022 and 2021, respectively. Credit Facility In July 2022, Xerox Corporation, as borrower, and its parent company, Xerox Holdings Corporation, entered into a new Credit Agreement with several participating lending banks. The new Credit Agreement provides Xerox Corporation with a $ 500 Revolving Credit Facility and has a maturity date of July 7, 2024. We deferred $ 3 of debt issuance costs in connection with this credit agreement, which will be amortized over the two-year term of the arrangement. This new facility replaced our prior $ 1.5 billion Credit Facility. The new revolving Credit Facility includes an uncommitted accordion feature that allows the Company to increase the facility by a total of up to $ 150 , subject to obtaining additional commitments from existing lenders or new lending institutions. The new revolving Credit Agreement also includes a $ 150 letter of credit sub-facility. At September 30, 2022, we had no outstanding borrowings or letters of credit under the new revolving Credit Facility. At Xerox Corporation’s election, the borrowings under the new revolving Credit Facility in U.S. dollars will bear interest at either (i) a rate per annum equal to the highest of Citibank’s prime rate or a rate 0.5 % in excess of the Federal Funds Rate or a rate 1.0 % in excess of one-month Term SOFR (the Base Rate), in each case plus an applicable margin, or (ii) the one-, three-, or six-month per annum Term SOFR (the Term SOFR Rate), as selected by the Company, plus an applicable margin. The applicable margin for Base Rate loans, through the quarterly Xerox 2022 Form 10-Q 29 reporting for the fiscal quarter ending September 30, 2022, is 1.00 % per annum, and thereafter varies from 0.50 % to 1.25 % depending on the Company’s consolidated total net leverage ratio (as defined in the New Credit Agreement). The applicable margin for Term SOFR Rate loans, through the quarterly reporting for the fiscal quarter ending September 30, 2022, is 2.00 % per annum, and thereafter varies from 1.50 % to 2.25 % depending on the Company’s consolidated total net leverage ratio. Xerox Corporation may also borrow in currencies other than U.S. dollars pursuant to the credit agreement, and such borrowings will bear interest calculated under a construct similar to that described above. Principal outstanding would be payable in full at maturity on July 7, 2024. Xerox Corporation’s borrowings under the new revolving Credit Facility are supported by guarantees from the Company and its subsidiary guarantors, and by security interests in substantially all of the assets of Xerox Holdings Corporation, as well as Xerox Corporation and its subsidiary guarantors, subject to certain exceptions. If an event of default occurs under the new revolving Credit Facility, the entire principal amount outstanding under the New Revolving Credit Facility, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable, subject, in certain instances, to the expiration of applicable cure periods. The new revolving Credit Facility requires the Company to comply with the following financial covenants measured as of the end of each fiscal quarter, commencing with the quarter ending September 30, 2022: (a) Minimum Unrestricted Cash - maintain an Unrestricted Cash balance, as defined in the new revolving Credit Agreement, in an amount not less than $ 500 as of the last day of the quarter. (b) Total Net Leverage Ratio - a quarterly test that is calculated as net debt for borrowed money divided by consolidated EBITDA, both as defined in the new revolving Credit Agreement - with a cap on cash netting of $ 1.0 billion. The required Total Net Leverage Ratio is 5.25 :1 at September 30, 2022; 5.00 :1.00 at December 31, 2022; 4.75 :1.00 at March 31, 2023; 4.50 :1:00 at June 30, 2023 and 4.25 :1.00 thereafter. (c) Interest Coverage Ratio - a quarterly test that is calculated as consolidated EBITDA divided by consolidated interest expense, both as defined in the new revolving Credit Agreement. The Interest Coverage Ratio is 2.25 :1:00 at September 30, 2022; 2.50 :1.00 at December 31, 2022; and 2.75 :1.00 thereafter. In addition, the new revolving Credit Facility requires that no more than $ 300 of the remaining $ 650 2023 Senior Notes is outstanding as of December 15, 2022 in order for the facility to remain in effect. The new revolving Credit Facility also imposes restrictions on the Company and its subsidiaries, including on the amount of dividends the Company is permitted to pay and the amount of shares the Company is permitted to repurchase. Pursuant to the credit agreement, provided there is no event of default existing, the Company may declare and pay cash dividends on shares of its common stock and its preferred stock, and may repurchase shares of its common stock and its preferred stock (i) in an unlimited amount if, at the time such dividend or repurchase is made, the Company’s Total Net Leverage ratio is 3.5 to 1.00 or less or (ii) in an aggregate amount in any fiscal year not to exceed the greater of (x) $ 200 or (y) 50 % of free cash flow, which is operating cash flows less capital expenditures, for the prior fiscal year, commencing with the fiscal year ending December 31, 2022. Secured Borrowings and Collateral In 2022 and 2021, we entered into secured loan agreements with various financial institutions where we sold finance receivables and rights to payments under our equipment on operating leases to special purpose entities (SPEs). The purchases by the SPEs were funded through amortizing secured loans to the SPEs from the financial institutions. The loans have variable interest rates and expected lives of approximately 2.5 years, with half projected to be repaid within the first year based on collections of the underlying portfolio of receivables. For certain loans, we entered into interest rate hedge agreements to either fix or cap the interest rate over the life of the loan. The sales of the receivables to the SPEs were structured as "true sales at law," and we have received opinions to that effect from outside legal counsel. However, the transactions were accounted for as secured borrowings as we fully consolidate the SPEs in our financial statements. As a result, the assets of the SPEs are not available to satisfy any of our other obligations. Conversely, the credit holders of these SPEs do not have legal recourse to the Company’s general credit. Xerox 2022 Form 10-Q 30 Below are the secured assets and obligations held by the SPEs, which are included in our Condensed Consolidated Balance Sheets. September 30, 2022 Finance Receivables, Net (1) Equipment on Operating Leases, Net Secured Debt (2) Interest Rate Expected Maturity U.S. January 2022 $ 595 $ — $ 474 4.30 % 2024 September 2021 209 5 168 1.78 % 2024 Total 804 5 642 Canada April 2022 73 0 65 3.32 % 2025 Total $ 877 $ 5 $ 707 December 31, 2021 Finance Receivables, Net (1) Equipment on Operating Leases, Net Secured Debt (2) Interest Rate Expected Maturity U.S. September 2021 $ 308 $ 8 $ 293 1.40 % 2024 December 2020 380 — 267 1.74 % 2023 Total $ 688 $ 8 $ 560 ____________ _ (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 the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021. (2) Net of debt issuance costs of $ 2 and $ 1 as of September 30, 2022 and December 31, 2021, respectively. Interest Expense and Income Interest expense and income were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Interest expense (1)(2) $ 49 $ 52 $ 151 $ 156 Interest income (3) 55 56 164 169 ____________ (1) Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of (Loss) Income. (2) Interest expense of Xerox Corporation included intercompany interest expense associated with the Xerox Holdings Corporation / Xerox Corporation Intercompany Loan of $ 20 and $ 21 for the three months ended September 30, 2022 and 2021, respectively, and $ 59 and $ 60 for the nine months ended September 30, 2022 and 2021, respectively. (3) Includes Financing revenue as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of (Loss) Income. Xerox 2022 Form 10-Q 31 Note 14 – Financial Instruments Interest Rate Risk Management We use interest rate swap and interest rate cap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged. Foreign Exchange Risk Management We are a global company and we are exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities: • Foreign currency-denominated assets and liabilities • Forecasted purchases and sales in foreign currency At September 30, 2022 and December 31, 2021, we had outstanding forward exchange and purchased option contracts with gross notional values of $ 1,201 and $ 1,113 respectively, with terms of less than 12 months. Approximately 83 % of the contracts at September 30, 2022 mature within three months, 8 % mature in three to six months and 9 % in six to twelve months. There have not been any material changes in our hedging strategy. Foreign Currency Cash Flow Hedges We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses. The net liability fair value of these contracts was $ 21 and $ 3 as of September 30, 2022 and December 31, 2021, respectively. Summary of Derivative Instruments Fair Value The following table provides a summary of the fair value amounts of our derivative instruments: Designation of Derivatives Balance Sheet Location September 30, 2022 December 31, 2021 Derivatives Designated as Hedging Instruments Foreign exchange contracts - forwards Other current assets $ 6 $ 3 Accrued expenses and other current liabilities ( 27 ) ( 6 ) Interest rate cap Other long-term assets 5 1 Interest rate swap Other long-term assets 1 — Net designated derivative liabilities $ ( 15 ) $ ( 2 ) Derivatives NOT Designated as Hedging Instruments Foreign exchange contracts – forwards Other current assets $ 5 $ 1 Accrued expenses and other current liabilities ( 8 ) ( 5 ) Net undesignated derivative liabilities $ ( 3 ) $ ( 4 ) Summary of Derivatives Total Derivative assets $ 17 $ 5 Total Derivative liabilities ( 35 ) ( 11 ) Net Derivative liabilities $ ( 18 ) $ ( 6 ) Xerox 2022 Form 10-Q 32 Summary of Derivative Instruments Gains (Losses) Derivative gains and (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses). Designated Derivative Instruments Gains (Losses) The following table provides a summary of gains (losses) on derivative instruments: Three Months Ended September 30, Nine Months Ended September 30, Loss on Derivative Instruments 2022 2021 2022 2021 Cash Flow Hedges - Foreign Exchange Forward Contracts and Options Derivative loss recognized in OCI (effective portion) $ ( 3 ) $ 3 $ ( 41 ) $ ( 9 ) Derivative loss reclassified from AOCL to income - Cost of sales (effective portion) ( 11 ) ( 2 ) ( 17 ) ( 5 ) During the nine months ended September 30, 2022 and 2021, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of (Loss) Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur. As of September 30, 2022, a net after-tax loss of $ 21 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions. Non-Designated Derivative Instruments Gains (Losses) Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the remeasurement of the underlying foreign currency-denominated asset or liability. The following table provides a summary of gains and (losses) on non-designated derivative instruments: Derivatives NOT Designated as Hedging Instruments Location of Derivative Gain (Loss) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Foreign exchange contracts – forwards Other expense – Currency gains (losses), net $ 1 $ 2 $ ( 22 ) $ ( 20 ) Currency losses, net were $ 1 and $ 3 for the three months ended September 30, 2022 and 2021, respectively, and $ 2 and $ 6 for nine months ended September 30, 2022 and 2021, respectively. Net currency gains and losses include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the remeasurement of foreign currency-denominated assets and liabilities and are included in Other expenses, net. Xerox 2022 Form 10-Q 33 Note 15 – Fair Value of Financial Assets and Liabilities The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs. September 30, 2022 December 31, 2021 Assets Foreign exchange contracts - forwards $ 11 $ 4 Interest rate cap 5 1 Interest rate swap 1 — Deferred compensation plan investments in mutual funds 15 18 Total $ 32 $ 23 Liabilities Foreign exchange contracts - forwards $ 35 $ 11 Deferred compensation plan liabilities 14 18 Total $ 49 $ 29 We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2. Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for those funds. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections. Summary of Other Financial Assets and Liabilities The estimated fair values of our other financial assets and liabilities were as follows: September 30, 2022 December 31, 2021 Carrying Amount Fair Value Carrying Amount Fair Value Cash and cash equivalents $ 932 $ 932 $ 1,840 $ 1,840 Accounts receivable, net 835 835 818 818 Short-term debt and current portion of long-term debt 1,070 1,066 650 653 Long-term Debt Xerox Holdings Corporation 1,496 1,280 1,494 1,579 Xerox Corporation 894 730 1,892 1,987 Xerox - Other Subsidiaries (1) 286 286 210 210 Long-term debt $ 2,676 $ 2,296 $ 3,596 $ 3,776 ____________ (1) Represents subsidiaries of Xerox Corporation The fair value amounts for Cash and cash equivalents and Accounts receivable, net, approximate carrying amounts due to the short maturities of these instruments. The fair value of Short-term debt, including the current portion of long-term debt, and Long-term debt was estimated based on the current rates offered to us for debt of similar maturities (Level 2). The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date. Xerox 2022 Form 10-Q 34 Note 16 – Employee Benefit Plans The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows: Three Months Ended September 30, Pension Benefits U.S. Plans Non-U.S. Plans Retiree Health Components of Net Periodic Benefit Costs: 2022 2021 2022 2021 2022 2021 Service cost $ — $ — $ 4 $ 5 $ — $ — Interest cost 24 19 32 23 2 2 Expected return on plan assets ( 22 ) ( 29 ) ( 58 ) ( 53 ) — — Recognized net actuarial loss (gain) 3 4 6 15 ( 1 ) — Amortization of prior service credit — — 1 — ( 4 ) ( 16 ) Recognized settlement loss 10 13 — — — — Defined benefit plans 15 7 ( 15 ) ( 10 ) ( 3 ) ( 14 ) Defined contribution plans 5 — 3 5 n/a n/a Net Periodic Benefit Cost (Credit) 20 7 ( 12 ) ( 5 ) ( 3 ) ( 14 ) Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Loss) Income: Net actuarial loss (gain) (1) 27 ( 14 ) 1 — ( 13 ) 1 Prior service credit — — — — ( 10 ) — Amortization of net actuarial (loss) gain ( 13 ) ( 17 ) ( 6 ) ( 15 ) 1 — Amortization of net prior service credit — — ( 1 ) — 4 16 Total Recognized in Other Comprehensive (Loss) Income (2) 14 ( 31 ) ( 6 ) ( 15 ) ( 18 ) 17 Total Recognized in Net Periodic Benefit Cost (Credit) and Other Comprehensive (Loss) Income $ 34 $ ( 24 ) $ ( 18 ) $ ( 20 ) $ ( 21 ) $ 3 Nine Months Ended September 30, Pension Benefits U.S. Plans Non-U.S. Plans Retiree Health Components of Net Periodic Benefit Costs: 2022 2021 2022 2021 2022 2021 Service cost $ 1 $ 1 $ 12 $ 15 $ 1 $ 1 Interest cost 68 56 94 67 6 6 Expected return on plan assets ( 73 ) ( 84 ) ( 172 ) ( 157 ) — — Recognized net actuarial loss (gain) 10 13 18 44 ( 2 ) — Amortization of prior service credit — ( 1 ) 1 — ( 11 ) ( 49 ) Recognized settlement loss 43 41 — — — — Defined benefit plans 49 26 ( 47 ) ( 31 ) ( 6 ) ( 42 ) Defined contribution plans 15 — 11 15 n/a n/a Net Periodic Benefit Cost (Credit) 64 26 ( 36 ) ( 16 ) ( 6 ) ( 42 ) Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Loss) Income: Net actuarial loss (gain) (1) 34 ( 83 ) 32 1 ( 20 ) 3 Prior service cost (credit) — — 48 — ( 33 ) — Amortization of net actuarial (loss) gain ( 53 ) ( 54 ) ( 18 ) ( 44 ) 2 — Amortization of prior service credit — 1 ( 1 ) — 11 49 Total Recognized in Other Comprehensive (Loss) Income (2) ( 19 ) ( 136 ) 61 ( 43 ) ( 40 ) 52 Total Recognized in Net Periodic Benefit Cost (Credit) and Other Comprehensive (Loss) Income $ 45 $ ( 110 ) $ 25 $ ( 59 ) $ ( 46 ) $ 10 _____________ (1) The 2022 and 2021 net actuarial loss (gain) for U.S. Pension Plans primarily reflects (i) the remeasurement of our primary U.S. pension plans as a result of the payment of periodic settlements and (ii) adjustments for the actuarial valuation results based on the January 1st plan census data. The 2022 net actuarial loss for Non-U.S. Plans reflects the remeasurement related to the second quarter 2022 Pension Plan amendment for our UK Defined Benefit Pension Plan..The 2022 net actuarial gain for Retiree Health plans reflect remeasurements related to the first and third quarter 2022 Plan Amendments for our U.S. Plan. (2) Amounts represent the pre-tax effect included within Other Comprehensive (Loss) Income. Refer to Note 20 - Other Comprehensive (Loss) Income for related tax effects and the after-tax amounts. Xerox 2022 Form 10-Q 35 Contributions The following table summarizes cash contributions to our defined benefit pension plans and retiree health benefit plans: Nine Months Ended September 30, Year Ended December 31, 2022 2021 Estimated 2022 2021 U.S. plans $ 18 $ 18 $ 25 $ 24 Non-U.S. plans 75 84 95 111 Total Pension plans 93 102 120 135 Retiree Health 13 17 25 25 Total Retirement plans $ 106 $ 119 $ 145 $ 160 There are no mandatory contributions required in 2022 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements. In addition, further contributions to our U.K. defined benefit pension plan are not required after October 2022 following agreement of the triennial valuation of the Plan with the Plan Trustees. Retiree Health Plan Amendment During the first quarter of 2022, we amended our U.S. Retiree Health Plan to reduce certain benefits for existing union retirees through the reduction or elimination of coverage or cost-sharing subsidies for retiree health care and life insurance costs. This negative plan amendment resulted in a reduction of approximately $ 23 in the Company's postretirement benefit obligation. The amount for the plan amendment will be amortized to future net periodic benefit costs as a prior service credit. During the third quarter of 2022, we further amended our U.S. Retiree Health Plan to eliminate Retiree Flex benefits for certain union employees as a result of contract negotiations. This negative plan amendment resulted in a reduction of approximately $ 10 in the Company's postretirement benefit obligation. The amount for the plan amendment will be amortized to future net periodic benefit costs as a prior service credit. Pension Plan Amendment In April 2022, our U.K. defined benefit pension plan was amended, at the sole discretion of the Plan Trustees as legally allowed, to increase the capped inflation indexation for the April 2022 pension increase award to 7.5 % in line with the December 2021 UK Retail Price Index (RPI). This amendment resulted in an increase of approximately $ 48 in the projected benefit obligation (PBO) for this plan (approximately 1.4 % of the plan PBO as of December 31, 2021). The associated impacts from the required remeasurement of the plan assets and obligations for updates to discount rates, actual returns and actuarial experience as of the effective date of the amendment resulted in an additional actuarial loss of $ 31 . Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements included in the 2021 Annual Report for additional information regarding our U.K. defined benefit pension plan including its funding status as of December 31, 2021. Xerox 2022 Form 10-Q 36 Note 17 – Shareholders’ Equity of Xerox Holdings (shares in thousands) The shareholders' equity information presented below reflects the consolidated activity of Xerox Holdings. Common Stock (1) Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (2) Xerox Holdings Shareholders’ Equity Non-controlling Interests Total Equity Balance at June 30, 2022 $ 155 $ 1,564 $ — $ 5,484 $ ( 3,330 ) $ 3,873 $ 9 $ 3,882 Comprehensive (loss) income, net — — — ( 383 ) ( 217 ) ( 600 ) 1 ( 599 ) Cash dividends declared - common (3) — — — ( 40 ) — ( 40 ) — ( 40 ) Cash dividends declared - preferred (4) — — — ( 4 ) — ( 4 ) — ( 4 ) Stock option and incentive plans, net 1 13 — — — 14 — 14 Investment from noncontrolling interests — — — — — — 1 1 Balance at September 30, 2022 $ 156 $ 1,577 $ — $ 5,057 $ ( 3,547 ) $ 3,243 $ 11 $ 3,254 Common Stock (1) Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (2) Xerox Holdings Shareholders’ Equity Non- controlling Interests Total Equity Balance at June 30, 2021 $ 189 $ 2,214 $ ( 159 ) $ 6,308 $ ( 3,265 ) $ 5,287 $ 8 $ 5,295 Comprehensive income (loss), net — — — 90 ( 70 ) 20 ( 1 ) 19 Cash dividends declared - common (3) — — — ( 46 ) — ( 46 ) — ( 46 ) Cash dividends declared - preferred (4) — — — ( 4 ) — ( 4 ) — ( 4 ) Stock option and incentive plans, net — 14 — — — 14 — 14 Payments to acquire treasury stock, including fees — — ( 87 ) — — ( 87 ) — ( 87 ) Cancellation of treasury stock ( 7 ) ( 152 ) 159 — — — — — Other — 4 — — — 4 — 4 Balance at September 30, 2021 $ 182 $ 2,080 $ ( 87 ) $ 6,348 $ ( 3,335 ) $ 5,188 $ 7 $ 5,195 Common Stock (1) Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (2) Xerox Holdings Shareholders’ Equity Non-controlling Interests Total Equity Balance at December 31, 2021 $ 168 $ 1,802 $ ( 177 ) $ 5,631 $ ( 2,988 ) $ 4,436 $ 7 $ 4,443 Comprehensive loss, net — — — ( 443 ) ( 559 ) ( 1,002 ) ( 1 ) ( 1,003 ) Cash dividends declared - common (3) — — — ( 120 ) — ( 120 ) — ( 120 ) Cash dividends declared - preferred (4) — — — ( 11 ) — ( 11 ) — ( 11 ) Stock option and incentive plans, net 2 51 — — — 53 — 53 Payments to acquire treasury stock, including fees — — ( 113 ) — — ( 113 ) — ( 113 ) Cancellation of treasury stock ( 14 ) ( 276 ) 290 — — — — — Investment from noncontrolling interests — — — — — — 6 6 Distributions to noncontrolling interests — — — — — — ( 1 ) ( 1 ) Balance at September 30, 2022 $ 156 $ 1,577 $ — $ 5,057 $ ( 3,547 ) $ 3,243 $ 11 $ 3,254 Xerox 2022 Form 10-Q 37 Common Stock (1) Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (2) Xerox Holdings Shareholders’ Equity Non- controlling Interests Total Equity Balance at December 31, 2020 $ 198 $ 2,445 $ — $ 6,281 $ ( 3,332 ) $ 5,592 $ 4 $ 5,596 Comprehensive income (loss), net — — — 220 ( 3 ) 217 ( 1 ) 216 Cash dividends declared - common (3) — — — ( 142 ) — ( 142 ) — ( 142 ) Cash dividends declared - preferred (4) — — — ( 11 ) — ( 11 ) — ( 11 ) Stock option and incentive plans, net 1 30 — — — 31 — 31 Payments to acquire treasury stock, including fees — — ( 500 ) — — ( 500 ) — ( 500 ) Cancellation of treasury stock ( 17 ) ( 396 ) 413 — — — — — Investment from noncontrolling interests — 1 — — — 1 4 5 Balance at September 30, 2021 $ 182 $ 2,080 $ ( 87 ) $ 6,348 $ ( 3,335 ) $ 5,188 $ 7 $ 5,195 _____________ (1) Common Stock has a par value of $ 1 per share. (2) Refer to Note 20 - Other Comprehensive (Loss) Income for the components of AOCL. (3) Cash dividends declared on common stock for the three and nine months ended September 30, 2022 and 2021 were $ 0.25 per share, respectively, and $ 0.75 per share, respectively. (4) Cash dividends declared on preferred stock for the three and nine months ended September 30, 2022 and 2021 were $ 20.00 per share, respectively, and $ 60.00 per share, respectively. Common Stock and Treasury Stock The following is a summary of the changes in Common and Treasury stock shares: Common Stock Shares Treasury Stock Shares Balance at December 31, 2021 168,069 8,675 Stock based compensation plans, net 630 — Acquisition of Treasury stock — 5,174 Cancellation of Treasury stock ( 12,341 ) ( 12,341 ) Balance at March 31, 2022 156,358 1,508 Stock based compensation plans, net 116 — Cancellation of Treasury stock ( 1,508 ) ( 1,508 ) Balance at June 30, 2022 154,966 — Stock based compensation plans, net 604 — Balance at September 30, 2022 155,570 — Xerox 2022 Form 10-Q 38 Note 18 – Shareholder's Equity of Xerox The shareholder's equity information presented below reflects the consolidated activity of Xerox. Additional Paid-in Capital Retained Earnings AOCL (1) Xerox Shareholder's Equity Non- controlling Interests Total Equity Balance at June 30, 2022 $ 3,630 $ 3,820 $ ( 3,330 ) $ 4,120 $ 9 $ 4,129 Comprehensive (loss) income, net — ( 383 ) ( 217 ) ( 600 ) 1 ( 599 ) Dividends declared to parent — ( 49 ) — ( 49 ) — ( 49 ) Transfers from parent 13 — — 13 — 13 Investment from noncontrolling interests — — — — 1 1 Balance at September 30, 2022 $ 3,643 $ 3,388 $ ( 3,547 ) $ 3,484 $ 11 $ 3,495 Additional Paid-in Capital Retained Earnings AOCL (1) Xerox Shareholder's Equity Non- controlling Interests Total Equity Balance at June 30, 2021 $ 3,413 $ 5,405 $ ( 3,265 ) $ 5,553 $ 8 $ 5,561 Comprehensive income (loss), net — 90 ( 70 ) 20 ( 1 ) 19 Dividends declared to parent — ( 215 ) — ( 215 ) — ( 215 ) Transfers from parent 96 — — 96 — 96 Balance at September 30, 2021 $ 3,509 $ 5,280 $ ( 3,335 ) $ 5,454 $ 7 $ 5,461 Additional Paid-in Capital Retained Earnings AOCL (1) Xerox Shareholder's Equity Non- controlling Interests Total Equity Balance at December 31, 2021 $ 3,202 $ 4,476 $ ( 2,988 ) $ 4,690 $ 7 $ 4,697 Comprehensive loss, net — ( 443 ) ( 559 ) ( 1,002 ) ( 1 ) ( 1,003 ) Dividends declared to parent — ( 645 ) — ( 645 ) — ( 645 ) Transfers from parent 441 — — 441 — 441 Investment from noncontrolling interests — — — — 6 6 Distributions to noncontrolling interests — — — — ( 1 ) ( 1 ) Balance at September 30, 2022 $ 3,643 $ 3,388 $ ( 3,547 ) $ 3,484 $ 11 $ 3,495 Additional Paid-in Capital Retained Earnings AOCL (1) Xerox Shareholder's Equity Non- controlling Interests Total Equity Balance at December 31, 2020 $ 4,888 $ 5,834 $ ( 3,332 ) $ 7,390 $ 4 $ 7,394 Comprehensive income (loss), net — 220 ( 3 ) 217 ( 1 ) 216 Dividends declared to parent — ( 774 ) — ( 774 ) — ( 774 ) Intercompany loan capitalization (2) ( 1,494 ) — — ( 1,494 ) — ( 1,494 ) Transfers from parent 114 — — 114 — 114 Investment from noncontrolling interests 1 — — 1 4 5 Balance at September 30, 2021 $ 3,509 $ 5,280 $ ( 3,335 ) $ 5,454 $ 7 $ 5,461 _____________ (1) Refer to Note 20 - Other Comprehensive (Loss) Income for the components of AOCL. (2) Refer to Note 13 - Debt for information regarding capitalization of balance to Intercompany Loan with Xerox Holdings Corporation. Xerox 2022 Form 10-Q 39 Note 19 – Stock-Based Compensation Stock-based compensation expense of $ 63 for the nine months ended September 30, 2022 reflects $ 21 of accelerated expense associated with the 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. Stock Options – CareAR Holdings, LLC In September 2021, Xerox Holdings Corporation announced the formation of CareAR Holdings, which consolidates CareAR, Inc., Docushare ® and XMPie under a single holding company named CareAR Holdings (CareAR). In March 2022, the CareAR Holdings, LLC Board approved the CareAR 2022 Equity Compensation Plan (the “Plan”) and authorized the issuance of 105 thousand stock options (SOs) to certain executives and employees of Xerox and CareAR. Compensation expense of $ 30 associated with 90 thousand SOs currently awarded under the Plan is based upon the grant date fair value, as determined by utilizing a Black-Scholes option-pricing model and is expected to be recorded on a straight-line basis over 4.7 years, based on the vesting period and management’s estimate of the number of SOs expected to vest. SOs vest on an annual, graduated schedule beginning January 2023 through January 2027 as follows: 10 % in January 2023 and 2024, respectively, 20 % in January 2025 and 2026, respectively, and 40 % in January 2027 based upon continued service. Options granted under the Plan are subject to terms and conditions as determined by the CareAR Board and become vested and exercisable at any time subsequent to the scheduled vesting dates and may expire 90 days or one year from employee termination, depending on cause, but in no event later than ten years from the May 2022 grant date. The terms of the awards also include certain provisions that allow for the immediate vesting in the event of a sale of the entity. Note 20 – Other Comprehensive (Loss) Income Other Comprehensive (Loss) Income is comprised of the following: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax Translation Adjustments Losses $ ( 280 ) $ ( 277 ) $ ( 129 ) $ ( 125 ) $ ( 646 ) $ ( 636 ) $ ( 126 ) $ ( 122 ) Unrealized (Losses) Gains Changes in fair value of cash flow hedges (losses) gains ( 3 ) ( 3 ) 3 2 ( 41 ) ( 32 ) ( 9 ) ( 7 ) Changes in cash flow hedges reclassed to earnings (1) 11 9 2 2 17 13 5 4 Net Unrealized Gains (Losses) 8 6 5 4 ( 24 ) ( 19 ) ( 4 ) ( 3 ) Defined Benefit Plans (Losses) Gains Net actuarial/prior service (losses) gains ( 5 ) ( 4 ) 13 10 ( 61 ) ( 47 ) 79 59 Prior service amortization (2) ( 3 ) ( 3 ) ( 16 ) ( 12 ) ( 10 ) ( 8 ) ( 50 ) ( 37 ) Actuarial loss amortization/settlement (2) 18 14 32 23 69 52 98 72 Other gains (3) 47 47 30 30 99 99 28 28 Changes in Defined Benefit Plans Gains 57 54 59 51 97 96 155 122 Other Comprehensive (Loss) Income Attributable to Xerox Holdings/Xerox $ ( 215 ) $ ( 217 ) $ ( 65 ) $ ( 70 ) $ ( 573 ) $ ( 559 ) $ 25 $ ( 3 ) ____________ (1) Reclassified to Cost of sales - refer to Note 14 - Financial Instruments for additional information regarding our cash flow hedges. (2) Reclassified to Total Net Periodic Benefit Cost - refer to Note 16 - Employee Benefit Plans for additional information. (3) Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL. Accumulated Other Comprehensive Loss (AOCL) AOCL is comprised of the following: September 30, 2022 December 31, 2021 Cumulative translation adjustments $ ( 2,497 ) $ ( 1,861 ) Other unrealized losses, net ( 21 ) ( 2 ) Benefit plans net actuarial losses and prior service credits ( 1,029 ) ( 1,125 ) Total Accumulated Other Comprehensive Loss Attributable to Xerox Holdings/Xerox $ ( 3,547 ) $ ( 2,988 ) Xerox 2022 Form 10-Q 40 Note 21 – (Loss) Earnings per Share (shares in thousands) The following table sets forth the computation of basic and diluted (loss) earnings per share of Xerox Holdings Corporation's common stock: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Basic (Loss) Earnings per Share Net (Loss) Income Attributable to Xerox Holdings $ ( 383 ) $ 90 $ ( 443 ) $ 220 Accrued dividends on preferred stock ( 4 ) ( 4 ) ( 11 ) ( 11 ) Adjusted Net (loss) income available to common shareholders $ ( 387 ) $ 86 $ ( 454 ) $ 209 Weighted average common shares outstanding (1) 155,697 179,408 155,799 187,549 Basic (Loss) Earnings per Share $ ( 2.48 ) $ 0.48 $ ( 2.91 ) $ 1.12 Diluted (Loss) Earnings per Share Net (Loss) Income Attributable to Xerox Holdings $ ( 383 ) $ 90 $ ( 443 ) $ 220 Accrued dividends on preferred stock ( 4 ) ( 4 ) ( 11 ) ( 11 ) Adjusted Net (loss) income available to common shareholders $ ( 387 ) $ 86 $ ( 454 ) $ 209 Weighted average common shares outstanding (1) 155,697 179,408 155,799 187,549 Common shares issuable with respect to: Stock options — — — — Restricted stock and performance shares — 2,168 — 2,120 Convertible preferred stock — — — — Adjusted weighted average common shares outstanding 155,697 181,576 155,799 189,669 Diluted (Loss) Earnings per Share $ ( 2.48 ) $ 0.48 $ ( 2.91 ) $ 1.10 The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive: Stock options 598 622 598 622 Restricted stock and performance shares 5,222 4,387 5,222 4,435 Convertible preferred stock 6,742 6,742 6,742 6,742 Total Anti-Dilutive Securities 12,562 11,751 12,562 11,799 Dividends per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.75 ____________ (1) Includes unissued shares associated with the accelerated share vesting since all contingencies regarding issuance have lapsed. Xerox 2022 Form 10-Q 41 Note 22 – Contingencies and Litigation Legal Matters We are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting; servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. Brazil Contingencies Our Brazilian operations have received or been the subject of numerous governmental assessments related to indirect and other taxes. The tax matters principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our positions. Based on the opinion of legal counsel and current reserves for those matters deemed probable of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. Below is a summary of our Brazilian tax contingencies: September 30, 2022 December 31, 2021 Tax contingency - unreserved $ 331 $ 292 Escrow cash deposits 35 32 Surety bonds 75 96 Letters of credit 66 74 Liens on Brazilian assets — — The increase in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily due to interest and currency. With respect to the unreserved tax contingency, the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute, as well as, additional surety bonds and letters of credit, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens on assets would be removed to the extent the matters are resolved in our favor. We are also involved in certain disputes with contract and former employees. Exposures related to labor matters are not material to the financial statements as of September 30, 2022 and December 31, 2021. We routinely assess all these matters as to the probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable. Litigation Miami Firefighters’ Relief & Pension Fund v. Icahn, et al.: On December 13, 2019, alleged shareholder Miami Firefighters’ Relief & Pension Fund (“Miami Firefighters”) filed a purported derivative complaint in New York State Supreme Court, New York County on behalf of Xerox Holdings Corporation ("Xerox Holdings") (as nominal defendant) against Carl Icahn and his affiliated entities High River Limited Partnership and Icahn Capital LP (the "Icahn defendants"), Xerox Holdings, and all then-current Xerox Holdings directors (the "Directors"). Plaintiff made no demand on the Board before bringing the action, but instead alleges that doing so would be futile because the Directors lack independence due to alleged direct or indirect relationships with Icahn. Among other things, the complaint alleges that Icahn controls and dominates Xerox Holdings and therefore owes a fiduciary duty of loyalty to Xerox Holdings, which he breached by acquiring HP stock at a time when he knew that Xerox Holdings was considering an offer to acquire HP or had knowledge of the "obvious merits" of such potential acquisition, and that the Icahn defendants’ holdings of HP common stock have risen in market value by approximately $ 128 since disclosure of the offer. The complaint includes four causes of Xerox 2022 Form 10-Q 42 action: breach of fiduciary duty of loyalty against the Icahn defendants; breach of contract against the Icahn defendants (for purchasing HP stock in violation of Icahn’s confidentiality agreement with Xerox Holdings); unjust enrichment against the Icahn defendants; and breach of fiduciary duty of loyalty against the Directors (for any consent to the Icahn defendants’ purchases of HP common stock while Xerox Holdings was considering acquiring HP). The complaint seeks a judgment of breach of fiduciary duties against the Icahn defendants and the Directors; a declaration that Icahn breached his confidentiality agreement with Xerox Holdings; a constructive trust on Icahn Capital and High River's investments in HP securities; disgorgement to Xerox Holdings of profits Icahn Capital and High River earned from trading in HP stock; payment of unspecified damages by the Directors for breaching fiduciary duties; and attorneys' fees, costs, and other relief the Court deems just and proper. The Court subsequently granted plaintiff’s unopposed motion to consolidate a similar action filed on December 26, 2019 by alleged shareholder Steven J. Reynolds against the same parties in the same court, and designating Miami Firefighters’ counsel as lead counsel in the consolidated action. Defendants moved to dismiss in August 2020, and the Court granted defendants’ motions and dismissed the action in its entirety, on December 14, 2020. Plaintiffs appealed the dismissal of the case to the Appellate Division, First Department. On November 18, 2021, the Appellate Division issued its decision and reversed the lower court’s ruling to the extent that it dismissed the claims asserted against the Icahn defendants. The claims asserted against the Directors remain dismissed. On December 8, 2021, the Xerox Board approved the formation of a Special Litigation Committee to investigate and evaluate the claims and allegations asserted in the Miami Firefighters’ case and determine the course of action that would be in the best interests of the Company and its shareholders. The Court subsequently stayed all discovery until February 28, 2022, except as related to the issue of the alleged damages sustained by Xerox. On March 18, 2022, following the conclusion of its investigation, the Special Litigation Committee filed a motion to dismiss plaintiffs’ claims on the grounds that the derivative claims are without merit and pursuing the claims would not be in the best interest of Xerox or its shareholders. One week later the Icahn Defendants filed a motion for summary judgment seeking dismissal of all claims against them. On April 4, 2022, Miami Firefighters filed papers in opposition to the pending motions and cross-moved to, among other things, seek discovery regarding the Special Litigation Committee’s investigation. Miami Firefighters also cross-moved seeking an order granting partial summary judgment against the Icahn Defendants for disgorgement of alleged unrealized profits in the amount of $ 18.12 . Oral argument on all pending motions took place on July 5, 2022. After hearing from all parties on the various motions, the Court denied without prejudice the Special Litigation Committee's motion to dismiss, the Icahn defendants' motion for summary judgment and the plaintiffs' cross-motion for summary judgment. The Court also granted the plaintiffs limited discovery to be completed within 60 days. On September 30, 2022, the Special Litigation Committee, the Icahn Defendants and plaintiffs filed supplemental briefs in support of the Special Litigation Committee’s renewed motion to dismiss and/or for summary judgment and the Icahn Defendants’ renewed motion for summary judgment. The parties filed response briefs on October 24, 2022. Oral argument on the motions is scheduled for November 28, 2022. Xerox Holdings Corporation v. Factory Mutual Insurance Company and Related Actions: On March 10, 2021, Xerox Holdings Corporation (“Xerox Holdings”) filed a complaint for breach of contract and declaratory judgment against Factory Mutual Insurance Company in Rhode Island Superior Court, Providence County seeking insurance coverage for business interruption losses resulting from the coronavirus/COVID-19 pandemic. The complaint alleges that defendant agreed to provide Xerox Holdings with up to $ 1 billion in per-occurrence coverage for losses resulting from pandemic-related loss or damage to certain real and other property, including business interruption loss resulting from insured property damage; that the pandemic had inflicted significant physical loss or damage to property of Xerox Holdings and its direct and indirect customers; that Xerox Holdings’ worldwide actual and projected losses through the end of 2020 totaled in excess of $ 300 (and is still increasing); and that following Xerox Holdings' timely and proper claim in March 2020 for coverage under the “all risk” commercial property insurance policy it had purchased from defendant, defendant improperly denied and rejected coverage for most of the claim. The complaint seeks a jury trial, a declaratory judgment against defendant declaring that Xerox is entitled to full coverage of costs and losses under defendant’s policy and declaring that defendant is required to pay for such costs and losses, subject to any applicable limits; damages in an amount to be determined at trial; consequential damages; attorneys’ fees and costs; pre- and post-judgment interest; and other relief the Court deems just and proper. Also on March 10, 2021, subsidiaries of Xerox Holdings filed similar complaints and related requests for arbitration in Toronto, London, and Amsterdam for Canadian, UK and European losses. Xerox 2022 Form 10-Q 43 Xerox Holdings consented to defendant’s request for an extension of its time in which to answer or otherwise respond to the complaint. On May 6, 2021, FMG filed its answer to the complaint. The parties thereafter agreed to stay all non-U.S. proceedings pending the outcome of the U.S. litigation. Guarantees We have issued or provided approximately $ 253 of guarantees as of September 30, 2022 in the form of letters of credit or surety bonds issued to i) support certain insurance programs; ii) support our obligations related to the Brazil contingencies; and iii) support certain contracts, primarily with public sector customers, which require us to provide a surety bond as a guarantee of our performance of contractual obligations. In general, we would only be liable for the amount of these guarantees in the event we defaulted in performing our obligations under each contract, the probability of which we believe is remote. We believe that our capacity in the surety markets as well as under various credit arrangements (including our Credit Facility) is sufficient to allow us to respond to future requests for proposals that require such credit support. Xerox 2022 Form 10-Q 44