What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-01 · 406 added, 239 removed, 403 unchanged (62% of the section changed)

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In January of 2023, all Xerox Ventures LLC investments were transferred and are held by Xerox Ventures Fund I, LLC, a subsidiary of Xerox Ventures LLC.

Xerox Ventures Fund I, LLC had investments of approximately $24 million at March 31, 2023.

Xerox Ventures Fund I, LLC had investments of approximately $24 million at June 30, 2023.

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

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

Balanced execution drove growth in revenue and profits for the first quarter.

Amid a challenging operating environment, Xerox remains focused on the execution of our 2023 priorities and the goal of delivering client success through products and services that address the productivity challenges of today’s hybrid workplace.

Demand for our print equipment and related services remains resilient despite continued economic uncertainty, as evidenced by another quarter of growth in both equipment revenue and constant currency 1 Post sale revenue, which included a benefit from prior year acquisitions.

Consistent with recent quarters, we are seeing isolated pockets of softer installation activity - often the result of delays in project deployments rather than order reductions.

This softness, however, is being offset by continued strength in our office print business, particularly for state and local government, education and mid-market accounts, as well as strength in our print and digital service offerings.

As a result, we continue to expect a stable revenue and demand outlook for the full year.

Equipment sales revenue of $391 million in first quarter 2023 increased 24.5% in actual currency and 27.0% in constant currency 1 as compared to the prior year.

Growth was driven by better availability of product in both the Americas and EMEA, particularly for our higher margin A3 devices and production equipment.

Backlog 2 declined for the third consecutive quarter as supply chain conditions further normalized.

Post-sale revenue declined 2.2% in actual currency and increased 0.5% in constant currency 1 .

Post-sale growth in constant currency 1 was driven by growth in consumables and contractual print and digital services 3 , including the acquisition of Go Inspire, partially offset by lower sales of IT Hardware.

Pre-tax income and adjusted 1 operating income were both higher year-over-year, primarily due to increased revenues as well the benefits from continued cost reduction actions, supply chain-related cost improvements, price increases and lower bad debt expense due to reserve releases.

We expect to deliver low-to-mid single digit gross operating cost efficiencies for the year, driven by continuous productivity improvement and specific cost reductions.

In the second quarter 2023, resilient demand and balanced execution drove another quarter of growth in revenue, profits, and cash flow.

Recent improvements in financial performance are driven by an intense focus on our three strategic priorities, which includes a focus on delivering client success through products and services that address the productivity challenges of today’s hybrid workplace.

Equipment sales revenue of $420 million in the second quarter 2023 increased 14.8% in actual currency and 14.3% in constant currency 1 as compared to the prior year period, reflecting stable demand and improved product availability, particularly in the Americas, and for our higher margin A3 devices.

As expected, backlog 2 returned to normalized levels and since we do not expect changes in backlog 2 to materially affect results going forward, we will no longer provide detailed backlog 2 information.

Consistent with recent quarters, revenue growth outpaced equipment installations due to favorable mix and pricing.

Post-sale revenue of $1.3 billion in the second quarter 2023 declined 3.4% in actual currency as compared to the prior year period and 3.2% in constant currency 1 .

The decrease was driven primarily by non-contractual items, including lower IT hardware and paper sales, lower finance income and the cessation of Fuji royalties, partially offset by gains and commissions on sales of finance receivables.

Pre-tax loss increased year-over-year driven by a net pre-tax charge of $132 million related to the donation of our Palo Alto Research Center (PARC), partially offset by continued cost reduction actions, supply chain-related cost improvements and higher revenues.

Adjusted 1 operating income, which excludes the PARC donation, was also higher year-over-year as a result of these impacts.

These benefits were partially offset by currency, the cessation of Fuji royalty income, and higher bad debt and employee compensation expenses.

We continue to expect to deliver low to mid-single digit gross operating cost efficiencies for the year.

Xerox 2023 Form 10-Q 43

Segment Reporting Change

During the second quarter of 2023, the Company recasted FITTLE’s segment revenues and profits measures to reflect the recent strategic shift in the Company’s approach to funding FITTLE’s growth through finance receivable funding agreements that involve the sale of lease receivables.

Refer to Note 4 - Segment Reporting in the Condensed Consolidated Financial Statements for additional information regarding this reporting change.

Donation of Palo Alto Research Center (PARC)

On April 29, 2023, Xerox completed the donation of its Palo Alto Research Center (PARC) subsidiary to SRI International (SRI), a nonprofit research institute.

Refer to Note 21 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information regarding this donation.

On April 29, 2023, Xerox completed the donation of its Palo Alto Research Center (PARC) subsidiary to Stanford Research Institute International (SRI), a nonprofit research institute.

Refer to Note 6 - Divestiture in the Condensed Consolidated Financial Statements for additional information regarding this donation.

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

First quarter 2023 backlog of $179 million excludes sales orders from Russia and Powerland Computers Ltd.

(3) Includes revenue from Services, maintenance and rentals.

First Quarter 2023 Review

Total revenue of $1.72 billion for first quarter 2023 increased 2.8% from first quarter 2022, which included a 2.2-percentage point benefit from acquisitions, offset by a 2.7-percentage point adverse impact from currency.

Total revenue reflected a decrease of 2.2% in Post sale revenue, which included a 2.7-percentage point adverse impact from currency, offset by a 2.8-percentage point benefit from acquisitions.

Equipment sales revenue increased 24.5%, which included a 2.5-percentage point adverse impact from currency.

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

Three Months Ended March 31,

(in millions) 2023 2022 B/(W)

Net Income (Loss) Attributable to Xerox Holdings $ 71 $ (56) $ 127

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

Second Quarter 2023 Review

Total revenue of $1.75 billion for second quarter 2023 increased 0.4% from second quarter 2022, which included a 1.2-percentage point benefit from an acquisition, partially offset by a 0.1-percentage point adverse impact from currency.

Total revenue reflected a decrease of 3.4% in Post sale revenue, which included a 1.5-percentage point benefit from an acquisition, partially offset by a 0.2-percentage point negative impact from currency.

Equipment sales revenue increased 14.8%, which included a 0.5-percentage point benefit impact from currency.

Total revenue of $3.47 billion for the six months ended June 30, 2023 increased 1.6% as compared to the prior year period, including a 1.7-percentage point benefit from acquisitions, partially offset by a 1.3-percentage point adverse impact from currency.

Total revenue for the six months ended June 30, 2023 reflected a decrease of 2.8% in Post sale revenue, which included a 2.1-percentage point benefit from acquisitions, partially offset by a 1.4-percentage point adverse impact from currency, and an increase of 19.3% in Equipment sales revenue, which included a 0.9-percentage point adverse impact from currency.

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

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

(in millions) 2023 2022 B/(W) 2023 2022 B/(W)

Net (Loss) Income Attributable to Xerox Holdings $ (61) $ (4) $ (57) $ 10 $ (60) $ 70

Adjusted (1) Net income attributable to Xerox Holdings

72 24 48 154 10 144

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

First quarter 2023 Net income attributable to Xerox Holdings of $71 million was an increase of $127 million as compared to first quarter 2022 Net loss attributable to Xerox Holdings of $56 million.

The increase primarily reflects higher revenues and gross margin, as well as the impact of lower supply chain-related costs, a lower rate of investments in new businesses, lower bad debt provisions, primarily due to reserve releases, lower Restructuring and related costs, net, and lower Other expenses, net, all of which were partially offset by higher Income tax expense.

First quarter 2023 Adjusted 1 Net income attributable to Xerox Holdings of $82 million increased $96 million as compared to the prior year period, primarily due to higher revenues and gross margin, as well as the impact of lower supply chain-related costs, a lower rate of investments in new businesses, and lower bad debt provisions, primarily due to reserve releases, all of which were partially offset by higher Income tax expense.

Second quarter 2023 Net (loss) attributable to Xerox Holdings was $(61) million as compared to the second quarter 2022 Net (loss) attributable to Xerox Holdings of $(4) million.

The increased loss primarily reflects the after-tax PARC donation charge of $92 million ($132 million pre-tax), as well as higher Restructuring and related costs, net, and higher Other expenses, net.

These negative impacts were partially offset by higher revenue and gross margin, which include the impact of lower supply chain-related costs, as well as a lower rate of investments in new businesses, lower Selling, administrative and general expenses, and lower Income tax expense.

Second quarter 2023 Adjusted 1 Net income attributable to Xerox Holdings of $72 million increased $48 million as compared to the prior year period, primarily reflecting higher gross margin, which include a favorable mix, and the impact of lower supply chain-related costs, a lower rate of investments in new businesses, and higher revenues.

These benefits were partially offset by higher Income tax expense.

Net income attributable to Xerox Holdings for the six months ended June 30, 2023 was $10 million as compared to a Net (loss) attributable to Xerox Holdings of $(60) million in the prior year period.

The increase in Net Income primarily reflects higher revenue and gross margin, which include the impact of lower supply chain-related costs, and lower Selling, administrative and general expenses, as well as a lower rate of investments in new businesses, and lower Other expenses, net, all of which were partially offset by the after-tax PARC donation charge of $92 million ($132 million pre-tax), as well as higher Restructuring and related costs, net, and Income tax expense.

A djusted 1 Net income attributable to Xerox Holdings for the six months ended June 30, 2023 of $154 million increased $144 million as compared to the prior year period, primarily reflecting higher revenues and gross margin, which include the impact of lower supply chain-related costs, as well as lower Selling, administrative and general

Xerox 2023 Form 10-Q 44

expenses, and a lower rate of investments in new businesses.

These benefits were partially offset by higher Income tax expense.

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

A summary of our segments - Print and Other and Financing (FITTLE) - is as follows:

Three Months Ended March 31, % of Total

(in millions) 2023 2022 % Change 2023 2022

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

(in millions) 2023 2022 % Change 2023 2022 % Change

Print and Other $ 1,674 $ 1,673 0.1 % $ 3,310 $ 3,266 1.3 %

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nm - Change is not meaningful.

Xerox 2023 Form 10-Q 40

Cash flows from operating activities during the three months ended March 31, 2023 was a source of $78 million and increased $12 million as compared to the prior year period, primarily related to higher net income as well as proceeds from the on-going sales of finance receivables under the Receivable Funding Agreement, partially offset by higher finance receivable originations, and an increased use of cash for working capital 1 .

Cash used in investing activities during the three months ended March 31, 2023 was $17 million reflecting capital expenditures of $8 million, acquisitions of $7 million and $3 million of noncontrolling investments as part of our corporate venture capital fund.

Cash used in financing activities during the three months ended March 31, 2023 was $505 million reflecting $300 million for Senior Notes that matured in 2023, payments of $152 million on existing secured financing arrangements and dividend payments of $45 million.

Cash flows from operating activities during the six months ended June 30, 2023 was a source of $173 million and increased $192 million as compared to the prior year period, primarily related to higher net income as well as proceeds of approximately $630 million from the on-going sales of finance receivables under the finance receivables funding agreement, partially offset by higher finance receivable originations, and an increased use of cash for working capital 1 .

Cash used in investing activities during the six months ended June 30, 2023 was $22 million primarily reflecting capital expenditures of $15 million and acquisitions of $7 million.

Cash used in financing activities during the six months ended June 30, 2023 was $725 million primarily due to net debt payments of $626 million reflecting $300 million for Senior Notes that matured in 2023, and payments of $519 million on existing secured financing arrangements, which includes the early repayment of $185 million on a U.S.

secured borrowing, partially offset by net proceeds of $193 million from the new Asset Based Loan Facility (ABL).

The remaining use of cash was dividend payments of $88 million.

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(1) Working capital, net reflects Accounts receivable, Billed portion of finance receivables, Inventories and Accounts payable.

We continue to expect total Revenue to be flat to down low-single-digits in constant currency 1 in 2023.

We also continue to expect pre-tax and adjusted 1 operating income and margin to increase over 2022 levels, with a slightly higher increase expected for adjusted 1 operating margin reflecting better than expected profitability in the first quarter of 2023 and the success of ongoing efficiency programs.

Lastly, we continue to expect Operating cash flows to be at least $550 million, which reflects the benefits of FITTLE's finance receivables funding agreement, and capital expenditures to be approximately $50 million.

We continue to expect total Revenue to be flat to down low-single-digits in constant currency 1 in 2023, which reflects a stable demand environment with a contingency for macroeconomic uncertainty.

In the past three months, the macroeconomic outlook has improved, as has momentum in signings for our services.

As a result, we now expect full-year revenue to be at the upper end of our expected range.

Due to better-than-expected profitability in the first half of 2023, reflecting a stronger-than-expected realization of operating efficiencies and revenue mix, we expect pre-tax and adjusted 1 operating income and margin to increase over 2022 levels, with a slightly higher increase expected for adjusted 1 operating margin.

Lastly, we have increased our expectations for Operating cash flows and now expect them to be at least $650 million, which is an increase from our original expectation of at least $550 million.

The increase reflects an improvement in expected operating income and incremental sales of finance receivables.

We continue to expect capital expenditures to be approximately $50 million.

Our capital allocation policy of returning at least 50% of free cash flow 2 to shareholders remains unchanged.

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Three Months Ended

March 31, % of Total Revenue

(in millions) 2023 2022 % Change CC % Change 2023 2022

June 30, Six Months Ended

June 30, % of Total Revenue

(in millions) 2023 2022 % Change CC % Change 2023 2022 % Change CC % Change 2023 2022

Equipment sales $ 420 $ 366 14.8 % 14.3 % $ 811 $ 680 19.3 % 20.2 % 23 % 20 %

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Total Revenue $ 1,754 $ 1,747 0.4 % 0.5 % $ 3,469 $ 3,415 1.6 % 2.9 % 100 % 100 %

Reconciliation to Condensed Consolidated Statements of Income (Loss):

Reconciliation to Condensed Consolidated Statements of (Loss) Income:

Sales $ 696 $ 667 4.3 % 4.1 % $ 1,355 $ 1,259 7.6 % 8.3 %

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(2) Refer to Note 4 - Segment Reporting in the Condensed Consolidated Financial Statements for additional information regarding our reportable segments.

(3) Refer to the "Geographic Sales Channels" section.

First quarter 2023 total revenue increased 2.8% as compared to first quarter 2022, which included a 2.2-percentage point benefit from acquisitions, as well as a 2.7-percentage point adverse impact from currency.

The increase in constant currency 1 revenue reflected growth in equipment sales revenue, primarily due to stable order flows, improved product supply and pricing actions taken in 2022.

Post sale revenue also increased at constant currency 1 , primarily reflecting growth in outsourcing revenues and consumables, as well as the benefits from acquisitions.

Geographically, revenue increased 4.0% in our Americas region as compared to first quarter 2022, primarily reflecting higher equipment sales resulting from increased product availability, and the benefits from recent acquisitions, partially offset by a 0.6-percentage point adverse impact from currency.

Revenue in our EMEA operations increased 0.4%, as compared to first quarter 2022 and included a 6.9-percentage point adverse impact from currency.

On a constant currency 1 basis, revenue increased 7.3% driven by strength in equipment sales revenue and the benefits from recent acquisitions.

Total revenue for the three months ended March 31, 2023 reflected the following:

(3) Refer to the "Geographic Sales Channels" section, for definitions.

Second quarter 2023 total revenue increased 0.4% as compared to second quarter 2022, which included a 1.2-percentage point benefit from an acquisition, partially offset by a 0.1-percentage point adverse impact from currency.

The increase in constant currency 1 revenue is attributable to growth in equipment sales revenue, reflecting a stable demand environment, improved product supply, recent pricing actions, and a favorable mix.

Post sale revenue decreased at constant currency 1 primarily due to lower paper sales, IT hardware revenue declines, lower finance income, and the cessation of Fuji royalty income and PARC revenue.

Contractual print services revenue 2 was down slightly, due to a reduction in our serviced fleet, partially offset by growth in digital services, including the benefits of a recent acquisition and price increases.

Total revenue for the six months ended June 30, 2023 increased 1.6%, including a 1.7-percentage point benefit from acquisitions, partially offset by a 1.3-percentage point adverse impact from currency.

Post sale revenue for the six months ended June 30, 2023 decreased at constant currency 1 , primarily due to lower paper sales, IT hardware revenue declines, lower finance income, and the cessation of Fuji royalty income and PARC revenue.

Contractual print services revenue 2 increased due to growth in IT and digital services revenue, which included the benefits of an acquisition, partially offset by a reduction in our serviced fleet.

Xerox 2023 Form 10-Q 46

Geographically, revenue increased 0.3% in our Americas region as compared to second quarter 2022, and included a 0.4-percentage point adverse impact from currency, and for the six months ended June 30, 2023, revenue increased 2.1% as compared to the prior year period, and included a 0.5-percentage point adverse impact from currency.

The increase in our Americas region in both periods, as compared to their respective prior year periods, was due to higher equipment sales resulting from increased product availability, offset by lower post sale revenue.

The increase for the six months ended June 30, 2023 also benefited from a recent acquisition.

Revenue in our EMEA operations increased 3.4%, as compared to second quarter 2022 and included a 0.3-percentage point benefit from currency, and for the six months ended June 30, 2023, revenue increased 1.9%, including a 3.3-percentage point adverse impact from currency.

On a constant currency 1 basis, revenue in our EMEA region increased 3.1% and 5.2% for the three and six months ended June 30, 2023, respectively, as compared to the respective prior year periods, driven by strength in equipment sales revenue and the benefits from a recent acquisition.

Total revenue for the three and six months ended June 30, 2023 reflected the following:

Post sale revenue

Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing.

Post sale revenue primarily reflects revenues from contractual print services 2 , supplies and financing.

These revenues are associated not only with the population of devices in the field, which is affected by installs and removals, but also by the page volumes generated from the usage of such devices and the revenue per printed page.

Post sale revenue also includes transactional IT hardware sales and implementation services.

Xerox 2023 Form 10-Q 42

Post sale revenue decreased 2.2% for the three months ended March 31, 2023 as compared to the prior year period and included a 2.7-percentage point adverse impact from currency, offset by a 2.8-percentage point benefit from acquisitions.

Post sale revenue also includes transactional IT hardware sales and other IT services, as well as gains and commissions on the sale of finance receivables.

For the three months ended June 30, 2023, Post sale revenue decreased 3.4% as compared to second quarter 2022, and included a 1.5-percentage point benefit from an acquisition, and a 0.2-percentage point adverse impact from currency.

Post sale revenue decreased 2.8% for the six months ended June 30, 2023 as compared to the prior year period and included a 2.1-percentage point benefit from acquisitions, and a 1.4-percentage point adverse impact from currency.

Post sale revenue reflected the following:

• Services, maintenance and rentals revenue includes maintenance revenue (including bundled supplies), print and digital services revenue from our Services offerings and rentals.

These revenues decreased 1.9% as compared to first quarter 2022, including a 3.3-percentage point adverse impact from currency.

In constant currency 1 , revenue growth was primarily driven by contractual print and digital services, including the acquisition of Go Inspire.

Contractual print and digital services 2 revenue grew as compared to first quarter 2022, due in large part to the expansion of our digital services offerings and price increases, which were partially offset by overall page volume declines associated with lower device placements in prior years.

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

These revenues decreased 3.6% as compared to first quarter 2022, including a 1.0-percentage point adverse impact from currency, and primarily reflected lower IT hardware sales, partially offset by higher paper sales.

• Financing revenue is generated from financed Xerox equipment sale transactions and third-party equipment placements.

These revenues decreased 1.9% as compared to first quarter 2022, including a 2.2-percentage point adverse impact from currency.

The essentially flat financing revenue at constant currency 1 reflects a steady average finance receivable portfolio as increased new originations for Xerox and third-party equipment were offset by ongoing sales under FITTLE's finance receivables funding agreement entered into in the fourth quarter 2022.

• Services, maintenance and rentals revenue includes maintenance revenue (including bundled supplies), print and digital services revenue from our Services offerings, rentals and other revenues.

◦ For the three months ended June 30, 2023, these revenues decreased 1.8% as compared to second quarter 2022, including a 0.2-percentage point adverse impact from currency.

The decline in constant currency 1 was due to the cessation of Fuji royalty income and PARC revenue.

Contractual print services 2 revenue was down slightly as compared to second quarter 2022, with growth in digital services, including the benefits of a recent acquisition, and benefits of price increases which were offset by a slight reduction in our serviced fleet.

These impacts were partially offset by the acquisition of Go Inspire and gains and commissions on sales of finance receivables.

◦ For the six months ended June 30, 2023, these revenues decreased 1.9% as compared to the prior year period, including a 1.8-percentage point adverse impact from currency.

The decline in constant currency 1 was due to the cessation of Fuji royalty income and PARC revenue.

These impacts were partially offset by gains and commissions on sales of finance receivables and revenue growth in contractual print services 2 .

Growth in contractual print services 2 revenue included growth in digital services, the benefits of a recent acquisition and price increases, which were partially offset by a slight reduction in our serviced fleet.

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

◦ For the three months ended June 30, 2023, these revenues decreased 8.3% as compared to second quarter 2022, including a 0.2-percentage point benefit from currency, and primarily reflected lower paper sales and IT hardware revenue, partially offset by higher sales of supplies.

◦ For the six months ended June 30, 2023, these revenues decreased 6.0% as compared to the prior year period, including a 0.4-percentage point adverse impact from currency and primarily reflected lower IT hardware revenue and paper sales, partially offset by higher sales of supplies.

• Financing revenue is generated from direct and indirect financed Xerox equipment sale transactions and third-party equipment placements.

For the three months ended June 30, 2023, these revenues decreased 5.8% as compared to second quarter 2022, including a 1.8-percentage point adverse impact from currency.

Financing revenue for the six months ended June 30, 2023 decreased 3.8%, including a 2.0-percentage point adverse impact from currency.

The decline at constant currency 1 for both the three and six months ended June 30, 2023, respectively, primarily reflects a reduction of the average finance receivables in the quarter and year-to-date periods as a result of the sales of finance receivables in 2023 and the fourth quarter 2022.

Finance receivables are approximately $250 million lower in June of 2023 as compared to June of 2022.

Xerox 2023 Form 10-Q 47

Equipment sales revenue

Equipment sales revenue increased 24.5% as compared to the first quarter 2022, including a 2.5-percentage point adverse impact from currency.

The increase in both actual and constant currency 1 reflected improvement in product availability in both the Americas and EMEA regions, particularly for our higher margin mid-range devices and high-end entry production equipment.

Backlog 3 declined 27.1% on a sequential basis and 58.8% on a year-over-year basis but remained above pre-pandemic levels.

Approximately 50% of the backlog is related to mid-range devices.

Equipment sales revenue increased 14.8% for the three months ended June 30, 2023 as compared to the second quarter 2022, including a 0.5-percentage point benefit from currency, and Equipment sales revenue for the six months ended June 30, 2023 increased 19.3%, including a 0.9-percentage point adverse impact from currency.

The increase for both the three and six months ended June 30, 2023 reflects improvement in product availability, particularly in the Americas region, and for our higher margin mid-range and high-end devices, as well as recent pricing actions.

Entry device installs were down for both the three and six months ended June 30, 2023, as compared to their respective prior year periods, due to the ongoing normalization of work-from-home trends.

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

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(2) Includes revenues from Services, maintenance and rentals.

(3) Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates.

It includes printing devices as well as IT hardware associated with our IT service offerings.

First quarter 2023 backlog of $179 million excludes sales orders from Russia and Powerland Computers, Ltd.

Geographic Sales Channels

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

Three Months Ended March 31,

(in millions) 2023 2022 B/(W)

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

(in millions) 2023 2022 B/(W) 2023 2022 B/(W)

Gross Profit $ 597 $ 557 $ 40 $ 1,186 $ 1,087 $ 99

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Equipment Gross Margin 35.2 % 23.5 % 11.7 pts.

35.8 % 22.1 % 13.7 pts.

Post sale Gross Margin 33.6 % 34.1 % (0.5) pts.

33.7 % 34.2 % (0.5) pts.

Total Gross Margin 34.0 % 31.9 % 2.1 pts.

34.2 % 31.8 % 2.4 pts.

RD&E as a % of Revenue 3.2 % 4.8 % 1.6 pts.

3.5 % 4.7 % 1.2 pts.

SAG as a % of Revenue 24.7 % 26.3 % 1.6 pts.

Pre-tax Income (Loss) $ 85 $ (89) $ 174

Pre-tax Income (Loss) Margin 5.0 % (5.3) % 10.3 pts.

Adjusted (1) Operating Profit (Loss)

24.2 % 26.8 % 2.6 pts.

Pre-tax (Loss) $ (89) $ (5) $ (84) $ (4) $ (94) $ 90

Pre-tax (Loss) Margin (5.1) % (0.3) % (4.8) pts.

(0.1) % (2.8) % 2.7 pts.

Adjusted (1) Operating Income

$ 107 $ 35 $ 72 $ 225 $ 32 $ 193

Adjusted (1) Operating Income (Loss) Margin

Adjusted (1) Operating Income Margin

6.1 % 2.0 % 4.1 pts.

6.5 % 0.9 % 5.6 pts.

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

Pre-tax Income (Loss) Margin

First quarter 2023 pre-tax income margin of 5.0% increased 10.3-percentage points as compared to first quarter 2022 pre-tax (loss) margin of (5.3)%.

The increase primarily reflected higher adjusted 1 operating margin (see below) and revenues, as well as lower Restructuring and related cost, net and Other expenses, net.

Pre-tax (Loss) Margin

Second quarter 2023 pre-tax (loss) margin of (5.1)% increased (4.8)-percentage points as compared to second quarter 2022 pre-tax (loss) margin of (0.3)%.

The increase was primarily due to the PARC donation charge which had a 7.6-percentage point adverse impact on pre-tax margin, as well as higher Restructuring and related costs, net, and Other expenses, net.

These negative impacts were partially offset by multiple items which resulted in higher adjusted 1 operating margin (see below).

Pre-tax (loss) margin for the six months ended June 30, 2023 of (0.1)% decreased 2.7-percentage points as compared to the prior year period pre-tax (loss) margin of (2.8)%.

The decrease in the pre-tax loss margin was primarily due to multiple items which resulted in higher adjusted 1 operating margin (see below), as well as lower Other expenses, net.

These favorable impacts were partially offset by the PARC donation charge which had a 3.8-percentage point adverse impact on pre-tax margin, as well as higher Restructuring and related costs, net.

Adjusted 1 Operating Margin

First quarter 2023 adjusted 1 operating income margin of 6.9% increased by 7.1-percentage points as compared to first quarter 2022 primarily reflecting higher revenue and gross margin, which includes the impact of lower supply chain-related costs, a lower rate of investments in new businesses and lower bad debt provisions due primarily to reserve releases (a 1.4-percentage point favorable impact).

Adjusted 1 operating margin also benefited from pricing actions and cost and productivity savings.

Second quarter 2023 adjusted 1 operating income margin of 6.1% increased by 4.1-percentage points as compared to second quarter 2022, primarily reflecting higher gross margin, which includes the impacts of lower supply chain-related costs, as well as the benefits from pricing and cost and productivity actions, and higher revenue.

Partially offsetting these benefits were unfavorable currency, the cessation of Fuji royalty income, and higher bad debt and employee compensation expenses.

Adjusted 1 operating margin for the six months ended June 30, 2023 of 6.5% increased by 5.6-percentage points as compared to the prior year period, primarily reflecting higher revenue and gross margin, which includes the impacts of lower supply chain-related costs, lower RD&E expense, and lower Selling, administrative and general expenses, due primarily to reserve releases, as well as the benefits from pricing and cost and productivity actions.

Partially offsetting these benefits were unfavorable currency, the cessation of Fuji royalty income, and higher employee compensation expenses.

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

First quarter 2023 gross margin of 34.3% increased by 2.5-percentage points as compared to first quarter 2022, reflecting higher revenue, lower supply chain-related costs, benefits associated with pricing actions and cost and productivity savings as well as a favorable product mix, and currency.

These impacts were partially offset by higher product costs.

First quarter 2023 equipment gross margin of 36.5% increased by 16.1-percentage points as compared to first quarter 2022, primarily reflecting higher revenue, a favorable product and channel mix, lower supply chain-related costs, pricing benefits and favorable currency.

These impacts were partially offset by higher product costs.

First quarter 2023 Post sale gross margin of 33.7% decreased by 0.7-percentage points as compared to first quarter 2022, reflecting lower revenue, higher component costs, a competitive pricing environment and the impacts from recent acquisitions and IT hardware/services revenue that have a lower gross margin.

Financing margin also declined due to higher borrowing costs.

These impacts were partially offset by lower supply chain-related costs and benefits associated with pricing actions and cost and productivity savings.

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

Second quarter 2023 gross margin of 34.0% increased by 2.1-percentage points as compared to second quarter 2022, reflecting improved product and channel mix, lower supply chain-related costs, benefits associated with recent pricing and cost and productivity actions, as well as higher revenue.

These impacts were partially offset by unfavorable currency and the cessation of Fuji royalties.

Xerox 2023 Form 10-Q 49

Gross margin for the six months ended June 30, 2023 of 34.2% increased by 2.4-percentage points as compared to the prior year period, reflecting lower supply chain-related costs, improved product and channel mix, benefits associated with recent pricing and cost and productivity actions, as well as higher revenue, including gains and commissions on sales of finance receivables.

These impacts were partially offset by the cessation of Fuji royalties and unfavorable currency.

Second quarter 2023 equipment gross margin of 35.2% increased by 11.7-percentage points as compared to second quarter 2022, primarily reflecting higher revenue, a favorable product and channel mix, lower supply chain-related costs, as well as the benefits associated with recent pricing actions.

These impacts were partially offset by unfavorable currency.

Equipment gross margin for the six months ended June 30, 2023 of 35.8% increased by 13.7-percentage points as compared to the prior year period, primarily reflecting higher revenue, a favorable product and channel mix, lower supply chain-related costs and pricing benefits.

Second quarter 2023 Post sale gross margin of 33.6% decreased by 0.5-percentage points as compared to second quarter 2022, reflecting lower revenue, the cessation of Fuji royalties, a slight reduction in our serviced fleet and unfavorable currency.

Financing margin also declined due to higher interest costs.

These impacts were partially offset by lower supply chain-related costs and benefits associated with pricing and cost and productivity actions, as well as gains and commissions on sales of finance receivables.

Post sale gross margin for the six months ended June 30, 2023 of 33.7% decreased by 0.5-percentage points as compared to the prior year period, reflecting lower revenue, the cessation of Fuji royalties, a reduction in our serviced fleet and unfavorable currency.

Financing margin also declined due to higher interest costs.

These impacts were partially offset by lower supply chain-related costs and benefits associated with pricing actions and cost and productivity actions, as well as gains and commissions on sales of finance receivables.

Research, Development and Engineering Expenses (RD&E)

Three Months Ended

(in millions) 2023 2022 Change

June 30, Six Months Ended

(in millions) 2023 2022 Change 2023 2022 Change

R&D $ 42 $ 70 $ (28) $ 94 $ 134 $ (40)

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Total RD&E Expenses $ 57 $ 84 $ (27) $ 121 $ 162 $ (41)

First quarter 2023 RD&E as a percentage of revenue of 3.7% decreased by 1.0-percentage point as compared to first quarter 2022, primarily due to a lower rate of investments in new businesses, including the spin-off of Innovation businesses within PARC Innovation, and higher revenues.

RD&E of $64 million decreased $14 million as compared to first quarter 2022 primarily reflecting lower spending in our innovation portfolio as well as modest savings from restructuring and productivity.

The lower spending in innovation reflects the decision made to focus more on projects within Print, Digital and IT Services and the spinout or shutdown of certain other PARC-related activities.

Second quarter 2023 RD&E as a percentage of revenue of 3.2% decreased by 1.6-percentage points as compared to second quarter 2022, primarily due to the strategic decision to donate our PARC subsidiary, and the impact of higher revenues.

RD&E as a percentage of revenue for the six months ended June 30, 2023 of 3.5% decreased by 1.2-percentage points as compared to the prior year period, primarily due to the strategic decision to donate our PARC subsidiary, as well as a lower rate of investments in new businesses, including the spin-off of Innovation businesses, and higher revenues.

RD&E of $57 million decreased $27 million as compared to second quarter 2022, primarily driven by lower spending in our innovation portfolio due to the strategic decision to donate our PARC subsidiary, and the exit from other certain PARC-related activities, as well as modest savings from restructuring and productivity actions.

RD&E for the six months ended June 30, 2023 of $121 million decreased $41 million as compared to the prior year period, primarily driven by lower spending in our innovation portfolio due to the strategic decision to donate our PARC subsidiary, and the exit from other certain PARC-related activities, as well as savings from restructuring and productivity actions.

The lower spending in innovation for both the three and the six months ended June 30, 2023, as compared to their respective prior year periods, reflects decisions to provide greater focus and financial flexibility to pursue growth opportunities adjacent to our core operations within Print, Digital and IT Services.

Xerox 2023 Form 10-Q 50

Selling, Administrative and General Expenses (SAG)

First quarter 2023 SAG as a percentage of revenue of 23.7% decreased by 3.6-percentage points as compared to first quarter 2022, primarily due to lower selling and administrative expenses and higher revenues, as well as a 1.4 percentage-point favorable impact from lower bad debt expense.

First quarter 2023 SAG of $407 million decreased by $48 million as compared to first quarter 2022, reflecting lower selling and administrative expenses, which benefited from productivity and cost savings as well as lower labor costs associated with a higher-than-expected number of open positions.

Additionally, SAG benefited from a favorable impact of currency, and lower bad debt expense primarily due to reserve releases.

Our bad debt provision for three months ended March 31, 2023 was an $8 million credit, a decrease of $23 million as compared to first quarter 2022, primarily related to a reserve release of approximately $12 million due to the favorable reassessment of the credit exposure on a large customer receivable balance after a contract amendment which improved our credit position, and a reserve release of approximately $5 million related to the sale of finance receivables on a non-recourse basis as part of the on-going FITTLE finance receivables funding agreement.

The remainder of the decrease is related to the prior year, which includes an increase in reserves related to Russia, as well an assessment of lower expected write-offs in our finance receivables portfolio, particularly in the Americas region, due to an overall improvement in credit exposures during the quarter.

Second quarter 2023 SAG as a percentage of revenue of 24.7% decreased by 1.6-percentage points as compared to second quarter 2022, primarily due to lower selling and administrative expenses, partially offset by higher bad debt expense, as well as the impact of higher revenues.

Second quarter 2023 SAG of $433 million decreased by $26 million as compared to second quarter 2022, primarily reflecting stock compensation expense of $21 million associated with the accelerated vesting of all outstanding equity awards, according to the terms of the award agreement, in connection with the passing of Xerox Holding's former CEO in the second quarter 2022.

Additionally, SAG benefited from productivity and cost savings, including savings related to the strategic decision to donate our PARC subsidiary.

These benefits were partially offset by higher bad debt and compensation expenses.

SAG as a percentage of revenue for the six months ended June 30, 2023 of 24.2% decreased by 2.6-percentage points as compared to the prior year period, primarily due to lower selling and administrative expenses and higher revenues, as well as a 0.5 percentage-point favorable impact from lower bad debt expense.

SAG for the six months ended June 30, 2023 of $840 million decreased by $74 million as compared to the prior year period, primarily reflecting stock compensation expense of $21 million associated with the accelerated vesting of all outstanding equity awards, according to the terms of the award agreement, in connection with the passing of Xerox Holding's former CEO in the second quarter 2022.

Additionally, SAG benefited from productivity and cost savings, including savings related to the strategic decision to donate our PARC subsidiary, as well as lower labor costs associated with a higher-than-expected number of open positions, lower bad debt expense and the favorable impact of currency.

These benefits were partially offset by higher marketing and compensation expenses, as well as the impact of an acquisition.

Our bad debt provision for the three months ended June 30, 2023 of $15 million increased $8 million as compared to second quarter 2022, primarily due to increased sales revenues and higher originations of finance receivables not subject to sale under the finance receivables funding agreement.

Our bad debt provision for six months ended June 30, 2023 of $7 million, decreased by $15 million as compared to the prior year period, primarily related to the first quarter 2023 reserve releases of approximately $12 million due to the favorable reassessment of the credit exposure on a large customer receivable balance after a contract amendment which improved our credit position, and approximately $5 million related to the sale of finance receivables on a non-recourse basis as part of the on-going finance receivables funding agreement.

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.

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

Xerox 2023 Form 10-Q 45

Restructuring and Related Costs, Net

We incurred Restructuring and related costs, net of $2 million for the first quarter 2023 , as compared to $18 million for first quarter 2022.

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

The following is a breakdown of those costs:

Three Months Ended

(in millions) 2023 2022

Severance (1)

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

Other credits (3)

Restructuring and asset impairment costs 1 20

Retention-related severance/bonuses (4)

Total $ 2 $ 18

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(1) Reflects headcount reductions of approximately 100 and 450 employees worldwide in first quarter 2023 and 2022, respectively.

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

(3) Reflects net reversals for changes in estimated reserves from prior period initiatives.

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

The reversals in 2022 reflect a change in estimates.

First quarter 2023 actions impacted several functional areas, with approximately 30% focused on gross margin improvements and approximately 70% focused on SAG reductions.

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

The Restructuring and related costs, net reserve balance for all programs as of March 31, 2023 was $50 million, of which $46 million is expected to be paid over the next twelve months.

We incurred Restructuring and related costs, net of $23 million for the second quarter 2023, as compared to $1 million for second quarter 2022, and $25 million for the six months ended June 30, 2023, as compared to $19 million in the prior year period.

These costs were primarily related to the implementation of initiatives under our business transformation projects in order to reduce our cost structure and realign it to the changing nature of our business.

Second quarter 2023 actions impacted several functional areas, with approximately 50% focused on SAG reductions and approximately 50% focused on RD&E optimization.

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

The Restructuring and related costs, net reserve balance for all programs as of June 30, 2023 was $42 million, of which $38 million is expected to be paid over the next twelve months.

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

Xerox 2023 Form 10-Q 51

Worldwide Employment

Worldwide employment was approximately 20,300 as of March 31, 2023, a decrease of approximately 200 from December 31, 2022.

Worldwide employment was approximately 20,300 as of June 30, 2023, a decrease of approximately 200 from December 31, 2022.

The decrease resulted from net attrition (attrition net of gross hires) and restructuring.

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Three Months Ended

June 30, Six Months Ended

(in millions) 2023 2022 2023 2022

3 unchanged sentences

Currency losses, net 5 1 16 1

Loss on early extinguishment of debt 3 4 3 4

Contract termination costs - product supply — — — 33

Excess contribution refund — (16) — (16)

All other expenses, net 4 3 5 6

1 unchanged sentence

Non-Financing Interest Expense

First quarter 2023 non-financing interest expense of $14 million was $15 million lower than first quarter 2022.

Second quarter 2023 non-financing interest expense of $12 million was $11 million lower than second quarter 2022.

The decrease was primarily related to lower non-financing debt as a result of the repayment of Senior Notes in 2022 and the first quarter 2023.

When non-financing interest is combined with financing interest expense (Cost of financing), total interest expense of $50 million decreased by $3 million as compared to first quarter 2022, primarily reflecting a lower average debt balance, partially offset by higher average interest rates.

When non-financing interest is combined with financing interest expense (Cost of financing), total interest expense of $46 million decreased by $3 million as compared to second quarter 2022, primarily reflecting a lower average debt balance, partially offset by higher average interest rates.

Non-financing interest expense for the six months ended June 30, 2023 of $26 million was $26 million lower than the prior year period.

The decrease was primarily related to lower non-financing debt as a result of the repayment of Senior Notes in 2022 and the first quarter 2023.

When combined with financing interest expense (Cost of financing), total interest expense of $96 million decreased by $6 million from the prior year period primarily reflecting a lower average debt balance, partially offset by higher average interest rates.

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

Xerox 2023 Form 10-Q 46

Interest Income

First quarter 2023 interest income was $4 million higher than first quarter 2022 primarily due to higher interest rates, partially offset by a lower cash balance.

Second quarter 2023 interest income increased $1 million as compared to the second quarter 2022, while interest income for the six months ended June 30, 2023 increased $5 million as compared to the prior year period, primarily due to higher interest rates, partially offset by a lower cash balance.

Non-Service Retirement-Related Costs

First quarter 2023 non-service retirement-related costs were $6 million higher than first quarter 2022, primarily due to higher interest cost driven by higher discount rates, partially offset by lower settlement losses.

Service retirement-related costs, which are included in operating expenses, were $1 million and $4 million for the three months ended March 31, 2023 and 2022, respectively.

Non-service retirement-related costs were $15 million and $21 million higher for the three and six months ended June 30, 2023, respectively, as compared to their respective prior year periods.

The increases reflect higher interest cost driven by higher discount rates, as well as a decrease in the expected return on plan assets due to lower plan asset values.

These negative impacts were partially offset by lower settlement losses.

Service retirement-related costs, which are included in operating expenses, were $1 million and $6 million for the three months ended June 30, 2023 and 2022, respectively, and $2 million and $10 million for the six months ended June 30, 2023 and 2022, respectively.

The decrease in both periods is primarily due to the transition of our pension plan in the Netherlands to a Defined Contribution Plan for future service at the end of 2022.

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

Currency Losses, Net

First quarter 2023 currency losses, net were $11 million higher than first quarter 2022, primarily due to increased volatility in the global exchange rates, particularly in our Eurasia and Middle East operations, which could not be fully hedged.

Second quarter 2023 currency losses, net were $4 million higher than second quarter 2022, while currency losses, net for the six months ended June 30, 2023 increased $15 million as compared to the prior year period.

The increase for both periods as compared to their prior year respective periods was primarily due to increased volatility in the global exchange rates, particularly in our Russia and Middle East operations, which could not be fully hedged.

Xerox 2023 Form 10-Q 52

Second quarter 2023 currency losses, net also reflect losses associated with the discontinuance of hedging relationships for certain YEN-based currency cash flow hedges.

Contract Termination Costs

First quarter 2022 reflects a $33 million charge ($25 million after-tax) associated with the termination of a product supply agreement.

Contract termination costs for the six months ended June 30, 2022 reflects a $33 million charge ($25 million after-tax) associated with the termination of a product supply agreement.

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

First quarter 2023 effective tax rate was 16.5%.

On an adjusted 1 basis, first quarter 2023 effective tax rate was 15.5%.

The difference between these rates and the U.S.

federal statutory tax rate of 21% primarily reflects the benefits from the redetermination of certain unrecognized tax positions of approximately 10% partially offset by the geographical mix of earnings.

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

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

Loss on Early Extinguishment of Debt

In the second quarter 2023, we recorded a loss of $3 million related to the early repayment on secured borrowings and the termination of our $250 million Credit Facility prior to entering into our new 5-year Asset Based Lending Facility (ABL).

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

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

Excess Contributions Refund

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

The excess contributions accumulated over the past 20 plus years.

Second quarter 2023 effective tax rate was a 31.5% tax benefit and includes the loss on the PARC donation as well as the associated tax benefits.

Excluding this impact, the effective tax rate was a 27.9% tax expense, which is higher than the U.S.

federal statutory tax rate of 21%, primarily due to the tax impacts associated with restructuring and asset impairment charges and the geographical mix of earnings.

On an adjusted 1 basis, second quarter 2023 effective tax rate was 20.0%, which is lower than the U.S.

federal statutory tax rate of 21% primarily due to tax benefits from the change in tax filing positions and the redetermination of certain unrecognized tax positions of approximately 10%, which were offset by the geographical mix of earnings.

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

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

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

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

The effective tax rate for the six months ended June 30, 2023 was a 350.0% tax benefit and includes the loss on the PARC donation as well as the associated tax benefits.

Excluding this impact, the effective tax rate was a 20.3% tax expense, which is lower than the U.S.

federal statutory tax rate of 21% primarily due to the tax benefits from the redetermination of certain unrecognized tax positions and the change in the tax filing positions predominately offset by the tax impacts associated with restructuring and asset impairment charges and the geographical mix of earnings.

On an adjusted 1 basis, the effective tax rate for the six months ended June 30, 2023 was 17.6%.

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

federal statutory tax rate of 21% primarily due to tax benefits from the redetermination of certain unrecognized tax positions and the change in tax filing positions, partially offset by the geographical mix of earnings.

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

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

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

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

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

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

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

Equity in net income of unconsolidated affiliates for the three months ended March 31, 2023 was relatively flat as compared to the prior year period.

Net Income (Loss)

First quarter 2023 Net Income Attributable to Xerox Holdings was $71 million, or $0.43 per diluted share.

Equity in net income of unconsolidated affiliates for the three and six months ended June 30, 2023 was relatively flat as compared to their respective prior year periods.

Net (Loss) Income

Second quarter 2023 Net (Loss) Attributable to Xerox Holdings was $(61) million, or $(0.41) per diluted share, which included the after-tax PARC donation charge of $92 million ($132 million pre-tax), or $0.58 per diluted share.

On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $72 million, or $0.44 per diluted share.

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

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

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

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

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

Net Income Attributable to Xerox Holdings for the six months ended June 30, 2023 was $10 million, or $0.02 per diluted share, which included the after-tax PARC donation charge of $92 million ($132 million pre-tax), or $0.58 per diluted share.

On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $154 million, or $0.93 per diluted share.

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

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

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

_____________

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

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

Other Comprehensive Income (Loss)

First quarter 2023 Other Comprehensive Income, Net Attributable to Xerox Holdings was $83 million and included the following:

i) net translation adjustment gains of $92 million reflecting the strengthening of our major foreign currencies against the U.S.

Second quarter 2023 Other Comprehensive Income, Net Attributable to Xerox Holdings was $17 million and included the following:

i) net translation adjustment gains of $49 million reflecting the strengthening of most of our major foreign currencies against the U.S.

Dollar during the quarter;

ii) $4 million of net unrealized gains;

and iii) $14 million of net losses from the changes in defined benefit plans primarily due to the adverse impact of currency partially offset by net actuarial gains and amortization of actuarial losses and settlement losses.

This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings of $44 million for the first quarter 2022, which reflected the following:

ii) $5 million of net unrealized losses;

and iii) $27 million of net losses from the changes in defined benefit plans primarily due to plan remeasurements and the adverse impact of currency, partially offset by amortization of actuarial losses.

This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings of $298 million for the second quarter 2022, which reflected the following:

i) net translation adjustment losses of $287 million reflecting the weakening of our major foreign currencies against the U.S.

Dollar during the quarter;

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

and iii) $3 million of net gains from the changes in defined benefit plans primarily due to the positive impact of currency as well as the amortization of actuarial losses and settlement losses, which were partially offset by a UK pension plan amendment and remeasurement.

Other Comprehensive Income, Net Attributable to Xerox Holdings for the six months ended June 30, 2023 was $100 million and included the following:

i) net translation adjustment gains of $141 million reflecting the strengthening of most of our major foreign currencies against the U.S.

ii) $1 million of net unrealized losses;

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

and iii) $41 million of net losses from the changes in defined benefit plans primarily due to the adverse impact of currency and plan remeasurements, partially offset by amortization of actuarial losses and settlement losses.

This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings for the six months ended June 30, 2022 of $342 million, which reflected the following:

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

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

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

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

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

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Segment Review

Three Months Ended March 31,

Three Months Ended June 30,

(in millions) External Revenue Intersegment Revenue (1)

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

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

Print and Other $ 1,653 $ 21 $ 1,674 94 % $ 107 6.5 %

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Total $ 1,747 $ 22 $ 1,769 100 % $ 35 2.0 %

Six Months Ended June 30,

(in millions) External Revenue Intersegment Revenue (1)

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

Print and Other $ 3,266 $ 44 $ 3,310 94 % $ 207 6.3 %

FITTLE 203 — 203 6 % 18 8.9 %

Total $ 3,469 $ 44 $ 3,513 100 % $ 225 6.5 %

Print and Other $ 3,221 $ 45 $ 3,266 94 % $ 18 0.6 %

FITTLE 194 — 194 6 % 14 7.2 %

Total $ 3,415 $ 45 $ 3,460 100 % $ 32 0.9 %

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

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Three Months Ended

June 30, Six Months Ended

(in millions) 2023 2022 %

Change 2023 2022 %

Equipment sales $ 414 $ 361 14.7% $ 799 $ 670 19.3%

1 unchanged sentence

Intersegment revenue (1)

21 22 (4.5)% 44 45 (2.2)%

Total Print and Other Revenue $ 1,674 $ 1,673 0.1% $ 3,310 $ 3,266 1.3%

1 unchanged sentence

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

First quarter 2023 Print and Other segment revenue increased 4.1% as compared to first quarter 2022, driven primarily by Equipment sales revenue growth as compared to the first quarter 2022.

Print and Other segment revenues included the following:

Equipment sales revenue increased 24.6% during the first quarter 2023 as compared to first quarter 2022 due to improvement in product availability and favora ble mix towards mid-range devices.

Equipment backlog declined 27.1% on a sequential basis and 58.8% on a year-over-year basis due to better availability of product but remained above pre-pandemic levels.

Post sale revenue decreased by 2.1% during the first quarter 2023 as compared to first quarter 2022, primarily due to IT hardware revenue declines, currency and lower page volumes associated with lower installations in prior periods.

These decreases were partially offset by growth in outsourcing revenues, which included the acquisition of Go Inspire, and paper sales.

Xerox 2023 Form 10-Q 55

Second quarter 2023 Print and Other segment revenue increased 0.1% as compared to second quarter 2022, and Print and Other revenue increased 1.3% for the six months ended June 30, 2023 as compared to the prior year period.

The increase for both the three and six months ended June 30, 2023 was driven primarily by Equipment sales revenue growth, partially offset by lower Post sale revenue, as compared to their respective prior year periods.

Print and Other segment revenues included the following:

Equipment sales revenue increased 14.7% during the second quarter 2023 as compared to second quarter 2022, and Equipment sales revenue increased 19.3% for the six months ended June 30, 2023 as compared to the prior year period.

The increase for the three and six months ended June 30, 2023 as compared to their respective prior year periods was due to improvement in product availability, particularly in our Americas operations, and for our higher margin mid-range and high-end devices, as well as recent pricing actions.

Post sale revenue decreased 4.0% during the second quarter 2023 as compared to second quarter 2022, primarily due to lower paper sales, IT hardware revenue declines, and the cessation of Fuji royalty income and PARC revenue.

Contractual print services revenue 1 was down slightly in constant currency 2 , as growth in digital services, including the benefits of a recent acquisition, and the benefits of price increases were offset by a slight reduction in our serviced fleet.

Post sale revenue decreased 3.3% for the six months ended June 30, 2023 as compared to the prior year period primarily due to lower paper sales, IT hardware revenue declines, and the cessation of Fuji royalty income and PARC revenue.

Contractual print services revenue 1 increased in constant currency 2 , due to improvement in IT and Digital Services revenue, which included the benefits of an acquisition, partially offset by a reduction in our serviced fleet.

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(1) Includes revenues from Services, maintenance and rentals.

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

Detail by product group is shown below.

Three Months Ended

March 31, % of Equipment Sales

(in millions) 2023 2022 % Change CC % Change 2023 2022

June 30, Six Months Ended

June 30, % of Equipment Sales

(in millions) 2023 2022 %

CC % Change 2023 2022 % Change CC % Change 2023 2022

Entry $ 63 $ 66 (4.5)% (4.3)% $ 125 $ 127 (1.6)% (1.1)% 16% 19%

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

(2) Includes equipment sales related to the FITTLE segment of $6 million and $5 million for the three months ended March 31, 2023 and 2022, respectively.

(2) Includes equipment sales related to the FITTLE segment of $6 million and $5 million for the three months ended June 30, 2023 and 2022, respectively, and $12 million and $10 million for the six months ended June 30, 2023 and 2022, respectively.

The change at constant currency 1 reflected the following:

• Entry - The increase was driven by strength in color devices and overall price increases.

• Mid-range - The increase was primarily driven by our higher margin A3 devices due to improved product availability, price increases, and a strong backlog going into the quarter.

• High-end - The increase was driven by strong performance in entry production color, improved product availability, as well as benefits from price increases.

• Entry - The decrease for the three and six months ended June 30, 2023 as compared to their respective prior year periods was driven by a shift towards black-and-white devices across all regions.

• Mid-range - The increase for the three and six months ended June 30, 2023 as compared to their respective prior year periods was driven by our higher margin A3 devices, primarily in our Americas operations, improved product availability, and price increases.

• High-end - The i ncrease for the three months ended June 30, 2023 was driven by Entry Production Mid where installs increased 24% as compared to second quarter 2022, due to higher supply and increased demand.

Additionally, iGen placement s more than tripled in the second quarter 2023 as compared to the prior year period, primarily in the Americas, with improved supply supporting orders in backlog.

The increase for the six months ended June 30, 2023 as compared to the prior year period was driven by higher revenue and higher installs of both Entry Production Color devices and iGens, due to improved product availability, as well as benefits from price increases.

_____________

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

Xerox 2023 Form 10-Q 56

Total Installs

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

Installs for the three months ended March 31, 2023 as compared to prior year period reflect the following:

• 9% decrease in entry color installs primarily due to declines in entry color printers, partially offset by growth in A4 Color multi-function printers.

• 1% decrease in entry black-and-white installs primarily driven by A4 mono multi-function printer (MFP) activity declines, partially offset by entry mono printer installs, and increased product availability.

• 26% increase in mid-range color installs primarily reflecting increased product availability.

• 160% increase in mid-range black-and-white installs, primarily reflecting increased product availability.

• 84% increase in high-end color installs primarily reflecting increased product availability and strong demand for entry production color devices.

• 23% decrease in high-end black-and-white installs reflecting lower demand.

Installs for the three months ended June 30, 2023 as compared to prior year period reflect the following:

• 43% decrease in entry color installs primarily due to declines in entry color printers and A4 Color multi-function printers (MFPs).

• 5% decrease in entry black-and-white installs driven by declines in A4 mono MFPs, partially offset by higher entry mono printer installs.

• 21% increase in mid-range color installs, driven by A3 color MFPs, reflecting increased product availability.

• 16% increase in mid-range black-and-white installs, driven by A3 mono MFPs, reflecting increased product availability.

• 8% increase in high-end color installs reflecting higher demand for iGen and Entry Production Color Mid devices, primarily in our Americas region.

• 8% decrease in high-end black-and-white installs reflecting macroeconomic pressures in EMEA and a competitive market for high end cut sheet devices.

Installs for the six months ended June 30, 2023 as compared to prior year period reflect the following:

• 28% decrease in entry color installs reflecting declines in entry color printers and A4 Color MFPs, primarily in our EMEA region.

• 3% decrease in entry black-and-white installs primarily driven by declines in A4 mono MFPs, partially offset by higher entry mono printer installs, and increased product availability.

• 23% increase in mid-range color installs, driven by A3 color MFPs, reflecting increased product availability.

• 61% increase in mid-range black-and-white installs, driven by A3 mono MFPs, primarily in our Americas region, as well as increased product availability.

• 38% increase in high-end color installs reflecting higher demand for iGen and Entry Production Color Mid devices, primarily in our Americas region.

• 16% decrease in high-end black-and-white installs reflecting lower demand, primarily in our Americas region.

_____________

(1) Reflects install activity for total Entry product group.

Xerox 2023 Form 10-Q 50

Products and Offerings Definitions

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Segment Margin

Print and Other segment margin of 6.8% for the three months ended March 31, 2023 increased by 8.1-percentage points as compared to first quarter 2022 primarily due to higher revenue, lower supply chain-related costs, lower RD&E expense as well as lower selling and administrative expense, which reflect the benefits of cost and productivity savings.

This activity was partially offset by higher product costs.

Print and Other segment margin of 6.5% for the three months ended June 30, 2023 increased by 4.7-percentage points as compared to second quarter 2022 primarily due to lower supply chain-related costs, lower RD&E expense,

Xerox 2023 Form 10-Q 57

and lower selling and administrative expenses, which reflect the benefits of cost and productivity savings, as well as higher revenue.

This activity was partially offset by higher bad debt expense.

Print and Other segment margin of 6.3% for the six months ended June 30, 2023 increased 5.7-percentage points as compared to the prior year period primarily due to lower supply chain-related costs, lower RD&E expense, and lower Selling, administrative and general expenses, which reflect the benefits of cost and productivity savings and lower bad debt expense, as well as higher revenue.

This activity was partially offset by higher Restructuring and related costs, net.

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

Three Months Ended

June 30, Six Months Ended

(in millions) 2023 2022 %

Change 2023 2022 %

Equipment sales $ 6 $ 5 20.0% $ 12 $ 10 20.0%

1 unchanged sentence

What changed 10-Q

Item 2. Management’s Discussion and Analysis