Xerox Holdings Corp 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Throughout the Management’s Discussion and Analysis (MD&A) that follows, 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. Currently, Xerox Holdings' primary direct operating subsidiary is Xerox and Xerox reflects nearly all of Xerox Holdings' operations. Accordingly, the following MD&A primarily focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and its results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, the Condensed Consolidated Financial Statements and the accompanying notes. Throughout this MD&A, references are made to various notes in the Condensed Consolidated Financial Statements which appear in Item 1 of this combined Quarterly Report on Form 10-Q (this Form 10-Q), and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made. Xerox Holdings' other direct subsidiary is Xerox Ventures LLC, which was established in 2021 solely to invest in startups and early/mid-stage growth companies aligned with the Company’s innovation focus areas and targeted adjacencies. 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 June 30, 2023. Due to its immaterial nature, and for ease of discussion, Xerox Ventures LLC's results are included within the following discussion. Currency Impact To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency," “currency impact” or “the impact from currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates. Overview 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 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. ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. (2) Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT services offerings. Second Quarter 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 ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. 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. ____________________________ (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 June 30, Six Months Ended June 30, (in millions) 2023 2022 % Change 2023 2022 % Change Revenue Print and Other $ 1,674 $ 1,673 0.1 % $ 3,310 $ 3,266 1.3 % FITTLE 101 96 5.2 % 203 194 4.6 % Intersegment Elimination (1) (21) (22) (4.5) % (44) (45) (2.2) % Total Revenue $ 1,754 $ 1,747 0.4 % $ 3,469 $ 3,415 1.6 % Profit Print and Other $ 107 $ 29 nm $ 207 $ 18 nm FITTLE — 6 nm 18 14 28.6 % Total Profit $ 107 $ 35 nm $ 225 $ 32 nm ____________________________ (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. nm - Change is not meaningful. 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. ____________________________ (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, 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. ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. (2) Free cash flow is Net cash provided by operating activities less capital expenditures. Xerox 2023 Form 10-Q 45 Financial Review Revenues Three Months Ended 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 % Post sale revenue 1,334 1,381 (3.4) % (3.2) % 2,658 2,735 (2.8) % (1.4) % 77 % 80 % 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 (Loss) Income: Sales $ 696 $ 667 4.3 % 4.1 % $ 1,355 $ 1,259 7.6 % 8.3 % Less: Supplies, paper and other sales (276) (301) (8.3) % (8.5) % (544) (579) (6.0) % (5.6) % Equipment sales $ 420 $ 366 14.8 % 14.3 % $ 811 $ 680 19.3 % 20.2 % Services, maintenance and rentals $ 1,009 $ 1,028 (1.8) % (1.6) % $ 2,013 $ 2,051 (1.9) % (0.1) % Add: Supplies, paper and other sales 276 301 (8.3) % (8.5) % 544 579 (6.0) % (5.6) % Add: Financing 49 52 (5.8) % (4.0) % 101 105 (3.8) % (1.8) % Post sale revenue $ 1,334 $ 1,381 (3.4) % (3.2) % $ 2,658 $ 2,735 (2.8) % (1.4) % Segments Print and Other $ 1,674 $ 1,673 0.1 % $ 3,310 $ 3,266 1.3 % 95 % 95 % FITTLE 101 96 5.2 % 203 194 4.6 % 6 % 6 % Intersegment elimination (1) (21) (22) (4.5) % (44) (45) (2.2) % (1) % (1) % Total Revenue (2) $ 1,754 $ 1,747 0.4 % $ 3,469 $ 3,415 1.6 % 100 % 100 % Go-To-Market Operations Americas $ 1,154 $ 1,150 0.3 % 0.7 % $ 2,268 $ 2,221 2.1 % 2.6 % 65 % 65 % EMEA 570 551 3.4 % 3.1 % 1,126 1,105 1.9 % 5.2 % 33 % 32 % Other 30 46 (34.8) % (34.8) % 75 89 (15.7) % (15.7) % 2 % 3 % Total Revenue (3) $ 1,754 $ 1,747 0.4 % 0.5 % $ 3,469 $ 3,415 1.6 % 2.9 % 100 % 100 % _____________ CC - See "Currency Impact" section for a description of Constant Currency. (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. (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, 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. 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 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 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 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, 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 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. ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. (2) Includes revenues from Services, maintenance and rentals. Geographic Sales Channels We also operate a matrix organization that includes a geographic focus that is primarily organized from a sales perspective on the basis of “go-to-market” (GTM) sales channels as follows: • Americas , which includes our sales channels in the U.S. and Canada, as well as Mexico, Brazil and Central and South America. • EMEA , which includes our sales channels in Europe, the Middle East, Africa and India. • Other , which includes royalties and licensing revenue. These GTM sales channels are structured to serve a range of customers for our products and services, including financing. Accordingly, we will continue to provide information, primarily revenue related, with respect to our principal GTM sales channels. Xerox 2023 Form 10-Q 48 Costs, Expenses and Other Income Summary of Key Financial Ratios The following is a summary of key financial ratios used to assess our performance: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 B/(W) 2023 2022 B/(W) Gross Profit $ 597 $ 557 $ 40 $ 1,186 $ 1,087 $ 99 RD&E 57 84 27 121 162 41 SAG 433 459 26 840 914 74 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. 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 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 (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 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. ______________ (1) Refer to the Adjusted Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. Gross Margin 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 June 30, Six Months Ended June 30, (in millions) 2023 2022 Change 2023 2022 Change R&D $ 42 $ 70 $ (28) $ 94 $ 134 $ (40) Sustaining engineering 15 14 1 27 28 (1) Total RD&E Expenses $ 57 $ 84 $ (27) $ 121 $ 162 $ (41) 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) 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. We continue to monitor developments in future economic conditions, and as a result, our reserves may need to be updated in future periods. On a trailing twelve-month basis (TTM), bad debt expense was approximately 1.0% of total receivables (excluding the reserve releases in the first quarter 2023). Refer to Note 8 - Accounts Receivable, Net and Note 9 - Finance Receivables, Net in the Condensed Consolidated Financial Statements for additional information regarding our bad debt provision. Restructuring and Related Costs, Net We incurred Restructuring and related costs, net of $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 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. Other Expenses, Net Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 2023 2022 Non-financing interest expense $ 12 $ 23 $ 26 $ 52 Interest income (4) (3) (9) (4) Non-service retirement-related costs 11 (4) 10 (11) 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 Other expenses, net $ 31 $ 8 $ 51 $ 65 Non-Financing Interest Expense 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 $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. Interest Income 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 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 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 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. 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. Income Taxes 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 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. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable. _____________ (1) Refer to the Adjusted Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section. Xerox 2023 Form 10-Q 53 Equity in Net Income of Unconsolidated Affiliates Investment in Affiliates, at Equity largely consists of several minor investments in entities in the Middle East region. Equity in net income of unconsolidated affiliates for the three 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. 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 and EPS reconciliation table in the "Non-GAAP Financial Measures" section. Other Comprehensive Income (Loss) 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) $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. Dollar; ii) $1 million of net unrealized losses; 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. Dollar; ii) $25 million of net unrealized losses primarily due to the weakening of the Yen during the first half of 2022 and the associated impact on our Yen based forward exchange contracts hedging forecasted purchases; and iii) $42 million of net gains from the changes in defined benefit plans primarily due to the positive impact of currency, a U.S. retiree-health plan amendment and the amortization of actuarial losses and settlement losses, which were partially offset by a UK pension plan amendment and remeasurement. 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. Xerox 2023 Form 10-Q 54 Reportable Segments Our business is organized to ensure we focus on efficiently managing operations while serving our customers and the markets in which we operate. We have two operating and reportable segments – Print and Other and FITTLE . Refer to Note 4 - Segment Reporting in the Condensed Consolidated Financial Statements for additional information regarding our reportable segments. Segment Review Three Months Ended June 30, (in millions) External Revenue Intersegment Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) 2023 Print and Other $ 1,653 $ 21 $ 1,674 94 % $ 107 6.5 % FITTLE 101 — 101 6 % — — % Total $ 1,754 $ 21 $ 1,775 100 % $ 107 6.1 % 2022 Print and Other $ 1,651 $ 22 $ 1,673 95 % $ 29 1.8 % FITTLE 96 — 96 5 % 6 6.3 % 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) 2023 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 % 2022 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. (2) Segment margin based on external revenue only. Print and Other Print and Other includes the design, development and sale of document management systems, solutions and services as well as associated technology offerings including IT and software products and services. Revenue Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 % Change 2023 2022 % Change Equipment sales $ 414 $ 361 14.7% $ 799 $ 670 19.3% Post sale revenue 1,239 1,290 (4.0)% 2,467 2,551 (3.3)% 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) 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. 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. _____________ (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 June 30, Six Months Ended June 30, % of Equipment Sales (in millions) 2023 2022 % Change CC % Change 2023 2022 % Change CC % Change 2023 2022 Entry $ 63 $ 66 (4.5)% (4.3)% $ 125 $ 127 (1.6)% (1.1)% 16% 19% Mid-range 270 221 22.2% 21.9% 522 415 25.8% 26.8% 64% 61% High-end 82 76 7.9% 8.0% 155 130 19.2% 20.6% 19% 19% Other 5 3 66.7% 66.7% 9 8 12.5% 12.5% 1% 1% Equipment sales (1)(2) $ 420 $ 366 14.8% 14.3% $ 811 $ 680 19.3% 20.2% 100% 100% _____________ CC - See "Currency Impact" section for a description of constant currency. (1) Refer to the Products and Offerings Definitions section. (2) Includes equipment sales related to the 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 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 Installs reflect new placements of devices only (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations). Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our services revenues (which are both reported within our Post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity for Xerox and non-Xerox branded products installed by our XBS sales unit. Detail by product group (see Products and Offerings Definitions ) is shown below. Installs for the three months ended June 30, 2023 as compared to prior year period reflect the following: Entry 1 • 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. Mid-Range • 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. High-End • 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: Entry 1 • 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. Mid-Range • 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. High-End • 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. Products and Offerings Definitions 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 product groups 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. Segment Margin 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 FITTLE represents a global financing solutions business, primarily enabling the sale of our equipment and services. Revenue Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 % Change 2023 2022 % Change Equipment sales $ 6 $ 5 20.0% $ 12 $ 10 20.0% Financing 49 52 (5.8)% 101 105 (3.8)% Other Post sale revenue (1) 46 39 17.9% 90 79 13.9% Total FITTLE Revenue $ 101 $ 96 5.2% $ 203 $ 194 4.6% _____________ (1) Other Post sale revenue includes lease renewal and fee income. Second quarter 2023 FITTLE segment revenue increased 5.2% as compared to second quarter 2022, and for the six months ended June 30, 2023 segment revenue increased 4.6% as compared to the prior year period. FITTLE segment revenue included the following: 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, 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. Other Post sale revenue increased 17.9% for the three months ended June 30, 2023 as compared to second quarter 2022, and increased 13.9% for the six months ended June 30, 2023 as compared to the prior year period. The increase in both periods is due to revenue from sales of finance receivables under our finance receivables funding agreement, which was $11 million and $14 million for the three and six months ended June 30, 2023. _____________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Segment Margin FITTLE segment margin of 0.0% for the three months ended June 30, 2023 decreased 6.3-percentage points as compared to second quarter 2022 due to higher strategic investment costs, and higher interest costs, partially offset by the benefits of the finance receivables funding agreement. FITTLE segment margin of 8.9% for the six months ended June 30, 2023 increased 1.7-percentage points as compared to the prior year period driven by higher revenue reflecting the benefits of the finance receivables funding agreement, and lower bad debt expense, partially offset by higher strategic investment costs, and higher interest costs. Xerox 2023 Form 10-Q 58 Capital Resources and Liquidity The following is a summary of our liquidity position: • As of June 30, 2023 and December 31, 2022, total cash, cash equivalents and restricted cash were $569 million and $1,139 million, respectively, and apart from restricted cash of $92 million and $94 million at June 30, 2023 and December 31, 2022, respectively, was readily accessible for use. The decrease in total cash, cash equivalents and restricted cash of $570 million primarily reflects payments on long-term debt of $826 million and dividend payments to shareholders of $88 million, which were partially offset by net proceeds of $193 million from the new asset-based revolving credit agreement (the ABL Facility) , and net cash flows from operations of $173 million. Net cash flows from operations included a $390 million benefit from a decrease in finance receivables, which reflected the sale of approximately $630 million of finance receivables under the finance receivables funding agreement, partially offset by new originations. • Total debt at June 30, 2023 was $3,116 million, of which $2,595 million is allocated to and supports the Company's finance assets. The remaining debt of $521 million is attributable to the non-financing business and declined from $806 million at December 31, 2022. Debt consists of Senior Unsecured Notes, secured borrowings through the securitization of finance assets, and borrowings under our new ABL Facility (see below). Approximately $300 million of our Senior Unsecured Note borrowings are due in within the next twelve months. • In May 2023, we entered into a five-year senior secured revolving credit facility of up to $300 million (the ABL Facility). Our previous $250 million Credit Facility due July 2024 was terminated prior to entering into the ABL Facility. As of June 30, 2023, there were $200 million of borrowings under the ABL Facility, which are reported as short-term borrowings based on management's intent to repay this balance within the next six months. There were no letters of credit outstanding under this facility and we were in full compliance with the covenants and other provisions of the ABL Facility. • 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. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity. Cash Flow Analysis The following summarizes our cash, cash equivalents and restricted cash: Six Months Ended June 30, Change (in millions) 2023 2022 Net cash provided by (used in) operating activities $ 173 $ (19) $ 192 Net cash used in investing activities (22) (62) 40 Net cash used in financing activities (725) (587) (138) Effect of exchange rate changes on cash, cash equivalents and restricted cash 4 (14) 18 Decrease in cash, cash equivalents and restricted cash (570) (682) 112 Cash, cash equivalents and restricted cash at beginning of period 1,139 1,909 (770) Cash, Cash Equivalents and Restricted Cash at End of Period $ 569 $ 1,227 $ (658) Cash Flows from Operating Activities Net cash provided by operating activities was $173 million for the six months ended June 30, 2023. The $192 million increase in operating cash from the prior year period was primarily due to the following: • $199 million increase in pre-tax income before depreciation and amortization, provisions, PARC donation, stock-based compensation, restructuring and related costs and non-service retirement-related costs. • $390 million increase from finance receivables reflecting the sale of approximately $630 million of finance receivables under the finance receivables funding agreement, partially offset by higher originations from increased equipment sales. Refer to Note 9 – Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding the sale of finance receivables. • $107 million increase due to lower inventory reflecting increased sales of equipment and supplies. • $43 million increase from lower net tax payments. • $40 million increase from lower contributions to our retirement plans primarily due to further contributions to our U.K. defined benefit pension plan not being required in 2023. Xerox 2023 Form 10-Q 59 • $462 million decrease from accounts payable primarily due to the timing of supplier and vendor payments and lower year-over-year spending. • $105 million decrease from other current and long-term liabilities primarily due to the timing of payment of higher year-end accruals. • $30 million decrease from higher installs of equipment on operating leases. Cash Flows from Investing Activities Net cash used in investing activities was $22 million for the six months ended June 30, 2023. The $40 million decrease in the use of cash from the prior year period was primarily due to the following: • $45 million decrease reflecting fewer acquisitions in 2023. • $14 million decrease reflecting lower capital expenditures. • $25 million increase primarily due to the sale of surplus buildings and land in the U.S. in the prior year. Cash Flows from Financing Activities Net cash used in financing activities was $725 million for the six months ended June 30, 2023. The $138 million increase in the use of cash from the prior year period was primarily due to the following: • $247 million increase from net debt activity. 2023 reflects payments of $300 million on Senior Notes and $519 million on secured financing arrangements offset by net proceeds of $193 million from the new ABL Facility, which includes a debt issuance cost payment of $7 million. The $519 million of payments on secured financing arrangements includes the early repayment of $185 million U.S. secured borrowing. 2022 reflects proceeds of $753 million on secured financing arrangements offset by payments of $477 million, $300 million on maturing 2022 Senior Notes and $353 million for the early redemption of 2023 Senior Notes, which includes a premium payment of $3 million. • $113 million decrease due to no share repurchases in the current year. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity. Cash, Cash Equivalents and Restricted Cash Refer to Note 7 - Supplementary Financial Information in the Condensed Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash. Operating Leases We have operating leases for real estate and vehicles in our domestic and international operations, and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to twelve years and a variety of renewal and/or termination options. As of June 30, 2023 and December 31, 2022, total operating lease liabilities were $203 million and $229 million, respectively. Refer to Note 11 - Lessee in the Condensed Consolidated Financial Statements for additional information regarding our leases accounted for under lessee accounting. Xerox 2023 Form 10-Q 60 Debt and Customer Financing Activities The following summarizes our debt: (in millions) June 30, 2023 December 31, 2022 Xerox Holdings Corporation $ 1,500 $ 1,500 Xerox Corporation 1,100 1,200 Xerox - Other Subsidiaries (1) 526 1,042 Subtotal - Principal debt balance 3,126 3,742 Debt issuance costs Xerox Holdings Corporation (7) (9) Xerox Corporation (4) (4) Xerox - Other Subsidiaries (1) (1) (5) Subtotal - Debt issuance costs (12) (18) Net unamortized premium 2 2 Total Debt $ 3,116 $ 3,726 _____________ (1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of the securitization of Finance Receivables. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt. Finance Assets and Related Debt The following represents our total finance assets, net associated with our lease and finance operations: (in millions) June 30, 2023 December 31, 2022 Total finance receivables, net (1) $ 2,707 $ 3,102 Equipment on operating leases, net 259 235 Total Finance Assets, net (2) $ 2,966 $ 3,337 _____________ (1) Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Condensed Consolidated Balance Sheets. (2) The change from December 31, 2022 includes an increase of $36 million due to currency. Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in Total finance assets, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets. Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt: (in millions) June 30, 2023 December 31, 2022 Finance receivables debt (1) $ 2,368 $ 2,714 Equipment on operating leases debt 227 206 Financing debt 2,595 2,920 Core debt 521 806 Total Debt $ 3,116 $ 3,726 __________________ (1) Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of (Loss) Income. Xerox 2023 Form 10-Q 61 Sales of Accounts Receivable Activity related to sales of accounts receivable is as follows: Six Months Ended June 30, (in millions) 2023 2022 Estimated decrease to net operating cash flows (1) $ (84) $ (10) _____________ (1) Represents the difference between current and prior period accounts receivable sales adjusted for the effects of currency. Refer to Note 8 - Accounts Receivable, Net in the Condensed Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements. Liquidity and Financial Flexibility We manage our worldwide liquidity using internal cash management practices, which are subject to i) the statutes, regulations and practices of each of the local jurisdictions in which we operate, ii) the legal requirements of the agreements to which we are a party, and iii) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services. Our principal debt maturities are spread over the next five years as follows: (in millions) Xerox Holdings Corporation Xerox Corporation Xerox - Other Subsidiaries (1) Total 2023 Q3 $ — $ 200 $ 113 $ 313 2023 Q4 — — 105 105 2024 — 300 271 571 2025 750 — 37 787 2026 — — — — 2027 — — — — 2028 and thereafter 750 600 — 1,350 Total (2) $ 1,500 $ 1,100 $ 526 $ 3,126 _____________ (1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of the securitization of Finance Receivables. (2) Includes fair value adjustments. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt. Treasury Stock Xerox Holdings Corporation made no repurchases of its Common Stock in second quarter 2023. Xerox 2023 Form 10-Q 62 Financial Risk Management We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, interest rate caps, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the Japanese Yen, Euro and U.K. Pound Sterling. The fair market values of all our derivative contracts change with fluctuations in interest rates and/or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. We are required to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. As permitted, certain of these derivative contracts have been designated for hedge accounting treatment. Certain of our derivatives that do not qualify for hedge accounting are effective as economic hedges. These derivative contracts are likewise required to be recognized each period at fair value and therefore do result in some level of volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties. The current market events have not required us to materially modify or change our financial risk management strategies with respect to our exposures to interest rate and foreign currency risk. Refer to Note 14 – Financial Instruments in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies. Xerox 2023 Form 10-Q 63 Non-GAAP Financial Measures We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below. Adjusted Earnings Measures • Adjusted Net Income and EPS • Adjusted Effective Tax Rate The above measures were adjusted for the following items: Restructuring and related costs, net: Restructuring and related costs, net include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance, nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance. Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods. Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the Company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in Other expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans. Xerox 2023 Form 10-Q 64 Discrete, unusual or infrequent items: We exclude these item(s), when applicable, given their discrete, unusual or infrequent nature and their impact on the comparability of our results for the period to prior periods and future expected trends. • Contract termination costs - product supply • PARC donation • Accelerated share vesting - stock compensation expense associated with the accelerated vesting of all outstanding equity awards, according to the terms of the award agreement, in connection with the passing of Xerox Holdings Corporation's former CEO. • Loss on early extinguishment of debt Adjusted Operating Income and Margin We calculate and utilize adjusted operating income (loss) and margin measures by adjusting our reported pre-tax income (loss) and margin amounts. In addition to the costs and expenses noted above as adjustments for our adjusted earnings measures, adjusted operating income (loss) and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business. Constant Currency (CC) Refer to "Currency Impact" for a discussion of this measure and its use in our analysis of revenue growth. Adjusted Net Income and EPS reconciliation: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in millions, except per share amounts) Net (Loss) Income Diluted EPS Net (Loss) Income Diluted EPS Net Income Diluted EPS Net (Loss) Income Diluted EPS Reported (1) $ (61) $ (0.41) $ (4) $ (0.05) $ 10 $ 0.02 $ (60) $ (0.43) Adjustments: Restructuring and related costs, net 23 1 25 19 Amortization of intangible assets 10 10 21 21 Non-service retirement-related costs 11 (4) 10 (11) Contract termination costs - product supply — — — 33 PARC donation 132 — 132 — Accelerated share vesting — 21 — 21 Loss on early extinguishment of debt 3 4 3 4 Income tax on PARC donation (2) (40) — (40) — Income tax on adjustments (excluding PARC donation) (2) (6) (4) (7) (17) Adjusted $ 72 $ 0.44 $ 24 $ 0.13 $ 154 $ 0.93 $ 10 $ 0.02 Dividends on preferred stock used in adjusted EPS calculation (3) $ 3 $ 3 $ 7 $ 7 Weighted average shares for adjusted EPS (3) 158 156 158 157 Fully diluted shares at June 30, 2023 (4) 158 ____________________________ (1) Net (Loss) Income and EPS attributable to Xerox Holdings. (2) Refer to Adjusted Effective Tax Rate reconciliation. (3) For those periods that include the preferred stock dividend, the average shares for the calculations of diluted EPS exclude the 7 million shares associated with our Series A convertible preferred stock. (4) Reflects common shares outstanding at June 30, 2023, plus potential dilutive common shares used for the calculation of adjusted diluted EPS for the second quarter 2023. The amount excludes shares associated with our Series A convertible preferred stock, which were anti-dilutive for the second quarter 2023. Xerox 2023 Form 10-Q 65 Adjusted Effective Tax Rate reconciliation: Three Months Ended June 30, 2023 2022 (in millions) Pre-Tax (Loss) Income Income Tax (Benefit) Expense Effective Tax Rate Pre-Tax (Loss) Income Income Tax Expense Effective Tax Rate Reported (1) $ (89) $ (28) 31.5 % $ (5) $ 1 (20.0) % PARC donation (2) 132 40 — — Non-GAAP Adjustments (2) 47 6 32 4 Adjusted (3) $ 90 $ 18 20.0 % $ 27 $ 5 18.5 % Six Months Ended June 30, 2023 2022 (in millions) Pre-Tax (Loss) Income Income Tax (Benefit) Expense Effective Tax Rate Pre-Tax (Loss) Income Tax (Benefit) Effective Tax Rate Reported (1) $ (4) $ (14) 350.0 % $ (94) $ (30) 31.9 % PARC donation (2) 132 40 — — Non-GAAP Adjustments (2) 59 7 87 17 Adjusted (3) $ 187 $ 33 17.6 % $ (7) $ (13) 185.7 % ____________________________ (1) Pre-tax (loss) and Income tax (benefit) expense. (2) Refer to Adjusted Net Income and EPS reconciliation for details. (3) The tax impact on Adjusted Pre-tax income (loss) is calculated under the same accounting principles applied to the Reported Pre-tax (loss) under ASC 740, which employs an annual effective tax rate method to the results. Adjusted Operating Income and Margin reconciliation: Three Months Ended June 30, 2023 2022 (in millions) (Loss) Profit Revenue Margin (Loss) Profit Revenue Margin Reported (1) $ (89) $ 1,754 (5.1) % $ (5) $ 1,747 (0.3) % Adjustments: Restructuring and related costs, net 23 1 Amortization of intangible assets 10 10 PARC donation 132 — Accelerated share vesting — 21 Other expenses, net 31 8 Adjusted $ 107 $ 1,754 6.1 % $ 35 $ 1,747 2.0 % Six Months Ended June 30, 2023 2022 (in millions) (Loss) Profit Revenue Margin (Loss) Profit Revenue Margin Reported (1) $ (4) $ 3,469 (0.1) % $ (94) $ 3,415 (2.8) % Adjustments: Restructuring and related costs, net 25 19 Amortization of intangible assets 21 21 PARC donation 132 — Accelerated share vesting — 21 Other expenses, net 51 65 Adjusted $ 225 $ 3,469 6.5 % $ 32 $ 3,415 0.9 % ____________________________ (1) Pre-tax (loss). Xerox 2023 Form 10-Q 66 ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the “Financial Risk Management” section of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this Item.