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 September 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 third quarter 2023, earnings and cash flow grew despite a decline in revenue, evidencing an ability to manage profitability amid fluctuations in revenue through strategic initiatives, cost efficiency actions and productivity. The decline in revenue for the third quarter 2023 reflects declines in certain transactional low-margin post-sale revenue categories, as well as declines in revenue associated with strategic actions put in place to simplify our business, partially offset by a stable demand for our products and services. Equipment sales of $386 million in the third quarter 2023 declined 1.0% in actual currency, or 2.1% in constant currency 1 , primarily due to the prior year reduction in backlog 2 . Consistent with recent quarters, revenue trends outpaced equipment installation activity, due to favorable product and geographic mix, as well as higher prices. This was particularly true with our A3 products, which experienced unfavorable geographic mix effects in the prior year due to backlog 2 reductions in EMEA. Entry A4 installations were lower again this quarter, due to the ongoing normalization of work-from-home trends. Post sale revenue of $1,266 million declined 7.0% in actual currency or 9.0% in constant currency 1 . Post sale declines were primarily driven by reductions in transactional items, most notably a significant decline in lower-margin paper sales and IT endpoint devices. Post sale revenue was further impacted by the termination of Fuji royalty income and specific strategic actions, resulting in lower financing and PARC revenue. Pre-tax income increased year-over-year primarily due to the Goodwill impairment charge in the prior year period and lower RD&E expenses, Other expenses, net and Restructuring and related costs, net. Adjusted 1 operating income was up slightly year-over-year as the effects of lower revenue and gross profit, along with higher incentive compensation and bad debt expenses, were offset by ongoing operating efficiencies and pricing actions. Xerox 2023 Form 10-Q 47 Segment Reporting Change During the second quarter of 2023, the Company recast FITTLE’s segment revenues and profits measures to reflect the recent strategic shift in the Company’s approach to funding FITTLE 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. Third Quarter 2023 Review Total revenue of $1.65 billion for third quarter 2023 decreased 5.7% from third quarter 2022, which included a 1.7-percentage point benefit from currency. Total revenue of $5.12 billion for the nine months ended September 30, 2023 decreased 0.9% as compared to the prior year period, which included a 0.3-percentage point adverse impact from currency, as well as a 1.1-percentage point benefit from an acquisition. Net income (loss) attributable to Xerox Holdings and adjusted 1 Net income attributable to Xerox Holdings were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 B/(W) 2023 2022 B/(W) Net Income (Loss) Attributable to Xerox Holdings $ 49 $ (383) $ 432 $ 59 $ (443) $ 502 Adjusted (1) Net income attributable to Xerox Holdings 77 33 44 231 43 188 ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Third quarter 2023 Net income attributable to Xerox Holdings was $49 million as compared to the third quarter 2022 Net (loss) attributable to Xerox Holdings of $(383) million. The increase in Net Income is primarily due to the Goodwill impairment charge in the prior year period, as well as lower RD&E expenses, Other expenses, net, and Restructuring and related costs, net. These favorable impacts were partially offset by lower revenue and gross profit, as well as higher Income tax expense. Third quarter 2023 Adjusted 1 Net income attributable to Xerox Holdings of $77 million increased $44 million as compared to the prior year period, primarily reflecting lower RD&E expenses, Other expenses, net and Income tax expense. These favorable impacts were partially offset by lower revenue and gross profit. Net income attributable to Xerox Holdings for the nine months ended September 30, 2023 was $59 million as compared to a Net (loss) attributable to Xerox Holdings of $(443) million in the prior year period. The increase in Net Income is primarily due to the Goodwill impairment charge in the prior year period, as well as higher gross profit, which includes the impact of lower supply chain-related costs, lower Selling, administrative and general expenses, lower RD&E expenses, and lower Other expenses, net. These favorable impacts were partially offset by the after-tax PARC donation charge of $92 million ($132 million pre-tax) in the second quarter 2023, as well as lower revenues and higher Income tax expense. A djusted 1 Net income attributable to Xerox Holdings for the nine months ended September 30, 2023 of $231 million increased $188 million as compared to the prior year period, primarily reflecting higher gross profit, which includes the impact of lower supply chain-related costs, as well as lower Selling, administrative and general expenses, RD&E expenses, and Other expenses, net. These favorable impacts were partially offset by lower revenue and higher Income tax expense. ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Xerox 2023 Form 10-Q 48 A summary of our segments - Print and Other and Financing (FITTLE) - is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 % Change 2023 2022 % Change Revenue Print and Other $ 1,575 $ 1,676 (6.0) % $ 4,885 $ 4,942 (1.2) % FITTLE 98 98 — % 301 292 3.1 % Intersegment Elimination (1) (21) (23) (8.7) % (65) (68) (4.4) % Total Revenue $ 1,652 $ 1,751 (5.7) % $ 5,121 $ 5,166 (0.9) % Profit Print and Other $ 64 $ 63 1.6 % $ 271 $ 81 nm FITTLE 4 2 nm 22 16 37.5 % Total Profit $ 68 $ 65 4.6 % $ 293 $ 97 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 nine months ended September 30, 2023 was a source of $297 million and increased $324 million as compared to the prior year period, primarily related to higher net income as well as proceeds of approximately $850 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 provided by investing activities during the nine months ended September 30, 2023 was $3 million, primarily reflecting gains from sales of non-core surplus business assets of $40 million, partially offset by capital expenditures of $27 million and acquisitions of $7 million. Cash used in financing activities during the nine months ended September 30, 2023 was $819 million primarily reflecting $544 million of share repurchases, as well as net debt payments of $131 million. Net debt payments include payments of $644 million on existing secured financing arrangements, which includes the early repayment of $185 million on a U.S. secured borrowing, and $300 million for Senior Notes that matured in 2023. These payments were partially offset by net proceeds of $549 million from the Bridge Loan Facility, which was used to fund the share repurchase, net proceeds of $213 million from the new Asset Based Loan Facility (ABL), and net proceeds of $52 million from the refinance of our Canadian securitization. The remaining use of cash was for dividend payments of $131 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 for full-year 2023. There continues to be momentum in demand for our products and services in the Americas, particularly for our faster-growing Digital Services. However, during third quarter 2023 there has been a mild softening of demand in our European markets, reflecting weaker macroeconomic conditions. As a result, revenue is expected to come in at the lower end of the expected range. The Company expects a difficult equipment sales revenue comparison in the fourth quarter 2023 due to the significant prior year reduction in backlog 2 . Further, the headwinds affecting post sale revenue in third quarter 2023 are expected to persist in fourth quarter 2023. Due to better-than-expected profitability, reflecting the successful implementation of ongoing cost efficiency programs and a focus on generating profitable revenue, we expect full-year 2023 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 continue to expect Operating cash flows to be at least $650 million and capital expenditures to be approximately $50 million. ____________________________ (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. Xerox 2023 Form 10-Q 49 Financial Review Revenues Three Months Ended September 30, Nine Months Ended September 30, % of Total Revenue (in millions) 2023 2022 % Change CC % Change 2023 2022 % Change CC % Change 2023 2022 Equipment sales $ 386 $ 390 (1.0) % (2.1) % $ 1,197 $ 1,070 11.9 % 12.1 % 23 % 21 % Post sale revenue 1,266 1,361 (7.0) % (9.0) % 3,924 4,096 (4.2) % (3.9) % 77 % 79 % Total Revenue $ 1,652 $ 1,751 (5.7) % (7.4) % $ 5,121 $ 5,166 (0.9) % (0.6) % 100 % 100 % Reconciliation to Condensed Consolidated Statements of Income (Loss): Sales $ 644 $ 690 (6.7) % (8.5) % $ 1,999 $ 1,949 2.6 % 2.4 % Less: Supplies, paper and other sales (258) (300) (14.0) % (16.7) % (802) (879) (8.8) % (9.4) % Equipment sales $ 386 $ 390 (1.0) % (2.1) % $ 1,197 $ 1,070 11.9 % 12.1 % Services, maintenance and rentals $ 962 $ 1,010 (4.8) % (6.4) % $ 2,975 $ 3,061 (2.8) % (2.2) % Add: Supplies, paper and other sales 258 300 (14.0) % (16.7) % 802 879 (8.8) % (9.4) % Add: Financing 46 51 (9.8) % (13.5) % 147 156 (5.8) % (5.6) % Post sale revenue $ 1,266 $ 1,361 (7.0) % (9.0) % $ 3,924 $ 4,096 (4.2) % (3.9) % Segments Print and Other $ 1,575 $ 1,676 (6.0) % $ 4,885 $ 4,942 (1.2) % 95 % 96 % FITTLE 98 98 — % 301 292 3.1 % 6 % 6 % Intersegment elimination (1) (21) (23) (8.7) % (65) (68) (4.4) % (1) % (2) % Total Revenue (2) $ 1,652 $ 1,751 (5.7) % $ 5,121 $ 5,166 (0.9) % 100 % 100 % Go-To-Market Operations Americas $ 1,103 $ 1,140 (3.2) % (3.6) % $ 3,371 $ 3,361 0.3 % 0.5 % 66 % 65 % EMEA 526 567 (7.2) % (12.1) % 1,652 1,672 (1.2) % (0.7) % 32 % 32 % Other 23 44 (47.7) % (47.7) % 98 133 (26.3) % (26.3) % 2 % 3 % Total Revenue (3) $ 1,652 $ 1,751 (5.7) % (7.4) % $ 5,121 $ 5,166 (0.9) % (0.6) % 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. Third quarter 2023 total revenue decreased 5.7% as compared to third quarter 2022, and included a 1.7-percentage point benefit from currency. The decrease in equipment sales revenue at constant currency 1 was primarily attributable to EMEA backlog reductions in the prior year quarter. This impact was partially offset by recent pricing actions and a favorable product and geographic mix. Post sale revenue decreased at constant currency 1 due to the decline of lower-margin paper sales and IT endpoint device revenue, lower finance income, the termination of Fuji royalty income and PARC revenue. Contractual print services 2 declined modestly, primarily due to lower service revenue from our economically-sensitive Production customers, and was partially offset by Digital and Managed IT Services revenue growth. Total revenue for the nine months ended September 30, 2023 decreased 0.9%, and included a 0.3-percentage point adverse impact from currency, as well as a 1.1-percentage point benefit from an acquisition. The decrease at constant currency 1 revenue is attributable to a decrease in Post sale revenue due to the decline in lower-margin paper sales and IT hardware revenue, lower finance income, and the termination of Fuji royalty income and PARC revenue. Contractual print services revenue 2 declined modestly, primarily due to lower service revenue from our economically-sensitive Production customers, and was partially offset by Digital and Managed IT Services revenue growth, which included the benefits of an acquisition. Growth in Equipment sales revenue, partially offset the decline in Post sale revenue, reflecting a stable demand environment, improved product supply, recent pricing actions, and a favorable mix. Xerox 2023 Form 10-Q 50 Geographically, third quarter 2023 revenue decreased 3.2% in the Americas as compared to third quarter 2022, and included a 0.4-percentage point benefit from currency. The decrease at constant currency 1 reflected lower post sale revenue, due to the decline in paper sales, finance income, and Contractual print services revenue 2 , partially offset by higher equipment sales revenue. The increase in equipment sales in the Americas is due to increased product availability as compared to third quarter 2022. Revenue in EMEA operations decreased 7.2%, as compared to third quarter 2022 and included a 4.9-percentage point benefit from currency. On a constant currency 1 basis, revenue decreased 12.1% driven by lower equipment sales, primarily due to prior year backlog reductions, as well as lower post sale revenue due to a significant decline in paper sales. Revenue in the Americas increased 0.3% for the nine months ended September 30, 2023, as compared to the prior year period, and included a 0.2-percentage point adverse impact from currency. The increase in the Americas, as compared to the prior year period, was due to higher equipment sales revenue resulting from increased product availability, which was partially offset by lower post sale revenue. Revenue in EMEA operations decreased 1.2% for the nine months ended September 30, 2023 as compared to the prior year period, and included a 0.5-percentage point adverse impact from currency. On a constant currency 1 basis, revenue in EMEA operations decreased 0.7% for the nine months ended September 30, 2023, as compared to the prior year period, driven by lower equipment sales revenue, due to prior year backlog reductions, which was partially offset by higher post sale revenue. The increase in post sale revenue primarily reflected the benefits of a recent acquisition, partially offset by lower paper sales. Total revenue for the three and nine months ended September 30, 2023 reflected the following: Post sale revenue Post sale revenue 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 Managed IT services, as well as gains and commissions, and servicing revenue on the sale of finance receivables. For the three months ended September 30, 2023, Post sale revenue decreased 7.0% as compared to third quarter 2022, including a 2.0-percentage point benefit from currency. Post sale revenue decreased 4.2% for the nine months ended September 30, 2023 as compared to the prior year period, which included a 1.4-percentage point benefit from an acquisition, partially offset by a 0.3-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 September 30, 2023, these revenues decreased 4.8% as compared to third quarter 2022, including a 1.6-percentage point benefit from currency. The decline in constant currency 1 was due in part to the termination of Fuji royalty income and PARC revenue. Contractual print services 2 revenue decreased as compared to third quarter 2022, reflecting declines in Production equipment print services, which were partially offset by revenue growth in Digital and Managed IT Services and price increases, as well as gains and commissions, and servicing revenue on sales of finance receivables. ◦ For the nine months ended September 30, 2023, these revenues decreased 2.8% as compared to the prior year period, including a 0.6-percentage point adverse impact from currency. The decline in constant currency 1 was due in part to the termination of Fuji royalty income and PARC revenue. Contractual print services 2 revenue decreased modestly as compared to the prior year period, reflecting declines in Production equipment print services. These declines were partially offset by revenue growth in Digital and Managed IT Services, which includes the benefits of a recent acquisition, and price increases, as well as gains and commissions, and servicing revenue on sales of finance receivables. • Supplies, paper and other sales revenue includes unbundled supplies, IT hardware and other sales. For the three months ended September 30, 2023, these revenues decreased 14.0% as compared to third quarter 2022, including a 2.7-percentage point benefit from currency. Supplies, paper and other sales for the nine months ended September 30, 2023 decreased 8.8% as compared to the prior year period, including a 0.6-percentage point benefit from currency. The respective decline at constant currency 1 for both the three and nine months ended September 30, 2023, primarily reflected lower paper sales, as well as IT hardware, particularly endpoint devices, and unbundled supplies revenue. Xerox 2023 Form 10-Q 51 • Financing revenue is generated from direct and indirect financing of Xerox equipment. For the three months ended September 30, 2023, these revenues decreased 9.8% as compared to third quarter 2022, including a 3.7-percentage point benefit from currency. Financing revenue for the nine months ended September 30, 2023 decreased 5.8% as compared to the prior year period, including a 0.2-percentage point adverse impact from currency. The decline at constant currency 1 for both the three and nine months ended September 30, 2023, respectively, reflects a reduction of the average finance receivables balance in the quarter and year-to-date periods as a result of the sales of finance receivables in 2023 and the fourth quarter 2022 to HPS Investment Partners (HPS). Finance receivables are approximately $300 million lower in September of 2023 as compared to September of 2022. Equipment sales revenue Equipment sales revenue decreased 1.0% for the three months ended September 30, 2023 as compared to the third quarter 2022, including a 1.1-percentage point benefit from currency. The decrease in constant currency 1 reflects the significant reduction in backlog, primarily in EMEA operations, in the third quarter 2022 as compared to the third quarter 2023. The decrease in revenue was driven by the Entry product group, primarily in EMEA operations, mostly offset by growth in higher-margin mid-range and high-end devices, in the Americas region, as well as recent pricing actions and stable demand conditions. Entry device revenues were down as compared to the prior year period due to the ongoing normalization of work-from-home trends. For the nine months ended September 30, 2023 Equipment sales revenue increased 11.9%, including a 0.2-percentage point adverse impact from currency. The increase in constant currency 1 reflects improvement in product availability for higher-margin mid-range and high-end devices, in the Americas region, as well as recent pricing actions and stable demand conditions. These increases were partially offset by lower revenue from the Entry product group, primarily in EMEA operations, as compared to the prior year period, 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 52 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 September 30, Nine Months Ended September 30, (in millions) 2023 2022 B/(W) 2023 2022 B/(W) Gross Profit $ 536 $ 556 $ (20) $ 1,722 $ 1,643 $ 79 RD&E 52 73 21 173 235 62 SAG 416 418 2 1,256 1,332 76 Equipment Gross Margin 31.0 % 21.0 % 10.0 pts. 34.3 % 21.7 % 12.6 pts. Post sale Gross Margin 32.9 % 34.9 % (2.0) pts. 33.4 % 34.5 % (1.1) pts. Total Gross Margin 32.4 % 31.8 % 0.6 pts. 33.6 % 31.8 % 1.8 pts. RD&E as a % of Revenue 3.1 % 4.2 % 1.1 pts. 3.4 % 4.5 % 1.1 pts. SAG as a % of Revenue 25.2 % 23.9 % (1.3) pts. 24.5 % 25.8 % 1.3 pts. Pre-tax Income (Loss) $ 63 $ (380) $ 443 $ 59 $ (474) $ 533 Pre-tax Income (Loss) Margin 3.8 % (21.7) % 25.5 pts. 1.2 % (9.2) % 10.4 pts. Adjusted (1) Operating Income $ 68 $ 65 $ 3 $ 293 $ 97 $ 196 Adjusted (1) Operating Income Margin 4.1 % 3.7 % 0.4 pts. 5.7 % 1.9 % 3.8 pts. ____________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Pre-tax Income (Loss) Margin Third quarter 2023 pre-tax income margin of 3.8% increased 25.5-percentage points as compared to third quarter 2022 pre-tax (loss) margin of (21.7)%. The increase was primarily due to the Goodwill impairment charge in the prior year period and lower RD&E expenses, Other expenses, net, and Restructuring and related costs, net. These favorable impacts were partially offset by lower revenue and gross profit. Pre-tax income margin for the nine months ended September 30, 2023 of 1.2% increased 10.4-percentage points as compared to the prior year period pre-tax (loss) margin of (9.2)%. The improvement in the pre-tax margin was primarily due to the Goodwill impairment charge in the prior year, as well as multiple items which resulted in higher adjusted 1 operating margin (see below), and lower Other expenses, net and Restructuring and related costs, net. These favorable impacts were partially offset by the PARC donation charge which had a 2.6-percentage point adverse impact on pre-tax margin, and lower revenue. Adjusted 1 Operating Margin Third quarter 2023 adjusted 1 operating income margin of 4.1% increased by 0.4-percentage points as compared to third quarter 2022, reflecting higher gross margin, the strategic decision to donate PARC and shutdown certain other PARC-related activities, as well as the benefits from pricing and cost and productivity actions. These favorable impacts were partially offset by lower revenue, which includes the termination of Fuji royalty income, and higher incentive compensation expense. Adjusted 1 operating margin income for the nine months ended September 30, 2023 of 5.7% increased by 3.8-percentage points as compared to the prior year period, primarily reflecting higher gross margin, which includes the impacts of lower supply chain-related costs, lower RD&E expense, and Selling, administrative and general expenses, due primarily to reserve releases in the first quarter of 2023 partially offset by higher incentive compensation expense, as well as the benefits from pricing and cost and productivity actions. Partially offsetting these benefits was lower revenue, which includes the termination of Fuji royalty income. ______________ (1) Refer to the Adjusted Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. Gross Margin Third quarter 2023 gross margin of 32.4% increased by 0.6-percentage points as compared to third quarter 2022, reflecting the benefits associated with recent pricing and cost and productivity actions, as well as gains and commissions, and servicing revenues on sales of finance receivables. These favorable impacts were partially offset by lower revenue, which includes the termination of Fuji royalty income, and lost revenues associated with the donation of PARC. Xerox 2023 Form 10-Q 53 Gross margin for the nine months ended September 30, 2023 of 33.6% increased by 1.8-percentage points as compared to the prior year period, reflecting lower supply chain-related costs, the benefits associated with recent pricing and cost and productivity actions, as well as gains and commissions, and servicing revenues on sales of finance receivables. These favorable impacts were partially offset by lower revenue, which includes the termination of Fuji royalty income, and lost revenue associated with the donation of PARC. Third quarter 2023 equipment gross margin of 31.0% increased by 10.0-percentage points as compared to third quarter 2022, reflecting a favorable product and channel mix, as well as the benefits associated with recent pricing actions. These favorable impacts were slightly offset by lower revenue and higher transportation costs. Equipment gross margin for the nine months ended September 30, 2023 of 34.3% increased by 12.6-percentage points as compared to the prior year period, reflecting higher revenue, a favorable product and channel mix, lower supply chain-related costs, and the benefits associated with recent pricing actions. Third quarter 2023 Post sale gross margin of 32.9% decreased by 2.0-percentage points as compared to third quarter 2022, reflecting lower activity, the termination of Fuji royalty income, and lower financing margin. Financing margin decreased primarily due to higher interest costs. These impacts were partially offset by the benefits associated with cost and productivity actions, as well as gains and commissions, and servicing revenue on sales of finance receivables. Post sale gross margin for the nine months ended September 30, 2023 of 33.4% decreased by 1.1-percentage points as compared to the prior year period, reflecting lower revenue, which includes the termination of Fuji royalty income and lost revenues associated with the donation of PARC, as well as lower financing margin. Financing margin decreased primarily due to higher interest costs. These impacts were partially offset by the benefits associated cost and productivity actions, and lower supply chain-related costs as well as gains and commissions, and servicing revenues on sales of finance receivables. Research, Development and Engineering Expenses (RD&E) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 Change 2023 2022 Change R&D $ 38 $ 59 $ (21) $ 132 $ 193 $ (61) Sustaining engineering 14 14 — 41 42 (1) Total RD&E Expenses $ 52 $ 73 $ (21) $ 173 $ 235 $ (62) Third quarter 2023 RD&E as a percentage of revenue of 3.1% decreased by 1.1-percentage points as compared to third quarter 2022, due to the lower rate of investments, as a result of the strategic decision to donate PARC. RD&E as a percentage of revenue for the nine months ended September 30, 2023 of 3.4% decreased by 1.1-percentage points as compared to the prior year period, primarily due to the strategic decision to donate PARC, including the spin-off of Innovation businesses and the shutdown of certain other PARC-related activities, as well as a lower rate of investments in new businesses. RD&E of $52 million decreased $21 million as compared to third quarter 2022. For the nine months ended September 30, 2023 RD&E of $173 million decreased $62 million as compared to the prior year period. The decrease, as compared to the respective prior year periods, was primarily driven by lower spending in our innovation portfolio due to the strategic decision to donate PARC, including the spin-off of Innovation businesses, and the shutdown of certain other PARC-related activities, as well as modest savings from restructuring and productivity actions. The lower spending in innovation for both the three and the nine months ended September 30, 2023, as compared to their respective prior year periods, reflects decisions which provide greater focus and financial flexibility to pursue growth opportunities adjacent to our core operations within Print, Digital and Managed IT services. Selling, Administrative and General Expenses (SAG) Third quarter 2023 SAG as a percentage of revenue of 25.2% increased by 1.3-percentage points as compared to third quarter 2022, due to lower revenues, as well as higher selling and bad debt expenses. These impacts were partially offset by lower administrative expense. Third quarter 2023 SAG of $416 million decreased by $2 million as compared to third quarter 2022, primarily reflecting productivity and cost savings, including savings related to the strategic decision to donate PARC, and lower litigation costs. These benefits were partially offset by higher incentive compensation expense, unfavorable currency, and bad debt expense. Xerox 2023 Form 10-Q 54 SAG as a percentage of revenue for the nine months ended September 30, 2023 of 24.5% decreased by 1.3-percentage points as compared to the prior year period, due to lower administrative and selling expenses, as well as a 0.2 percentage-point favorable impact from lower bad debt expense. These favorable impacts were partially offset by lower revenues. SAG for the nine months ended September 30, 2023 of $1,256 million decreased by $76 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 PARC, as well as lower labor costs associated with a higher-than-expected number of open positions, lower bad debt expense, lower supply chain-related costs, lower litigation costs, and the favorable impact of currency. These benefits were partially offset by higher incentive compensation expense and marketing expenses, as well as the impact of an acquisition. The bad debt provision for the third quarter 2022 of $10 million increased $3 million as compared to the third quarter 2022 primarily due to i ncreased provisions for accounts receivables as a result of favorable adjustments in the prior year and the timing of aged write-offs. The bad debt provision for nine months ended September 30, 2023 of $17 million, decreased by $12 million as compared to the prior year period. The decrease reflects the first quarter 2023 reserve release of approximately $12 million as a result of a favorable reassessment of the credit exposure on a large customer receivable balance after a contract amendment that improved our credit position, and the benefits 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 release 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 $10 million for the third quarter 2023, as compared to $22 million for third quarter 2022, and $35 million for the nine months ended September 30, 2023, as compared to $41 million in the prior year period. These costs were primarily related to the implementation of initiatives under our business transformation projects to reduce and realign our cost structure to the changing nature of our business. Third quarter 2023 activity includes impairment associated with the Company's sale of its Russian subsidiary, which was completed in October 2023. Third quarter 2023 actions impacted several functional areas, with approximately 80% focused on SAG reductions and approximately 20% focused on gross margin improvements. Third quarter 2022 actions impacted several functional areas, with approximately 75% focused on gross margin improvements, approximately 20% 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 September 30, 2023 was $33 million, of which $32 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. Worldwide Employment Worldwide employment was approximately 20,100 as of September 30, 2023, a decrease of approximately 400 from December 31, 2022. The decrease resulted from net attrition (attrition net of gross hires) and restructuring. Xerox 2023 Form 10-Q 55 Other Expenses, Net Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Non-financing interest expense $ 14 $ 21 $ 40 $ 73 Interest income (3) (4) (12) (8) Non-service retirement-related costs 4 (7) 14 (18) Gains on sales of businesses and assets (35) (16) (37) (17) Currency losses, net 6 1 22 2 Tax indemnification - Conduent (7) — (7) — Loss on early extinguishment of debt — — 3 4 Contract termination costs - product supply — — — 33 Excess contribution refund — — — (16) All other expenses, net 4 6 11 13 Other expenses, net $ (17) $ 1 $ 34 $ 66 Non-Financing Interest Expense Third quarter 2023 non-financing interest expense of $14 million was $7 million lower than third quarter 2022. The decrease was 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 $44 million decreased by $5 million as compared to third quarter 2022, reflecting a lower average debt balance, partially offset by higher average interest rates. Non-financing interest expense for the nine months ended September 30, 2023 of $40 million was $33 million lower than the prior year period. The decrease was 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 $140 million decreased by $11 million from the prior year period 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 Third quarter 2023 interest income decreased $1 million as compared to the third quarter 2022, while interest income for the nine months ended September 30, 2023 increased $4 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 $11 million and $32 million higher for the three and nine months ended September 30, 2023, respectively, as compared to their respective prior year periods. The increases reflect higher interest cost associated with higher discount rates, partially offset by lower settlement losses. The increase in non-service retirement-related costs for the nine months ended September 30, 2023 as compared to the prior year period, also reflected a decrease in the expected return on plan assets due to lower plan asset values Service retirement-related costs, which are included in operating expenses, were $2 million and $4 million for the three months ended September 30, 2023 and 2022, respectively, and $4 million and $14 million for the nine months ended September 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. Gains on sales of businesses and assets Gains on sales of businesses and assets were $19 million and $20 million higher for the three and nine months ended September 30, 2023, respectively, as compared to their respective prior year periods. The gains in both 2023 and 2022 reflect the sales of non-core surplus business assets. Currency Losses, Net Third quarter 2023 currency losses, net were $5 million higher than third quarter 2022, while currency losses, net for the nine months ended September 30, 2023 increased $20 million as compared to the prior year period. The Xerox 2023 Form 10-Q 56 increase for both periods as compared to their prior year respective periods was due to continued volatility in the global exchange rates, particularly in developing markets, and the cost of hedging. Currency losses, net for the nine months ended September 30, 2023 also reflect losses associated with the discontinuance of hedging relationships for certain YEN-based currency cash flow hedges in the second quarter 2023. Tax indemnification - Conduent Third quarter 2023 credit represents the reversal of a payable to Conduent of an IRS refund Xerox was expected to receive with the settlement of a pre-separation unrecognized tax position. The matter was resolved during the third quarter 2023 and both the receivable from the IRS and the payable to Conduent were no longer required. The reversal of the offsetting IRS refund receivable is recorded as a charge in Income tax expense. 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 the 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. Contract Termination Costs Contract termination costs for the nine months ended September 30, 2022 reflects a $33 million charge ($25 million after-tax) associated with the termination of a product supply agreement. The charge reflects the payment of the contractual cancellation fee plus interest, and related legal fees. 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 a certain Latin American subsidiary as a result of employee forfeitures. The excess contributions accumulated over the past 20 plus years. Income Taxes Third quarter 2023 effective tax rate was 23.8% which was higher than the U.S. federal statutory tax rate of 21%, primarily due to geographical mix of earnings, partially offset by tax benefits due to the redetermination of certain unrecognized tax positions upon the conclusion of several audits, and the remeasurement of deferred tax assets. On an adjusted 1 basis, third quarter 2023 effective tax rate was 7.3%, which is lower than the U.S. federal statutory tax rate of 21%, primarily due to a tax rate benefit of approximately 15% related to the redetermination of certain unrecognized tax positions upon the conclusion of several audits, as well as the remeasurement of deferred tax assets, partially offset by the geographical mix of earnings. Third quarter 2022 effective tax rate was (0.8)% and included tax impacts associated with the non-cash Goodwill impairment charge. On an adjusted 1 basis, third quarter 2022 effective tax rate was 42.1%. The adjusted 1 effective tax rate was higher than the U.S. federal statutory tax rate of 21% primarily due to changes in elections made to certain tax positions for recently filed returns as well as the geographical mix of earnings, combined with lower adjusted pre-tax income. The effective tax rate for the nine months ended September 30, 2023 was 1.7% and includes the loss on the PARC donation as well as the associated tax benefits. Excluding this impact, the effective tax rate was 21.5%. On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2023 was 14.5%. The adjusted 1 effective tax rate was lower than the U.S. federal statutory tax rate of 21% primarily due to a tax rate benefit of approximately 7% related to the redetermination of certain unrecognized tax positions upon the conclusion of several audits, as well as the change in tax filing positions and the remeasurement of deferred tax assets, partially offset by the geographical mix of earnings. The effective tax rate for the nine months ended September 30, 2022 was 5.7% and included tax expense associated with the non-cash Goodwill impairment charge, changes in elections made to certain tax positions for recently filed returns, and the non-deductible accelerated share vestings, according to the terms of an award agreement, in connection with the passing of Xerox Holding's former CEO, offset by benefits from additional tax incentives, a change in our indefinite reinvestment tax liability due to a recent acquisition and the geographical mix of earnings. On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2022 was 22.0%. The adjusted 1 effective tax rate was higher than the U.S. federal statutory tax rate of 21% primarily due to tax expense associated with changes in elections made to certain tax positions for recently filed returns, offset by Xerox 2023 Form 10-Q 57 benefits from additional tax incentives and a change in our indefinite reinvestment tax liability due to a recent acquisition. The effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, the 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. 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 nine months ended September 30, 2023 was relatively flat as compared to their respective prior year periods. Net Income (Loss) Third quarter 2023 Net Income Attributable to Xerox Holdings was $49 million, or $0.28 per diluted share. On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $77 million, or $0.46 per diluted share. Third quarter 2022 Net (Loss) Attributable to Xerox Holdings was $(383) million, or $(2.48) per diluted share, which included an after-tax non-cash Goodwill impairment charge of $395 million ($412 million pre-tax), or $2.54 per share. On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $33 million, or $0.19 per diluted share. Net Income Attributable to Xerox Holdings for the nine months ended September 30, 2023 was $59 million, or $0.30 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 $231 million, or $1.39 per diluted share. Net (Loss) Attributable to Xerox Holdings for the nine months ended September 30, 2022 was $(443) million, or $(2.91) per diluted share, which included an after-tax non-cash Goodwill impairment charge of $395 million ($412 million pre-tax), or a $2.54 per share. On an adjusted 1 basis, Net Income Attributable to Xerox Holdings was $43 million, or $0.21 per diluted share. Refer to Note 20 - Earnings (Loss) 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 (Loss) Income Third quarter 2023 Other Comprehensive Loss, Net Attributable to Xerox Holdings was $67 million and included the following: i) net translation adjustment losses of $122 million reflecting the weakening of our major foreign currencies against the U.S. Dollar during the quarter; ii) $55 million of net gains from the changes in defined benefit plans primarily due to net actuarial gains, the positive impact of currency, and the amortization of actuarial losses; and iii) $1 million of net unrealized gains. This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings of $217 million for the third quarter 2022, which included the following: i) net translation adjustment losses of $277 million reflecting the weakening of our major foreign currencies against the U.S. Dollar during the quarter; ii) $54 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; and iii) $6 million of net unrealized gains. Other Comprehensive Income, Net Attributable to Xerox Holdings for the nine months ended September 30, 2023 was $33 million and included the following: i) net translation adjustment gains of $19 million reflecting the strengthening of most of our major foreign currencies against the U.S. Dollar; and ii) $14 million of net gains from the changes in defined benefit plans primarily due to net actuarial gains as well as the amortization of actuarial losses, partially offset by the adverse impact of currency and plan remeasurements. This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings for the nine months ended September 30, 2022 of $559 million, which included the following: i) net translation adjustment losses of $636 million reflecting the weakening of our major foreign currencies against the U.S. Dollar; ii) $19 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) $96 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. Xerox 2023 Form 10-Q 58 Refer to Note 19 - Other Comprehensive (Loss) Income in the Condensed Consolidated Financial Statements for the components of Other Comprehensive (Loss) Income, Note 14 - Financial Instruments in the Condensed Consolidated Financial Statements for additional information regarding unrealized 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. 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 September 30, (in millions) External Revenue Intersegment Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) 2023 Print and Other $ 1,554 $ 21 $ 1,575 94 % $ 64 4.1 % FITTLE 98 — 98 6 % 4 4.1 % Total $ 1,652 $ 21 $ 1,673 100 % $ 68 4.1 % 2022 Print and Other $ 1,653 $ 23 $ 1,676 94 % $ 63 3.8 % FITTLE 98 — 98 6 % 2 2.0 % Total $ 1,751 $ 23 $ 1,774 100 % $ 65 3.7 % Nine Months Ended September 30, (in millions) External Revenue Intersegment Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) 2023 Print and Other $ 4,820 $ 65 $ 4,885 94 % $ 271 5.6 % FITTLE 301 — 301 6 % 22 7.3 % Total $ 5,121 $ 65 $ 5,186 100 % $ 293 5.7 % 2022 Print and Other $ 4,874 $ 68 $ 4,942 94 % $ 81 1.7 % FITTLE 292 — 292 6 % 16 5.5 % Total $ 5,166 $ 68 $ 5,234 100 % $ 97 1.9 % ___________ (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. Xerox 2023 Form 10-Q 59 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 September 30, Nine Months Ended September 30, (in millions) 2023 2022 % Change 2023 2022 % Change Equipment sales $ 381 $ 384 (0.8)% $ 1,180 $ 1,054 12.0% Post sale revenue 1,173 1,269 (7.6)% 3,640 3,820 (4.7)% Intersegment revenue (1) 21 23 (8.7)% 65 68 (4.4)% Total Print and Other Revenue $ 1,575 $ 1,676 (6.0)% $ 4,885 $ 4,942 (1.2)% _____________ (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. Third quarter 2023 Print and Other segment revenue decreased 6.0% as compared to third quarter 2022, and Print and Other segment revenue decreased 1.2% for the nine months ended September 30, 2023 as compared to the prior year period. The decrease for both the three and nine months ended September 30, 2023 was driven by lower Post sale revenue, as compared to their respective prior year periods. Print and Other segment revenues included the following: Equipment sales revenue decreased 0.8% during the third quarter 2023 as compared to third quarter 2022, driven by the Entry product group, primarily in EMEA operations, which was partially offset by growth in higher-margin mid-range and high-end devices in the Americas, as well as recent pricing actions. Equipment sales revenue increased 12.0% for the nine months ended September 30, 2023 as compared to the prior year period, driven by improvement in product availability, for higher-margin mid-range and high-end devices in the Americas, as well as recent pricing actions and stable demand conditions, both of which were partially offset by lower revenue from the Entry product group, primarily in EMEA operations, due to the ongoing normalization of work-from-home trends. Post sale revenue decreased 7.6% during the third quarter 2023 as compared to third quarter 2022, due to lower paper, supplies, and IT endpoint devices revenue, as well as the termination of Fuji royalty income and PARC revenue. Contractual print services revenue 1 decreased as compared to third quarter 2022, primarily due to lower service revenue from our economically-sensitive Production customers. These impacts were partially offset by growth in Digital and Managed IT services revenue, price increases, as well as gains and commissions, and servicing revenue on sales of finance receivables. Post sale revenue decreased 4.7% for the nine months ended September 30, 2023 as compared to the prior year period due to lower paper, IT endpoint devices, and supplies revenues, as well as the termination of Fuji royalty income and PARC revenue. Contractual print services revenue 1 decreased as compared to the prior year period, primarily due to lower service revenue from our economically-sensitive Production customers. These declines were partially offset by revenue growth in Digital and Managed IT Services, which includes the benefits of a recent acquisition, and price increases, as well as gains and commissions, and servicing revenue on sales of finance receivables. _____________ (1) Includes revenues from Services, maintenance and rentals. Xerox 2023 Form 10-Q 60 Detail by product group is shown below. Three Months Ended September 30, Nine Months Ended September 30, % of Equipment Sales (in millions) 2023 2022 % Change CC % Change 2023 2022 % Change CC % Change 2023 2022 Entry $ 56 $ 74 (24.3)% (25.3)% $ 181 $ 201 (10.0)% (10.0)% 15% 19% Mid-range 260 246 5.7% 4.3% 782 661 18.3% 18.4% 65% 62% High-end 67 65 3.1% 0.5% 222 195 13.8% 13.9% 19% 18% Other 3 5 (40.0)% (40.0)% 12 13 (7.7)% (7.7)% 1% 1% Equipment sales (1)(2) $ 386 $ 390 (1.0)% (2.1)% $ 1,197 $ 1,070 11.9% 12.1% 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 $5 million and $6 million for the three months ended September 30, 2023 and 2022, respectively, and $17 million and $16 million for the nine months ended September 30, 2023 and 2022, respectively. The change at constant currency 1 reflected the following: • Entry - The decrease for the three and nine months ended September 30, 2023 as compared to their respective prior year periods was driven by the on-going normalization of work-from-home trends. • Mid-range - The increase for the three months ended September 30, 2023 as compared to the third quarter 2022 was driven by growth in the Americas, supported by increased product availability, partially offset by declines in EMEA, reflecting backlog reductions in the prior year. The increase for the nine months ended September 30, 2023 as compared to the prior year period was driven by higher margin A3 devices due to improved product availability, primarily in the Americas, and price increases, both of which were partially offset by declines in EMEA, which reflected backlog reductions in the prior year. • High-end - The increase for the three months ended September 30, 2023 was driven by growth in the Americas, which was offset by declines in EMEA. The increase for the nine months ended September 30, 2023 as compared to the prior year period was driven by revenue growth in the Americas, as well as higher revenue and higher installs of both Entry Production Color devices and iGens, due to improved product availability, and benefits from price increases and Xerox’s complete offering of software, services and technology. _____________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. 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 September 30, 2023 as compared to prior year period reflect the following: Entry 1 • 52% decrease in entry color installs primarily due to a softer demand associated with the ongoing normalization of work-from-home trends. • 28% decrease in entry black-and-white installs driven by EMEA markets, mostly across multi-function printers. Mid-Range • 18% decrease in mid-range color installs, driven by a decline in EMEA channels, partially offset by growth in the Americas. • 10% decrease in mid-range black-and-white installs, driven by a decline in EMEA channels, partially offset by growth in the Americas. High-End • 15% increase in high-end color installs reflecting strong demand for Versant products, primarily in the Americas. • 16% decrease in high-end black-and-white installs reflecting a decline for Nuvera and Baltoro products in EMEA. Xerox 2023 Form 10-Q 61 Installs for the nine months ended September 30, 2023 as compared to prior year period reflect the following: Entry 1 • 37% decrease in entry color installs driven by declines in entry color printers and A4 Color MFPs, associated with the ongoing normalization of work-from-home trends, primarily in EMEA. • 12% decrease in entry black-and-white installs driven by declines in A4 mono MFPs, primarily in EMEA, which was partially offset by higher entry mono printer installs. Mid-Range • 7% increase in mid-range color installs, driven by A3 color MFPs, reflecting increased product availability in the Americas. • 31% increase in mid-range black-and-white installs, driven by A3 mono MFPs, reflecting increased product availability primarily in the Americas. High-End • 30% increase in high-end color installs reflecting higher demand for iGen and Versant products, primarily in the Americas. • 16% decrease in high-end black-and-white installs reflecting a decline for Nuvera. _____________ (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 4.1% for the three months ended September 30, 2023 increased by 0.3-percentage points as compared to third quarter 2022, primarily due to lower supply chain-related costs, lower RD&E expense, and benefits of cost and productivity savings. These positive impacts were partially offset by higher selling and bad debt expenses. Print and Other segment margin of 5.6% for the nine months ended September 30, 2023 increased 3.9-percentage points as compared to the prior year period primarily due to higher profit margin, which includes 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. These positive impacts were partially offset by higher bad debt expense. Xerox 2023 Form 10-Q 62 FITTLE FITTLE represents a global financing solutions business, primarily enabling the sale of our equipment and services. Revenue Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 % Change 2023 2022 % Change Equipment sales $ 5 $ 6 (16.7)% $ 17 $ 16 6.3% Financing 46 51 (9.8)% 147 156 (5.8)% Other Post sale revenue (1) 47 41 14.6% 137 120 14.2% Total FITTLE Revenue $ 98 $ 98 —% $ 301 $ 292 3.1% _____________ (1) Other Post sale revenue includes lease renewal and fee income. Third quarter 2023 FITTLE segment revenue was flat as compared to third quarter 2022, while for the nine months ended September 30, 2023 segment revenue increased 3.1% 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. For the three months ended September 30, 2023, these revenues decreased 9.8% as compared to third quarter 2022, including a 3.7-percentage point benefit from currency. Financing revenue for the nine months ended September 30, 2023 decreased 5.8% as compared to the prior year period, including a 0.2-percentage point adverse impact from currency. The decline at constant currency 1 for both the three and nine months ended September 30, 2023, respectively, reflects a reduction of the average finance receivables balance in the quarter and year-to-date periods as a result of the sales of finance receivables in 2023 and the fourth quarter 2022 to HPS. Finance receivables are approximately $300 million lower in September of 2023 as compared to September of 2022. Other Post sale revenue increased 14.6% for the three months ended September 30, 2023 as compared to third quarter 2022, and increased 14.2% for the nine months ended September 30, 2023 as compared to the prior year period. The increase for both the three and nine months ended September 30, 2023, respectively, is due to higher commissions and servicing revenue on increased sales of finance receivables under our finance receivables funding agreement, which was $7 million and $21 million for the three and nine months ended September 30, 2023, respectively. _____________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Segment Margin FITTLE segment margin of 4.1% for the three months ended September 30, 2023 increased 2.1-percentage points as compared to third quarter 2022 primarily reflecting lower bad debt expense as a result of sales of receivables without recourse through our receivable funding arrangements, as well as lower intersegment commissions. FITTLE segment margin of 7.3% for the nine months ended September 30, 2023 increased 1.8-percentage points as compared to the prior year period driven by higher revenue reflecting higher commissions and servicing revenue on increased sales of finance receivables under our finance receivables funding agreement, as well as lower bad debt expense. These favorable impacts were partially offset by higher strategic investment costs, and higher interest costs. We expect further improvements to bad debt expense going forward as our finance receivable balances decline as a result of increased sales of receivables. Xerox 2023 Form 10-Q 63 Capital Resources and Liquidity The following is a summary of our liquidity position: • As of September 30, 2023 and December 31, 2022, total cash, cash equivalents and restricted cash were $617 million and $1,139 million, respectively, and apart from restricted cash of $85 million and $94 million at September 30, 2023 and December 31, 2022, respectively, was readily accessible for use. The decrease in total cash, cash equivalents and restricted cash of $522 million primarily reflects an $819 million financing use of cash, which was partially offset by operating cash flows of $297 million. • Total debt at September 30, 2023 was $3,609 million, of which $2,492 million is allocated to and supports the Company's finance assets. The remaining debt of $1,117 million is attributable to the non-financing business and increased from $806 million at December 31, 2022. Debt consists of Senior Unsecured Notes, secured borrowings through the securitization of finance assets, borrowings under the new ABL Facility and borrowings under a loan facility used to fund the repurchase of shares from Carl C. Icahn and certain of his affiliates. $300 million of Senior Unsecured Note borrowings are due 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 September 30, 2023, there were $220 million of borrowings under the ABL Facility, which are reported as short-term borrowings based on management's intent to repay this balance by the end of 2023. 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. • In September 2023, we entered into a five-year $555 million loan facility (the Loan Facility), which was fully drawn at September 30, 2023 to finance the $542 million repurchase of approximately 34 million shares of the Company’s common stock from Carl C. Icahn and certain of his affiliates pursuant to the terms of a related purchase agreement. Although the Loan Facility has a final maturity date of September 28, 2028, Xerox anticipates refinancing amounts borrowed under the Loan Facility with a new financing instrument in the near term. • We expect Operating cash flows for 2023 to be at least $650 million and 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: Nine Months Ended September 30, Change (in millions) 2023 2022 Net cash provided by (used in) operating activities $ 297 $ (27) $ 324 Net cash provided by (used in) investing activities 3 (95) 98 Net cash used in financing activities (819) (755) (64) Effect of exchange rate changes on cash, cash equivalents and restricted cash (3) (31) 28 Decrease in cash, cash equivalents and restricted cash (522) (908) 386 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 $ 617 $ 1,001 $ (384) Cash Flows from Operating Activities Net cash provided by operating activities was $297 million for the nine months ended September 30, 2023. The $324 million increase in operating cash from the prior year period was primarily due to the following: • $209 million increase in pre-tax income before depreciation and amortization, provisions, gain on sales of businesses and assets, PARC donation, stock-based compensation, goodwill impairment, restructuring and related costs and non-service retirement-related costs. • $500 million increase from finance receivables reflecting the sale of approximately $850 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 i n the Condensed Consolidated Financial Statements for additional information regarding the sale of finance receivables. • $186 million increase due to lower inventory reflecting increased sales of equipment and supplies. Xerox 2023 Form 10-Q 64 • $31 million increase from lower contributions to our retirement plans primarily due to additional contributions to our U.K. defined benefit pension plan not being required in 2023. • $29 million increase from lower net tax payments. • $488 million decrease from accounts payable primarily due to the timing of supplier and vendor payments and lower year-over-year spending. • $99 million decrease from other current and long-term liabilities primarily due to the timing of payment of higher year-end accruals. • $35 million decrease from higher installs of equipment on operating leases. Cash Flows from Investing Activities Net cash provided by investing activities was $3 million for the nine months ended September 30, 2023. The $98 million increase in cash from the prior year period was primarily due to the following: • $86 million increase reflecting fewer acquisitions in 2023. • $12 million increase reflecting lower capital expenditures. Cash Flows from Financing Activities Net cash used in financing activities was $819 million for the nine months ended September 30, 2023. The $64 million increase in the use of cash from the prior year period was primarily due to the following: • $431 million increase due to the share repurchase agreement with Icahn and Affiliated Parties for $544 million in 2023 compared to $113 million of share repurchases in the prior year under the Company’s open-market share repurchase program. • $374 million decrease from net debt activity. 2023 reflects net proceeds of $549 million from the Loan Facility, used to fund the share repurchase, and $213 million from the ABL Facility, which include debt issuance costs payments of $6 million and $7 million, respectively, and net proceeds of $52 million from the refinance of our Canadian secured loan. These borrowings were offset by payments of $644 million on secured financing arrangements and $300 million on Senior Notes. The $644 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 $600 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. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity and Note 17 – Shareholders’ Equity of Xerox Holdings in the Condensed Consolidated Financial Statements for additional information regarding the Icahn share repurchase. 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 eleven years and a variety of renewal and/or termination options. As of September 30, 2023 and December 31, 2022, total operating lease liabilities were $190 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 65 Debt and Customer Financing Activities The following summarizes our debt: (in millions) September 30, 2023 December 31, 2022 Xerox Holdings Corporation $ 1,500 $ 1,500 Xerox Corporation 1,676 1,200 Xerox - Other Subsidiaries (1) 449 1,042 Subtotal - Principal debt balance 3,625 3,742 Debt issuance costs Xerox Holdings Corporation (10) (9) Xerox Corporation (7) (4) Xerox - Other Subsidiaries (1) (1) (5) Subtotal - Debt issuance costs (18) (18) Net unamortized premium 2 2 Total Debt $ 3,609 $ 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) September 30, 2023 December 31, 2022 Total finance receivables, net (1) $ 2,591 $ 3,102 Equipment on operating leases, net 257 235 Total Finance Assets, net (2) $ 2,848 $ 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 a decrease of $4 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) September 30, 2023 December 31, 2022 Finance receivables debt (1) $ 2,267 $ 2,714 Equipment on operating leases debt 225 206 Financing debt 2,492 2,920 Core debt 1,117 806 Total Debt $ 3,609 $ 3,726 __________________ (1) Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of Income (Loss). Sale of Finance Receivables In December 2022, the Company entered into a finance receivables funding agreement with an affiliate of HPS Investment Partners (HPS) pursuant to which the Company agreed to offer for sale, and HPS agreed to purchase, certain eligible pools of finance receivables on a monthly basis in transactions structured as "true sales at law" and bankruptcy remote transfers. Accordingly, the receivables sold were derecognized from our financial statements and HPS does not have recourse back to the Company for uncollectible receivables. During the second quarter 2023, the finance receivables funding agreement with HPS was amended to expand the pools of finance receivables eligible for sale and to include the sale of the underlying leased equipment to HPS. The effect of these transactions has accordingly reduced financing debt as funding for new finance receivable originations is through the direct sale to HPS. Xerox 2023 Form 10-Q 66 Third Party Leasing Programs In the third quarter 2023, the Company entered into an agreement with PEAC Solutions (a subsidiary of HPS) that named PEAC as the provider of certain leasing and financial services programs for non-Xerox equipment in the U.S. network of independent dealers and resellers. Prior to this arrangement Xerox's FITTLE business provided leasing directly to end-user customers who purchased Xerox and non-Xerox equipment sold through independent dealers and resellers. Xerox's FITTLE business will return to a captive lessor as the Company focuses on core capabilities and offerings including print, IT and digital services. Xerox's FITTLE business will continue to offer leasing for Xerox hardware, software, and solutions. The effect of this arrangement will accordingly reduce future lease originations and associated financing debt. 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 Q4 $ — $ 220 $ 106 $ 326 2024 — 300 285 585 2025 750 — 49 799 2026 — — 9 9 2027 — — — — 2028 and thereafter 750 1,156 — 1,906 Total (2) $ 1,500 $ 1,676 $ 449 $ 3,625 _____________ (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 open-market repurchases of its Common Stock in third quarter 2023. On September 28, 2023, Xerox Holdings Corporation entered into a share purchase agreement (the Purchase Agreement) with Carl C. Icahn and certain of his affiliates (Icahn Parties) pursuant to which the Company agreed to purchase an aggregate of approximately 34 million shares of the Company’s common stock for an aggregate purchase price of approximately $542 million, exclusive of fees and expenses. Refer to Note 17 – Shareholders’ Equity of Xerox Holdings in the Condensed Consolidated Financial Statements for additional information regarding the share purchase. Xerox 2023 Form 10-Q 67 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 Euro, U.K. Pound Sterling and Japanese Yen. 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 68 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 69 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. • Goodwill impairment • 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 • Tax indemnification - Conduent Adjusted Operating Income and Margin We calculate and utilize adjusted operating income 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 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in millions, except per share amounts) Net Income Diluted EPS Net (Loss) Income Diluted EPS Net Income Diluted EPS Net (Loss) Income Diluted EPS Reported (1) $ 49 $ 0.28 $ (383) $ (2.48) $ 59 $ 0.30 $ (443) $ (2.91) Adjustments: Goodwill impairment — 412 — 412 Restructuring and related costs, net 10 22 35 41 Amortization of intangible assets 12 10 33 31 Non-service retirement-related costs 4 (7) 14 (18) Contract termination costs - product supply — — — 33 PARC donation — — 132 — Accelerated share vesting — — — 21 Loss on early extinguishment of debt — — 3 4 Tax indemnification - Conduent (7) — (7) — Income tax on PARC donation (2) — — (40) — Income tax on adjustments (excluding PARC donation) (2) 9 (21) 2 (38) Adjusted $ 77 $ 0.46 $ 33 $ 0.19 $ 231 $ 1.39 $ 43 $ 0.21 Dividends on preferred stock used in adjusted EPS calculation (3) $ 4 $ 4 $ 11 $ 11 Weighted average shares for adjusted EPS (3) 159 157 158 157 Fully diluted shares at September 30, 2023 (4) 125 ____________________________ (1) Net Income (Loss) and EPS attributable to Xerox Holdings. Net loss and EPS for the three and nine months ended September 30, 2022 includes an after-tax non-cash Goodwill impairment charge of $395 million or $2.54 per share, respectively. (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 September 30, 2023, plus potential dilutive common shares used for the calculation of adjusted diluted EPS for the third quarter 2023. Excludes shares associated with our Series A convertible preferred stock, which were anti-dilutive for the third quarter 2023. Xerox 2023 Form 10-Q 70 Adjusted Effective Tax Rate reconciliation: Three Months Ended September 30, 2023 2022 (in millions) Pre-Tax Income Income Tax Expense Effective Tax Rate Pre-Tax (Loss) Income Income Tax Expense Effective Tax Rate Reported (1) $ 63 $ 15 23.8 % $ (380) $ 3 (0.8) % Goodwill impairment — — 412 17 Non-GAAP Adjustments (2) 19 (9) 25 4 Adjusted (3) $ 82 $ 6 7.3 % $ 57 $ 24 42.1 % Nine Months Ended September 30, 2023 2022 (in millions) Pre-Tax Income Income Tax Expense Effective Tax Rate Pre-Tax (Loss) Income Income Tax (Benefit) Expense Effective Tax Rate Reported (1) $ 59 $ 1 1.7 % $ (474) $ (27) 5.7 % Goodwill impairment — — 412 17 PARC donation (2) 132 40 — — Non-GAAP Adjustments (2) 78 (2) 112 21 Adjusted (3) $ 269 $ 39 14.5 % $ 50 $ 11 22.0 % ____________________________ (1) Pre-tax income (loss) and Income tax expense (benefit). (2) Refer to Adjusted Net Income and EPS reconciliation for details. (3) The tax impact on Adjusted Pre-tax income is calculated under the same accounting principles applied to the Reported Pre-tax income (loss) under ASC 740, which employs an annual effective tax rate method to the results. Adjusted Operating Income and Margin reconciliation: Three Months Ended September 30, 2023 2022 (in millions) Profit Revenue Margin (Loss) Profit Revenue Margin Reported (1) $ 63 $ 1,652 3.8 % $ (380) $ 1,751 (21.7) % Adjustments: Goodwill impairment — 412 Restructuring and related costs, net 10 22 Amortization of intangible assets 12 10 Other expenses, net (17) 1 Adjusted $ 68 $ 1,652 4.1 % $ 65 $ 1,751 3.7 % Nine Months Ended September 30, 2023 2022 (in millions) Profit Revenue Margin (Loss) Profit Revenue Margin Reported (1) $ 59 $ 5,121 1.2 % $ (474) $ 5,166 (9.2) % Adjustments: Goodwill impairment — 412 Restructuring and related costs, net 35 41 Amortization of intangible assets 33 31 PARC donation 132 — Accelerated share vesting — 21 Other expenses, net 34 66 Adjusted $ 293 $ 5,121 5.7 % $ 97 $ 5,166 1.9 % ____________________________ (1) Pre-tax income (loss). Xerox 2023 Form 10-Q 71 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.