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. 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 solely to invest in startups and early/mid-stage growth companies aligned with the Company’s innovation focus areas and targeted adjacencies. At December 31, 2023 Xerox Ventures, LLC held investments of $26 million. In January 2024, Myriad Ventures Fund I LP (Myriad) was established, and the investments held by Xerox Ventures, LLC were transferred to Myriad, which will continue to be fully consolidated by Xerox Holdings. At June 30, 2024 Myriad had investments of approximately $34 million. Due to its immaterial nature, and for ease of discussion, Xerox Ventures LLC's results are included within the following discussion. Currency Impact To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency," “currency impact” or “the impact from currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates. Overview In the second quarter of 2024, Xerox progressed in the design, planning and implementation of structural changes that will drive the Company's multi-year Reinvention strategy. The intended benefits of the new operating model implemented in the first quarter 2024 are materializing in financial results. In second quarter 2024, adjusted 1 operating income margin, cash flow and revenue trajectory all improved sequentially. These improvements, and ongoing enhancements to management processes, further our confidence that we have the right strategy in place to deliver our targeted $300 million of improvement in adjusted 1 operating income by the end of 2026. Equipment sales of $356 million in the second quarter 2024 declined 15.2% in actual currency, or 14.9% in constant currency 1 , as compared to the second quarter 2023. The prior year effect of backlog 2 reduction and geographic simplification drove an approximate 14-percentage point year-over-year decline. Total equipment revenue declines outpaced equipment installation activity, due to unfavorable product mix. Revenue declined across all product groups, primarily due to the effects of backlog 2 fluctuations in the current and prior year. Post-sale revenue of $1.2 billion declined 8.4% in actual currency, or 7.9% in constant currency 1 , as compared to second quarter 2023. The decline was primarily due to lower outsourcing and service revenue, reductions in non-strategic, lower margin IT endpoint device placements and paper sales, as well as the effects of geographic simplification. Excluding non-strategic effects, post sale revenue declined mid-single digits. Pre-tax income of $25 million for the second quarter 2024 increased by $114 million as compared to a pre-tax (loss) of $(89) million in the second quarter 2023, and was primarily driven by the net pre-tax charge of $132 million related to the donation of our Palo Alto Research Center (PARC), in the prior year period. The increase also reflects lower Selling, administrative and general expenses, due to actions taken to improve our cost structure, and lower Restructuring and related costs, net. These benefits were partially offset by lower revenues and associated gross Xerox 2024 Form 10-Q 44 profit. Adjusted 1 operating income decreased $22 million as compared to second quarter 2023, due to lower equipment and post sale revenue, and associated gross profits. These impacts were partially offset by benefits from cost reduction actions associated with structural simplification efforts and lower bad debt expense. Divestitures In March 2024, Xerox completed the sales of its direct business operations in Argentina and Chile to Grupo Datco. Refer to Note 6 - Divestitures in the Condensed Consolidated Financial Statements for additional information regarding these sales. ____________________________ (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. 2024 Review Total revenue of $1.58 billion for second quarter 2024 decreased 10.0% from second quarter 2023, which included a 0.4-percentage point unfavorable impact from currency. Total revenue of $3.08 billion for the six months ended June 30, 2024 decreased 11.2% as compared to the prior year period, including a 0.2-percentage point benefit from currency. Net income (loss) and adjusted 1 Net income were as follows: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 B/(W) 2024 2023 B/(W) Net Income (Loss) $ 18 $ (61) $ 79 $ (95) $ 10 $ (105) Adjusted (1) Net income 41 72 (31) 52 154 (102) ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Second quarter 2024 Net income was $18 million as compared to the second quarter 2023 Net (loss) of $(61) million. The increase in Net income of $79 million primarily reflects the net after-tax PARC donation charge of $92 million ($132 million pre-tax) in the prior year period, as well as lower Selling, administrative and general expenses, Restructuring and related costs, net, and Research, development and engineering expenses (RD&E). These positive impacts were partially offset by lower revenue and gross profit, which includes the exit of certain production print manufacturing operations, as well as, higher Other expenses, net, which included the impacts of higher non-service retirement-related costs and insurance proceeds related to a legal settlement, and higher Income tax expense. Second quarter 2024 Adjusted 1 Net income of $41 million decreased $31 million as compared to the prior year period, primarily reflecting lower revenue and gross profit, as well as higher Other expenses, net. These negative impacts were partially offset by lower Selling, administrative and general expenses, RD&E, and Income tax expense. Net (loss) for the six months ended June 30, 2024 was $(95) million as compared to the prior year period Net income of $10 million, which reflects the net after-tax PARC donation charge of $92 million ($132 million pre-tax). The decrease in Net income reflects lower revenue and gross profit, as well as the loss from divestitures of certain direct business operations in Latin America, the exit of certain production print manufacturing operations, higher Restructuring and related costs, net, and higher Other expenses, net, which included the impacts of higher non-service retirement-related costs as well as insurance proceeds related to a legal settlement. These negative impacts were partially offset by lower Selling, administrative and general expenses and lower RD&E, as well as higher Income tax benefits. A djusted 1 Net income for the six months ended June 30, 2024 of $52 million decreased $102 million as compared to the prior year period, primarily reflecting lower revenue and gross profit, as well as higher Other expenses, net. These negative impacts were partially offset by lower Selling, administrative and general expenses, lower RD&E, and lower Income tax expense. ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Xerox 2024 Form 10-Q 45 The following is a summary of our segments - Print and Other and Xerox Financial Services (XFS) : Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 % Change 2024 2023 % Change Revenue Print and Other $ 1,508 $ 1,674 (9.9) % $ 2,938 $ 3,310 (11.2) % XFS 89 101 (11.9) % 180 203 (11.3) % Intersegment Elimination (1) (19) (21) (9.5) % (38) (44) (13.6) % Total Revenue $ 1,578 $ 1,754 (10.0) % $ 3,080 $ 3,469 (11.2) % Profit Print and Other $ 81 $ 107 (24.3) % $ 114 $ 207 (44.9) % XFS 4 — nm 4 18 (77.8) % Total Profit $ 85 $ 107 (20.6) % $ 118 $ 225 (47.6) % ____________________________ (1) Reflects revenue, primarily commissions and other payments, made by the XFS segment to the Print and Other segment for the lease of Xerox equipment placements. Cash flows from operating activities during the six months ended June 30, 2024 was a source of $44 million and decreased $129 million as compared to the prior year period, primarily related to lower net income as well as higher payments for accrued compensation and restructuring, partially offset by net proceeds of approximately $377 million from the on-going sales of finance receivables under the finance receivables funding agreement, as well as lower finance receivable originations, and improvements in cash for working capital 1 . Cash used in investing activities during the six months ended June 30, 2024 was $19 million, reflecting capital expenditures of $18 million, $11 million related to the impact of the deconsolidation of an entity that is now accounted for using the equity method of accounting, and $9 million for investments in noncontrolling interests, all of which was partially offset by net cash proceeds of approximately $11 million from the sale of assets, and $7 million from the sales of our business operations in Argentina and Chile. Cash used in financing activities during the six months ended June 30, 2024 was $75 million reflecting net payments of approximately $658 million on Senior Notes due in 2024 and 2025, $178 million on secured financing arrangements, $15 million for debt issuance costs, and $14 million on the Term Loan B facility. Partially offsetting payments on debt were proceeds from the issuance of Senior Notes during first quarter 2024 of approximately $900 million. Dividend payments were $71 million and purchases of capped calls were $23 million in connection with the issuance of Convertible Senior Notes. ____________________________ (1) Working capital, net reflects Accounts receivable, Billed portion of finance receivables, Inventories and Accounts payable. Due primarily to incremental reductions in revenue associated with geographic simplification and the decision to exit the manufacturing of certain Production equipment, we are lowering our full-year revenue guidance from a decline of 3% to 5% in constant currency 1 to a decline of 5% to 6% in constant currency 1 . Core business revenue in 2024 is expected to be roughly flat year-over-year in constant currency 1 consistent with our prior outlook, reflecting growing demand for our products and services in the second half of the year. As a result of lower expected revenues, and to a lesser extent rising freight and product costs, we are lowering adjusted 1 operating income margin guidance from at least 7.5% to at least 6.5%. Operating cash flows is now expected to be at least $600 million in 2024 versus prior guidance of at least $650 million. The reduction in operating cash flows is in-line with the after-tax reduction in adjusted 1 operating income expectations. We continue to expect 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. Xerox 2024 Form 10-Q 46 Financial Review Revenues Three Months Ended June 30, Six Months Ended June 30, % of Total Revenue (in millions) 2024 2023 % Change CC % Change 2024 2023 % Change CC % Change 2024 2023 Equipment sales $ 356 $ 420 (15.2) % (14.9) % $ 646 $ 811 (20.3) % (20.4) % 21 % 23 % Post sale revenue 1,222 1,334 (8.4) % (7.9) % 2,434 2,658 (8.4) % (8.6) % 79 % 77 % Total Revenue $ 1,578 $ 1,754 (10.0) % (9.6) % $ 3,080 $ 3,469 (11.2) % (11.4) % 100 % 100 % Reconciliation to Condensed Consolidated Statements of Income (Loss): Sales $ 611 $ 696 (12.2) % (12.0) % $ 1,134 $ 1,355 (16.3) % (16.5) % Less: Supplies, paper and other sales (255) (276) (7.6) % (7.7) % (488) (544) (10.3) % (10.8) % Equipment sales $ 356 $ 420 (15.2) % (14.9) % $ 646 $ 811 (20.3) % (20.4) % Services, maintenance and rentals $ 929 $ 1,009 (7.9) % (7.3) % $ 1,866 $ 2,013 (7.3) % (7.4) % Add: Supplies, paper and other sales 255 276 (7.6) % (7.7) % 488 544 (10.3) % (10.8) % Add: Financing 38 49 (22.4) % (21.2) % 80 101 (20.8) % (21.0) % Post sale revenue $ 1,222 $ 1,334 (8.4) % (7.9) % $ 2,434 $ 2,658 (8.4) % (8.6) % Segments Print and Other $ 1,508 $ 1,674 (9.9) % $ 2,938 $ 3,310 (11.2) % 95 % 95 % Xerox Financial Services (XFS) 89 101 (11.9) % 180 203 (11.3) % 6 % 6 % Intersegment elimination (1) (19) (21) (9.5) % (38) (44) (13.6) % (1) % (1) % Total Revenue (2) $ 1,578 $ 1,754 (10.0) % $ 3,080 $ 3,469 (11.2) % 100 % 100 % _____________ CC - See "Currency Impact" section for a description of Constant Currency. (1) Reflects revenue, primarily commissions and other payments, made by the XFS 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. Second quarter 2024 total revenue decreased 10.0% as compared to second quarter 2023, and included a 0.4-percentage point adverse impact from currency, while total revenue for the six months ended June 30, 2024 decreased 11.2%, and included a 0.2-percentage point benefit from currency. The decrease in equipment sales revenue at constant currency 1 for both the three and six months ended June 30, 2024 was primarily attributable to the effects of backlog fluctuations in the current and prior year quarters, along with non-strategic reductions in revenue, including offering and geographic simplification. The six months ended June 30, 2024 was also impacted by the organizational changes implemented during the first quarter 2024. Post sale revenue decreased at constant currency 1 for both the three and six months ended June 30, 2024 primarily due to the decline in Contractual print services 2 driven by lower service and outsourcing revenue, as well as reductions in non-strategic, lower margin IT endpoint device placements and paper sales, lower Finance income, and the effects of geographic simplification. Post sale revenue for the six months ended June 30, 2024, was also negatively impacted by the termination of Fuji royalty income and PARC revenue. Total revenue for the three and six months ended June 30, 2024 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, commissions, and servicing revenue on the sale of finance receivables. Post sale revenue decreased 8.4% as compared to second quarter 2023, which included a 0.5-percentage point adverse impact from currency, while Post sale revenue decreased 8.4% for the six months ended June 30, 2024 as compared to the prior year period, including a 0.2-percentage point benefit from currency. Post sale revenue reflected the following: Xerox 2024 Form 10-Q 47 • Services, maintenance and rentals revenue includes maintenance revenue (including bundled supplies), print, digital and managed IT services revenue from our Services offerings, rentals and other revenues. For the three months ended June 30, 2024, these revenues decreased 7.9% as compared to second quarter 2023, which included a 0.6-percentage point adverse impact from currency, while for the six months ended June 30, 2024 these revenues decreased 7.3% as compared to the prior year period, including a 0.1-percentage point benefit from currency. The decline at constant currency 1 for both the three and six months ended June 30, 2024, respectively, was primarily due to Contractual print services 2 declines and the absence of PARC revenue. Contractual print services 2 revenue declined mid-single digits for the three and six months ended June 30, 2024 as compared to the respective prior year periods, driven by lower outsourcing and service revenue and the effects of geographic simplification, which was partially offset by gains, commissions, and servicing revenue on sales of finance receivables. The decline for the six months ended June 30, 2024 was also negatively impacted by the termination of Fuji royalty income. • Supplies, paper and other sales revenue includes unbundled supplies, IT hardware and other sales. For the three months ended June 30, 2024, these revenues decreased 7.6% as compared to second quarter 2023, including a 0.1-percentage point benefit from currency, while for the six months ended June 30, 2024 the revenues decreased 10.3% as compared to the prior year period, including a 0.5-percentage point benefit from currency. The decline at constant currency 1 for both the three and six months ended June 30, 2024, respectively, primarily reflected lower sales of non-strategic, lower margin IT endpoint device placements and paper sales, as well as the effects of geographic simplification. The decline in both periods was partially offset by higher supplies revenue. • Financing revenue is generated from direct and indirect financing of Xerox equipment. These revenues decreased 22.4% as compared to second quarter 2023, including a 1.2-percentage point adverse impact from currency. Financing revenue for the six months ended June 30, 2024 decreased 20.8% as compared to the prior year period, including a 0.2-percentage point benefit from currency. The decline at constant currency 1 for both the three and six months ended June 30, 2024, respectively, reflects a reduction of the average finance receivables balance in the first half of 2024 as a result of the sales of finance receivables to HPS Investment Partners (HPS), as well as lower originations. Finance receivables are approximately $650 million lower in June of 2024 as compared to June of 2023. Equipment sales revenue Equipment sales revenue decreased 15.2% as compared to second quarter 2023, including a 0.3-percentage point adverse impact from currency. The decrease in both actual and constant currency 1 reflects backlog fluctuations in the current and prior year quarters, as well as effects of non-strategic reductions in revenue, including offering and geographic simplification. Revenue declined across all product groups, and was most pronounced in Mid-range, driven by declines in A3 color multi-function printers. For the six months ended June 30, 2024 Equipment sales revenue decreased 20.3%, including a 0.1-percentage point benefit from currency. The decrease in both actual and constant currency 1 reflects the significant reduction in backlog in the first quarter 2023 as compared to the first quarter 2024, as well as organizational changes implemented during the first quarter 2024, and the effects of non-strategic reductions in revenue, including offering and geographic simplification. Revenue declined across all product groups, and was most pronounced in Mid-range, driven by declines in A3 color multi-function printers. 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. Xerox 2024 Form 10-Q 48 Costs, Expenses and Other Income Summary of Key Financial Ratios The following is a summary of key financial ratios used to assess our performance: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 B/(W) 2024 2023 B/(W) Gross Profit $ 520 $ 597 $ (77) $ 963 $ 1,186 $ (223) RD&E 50 57 7 99 121 22 SAG 393 433 40 790 840 50 Equipment Gross Margin 34.5 % 35.2 % (0.7) pts. 32.9 % 35.8 % (2.9) pts. Post sale Gross Margin 32.5 % 33.6 % (1.1) pts. 30.8 % 33.7 % (2.9) pts. Total Gross Margin 33.0 % 34.0 % (1.0) pts. 31.3 % 34.2 % (2.9) pts. RD&E as a % of Revenue 3.2 % 3.2 % — pts. 3.2 % 3.5 % 0.3 pts. SAG as a % of Revenue 24.9 % 24.7 % (0.2) pts. 25.6 % 24.2 % (1.4) pts. Pre-tax Income (Loss) $ 25 $ (89) $ 114 $ (125) $ (4) $ (121) Pre-tax Income (Loss) Margin 1.6 % (5.1) % 6.7 pts. (4.1) % (0.1) % (4.0) pts. Adjusted (1) Operating Income $ 85 $ 107 $ (22) $ 118 $ 225 $ (107) Adjusted (1) Operating Income Margin 5.4 % 6.1 % (0.7) pts. 3.8 % 6.5 % (2.7) pts. ____________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Gross Margin Second quarter 2024 gross margin of 33.0% decreased by 1.0-percentage points as compared to second quarter 2023, primarily reflecting lower revenue and gross profit, higher transportation and product costs, and the exit of certain production print manufacturing operations. These impacts were partially offset by favorable currency and the benefits associated with recent cost and productivity actions. Gross margin for the six months ended June 30, 2024 of 31.3% decreased by 2.9-percentage points as compared to the prior year period, reflecting lower revenue and gross profit, primarily due to charges associated with the exit of certain production print manufacturing operations, which had a 1.4-percentage point unfavorable impact on gross margin, as well as higher transportation and product costs. These impacts were partially offset by the benefits associated with recent cost and productivity actions and favorable currency. Second quarter 2024 Equipment gross margin of 34.5% decreased by 0.7-percentage points as compared to second quarter 2023, reflecting lower revenue and gross profit, and higher transportation and product costs. These impacts were partially offset by favorable currency. Equipment gross margin for the six months ended June 30, 2024 of 32.9% decreased by 2.9-percentage points as compared to the prior year period, reflecting lower revenue and gross profit, the exit of certain production print manufacturing operations, and higher product and transportation costs. These impacts were partially offset by favorable currency. Second quarter 2024 Post sale gross margin of 32.5% decreased by 1.1-percentage points as compared to second quarter 2023, reflecting lower revenue and gross profit, including lower page volumes, charges associated with the Company's Reinvention, primarily related to the exit of certain production print manufacturing operations, and higher transportation and product costs. These impacts were partially offset by the benefits associated with recent cost and productivity actions and favorable currency. Post sale gross margin for the six months ended June 30, 2024 of 30.8% decreased by 2.9-percentage points as compared to the prior year period, reflecting lower revenue and gross profit, including lower page volumes, and charges associated with the Company's Reinvention, primarily related to the exit of certain production print manufacturing operations, which had a 1.9-percentage point unfavorable impact on gross margin. Higher transportation and product costs, and the termination of Fuji royalty income also adversely impacted gross margin. These impacts were partially offset by the benefits associated with recent cost and productivity actions and favorable currency. Xerox 2024 Form 10-Q 49 Research, Development and Engineering Expenses (RD&E) Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 Change 2024 2023 Change R&D $ 38 $ 42 $ (4) $ 75 $ 94 $ (19) Sustaining engineering 12 15 (3) 24 27 (3) Total RD&E Expenses $ 50 $ 57 $ (7) $ 99 $ 121 $ (22) Second quarter 2024 RD&E as a percentage of revenue of 3.2% was flat as compared to second quarter 2023, primarily due to lower RD&E and revenues. RD&E as a percentage of revenue for the six months ended June 30, 2024 of 3.2% decreased by 0.3-percentage points as compared to the prior year period, primarily due to the strategic decision to donate PARC in second quarter 2023. Second quarter 2024 RD&E of $50 million decreased $7 million as compared to second quarter 2023. For the six months ended June 30, 2024 RD&E of $99 million decreased $22 million as compared to the prior year period. The decrease, as compared to the respective prior year periods was primarily due to the strategic decision to donate PARC in second quarter 2023, and the spin-off, exit, or shutdown of certain other RD&E related activities or businesses, as well as a corresponding reduction in real estate. The decrease also reflects productivity and cost savings related to the Company's Reinvention. The lower spending in innovation reflects decisions which provide greater focus and financial flexibility to pursue growth opportunities adjacent to our core operations within Print, Digital and IT Services. Selling, Administrative and General Expenses (SAG) Second quarter 2024 SAG as a percentage of revenue of 24.9% increased by 0.2-percentage points as compared to second quarter 2023, primarily due to lower revenues. Second quarter 2024 SAG of $393 million decreased by $40 million as compared to second quarter 2023, primarily reflecting productivity and cost savings related to the Company's Reinvention, lower bad debt and incentive compensation expenses, as well as favorable currency. SAG as a percentage of revenue for the six months ended June 30, 2024 of 25.6% increased by 1.4-percentage points as compared to the prior year period, primarily due to lower revenues, as well as higher bad debt expense, which were partially offset by lower selling and other administrative and general expenses. SAG for the six months ended June 30, 2024 of $790 million decreased by $50 million as compared to the prior year period, primarily reflecting productivity and cost savings related to the Company's Reinvention, as well as, lower incentive compensation expense, lower litigation costs, and the strategic decision to donate PARC in the prior year. These favorable impacts were partially offset by higher bad debt expense and unfavorable currency. The bad debt provision for the second quarter 2024 of $10 million decreased $5 million as compared to the second quarter 2023, primarily related to lower sales revenue. The bad debt provision for six months ended June 30, 2024 of $25 million, increased by $18 million as compared to the prior year period. The increase reflects a reserve release in the prior year period of approximately $12 million due to a favorable reassessment of the credit exposure on a large customer receivable balance. We continue to monitor developments in future economic conditions, and as a result, our reserves may need to be updated in future periods. As of June 30, 2024, on a trailing twelve-month basis, bad debt expense was approximately 1.5% of total receivables, as compared to approximately 1.0% for the prior year comparable period (excluding the reserve release in the first quarter 2023). Refer to Note 7 - Accounts Receivable, Net and Note 8 - Finance Receivables, Net in the Condensed Consolidated Financial Statements for additional information regarding our bad debt provision. Xerox 2024 Form 10-Q 50 Restructuring and Related Costs, Net We incurred Restructuring and related costs, net of $12 million for the second quarter 2024, as compared to $23 million for the second quarter 2023, and $51 million for the six months ended June 30, 2024, as compared to $25 million in the prior year period. Charges incurred during 2024 are associated with strategic actions taken as a result of the Company's Reinvention, primarily related to the exit of certain production print manufacturing operations and geographic simplification. Second quarter 2024 actions entirely impacted gross margins improvements. Second quarter 2023 actions impacted several functional areas, with approximately 50% focused on SAG reductions and approximately 50% focused on RD&E Optimization. The Restructuring and related costs, net reserve balance for all programs as of June 30, 2024 was $97 million, of which $87 million is expected to be paid over the next twelve months. Refer to Note 11 - Restructuring Programs in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs. Worldwide Employment Worldwide employment was approximately 18,100 as of June 30, 2024, a decrease of approximately 2,000 from December 31, 2023. The decrease primarily relates to the Company's Reinvention, which includes the effects of workforce reduction decisions announced in January 2024, as well as net attrition (attrition net of gross hires). Other Expenses, Net Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 2024 2023 Non-financing interest expense $ 31 $ 12 $ 57 $ 26 Interest income (4) (4) (7) (9) Non-service retirement-related costs 26 11 49 10 Currency losses, net 2 5 13 16 Transaction related costs, net (23) — (23) — Loss (gain) on early extinguishment of debt — 3 (3) 3 Gain on release of contingent consideration — — (5) — All other expenses, net 1 4 (4) 5 Other expenses, net $ 33 $ 31 $ 77 $ 51 Non-Financing Interest Expense Second quarter 2024 non-financing interest expense of $31 million was $19 million higher than second quarter 2023. Non-financing interest expense for the six months ended June 30, 2024 of $57 million was $31 million higher than the prior year period. The respective increase in both periods is primarily due to higher interest rates on new debt issued in the first quarter of 2024, partially offset by lower non-financing debt in the prior year period as a result of the repayment of Senior Notes in 2022 and in the first quarter 2023. When non-financing interest is combined with financing interest expense (Cost of financing) for the three months ended June 30, 2024, total interest expense increased by $14 million as compared to second quarter 2023, while for the six months ended June 30, 2024, total interest expense of $113 million increased by $17 million from the prior year period. The respective increase in both periods reflects the impact of higher interest rates on new debt partially offset by a lower average debt balance, due in part to the reduction of the average finance receivables balance, due to the sales of finance receivables to HPS Investment Partners, as well as lower originations. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity and interest expense. Non-Service Retirement-Related Costs Second quarter 2024 non-service retirement-related costs of $26 million were $15 million higher than the second quarter 2023, while non-service retirement-related costs of $49 million for the six months ended June 30, 2024 were $39 million higher than the prior year period. The respective increase in both periods is primarily due to an increase in actuarial losses subject to amortization, as well as a decrease in the expected return on plan assets. Refer to Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements for additional information regarding service and non-service retirement-related costs. Xerox 2024 Form 10-Q 51 Transaction and related costs, net Transaction and related costs, net primarily reflect costs from third party providers for professional services associated with certain major and strategic M&A projects. Second quarter 2024 Transaction and related costs, net reflect insurance proceeds related to a legal settlement, for the reimbursement of certain legal and other professional costs, associated with the terminated proposal to acquire HP Inc. in early 2020. Loss (Gain) on early extinguishment of debt The (gain) on early extinguishment of debt of $(3) million for the six months ended June 30, 2024 reflects a $(4) million (gain) on the repayment of Senior Notes (via tender offer) in the first quarter of 2024, partially offset by a loss of approximately $1 million on the write-off of deferred debt issuance costs. The loss on early extinguishment of debt of $3 million for the three and six months ended June 30, 2023 related to the early repayment on secured borrowings and the termination of our $250 million Credit Facility prior to entering into our 5-year Asset Based Lending (ABL) Facility. Gain on release of contingent consideration The gain on the release of contingent consideration of $5 million for the six months ended June 30, 2024 reflects a reserve release related to earn-out provisions which were not met, in connection with a prior acquisition. Pre-tax Income (Loss) Margin Second quarter 2024 pre-tax income margin of 1.6% increased 6.7-percentage points, as compared to second quarter 2023 pre-tax (loss) margin of (5.1)%. The increase was primarily due to the PARC donation charge in the prior year period, which resulted in a 7.6-percentage point favorable impact when compared to second quarter 2024. The increase also reflects lower Selling, administrative and general expenses and Restructuring and related costs, net, as well as insurance proceeds related to a legal settlement, which resulted in a 1.5-percentage point favorable impact. These impacts were partially offset by lower revenues and associated gross profits, which included higher transportation and product costs. Pre-tax (loss) margin of (4.1)% for the six months ended June 30, 2024 decreased 4.0-percentage points, as compared to the prior year period pre-tax (loss) margin of (0.1)%. The decrease was primarily due to lower revenues and associated gross profit, the divestitures of certain direct business operations in Latin America, the exit of certain production print manufacturing operations, and higher Restructuring and related costs, net. These impacts were partially offset by the PARC donation charge in 2023, which resulted in a 3.8-percentage point favorable impact when comparing the pre-tax loss margin for the six months ended June 30, 2024 to the prior year period, as well as lower Selling, administrative and general expenses, insurance proceeds related to a legal settlement, which resulted in a 0.7-percentage point favorable impact, and lower RD&E expenses. Adjusted 1 Operating Margin Second quarter 2024 adjusted 1 operating income margin of 5.4% decreased by 0.7-percentage points as compared to second quarter 2023, primarily reflecting lower revenue and lower gross margin, which included higher product and transportation costs. These impacts were partially offset by the benefits from cost and productivity actions, lower Selling, administrative and general expenses, including lower bad debt and incentive compensation expenses, as well as, the benefits from the strategic decision to donate PARC, and the spin-off, exit, or shutdown of certain other RD&E related activities or businesses, as well as a corresponding reduction in real estate. Currency also positively impacted adjusted 1 operating income margin. Adjusted 1 operating income margin of 3.8% for the six months ended June 30, 2024 decreased by 2.7-percentage points as compared to prior year period, reflecting lower revenue and lower gross margin, which included the termination of Fuji royalty income, and higher transportation and product costs, as well as higher bad debt expense primarily related to a reserve release in the first quarter of 2023. These impacts were partially offset by lower Selling, administrative and general expenses, the benefits from the strategic decision to donate PARC in second quarter 2023, and the spin-off, exit, or shutdown of certain other RD&E related activities or businesses, as well as a corresponding reduction in real estate, and benefits from cost and productivity actions. ______________ (1) Refer to the Adjusted Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. Xerox 2024 Form 10-Q 52 Income Taxes Second quarter 2024 effective tax rate was 28.0% which was higher than the U.S. federal statutory tax rate of 21% due primarily to the redetermination of certain unrecognized tax positions and the geographical mix of earnings, including the mix associated with charges related to the Company's Reinvention. On an adjusted 1 basis, second quarter 2024 effective tax rate was 25.5% which was higher than the U.S. federal statutory tax rate of 21% primarily due to changes in our uncertain tax positions and the geographical mix of earnings. Second quarter 2023 effective tax rate was a 31.5% tax benefit and includes the loss on the PARC donation as well as the associated tax benefits. Excluding this impact, the effective tax rate was a 27.9% tax expense, which is higher than the U.S. federal statutory tax rate of 21%, primarily due to the tax impacts associated with restructuring and asset impairment charges and the geographical mix of earnings. On an adjusted 1 basis, second quarter 2023 effective tax rate was 20.0%, which is lower than the U.S. federal statutory tax rate of 21% primarily due to tax benefits from the change in tax filing positions and the redetermination of certain unrecognized tax positions of approximately 10%, which were offset by the geographical mix of earnings. The effective tax rate for the six months ended June 30, 2024 was 24.0% which resulted in a tax benefit. This tax benefit is higher than the benefit under the U.S. federal statutory tax rate of 21% due primarily to the redetermination of certain unrecognized tax positions, partially offset by the geographical mix of earnings, including the mix associated with charges related to the Company's Reinvention. On an adjusted 1 basis, the effective tax rate for the six months ended June 30, 2024 was 18.8%. The difference between this rate and the U.S. federal statutory tax rate of 21% primarily reflects the redetermination of certain unrecognized tax positions partially offset by the geographical mix of earnings. The effective tax rate for the six months ended June 30, 2023 was a 350.0% tax benefit and includes the loss on the PARC donation as well as the associated tax benefits. Excluding this impact, the effective tax rate was a 20.3% tax expense, which is lower than the U.S. federal statutory tax rate of 21% primarily due to the tax benefits from the redetermination of certain unrecognized tax positions and the change in the tax filing positions predominately offset by the tax impacts associated with restructuring and asset impairment charges and the geographical mix of earnings. On an adjusted 1 basis, the effective tax rate for the six months ended June 30, 2023 was 17.6%. The adjusted 1 effective tax rate was lower than the U.S. federal statutory tax rate of 21% primarily due to tax benefits from the redetermination of certain unrecognized tax positions and the change in tax filing positions, partially offset by the geographical mix of earnings. The effective tax rate 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. Net Income (Loss) Second quarter 2024 Net Income was $18 million, or $0.11 per diluted share. On an adjusted 1 basis, Net Income was $41 million, or $0.29 per diluted share. Second quarter 2023 Net (Loss) was $(61) million, or $(0.41) per diluted share, which included the net 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 was $72 million, or $0.44 per diluted share. Net (Loss) for the six months ended June 30, 2024 was $(95) million, or $(0.83) per diluted share. On an adjusted 1 basis, Net Income was $52 million, or $0.35 per diluted share. Net Income for the six months ended June 30, 2023 was $10 million, or $0.02 per diluted share, which included the net 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 was $154 million, or $0.93 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. For the calculations of basis and diluted earnings (loss) per share, refer to Note 20 - Earnings (Loss) per Share in the Notes to the Condensed Consolidated Financial Statements. Xerox 2024 Form 10-Q 53 Other Comprehensive (Loss) Income Second quarter 2024 Other Comprehensive Loss, Net was $14 million and included the following: i) net translation adjustment losses of $20 million reflecting the weakening of most of our major foreign currencies against the U.S. Dollar during the quarter; and ii) $6 million of net gains from the changes in defined benefit plans reflecting the amortization of actuarial losses, partially offset by actuarial losses. This compares to Other Comprehensive Income, Net of $17 million for the second quarter 2023, which included the following: i) net translation adjustment gains of $49 million reflecting the strengthening of most of our major foreign currencies against the U.S. Dollar during the quarter; ii) $27 million of net losses from the changes in defined benefit plans primarily due to plan remeasurements and the adverse impact of currency, partially offset by amortization of actuarial losses; and iii) $5 million of net unrealized losses. Other Comprehensive Loss, Net for the six months ended June 30, 2024 was $11 million and included the following: i) net translation adjustment losses of $52 million reflecting the weakening of our major foreign currencies against the U.S. Dollar; ii) $1 million of net unrealized losses; and iii) $42 million of net gains from the changes in defined benefit plans primarily reflecting the amortization of actuarial losses, the positive impact of currency, partially offset by actuarial losses. This compares to Other Comprehensive Income, Net for the six months ended June 30, 2023 of $100 million, which included the following: i) net translation adjustment gains of $142 million reflecting the strengthening of most of our major foreign currencies against the U.S. Dollar; ii) $41 million of net losses from the changes in defined benefit plans primarily due to the adverse impact of currency and plan remeasurements, partially offset by amortization of actuarial losses and settlement losses; and iii) $1 million of net unrealized losses. 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. Xerox 2024 Form 10-Q 54 Reportable Segments Our business is organized to ensure we focus on efficiently managing operations while serving our customers and the markets in which we operate. We have two operating and reportable segments – Print and Other and Xerox Financial Services (XFS) . Refer to Note 4 - Segment Reporting in the Condensed Consolidated Financial Statements for additional information regarding our reportable segments. Segment Review Three Months Ended June 30, (in millions) External Revenue Intersegment Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) 2024 Print and Other $ 1,489 $ 19 $ 1,508 94 % $ 81 5.4 % XFS 89 — 89 6 % 4 4.5 % Total $ 1,578 $ 19 $ 1,597 100 % $ 85 5.4 % 2023 Print and Other $ 1,653 $ 21 $ 1,674 94 % $ 107 6.5 % XFS 101 — 101 6 % — — % Total $ 1,754 $ 21 $ 1,775 100 % $ 107 6.1 % Six Months Ended June 30, (in millions) External Revenue Intersegment Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) 2024 Print and Other $ 2,900 $ 38 $ 2,938 94 % $ 114 3.9 % XFS 180 — 180 6 % 4 2.2 % Total $ 3,080 $ 38 $ 3,118 100 % $ 118 3.8 % 2023 Print and Other $ 3,266 $ 44 $ 3,310 94 % $ 207 6.3 % XFS 203 — 203 6 % 18 8.9 % Total $ 3,469 $ 44 $ 3,513 100 % $ 225 6.5 % ___________ (1) Reflects revenue, primarily commissions and other payments, made by the XFS segment to the Print and Other segment for the lease of Xerox equipment placements. (2) Segment margin based on external revenue only. Print and Other Print and Other includes the design, development and sale of document management systems, solutions and services as well as associated technology offerings including Digital and IT services and software. Revenue Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 % Change 2024 2023 % Change Equipment sales $ 351 $ 414 (15.2)% $ 636 $ 799 (20.4)% Post sale revenue 1,138 1,239 (8.2)% 2,264 2,467 (8.2)% Intersegment revenue (1) 19 21 (9.5)% 38 44 (13.6)% Total Print and Other Revenue $ 1,508 $ 1,674 (9.9)% $ 2,938 $ 3,310 (11.2)% _____________ (1) Reflects revenue, primarily commissions and other payments, made by the XFS segment to the Print and Other segment for the lease of Xerox equipment placements. Second quarter 2024 Print and Other segment revenue decreased 9.9% as compared to second quarter 2023 and Print and Other segment revenue decreased 11.2% for the six months ended June 30, 2024 as compared to the prior year period. Print and Other segment revenue included the following: Xerox 2024 Form 10-Q 55 Equipment sales revenue decreased 15.2% during the second quarter 2024 as compared to second quarter 2023, while Equipment sales revenue decreased 20.4% for the six months ended June 30, 2024 as compared to the prior year period. The respective decrease as compared to the prior year periods reflects the effects of backlog fluctuations in the current and prior year, along with non-strategic reductions in revenue, including offering and geographic simplification. Revenue declined across all product groups, and was most pronounced in Mid-range, driven by declines in A3 color multi-function printers. Post sale revenue decreased 8.2% during the second quarter 2024 as compared to second quarter 2023, while Post sale revenue decreased 8.2% for the six months ended June 30, 2024 as compared to the prior year period. The respective decrease as compared to the prior year periods primarily reflects reductions in non-strategic, lower margin IT endpoint device placements and paper sales, as well as the effects of geographic simplification, associated with our strategic Reinvention actions. Contractual print services 1 revenue declined mid-single digits, driven by lower service and outsourcing revenue and the effects of geographic simplification. The impacts were partially offset by gains, commissions and servicing revenue on sales of finance receivables. The decrease for the six months ended June 30, 2024 as compared to the prior year period also reflected the termination of the Fuji royalty income and PARC revenue. _____________ (1) Includes revenues from Services, maintenance and rentals. Detail by product group is shown below. Three Months Ended June 30, Six Months Ended June 30, % of Equipment Sales (in millions) 2024 2023 % Change CC % Change 2024 2023 % Change CC % Change 2024 2023 Entry $ 56 $ 63 (11.1)% (11.4)% $ 101 $ 125 (19.2)% (19.1)% 16% 16% Mid-range 235 270 (13.0)% (12.7)% 428 522 (18.0)% (18.2)% 66% 64% High-end 60 82 (26.8)% (26.6)% 107 155 (31.0)% (31.0)% 17% 19% Other 5 5 —% —% 10 9 11.1% 11.1% 1% 1% Equipment sales (1)(2) $ 356 $ 420 (15.2)% (14.9)% $ 646 $ 811 (20.3)% (20.4)% 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 XFS segment of $5 million and $6 million for the three months ended June 30, 2024 and 2023, respectively, and $10 million and $12 million for the six months ended June 30, 2024 and 2023, respectively. The change at constant currency 1 reflected the effects of non-strategic reductions in revenue, including offering and geographic simplification, as well as the following: • Entry - The decrease for the three months ended June 30, 2024 primarily reflects higher backlog reductions in the prior year period, and mix toward black-and-white installs. The decrease for the six months ended June 30, 2024 primarily reflects higher backlog reductions in the prior year period, as well as constraints in Entry, A4 devices during the first quarter of 2024. • Mid-range - The decrease for both the three and six months ended June 30, 2024 reflects higher backlog reductions in the prior year period, partially offset by favorable mix to color. • High-end - The decrease for both the three and six months ended June 30, 2024 was primarily due to higher backlog reductions in the prior year period, partially offset by favorable mix to color. _____________ (1) Refer to the “Currency Impact” section for a description of constant currency. Xerox 2024 Form 10-Q 56 Total Installs Installs reflect new placements of devices only (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations). Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our services revenues (which are both reported within our post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity for Xerox and non-Xerox branded products installed by our XBS sales unit. Detail by product group (see Products and Offerings Definitions ) is shown below. Installs for the three months ended June 30, 2024 as compared to prior year period reflect the following: Entry • 13% decrease in entry color installs, with A4 Color MFPs driving the majority of the decline. • 9% decrease in entry black-and-white installs, with Entry Mono printers driving the decline, partially offset by growth in A4 Mono MFPs. Mid-Range • 12% decrease in mid-range color installs, driven primarily by declines in A3 Color MFPs. • 29% decrease in mid-range black-and-white installs, driven primarily by A3 Mono MFPs. High-End • 22% decrease in high-end color installs primarily reflecting declines in Entry Production Color Mid products. • 24% decrease in high-end black-and-white primarily reflecting declines in High End Cut Sheet products. Installs for the six months ended June 30, 2024 as compared to prior year period reflect the following: Entry • 26% decrease in entry color installs, with A4 Color MFPs driving the majority of the decline • 28% decrease in entry black-and-white installs, with Entry Mono printers driving the decline. Mid-Range • 15% decrease in mid-range color installs, driven primarily by declines in A3 Color MFPs. • 29% decrease in mid-range black-and-white installs, driven primarily by A3 Mono MFPs. High-End • 33% decrease in high-end color installs primarily reflecting declines in Entry Production Color Mid products. • 20% decrease in high-end black-and-white primarily reflecting declines in High End Cut Sheet products. 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 Second quarter 2024 Print and Other segment margin of 5.4% decreased by 1.1-percentage points as compared to second quarter 2023, primarily due to lower revenue, and higher product and transportation costs, which were partially offset by lower Selling, administrative and general expenses, lower RD&E expense, favorable currency, and the benefits of cost and productivity savings. Print and Other segment margin of 3.9% for the six months ended June 30, 2024 decreased 2.4-percentage points as compared to the prior year period. The decrease is primarily due to lower revenue, higher transportation and product costs, and higher bad debts expense. These adverse impacts were partially offset by lower Selling and other administrative and general expenses, lower RD&E expense, and the benefits of cost and productivity savings. Xerox 2024 Form 10-Q 57 Xerox Financial Services Xerox Financial Services (XFS) represents a global financing solutions business, primarily enabling the sale of our equipment and services. Revenue Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 % Change 2024 2023 % Change Equipment sales $ 5 $ 6 (16.7)% $ 10 $ 12 (16.7)% Financing 38 49 (22.4)% 80 101 (20.8)% Other Post sale revenue (1) 46 46 —% 90 90 —% Total XFS Revenue $ 89 $ 101 (11.9)% $ 180 $ 203 (11.3)% _____________ (1) Other Post sale revenue includes lease renewal and fee income as well as gains, commissions and servicing revenue associated with sold finance receivables. Second quarter 2024 XFS segment revenue decreased 11.9% as compared to second quarter 2023, while for the six months ended June 30, 2024 segment revenue decreased 11.3% as compared to the prior year period and reflected the following: Financing revenue is generated from direct and indirectly financed Xerox equipment sale transactions. For the three months ended June 30, 2024, these revenues decreased 22.4% as compared to second quarter 2023, including a 1.2-percentage point adverse impact from currency. Financing revenue for the six months ended June 30, 2024 decreased 20.8% as compared to the prior year period, including a 0.2-percentage point benefit from currency. The decline at constant currency 1 for both the three and six months ended June 30, 2024, respectively, reflects a reduction of the average finance receivables balance in the first half of 2024 as a result of the sales of finance receivables to HPS Investment Partners (HPS), as well as lower originations. Finance receivables are approximately $650 million lower in June of 2024 as compared to June of 2023. Other Post sale revenue was flat for both the three and six months ended June 30, 2024 as compared to the respective prior year periods, and includes gains, commissions and servicing revenue on sales of finance receivables under our finance receivables funding agreement, which were $13 and $11 for the three months ended June 30, 2024 and 2023, respectively, and $21 and $14 for the six months ended June 30, 2024 and 2023, respectively . _____________ (1) Refer to the “Currency Impact” section for a description of constant currency. Segment Margin Second quarter 2024 XFS segment margin of 4.5% increased 4.5-percentage points as compared to second quarter 2023. Segment profit for XFS was $4 million higher as compared to second quarter 2023 mainly due to lower bad debt expense of $4 million as compared to second quarter 2023, which was partially offset by lower revenues from reduced assets. XFS segment margin of 2.2% for the six months ended June 30, 2024 decreased 6.7-percentage points as compared to the prior year period. Segment profit for XFS was $14 million lower as compared to the prior year period mainly due to lower revenue from reduced assets and higher bad debt expense of $16 million as compared to the prior year period. These adverse impacts were partially offset by modestly higher gross profit from fees and lower intercompany commissions. Xerox 2024 Form 10-Q 58 Capital Resources and Liquidity The following is a summary of our liquidity position: • As of June 30, 2024 and December 31, 2023, total cash, cash equivalents and restricted cash of Xerox Holdings Corporation were $551 million and $617 million, respectively, and apart from restricted cash of $66 million and $98 million at June 30, 2024 and December 31, 2023, respectively, was readily accessible for use. The decrease in total cash, cash equivalents and restricted cash of $66 million primarily reflects net cash used in financing activities of $75 million, as well as net cash used in investing activities of $19 million, both of which was partially offset by net cash provided by operating cash activities of $44 million. • Total debt at June 30, 2024 was $3,303 million, of which $2,024 million is allocated to and supports the Company's finance assets. The remaining debt of $1,279 million is attributable to the non-financing business and increased from $849 million at December 31, 2023. Debt consists of senior unsecured notes, secured borrowings through the securitization of finance assets, and borrowings under a Term Loan B facility. • In March 2024, Xerox Holdings Corporation issued $500 million of 8.875% Senior Notes due in 2029, as well as an aggregate $400 million of 3.75% Convertible Senior Notes due in 2030. In connection with the issuance of the 2030 Notes, the Company entered into privately negotiated capped call transactions, with the option counterparties, including certain of the initial purchasers of the 2030 Notes or their respective affiliates at a cost of approximately $23 million. A portion of the aggregate net proceeds were used to repay, via tender offer, approximately $84 million of the 3.80% Xerox Corporation Senior Notes due in 2024 and approximately $362 million of the 5.00% Xerox Holdings Corporation Senior Notes due in 2025. The remaining outstanding 3.80% Senior Notes that were not redeemed as part of the Senior Notes tender offer were repaid in May 2024. There are no repayments for Senior Notes that are due within the next twelve months. • In June 2024 we amended our ABL facility dated as of May 22, 2023, to (i) increase the commitments of the lenders under the ABL Credit Agreement from $300 to $425 and (ii) amend the excess availability used to trigger the fixed charge coverage ratio springing covenant from an amount equal to the greater of (A) $22.5 and (B) 10% of the Line Cap (the lesser of the aggregate amount of Revolving Commitments and the then-applicable Borrowing Base), to an amount equal to the greater of (A) $31.875 and (B) 10% of the Line Cap. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity. • As of June 30, 2024, there were no borrowings or letters of credit outstanding under our ABL facility, under which we can borrow up to a maximum of $425 million. We were in full compliance with the covenants and other provisions of the ABL Facility. • As a result of our lowered guidance, we now expect Operating cash flows for 2024 to be at least $600 million, which is a decrease from our original expectation of at least $650 million. We continue to expect capital expenditures to be approximately $50 million. Xerox 2024 Form 10-Q 59 Cash Flow Analysis The following summarizes our cash, cash equivalents and restricted cash: Six Months Ended June 30, Change (in millions) 2024 2023 Net cash provided by operating activities $ 44 $ 173 $ (129) Net cash used in investing activities (19) (22) 3 Net cash used in financing activities (75) (725) 650 Effect of exchange rate changes on cash, cash equivalents and restricted cash (16) 4 (20) Decrease in cash, cash equivalents and restricted cash (66) (570) 504 Cash, cash equivalents and restricted cash at beginning of period 617 1,139 (522) Cash, Cash Equivalents and Restricted Cash at End of Period $ 551 $ 569 $ (18) Cash Flows from Operating Activities Net cash provided by operating activities was $44 million for the six months ended June 30, 2024. The $129 million decrease in operating cash from the prior year period was primarily due to the following: • $85 million decrease in pre-tax income before depreciation and amortization, provisions, gains on sales of businesses and assets, divestitures, PARC donation, stock-based compensation, restructuring and related costs, net and non-service retirement-related costs. • $160 million decrease from inventory primarily due to higher purchases related to a change in contractual terms with a large OEM vendor and decreased sales of equipment and supplies. • $86 million decrease from accrued compensation due to the timing of payments of higher year-end accruals. • $41 million decrease from higher restructuring and related payments. • $31 million decrease from higher net tax payments. • $26 million decrease from higher pension contributions. • $202 million increase from accounts payable primarily due to the timing of supplier and vendor payments. • $89 million increase from other current and long-term liabilities due to timing of payments. • $27 million increase due to lower placements of equipment on operating leases. Cash Flows from Investing Activities Net cash used in investing activities was $19 million for the six months ended June 30, 2024, which was essentially flat as compared to the prior year period. Cash Flows from Financing Activities Net cash used in financing activities was $75 million for the six months ended June 30, 2024. The $650 million decrease in the use of cash from the prior year period was primarily due to the following: • $661 million decrease from net debt activity. 2024 reflects proceeds of $500 million on Senior Notes and $400 million on Convertible Senior Notes offset by net payments of $658 million on Senior Notes, deferred debt issuance costs of $15 million from Senior Notes issuances, $178 million on secured financing arrangements and $14 million on the Term Loan B facility. The $658 million of net payments on Senior Notes includes $300 million on Senior Notes maturing in May 2024 and $362 million for the early redemption of 2025 Senior Notes offset by early redemption premium of $4 million. 2023 reflects payments of $300 million on Senior Notes and $519 million on secured financing arrangements offset by net proceeds of $193 million from the new ABL Facility, which includes a debt issuance cost payment of $7 million. The $519 million of payments on secured financing arrangements includes the early repayment of $185 million U.S. secured borrowing. • $17 million decrease from common stock dividends due to lower outstanding shares. • $23 million increase from purchases of capped calls. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity. Cash, Cash Equivalents and Restricted Cash Refer to Note 12 - Supplementary Financial Information in the Condensed Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash. Xerox 2024 Form 10-Q 60 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 June 30, 2024 and December 31, 2023, total operating lease liabilities were $179 million and $182 million, respectively. Refer to Note 10 - Lessee in the Condensed Consolidated Financial Statements for additional information regarding our leases accounted for under lessee accounting. Debt and Customer Financing Activities The following summarizes our debt: (in millions) June 30, 2024 December 31, 2023 Xerox Holdings Corporation $ 2,038 $ 1,500 Xerox Corporation 1,136 1,450 Xerox - Other Subsidiaries (1) 176 361 Subtotal - Principal debt balance 3,350 3,311 Debt issuance costs Xerox Holdings Corporation (21) (6) Xerox Corporation (12) (12) Xerox - Other Subsidiaries (1) — (1) Subtotal - Debt issuance costs (33) (19) Net unamortized premium (14) (15) Total Debt $ 3,303 $ 3,277 _____________ (1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of the securitization of Finance Receivables. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt. Finance Assets and Related Debt The following represents our total finance assets, net associated with our lease and finance operations: (in millions) June 30, 2024 December 31, 2023 Total finance receivables, net (1) $ 2,060 $ 2,510 Equipment on operating leases, net 253 265 Total Finance Assets, net (2) $ 2,313 $ 2,775 _____________ (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, 2023 includes an increase of $42 million due to currency. Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in Total finance assets, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets. Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt: (in millions) June 30, 2024 December 31, 2023 Finance receivables debt (1) $ 1,803 $ 2,196 Equipment on operating leases debt 221 232 Financing debt 2,024 2,428 Core debt 1,279 849 Total Debt $ 3,303 $ 3,277 __________________ (1) Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of Income (Loss). Xerox 2024 Form 10-Q 61 Sales of Finance Receivables and Third Party Leasing Programs Refer to Note 8 - Finance Receivables, Net in the Condensed Consolidated Financial Statements for additional information regarding our sales of finance receivables and our third party leasing programs. Capital Market/Debt Activity Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding our debt activity. 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 2024 Q3 $ — $ 7 $ 24 $ 31 2024 Q4 — 7 29 36 2025 388 28 101 517 2026 — 41 22 63 2027 — 55 — 55 2028 750 55 — 805 2029 and thereafter 900 943 — 1,843 Total $ 2,038 $ 1,136 $ 176 $ 3,350 _____________ (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. Treasury Stock Xerox Holdings Corporation made no open-market repurchases of its Common Stock during 2024. Technology Commitments In the second quarter 2024, Xerox entered into a seven year agreement with Tata Consulting Services (TCS), for the purpose of consolidating Xerox’s technology services to improve business outcomes, migrate legacy data centers to the cloud, deploy a cloud-based digital ERP platform to transform business processes, and incorporate generative artificial intelligence (GenAI) into operations to help drive sustainable growth. The agreement expands Xerox's existing partnership with TCS, who currently provides business processing outsourcing services in support of our global finance and accounting organization; there were no changes to the terms of the business processing outsourcing services agreement. In connection with the technology agreement with TCS, Xerox also entered into seven year agreements with both SAP Limited (SAP), who will provide Xerox with a cloud-based digital ERP platform, and Microsoft, who will provide their Azure cloud platform services. In the second quarter 2024, Xerox entered into a five year agreement with Verizon Business Services (Verizon) to provide their Network as a Service (NaaS) solutions framework as part of Xerox's Reinvention. Under the terms of the agreement, Verizon will provide a secure network platform solution delivering network services to Xerox business locations globally. The approximate aggregate spending commitments as of June 30, 2024 is as follows: (in millions) June 30, 2024 Agreement Term TCS $ 355 7 Years Microsoft 125 7 Years SAP 45 7 Years Verizon 85 5 Years Xerox 2024 Form 10-Q 62 Financial Risk Management We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, interest rate caps, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the 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. 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 Earnings per Share (EPS) • Adjusted Effective Tax Rate Xerox 2024 Form 10-Q 63 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. Transaction and related costs, net : Transaction and related costs, net are costs and expenses primarily associated with certain major or significant strategic M&A projects. These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements that may arise in connection with those M&A transactions. These costs are considered incremental to our normal operating charges and were incurred or are expected to be incurred solely as a result of the planned transactions. Accordingly, we are excluding these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis. 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. • Inventory-related impact - exit of certain production print manufacturing operations • Divestitures • PARC donation • Loss (gain) on early extinguishment of debt 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. Xerox 2024 Form 10-Q 64 Adjusted Net Income and EPS reconciliation: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in millions, except per share amounts) Net Income Diluted EPS Net (Loss) Income Diluted EPS Net (Loss) Income Diluted EPS Net Income Diluted EPS Reported (1) $ 18 $ 0.11 $ (61) $ (0.41) $ (95) $ (0.83) $ 10 $ 0.02 Adjustments: Inventory-related impact - exit of certain production print manufacturing operations (2) 8 — 44 — Restructuring and related costs, net 12 23 51 25 Amortization of intangible assets 10 10 20 21 Divestitures (3) — 51 — PARC donation — 132 — 132 Non-service retirement-related costs 26 11 49 10 Transaction and related costs, net (23) — (23) — Loss (gain) on early extinguishment of debt — 3 (3) 3 Income tax on PARC donation (3) — (40) — (40) Income tax on adjustments (3) (7) (6) (42) (7) Adjusted $ 41 $ 0.29 $ 72 $ 0.44 $ 52 $ 0.35 $ 154 $ 0.93 Dividends on preferred stock used in adjusted EPS calculation (4) $ 3 $ 3 $ 7 $ 7 Weighted average shares for adjusted EPS (4) 126 158 125 158 Fully diluted shares at June 30, 2024 (5) 126 ____________________________ (1) Net Income (Loss) and EPS. (2) Reflects the reduction of inventory of approximately $6 and $38 and the cancellation of related purchase contracts of approximately $2 and $6, as a result of the exit of certain production print manufacturing operations during the three and six months ended June 30, 2024, respectively. (3) Refer to Adjusted Effective Tax Rate reconciliation. (4) 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. (5) Reflects common shares outstanding at June 30, 2024, plus potential dilutive common shares used for the calculation of adjusted diluted EPS for the second quarter 2024. Excludes shares associated with our Series A convertible preferred stock, which were anti-dilutive for the second quarter 2024 and 2023, respectively. Xerox 2024 Form 10-Q 65 Adjusted Effective Tax Rate reconciliation: Three Months Ended June 30, 2024 2023 (in millions) Pre-Tax Income Income Tax Expense Effective Tax Rate Pre-Tax (Loss) Income Income Tax (Benefit) Expense Effective Tax Rate Reported (1) $ 25 $ 7 28.0 % $ (89) $ (28) 31.5 % PARC donation (2) — — 132 40 Non-GAAP Adjustments (2) 30 7 47 6 Adjusted (3) $ 55 $ 14 25.5 % $ 90 $ 18 20.0 % Six Months Ended June 30, 2024 2023 (in millions) Pre-Tax (Loss) Income Income Tax (Benefit) Expense Effective Tax Rate Pre-Tax (Loss) Income Income Tax (Benefit) Expense Effective Tax Rate Reported (1) $ (125) $ (30) 24.0 % $ (4) $ (14) 350.0 % PARC donation (2) — — 132 40 Non-GAAP Adjustments (2) 189 42 59 7 Adjusted (3) $ 64 $ 12 18.8 % $ 187 $ 33 17.6 % ____________________________ (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. Xerox 2024 Form 10-Q 66 Adjusted Operating Income and Margin reconciliation: Three Months Ended June 30, 2024 2023 (in millions) Profit Revenue Margin (Loss) Profit Revenue Margin Reported (1) $ 18 $ 1,578 $ (61) $ 1,754 Income tax expense (benefit) 7 — (28) — Pre-tax income (loss) $ 25 $ 1,578 1.6 % $ (89) $ 1,754 (5.1) % Adjustments: Inventory-related impact - exit of certain production print manufacturing operations (2) 8 — Restructuring and related costs, net 12 23 Amortization of intangible assets 10 10 Divestitures (3) — PARC donation — 132 Other expenses, net (3) 33 31 Adjusted $ 85 $ 1,578 5.4 % $ 107 $ 1,754 6.1 % Six Months Ended June 30, 2024 2023 (in millions) (Loss) Profit Revenue Margin Profit (Loss) Revenue Margin Reported (1) $ (95) $ 3,080 $ 10 $ 3,469 Income tax benefit (30) (14) Pre-tax loss $ (125) $ 3,080 (4.1) % $ (4) $ 3,469 (0.1) % Adjustments: Inventory-related impact - exit of certain production print manufacturing operations (2) 44 — Restructuring and related costs, net 51 25 Amortization of intangible assets 20 21 Divestitures 51 — PARC donation — 132 Other expenses, net (3) 77 51 Adjusted $ 118 $ 3,080 3.8 % $ 225 $ 3,469 6.5 % ____________________________ (1) Net Income (Loss) (2) Reflects the reduction of inventory of approximately $6 and $38 and the cancellation of related purchase contracts of approximately $2 and $6, as a result of the exit of certain production print manufacturing operations during the three and six months ended June 30, 2024, respectively. (3) Includes non-service retirement-related costs. Xerox 2024 Form 10-Q 67 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.