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 September 30, 2024 Myriad had investments of approximately $41 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 third quarter of 2024, the benefits of Reinvention drove improved financial results, albeit at a slower pace than expected. Third quarter 2024 included a second consecutive period of moderating revenue declines, year over year improvements in adjusted 1 operating income and income margin, and more than 100 percent free cash flow 2 conversion from adjusted 1 operating income. Further, the pending acquisition of ITsavvy is expected to improve our mix of revenue from complementary, value-added businesses with higher underlying rates of revenue growth. Equipment sales of $339 million in the third quarter 2024 declined 12.2% in actual and constant currency 1 , as compared to the third quarter 2023. The effects of fluctuations in backlog 3 in the prior and current years and other Reinvention actions drove approximately 4.0-percentage points of the year-over-year decline. The remainder of the decline primarily reflects the delayed global launch of two new products, lower-than-expected improvements in sales force productivity, delays in the timing of installations associated with Hurricane Helene, unfavorable mix, and a large Production equipment sale in the prior year. Total equipment installations increased approximately 17.0% year-over-year, due to growth in entry level equipment. Post-sale revenue of $1.2 billion declined 6.1% in actual currency, or 5.7% in constant currency 1 , as compared to third quarter 2023. The decline was primarily due to lower outsourcing and service revenue, intentional reductions in non-strategic revenue, and the effects of geographic simplification. Excluding non-strategic effects, post sale revenue decreased low-single digits. Pre-tax loss of approximately $1.1 billion for the third quarter 2024 decreased by approximately $1.2 billion as compared to pre-tax income of $64 million in the third quarter 2023. Third quarter 2024 includes a pre-tax, non-cash goodwill impairment charge of $1.1 billion ($1.0 billion after-tax) or $8.16 per diluted share. As a result of a sustained market capitalization below our book value and current results, in the third quarter 2024 we performed a Xerox 2024 Form 10-Q 47 quantitative assessment of Goodwill. Although operating results and related cash flows are expected to sequentially improve in the fourth quarter 2024, and in 2025, we see greater risk to our previous outlooks and estimates, at least in the near term. This impact and the resulting effect on discounted future cash flows, continued to negatively impact the Company’s valuation resulting in the goodwill impairment charge for the third quarter 2024. The decrease associated with this charge was partially offset by an increase in adjusted 1 operating income. Adjusted 1 operating income increased by $12 million as compared to third quarter 2023, reflecting lower Selling, administrative and general expenses associated with actions taken to simplify our organization, Research, development and engineering expenses (RD&E), and partially offset by lower equipment and post sale revenue and associated gross profits. ____________________________ (1) Refer to the “Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure. (2) Free cash flow is defined as Net cash provided by operating activities less capital expenditures. (3) Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT services offerings. Goodwill - Quantitative Impairment Evaluation We assess Goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During the third quarter 2024, we identified events and conditions that required a quantitative assessment of Goodwill. Refer to Note 1 - Basis of Presentation in the Condensed Consolidated Financial Statements for additional information regarding the assessment of Goodwill. Valuation Allowance During the third quarter 2024, a valuation allowance was recorded primarily related to certain deferred tax assets in a non-U.S tax jurisdiction. Refer to Note 1 - Basis of Presentation in the Condensed Consolidated Financial Statements for additional information regarding the valuation allowance. 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. Xerox 2024 Form 10-Q 48 2024 Review Total revenue of $1.53 billion for third quarter 2024 decreased 7.5% from third quarter 2023, which included a 0.2-percentage point unfavorable impact from currency. Total revenue of $4.61 billion for the nine months ended September 30, 2024 decreased 10.0% as compared to the prior year period, with no impact from currency. Net (loss) income and adjusted 1 Net income were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2024 2023 B/(W) 2024 2023 B/(W) Net (Loss) Income $ (1,205) $ 49 $ (1,254) $ (1,300) $ 59 $ (1,359) Adjusted (1) Net income 34 77 (43) 86 231 (145) ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Third quarter 2024 Net (loss) was $(1,205) million as compared to the third quarter 2023 Net income of $49 million. The decrease in Net income of $1,254 million primarily reflects the after-tax non-cash Goodwill impairment charge of $1,015 million ($1,058 million pre-tax) in the third quarter 2024, as well as lower revenue and gross profit, higher Other expenses, net, which included the impacts of higher non-service retirement-related costs, higher Restructuring and related costs, net, and higher Income tax expense. These negative impacts were partially offset by lower Selling, administrative and general expenses and Research, development and engineering expenses (RD&E). Third quarter 2024 Adjusted 1 Net income of $34 million decreased $43 million as compared to the prior year period, primarily reflecting lower revenue and gross profit, as well as higher Other expenses, net, and Income tax expense. These negative impacts were partially offset by lower Selling, administrative and general expenses, and RD&E. Net (loss) for the nine months ended September 30, 2024 was $(1,300) million as compared to the prior year period Net income of $59 million. The decrease in Net income of $1,359 million primarily reflects the after-tax non-cash Goodwill impairment charge of $1,015 million ($1,058 million pre-tax) in the third quarter 2024, as well as lower revenue and gross profit, higher Other expenses, net, which included the impacts of higher non-service retirement-related costs, higher Income tax expense, higher Restructuring and related costs, net, the loss from divestitures of certain direct business operations in Latin America, and the exit of certain production print manufacturing operations. These negative impacts were partially offset by lower Selling, administrative and general expenses and lower RD&E. A djusted 1 Net income for the nine months ended September 30, 2024 of $86 million decreased $145 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. The following is a summary of our segments - Print and Other and Xerox Financial Services (XFS) : Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2024 2023 % Change 2024 2023 % Change Revenue Print and Other $ 1,457 $ 1,575 (7.5) % $ 4,395 $ 4,885 (10.0) % XFS 88 98 (10.2) % 268 301 (11.0) % Intersegment Elimination (1) (17) (21) (19.0) % (55) (65) (15.4) % Total Revenue $ 1,528 $ 1,652 (7.5) % $ 4,608 $ 5,121 (10.0) % Profit Print and Other $ 67 $ 64 4.7 % $ 181 $ 271 (33.2) % XFS 13 4 nm 17 22 (22.7) % Total Profit $ 80 $ 68 17.6 % $ 198 $ 293 (32.4) % ____________________________ (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. Xerox 2024 Form 10-Q 49 Cash flows from operating activities during the nine months ended September 30, 2024 was a source of $160 million and decreased $137 million as compared to the prior year period, primarily related to lower net income as well as higher payments for accrued compensation, pension contributions, and restructuring, partially offset by net proceeds of approximately $511 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 nine months ended September 30, 2024 was $26 million, reflecting capital expenditures of $27 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 $16 million for investments in noncontrolling interests, all of which was partially offset by net cash proceeds of approximately $20 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 nine months ended September 30, 2024 was $149 million reflecting net payments of approximately $658 million on Senior Notes due in 2024 and 2025, $211 million on secured financing arrangements, $18 million for debt issuance costs, and $21 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 $107 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. Revenue guidance was reduced from a decline of 5% to 6% in constant currency 1 to a decline of about 10% in constant currency 1 , reflecting the incremental effects of intentional reductions in non-strategic revenue and lower equipment revenue associated with the delayed global launch of two new products and lower-than-expected improvements in sales force productivity. Adjusted 1 operating income guidance was reduced from at least 6.5% to about 5.0%, reflecting the effects of gross profit declines associated with the decline in revenue guidance, and to a lesser extent, delays in the implementation of certain cost reduction initiatives to 2025. Operating cash flows are now expected to be to be within a range of $490 million to $540 million, versus prior guidance of at least $600 million, reflecting the after-tax effects of the reduction in adjusted 1 operating income guidance. We now expect capital expenditures to be approximately $40 million, as compared to previous guidance of approximately $50 million. Due to lower-than-expected revenue in 2024, we no longer expect to grow adjusted 1 operating income $300 million above 2023 levels by 2026. However, we continue to expect growth in adjusted 1 operating income and a return to double-digit adjusted 1 operating income margin over the course of our Reinvention. ____________________________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Xerox 2024 Form 10-Q 50 Financial Review Revenues Three Months Ended September 30, Nine Months Ended September 30, % of Total Revenue (in millions) 2024 2023 % Change CC % Change 2024 2023 % Change CC % Change 2024 2023 Equipment sales $ 339 $ 386 (12.2) % (12.2) % $ 985 $ 1,197 (17.7) % (17.7) % 21 % 23 % Post sale revenue 1,189 1,266 (6.1) % (5.7) % 3,623 3,924 (7.7) % (7.7) % 79 % 77 % Total Revenue $ 1,528 $ 1,652 (7.5) % (7.3) % $ 4,608 $ 5,121 (10.0) % (10.0) % 100 % 100 % Reconciliation to Condensed Consolidated Statements of (Loss) Income): Sales $ 588 $ 644 (8.7) % (8.3) % $ 1,722 $ 1,999 (13.9) % (13.9) % Less: Supplies, paper and other sales (249) (258) (3.5) % (2.3) % (737) (802) (8.1) % (8.1) % Equipment sales $ 339 $ 386 (12.2) % (12.2) % $ 985 $ 1,197 (17.7) % (17.7) % Services, maintenance and rentals $ 902 $ 962 (6.2) % (6.1) % $ 2,768 $ 2,975 (7.0) % (7.0) % Add: Supplies, paper and other sales 249 258 (3.5) % (2.3) % 737 802 (8.1) % (8.1) % Add: Financing 38 46 (17.4) % (17.6) % 118 147 (19.7) % (19.9) % Post sale revenue $ 1,189 $ 1,266 (6.1) % (5.7) % $ 3,623 $ 3,924 (7.7) % (7.7) % Segments Print and Other $ 1,457 $ 1,575 (7.5) % $ 4,395 $ 4,885 (10.0) % 95 % 95 % Xerox Financial Services (XFS) 88 98 (10.2) % 268 301 (11.0) % 6 % 6 % Intersegment elimination (1) (17) (21) (19.0) % (55) (65) (15.4) % (1) % (1) % Total Revenue (2) $ 1,528 $ 1,652 (7.5) % $ 4,608 $ 5,121 (10.0) % 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. Third quarter 2024 total revenue decreased 7.5% as compared to third quarter 2023, and included a 0.2-percentage point adverse impact from currency, while total revenue for the nine months ended September 30, 2024 decreased 10.0%, with no impact from currency. The decrease in equipment sales revenue at constant currency 1 for the three months ended September 30, 2024 was primarily attributable to a delay in the global launch of two new products, lower-than-expected improvements in sales productivity, unfavorable mix, and a large production equipment sale in the third quarter 2023. Equipment sales revenue for the three months ended September 30, 2024 was also impacted by the effects of backlog fluctuations in the current and prior year quarters, and non-strategic reductions in revenue, including geographic simplification. For the nine months ended September 30, 2024, equipment sales revenue was primarily impacted by lower-than-expected improvements in sales productivity and unfavorable mix, as well as the effects of backlog fluctuations in the current and prior year quarters, and non-strategic reductions in revenue, including geographic simplification. Third quarter 2024 Post sale revenue decreased at constant currency 1 due to a decline in contractual print services 2 revenue, driven by lower service and outsourcing revenue, and reductions in lower margin IT endpoint device placements. These negative impacts were partially offset by higher supplies revenue and digital and managed IT services revenue. For the nine months ended September 30, 2024, Post sale revenue decreased at constant currency 1 primarily due to the decline in Contractual print services 2 driven by lower service and outsourcing revenue, and reductions in lower margin IT endpoint device placements, as well as the termination of Fuji royalty income and PARC revenue, lower paper sales, lower Finance income, and the effects of geographic simplification. These negative impacts were partially offset by higher supplies revenue and digital and managed IT services revenue. Total revenue for the three and nine months ended September 30, 2024 reflected the following: Xerox 2024 Form 10-Q 51 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. Post sale revenue decreased 6.1% as compared to third quarter 2023, which included a 0.4-percentage point adverse impact from currency, while Post sale revenue decreased 7.7% for the nine months ended September 30, 2024 as compared to the prior year period, with no impact from currency. Post sale revenue reflected the following: • 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 September 30, 2024, these revenues decreased 6.2% as compared to third quarter 2023, which included a 0.1-percentage point adverse impact from currency, while for the nine months ended September 30, 2024 these revenues decreased 7.0% as compared to the prior year period, with no impact from currency. The decline at constant currency 1 for both the three and nine months ended September 30, 2024, respectively, was primarily due to Contractual print services 2 declines. Contractual print services 2 revenue declined mid-single digits for the three and nine months ended September 30, 2024 as compared to the respective prior year periods, driven by lower outsourcing and service revenue, which includes the effects of geographic simplification, which were partially offset by higher digital and IT managed services, as well as gains, commissions, and servicing revenue on sales of finance receivables. The decline for the nine months ended September 30, 2024 was also driven by the termination of Fuji royalty income and PARC revenue. • Supplies, paper and other sales revenue includes unbundled supplies, IT hardware and other sales. For the three months ended September 30, 2024, these revenues decreased 3.5% as compared to third quarter 2023, including a 1.2-percentage point adverse impact from currency, while for the nine months ended September 30, 2024 the revenues decreased 8.1% as compared to the prior year period with no impact from currency. The decline at constant currency 1 for both the three and nine months ended September 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 17.4% as compared to third quarter 2023, including a 0.2-percentage point benefit from currency. Financing revenue for the nine months ended September 30, 2024 decreased 19.7% 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 nine months ended September 30, 2024, respectively, reflects a continued reduction of the average finance receivables balance in 2024 as a result of the sales of finance receivables in recent quarters to HPS Investment Partners (HPS), as well as lower originations. Finance receivables are approximately $630 million lower as of September 30, 2024 when compared with September 30, 2023. Equipment sales revenue Equipment sales revenue decreased 12.2% as compared to third quarter 2023, with no impact from currency. The decrease in constant currency 1 was primarily attributable to a delay in the global launch of two new products, lower-than-expected improvements in sales productivity, unfavorable mix, and a large production equipment sale in the prior year. Equipment sales revenue was also impacted by the effects of backlog fluctuations in the current and prior year quarters, and non-strategic reductions in revenue, including geographic simplification. Revenue declined across all product groups, and was most pronounced in Mid-range, driven by declines in entry production color products. For the nine months ended September 30, 2024 Equipment sales revenue decreased 17.7%, with no impact from currency. The decrease in constant currency 1 was primarily impacted by lower-than-expected improvements in sales productivity, unfavorable mix, as well as the effects of backlog fluctuations in the current and prior year quarters, and 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 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) 2024 2023 B/(W) 2024 2023 B/(W) Gross Profit $ 495 $ 536 $ (41) $ 1,458 $ 1,722 $ (264) RD&E 45 52 7 144 173 29 SAG 370 416 46 1,160 1,256 96 Equipment Gross Margin 28.5 % 31.0 % (2.5) pts. 31.4 % 34.3 % (2.9) pts. Post sale Gross Margin 33.5 % 32.9 % 0.6 pts. 31.7 % 33.4 % (1.7) pts. Total Gross Margin 32.4 % 32.4 % — pts. 31.6 % 33.6 % (2.0) pts. RD&E as a % of Revenue 2.9 % 3.1 % 0.2 pts. 3.1 % 3.4 % 0.3 pts. SAG as a % of Revenue 24.2 % 25.2 % 1.0 pts. 25.2 % 24.5 % (0.7) pts. Pre-tax (Loss) Income $ (1,087) $ 64 $ (1,151) $ (1,212) $ 60 $ (1,272) Pre-tax (Loss) Income Margin (71.1) % 3.9 % (75.0) pts. (26.3) % 1.2 % (27.5) pts. Adjusted (1) Operating Income $ 80 $ 68 $ 12 $ 198 $ 293 $ (95) Adjusted (1) Operating Income Margin 5.2 % 4.1 % 1.1 pts. 4.3 % 5.7 % (1.4) pts. ____________ (1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Gross Margin Third quarter 2024 gross margin of 32.4% was flat as compared to third quarter 2023, primarily reflecting lower revenue and gross profit, higher transportation costs, as well as unfavorable equipment mix and lower print volumes. These impacts were offset by the benefits associated with recent cost and productivity actions, and favorable currency. Gross margin for the nine months ended September 30, 2024 of 31.6% decreased by 2.0-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 1.0-percentage point unfavorable impact on gross margin, as well as higher transportation and product costs, an unfavorable equipment mix and lower print volumes. These impacts were partially offset by the benefits associated with recent cost and productivity actions and favorable currency. Third quarter 2024 Equipment gross margin of 28.5% decreased by 2.5-percentage points as compared to third quarter 2023, reflecting lower revenue and gross profit, higher transportation costs, and the release of a tariff accrual in the prior year period. These impacts were partially offset by favorable currency. Equipment gross margin for the nine months ended September 30, 2024 of 31.4% decreased by 2.9-percentage points as compared to the prior year period, reflecting lower revenue and gross profit, higher product and transportation costs, and the release of a tariff accrual in the prior year period. These impacts were partially offset by favorable currency. Third quarter 2024 Post sale gross margin of 33.5% increased by 0.6-percentage points as compared to third quarter 2023, reflecting the benefits associated with recent Reinvention-related cost and productivity actions and favorable currency. These benefits were partially offset by lower revenue and gross profit, including lower page volumes. Post sale gross margin for the nine months ended September 30, 2024 of 31.7% decreased by 1.7-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 1.2-percentage point unfavorable impact on gross margin. Higher transportation costs 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 53 Research, Development and Engineering Expenses (RD&E) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2024 2023 Change 2024 2023 Change R&D $ 33 $ 38 $ (5) $ 108 $ 132 $ (24) Sustaining engineering 12 14 (2) 36 41 (5) Total RD&E Expenses $ 45 $ 52 $ (7) $ 144 $ 173 $ (29) Third quarter 2024 RD&E as a percentage of revenue of 2.9% decreased 0.2-percentage points as compared to third quarter 2023, primarily due to lower revenues and lower RD&E. RD&E as a percentage of revenue for the nine months ended September 30, 2024 of 3.1% 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. Third quarter 2024 RD&E of $45 million decreased $7 million as compared to third quarter 2023. For the nine months ended September 30, 2024 RD&E of $144 million decreased $29 million as compared to the prior year period. The decrease, as compared to the respective prior year periods, was primarily due to productivity and cost savings related to the Company's Reinvention, the spin-off, exit, or shutdown of certain other RD&E related activities or businesses, and the corresponding reduction in real estate. 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. The decrease for the nine months ended September 30, 2024 also reflected the strategic decision to donate PARC in second quarter 2023. Selling, Administrative and General Expenses (SAG) Third quarter 2024 SAG as a percentage of revenue of 24.2% decreased by 1.0-percentage points as compared to third quarter 2023, primarily due to lower revenue, as well lower selling and other administrative and general expenses. Third quarter 2024 SAG of $370 million decreased by $46 million as compared to third quarter 2023, primarily reflecting productivity and cost savings related to the Company's Reinvention, and lower incentive compensation expenses. SAG as a percentage of revenue for the nine months ended September 30, 2024 of 25.2% increased by 0.7-percentage points as compared to the prior year period, primarily due to lower revenue, as well as higher bad debt expense, which were partially offset by lower selling and other administrative and general expenses. SAG for the nine months ended September 30, 2024 of $1,160 million decreased by $96 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 IT, litigation, and advertising 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 third quarter 2024 of $10 million was flat as compared to the third quarter 2023, and includes a reserve release of approximately $8 million due in part to a lower finance receivables balance, as a result of sales of finance receivables in recent quarters to HPS Investment Partners, mostly offset by an increased provision for aged accounts receivables. The bad debt provision for nine months ended September 30, 2024 of $35 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, as well as an increased provision for aged accounts receivables in the current year, both of which were offset by a reserve release of approximately $8 million, in the current year, due in part to a lower finance receivables balance, as a result of sales of finance receivables in recent quarters to HPS Investment Partners. 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 September 30, 2024, on a trailing twelve-month basis, bad debt expense (excluding the reserve release in the third quarter 2024) was approximately 1.6% of total receivables, as compared to approximately 1.0% for the prior year comparable period, primarily due to a lower finance receivables balance, as well the reserve release of approximately $8 million in third quarter 2024. 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 54 Restructuring and Related Costs, Net We incurred Restructuring and related costs, net of $56 million for the third quarter 2024, as compared to $10 million for the third quarter 2023, and $107 million for the nine months ended September 30, 2024, as compared to $35 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 optimizing operations, the exit of certain production print manufacturing operations, and geographic simplification. Third quarter 2024 actions impacted several functional areas, with approximately 65% focused on gross margins improvements, approximately 30% focused on SAG reductions, and the remainder focused on RD&E optimization. Third quarter 2023 actions impacted several functional areas, with approximately 80% focused on SAG reductions and approximately 20% focused on RD&E optimization. The Restructuring and related costs, net reserve balance for all programs as of September 30, 2024 was $132 million, of which $112 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 17,300 as of September 30, 2024, a decrease of approximately 2,800 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 September 30, Nine Months Ended September 30, (in millions) 2024 2023 2024 2023 Non-financing interest expense $ 31 $ 14 $ 88 $ 40 Interest income (3) (3) (10) (12) Non-service retirement-related costs 25 4 74 14 Gains on sales of businesses and assets (2) (35) (3) (37) Currency losses, net 2 6 15 22 Tax indemnification - Conduent — (7) — (7) Transaction related costs, net (15) — (38) — (Gain) loss on early extinguishment of debt — — (3) 3 Gain on release of contingent consideration — — (5) — All other expenses, net 5 3 2 10 Other expenses, net $ 43 $ (18) $ 120 $ 33 Non-Financing Interest Expense Third quarter 2024 non-financing interest expense of $31 million was $17 million higher than third quarter 2023. Non-financing interest expense for the nine months ended September 30, 2024 of $88 million was $48 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 a lower average debt balance 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 September 30, 2024, total interest expense increased by $13 million as compared to third quarter 2023, while for the nine months ended September 30, 2024, total interest expense of $170 million increased by $30 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 Xerox 2024 Form 10-Q 55 Third quarter 2024 non-service retirement-related costs of $25 million were $21 million higher than the third quarter 2023, while non-service retirement-related costs of $74 million for the nine months ended September 30, 2024 were $60 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. Gains on sales of businesses and assets For the three and nine months ended September 30, 2024, gains on sales of businesses and assets decreased $33 million and $34 million, respectively, as compared to their respective prior year periods, due to the sales of non-core surplus business assets in the prior year period. Currency losses, net For the three and nine months ended September 30, 2024, currency losses, net decreased $4 million and $7 million, respectively, as compared to their respective prior year periods, primarily due to the prior period sales of our Russian subsidiary, and our direct business operations in Argentina. 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. Transaction and related costs, net Transaction and related costs, net primarily reflect costs from third party providers for professional services associated with certain major or strategic M&A projects. For the three and nine months ended September 30, 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 a past potential merger. (Gain) loss on early extinguishment of debt The (gain) on early extinguishment of debt of $(3) million for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2024 reflects a reserve release related to earn-out provisions which were not met, in connection with a prior acquisition. Pre-tax (Loss) Income Margin Third quarter 2024 pre-tax (loss) margin of (71.1)% increased 75.0-percentage points, as compared to third quarter 2023 pre-tax income margin of 3.9%. The increase was due to the pre-tax non-cash goodwill impairment charge of $1,058 million, as a result of a sustained market capitalization below our book value, current results and expected future projections. In addition, the pre-tax (loss) margin also reflects lower revenue and associated gross profit, higher Restructuring and related costs, net, as well as higher Other expenses, net. These impacts were partially offset by lower Selling, administrative and general expenses. Pre-tax (loss) margin of (26.3)% for the nine months ended September 30, 2024 increased 27.5-percentage points, as compared to the prior year period pre-tax income margin of 1.2%. The increase was primarily due to the pre-tax goodwill non-cash impairment charge of $1,058 million recorded in the third quarter 2024. In addition, the pre-tax (loss) margin also reflects lower revenues and associated gross profit, higher Restructuring and related costs, net, the divestitures of certain direct business operations in Latin America, the exit of certain production print manufacturing operations, as well as higher Other expense, net. These impacts were partially offset by the PARC donation charge in 2023, as well as lower Selling, administrative and general expenses, and lower RD&E expenses. Xerox 2024 Form 10-Q 56 Adjusted 1 Operating Margin Third quarter 2024 adjusted 1 operating income margin of 5.2% increased by 1.1-percentage points as compared to third quarter 2023, primarily reflecting the benefits from Reinvention related cost and productivity actions, lower Selling, administrative and general expenses, including lower incentive compensation expenses, favorable currency, and the spin-off, exit, or shutdown of certain other RD&E related activities or businesses. These benefits were partially offset by lower revenue and lower gross profit, and higher transportation costs. Adjusted 1 operating income margin of 4.3% for the nine months ended September 30, 2024 decreased by 1.4-percentage points as compared to prior year period, reflecting lower revenue and lower gross profit, which included higher transportation and product costs, and the termination of Fuji royalty income, as well as higher bad debt expense. These impacts were partially offset by lower Selling, administrative and general expenses, including lower incentive compensation expenses, and the benefits from Reinvention related cost and productivity actions, 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. ______________ (1) Refer to the Adjusted Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. Income Taxes Third quarter 2024 effective tax rate was (10.9)%. This rate was lower than the U.S. federal statutory tax rate of 21% but resulted in a tax expense, primarily due to the goodwill impairment charge, the establishment of a valuation allowance on certain deferred tax assets including not benefiting related current year losses as well as the geographical mix of earnings. On an adjusted 1 basis, third quarter 2024 effective tax rate was 27.7%, which was higher than the U.S. federal statutory tax rate of 21% primarily due to not benefiting certain current year losses and the geographical mix of adjusted earnings, partially offset by the redetermination of certain unrecognized tax positions. Third quarter 2023 effective tax rate was a 23.4%, which is higher than the U.S. federal statutory tax rate of 21%, primarily due to the geographical mix of earnings, partially offset by the tax benefits due to redetermination of certain unrecognized tax positions upon conclusion of several audits, and the remeasurement of deferred tax assets. On an adjusted 1 basis, third quarter 2023 effective tax rate was 7.2%, 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 adjusted earnings. The effective tax rate for the nine months ended September 30, 2024 was (7.3)%. This rate was lower than the U.S. federal statutory tax rate of 21% but resulted in a tax expense, primarily due to the goodwill impairment charge, the establishment of a valuation allowance on certain deferred tax assets including not benefiting related current year losses and the geographical mix of earnings, partially offset by the redetermination of certain unrecognized tax positions. On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2024 was 22.5%, which was higher than the U.S. federal statutory tax rate of 21% primarily due to not benefiting certain current year losses and the geographical mix of adjusted earnings, partially offset by the redetermination of certain unrecognized tax positions. The effective tax rate for the nine months ended September 30, 2023 was a 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 14.4%. 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 adjusted 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. Xerox 2024 Form 10-Q 57 Net (Loss) Income Third quarter 2024 Net (Loss) was $(1,205) million, or $(9.71) per diluted share, which includes an after-tax non-cash goodwill impairment charge of approximately $1,015 billion (approximately $1,058 billion pre-tax), or $8.16 per diluted share. In addition, third quarter 2024 includes a tax expense charge of $161 million, or $1.29 per diluted share, related to the establishment of a valuation allowance against certain non-U.S. tax jurisdiction deferred tax assets to reflect their realizability. On an adjusted 1 basis, Net Income was $34 million, or $0.25 per diluted share. Third quarter 2023 Net income was $49 million, or $0.28 per diluted share. On an adjusted 1 basis, Net Income was $77 million, or $0.46 per diluted share. Net (Loss) for the nine months ended September 30, 2024 was $(1,300) million, or $(10.55) per diluted share, which includes an after-tax non-cash goodwill impairment charge of approximately $1,015 billion (approximately $1,058 billion pre-tax), or $8.16 per diluted share. In addition, 2024 includes a tax expense charge of $161 million, or $1.29 per diluted share, related to the establishment of a valuation allowance against certain non-U.S. tax jurisdiction deferred tax assets to reflect their realizability. On an adjusted 1 basis, Net Income was $86 million, or $0.60 per diluted share. Net Income for the nine months ended September 30, 2023 was $59 million, or $0.30 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 $231 million, or $1.39 per diluted share. Refer to Note 20 - (Loss) Earnings per Share in the Condensed Consolidated Financial Statements for additional information regarding the calculation of basic and diluted (loss) 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 (loss) earnings per share, refer to Note 20 - (Loss) Earnings per Share in the Notes to the Condensed Consolidated Financial Statements. Other Comprehensive Income (Loss) Third quarter 2024 Other Comprehensive Income, Net was $173 million and included the following: i) net translation adjustment gains of $192 million reflecting the strengthening of all of our major foreign currencies against the U.S. Dollar during the quarter; ii) $5 million of net unrealized gains; and iii) $24 million of net losses from the changes in defined benefit plans primarily reflecting the negative impact of currency, partially offset by the amortization of actuarial losses, as well as actuarial gains. This compares to Other Comprehensive Loss, Net of $67 million for the third quarter 2023, which included the following: i) net translation adjustment losses of $123 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 due to net actuarial gains, the positive impact of currency, and the amortization of actuarial losses; and iii) $1 million of net unrealized gains. Other Comprehensive Income, Net for the nine months ended September 30, 2024 was $162 million and included the following: i) net translation adjustment gains of $140 million reflecting the strengthening of the British Pound and the Euro against the U.S. Dollar; ii) $18 million of net gains from the changes in defined benefit plans primarily reflecting the amortization of actuarial losses, as well as actuarial gains, partially offset by the negative impact of currency; and iii) $4 million of net unrealized gains. This compares to Other Comprehensive Income, Net for the nine months ended September 30, 2023 of $33 million, which 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 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. Refer to Note 19 - Other Comprehensive Income (Loss) in the Condensed Consolidated Financial Statements for the components of Other Comprehensive Income (Loss), Note 14 - Financial Instruments in the Condensed Consolidated Financial Statements for additional information regarding unrealized gains (losses), net, and Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements for additional information regarding net changes in our defined benefit plans. Xerox 2024 Form 10-Q 58 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 September 30, (in millions) External Revenue Intersegment Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) 2024 Print and Other $ 1,440 $ 17 $ 1,457 94 % $ 67 4.7 % XFS 88 — 88 6 % 13 14.8 % Total $ 1,528 $ 17 $ 1,545 100 % $ 80 5.2 % 2023 Print and Other $ 1,554 $ 21 $ 1,575 94 % $ 64 4.1 % XFS 98 — 98 6 % 4 4.1 % Total $ 1,652 $ 21 $ 1,673 100 % $ 68 4.1 % Nine Months Ended September 30, (in millions) External Revenue Intersegment Revenue (1) Total Segment Revenue % of Total Revenue Segment Profit Segment Margin (2) 2024 Print and Other $ 4,340 $ 55 $ 4,395 94 % $ 181 4.2 % XFS 268 — 268 6 % 17 6.3 % Total $ 4,608 $ 55 $ 4,663 100 % $ 198 4.3 % 2023 Print and Other $ 4,820 $ 65 $ 4,885 94 % $ 271 5.6 % XFS 301 — 301 6 % 22 7.3 % Total $ 5,121 $ 65 $ 5,186 100 % $ 293 5.7 % ___________ (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 September 30, Nine Months Ended September 30, (in millions) 2024 2023 % Change 2024 2023 % Change Equipment sales $ 335 $ 381 (12.1)% $ 971 $ 1,180 (17.7)% Post sale revenue 1,105 1,173 (5.8)% 3,369 3,640 (7.4)% Intersegment revenue (1) 17 21 (19.0)% 55 65 (15.4)% Total Print and Other Revenue $ 1,457 $ 1,575 (7.5)% $ 4,395 $ 4,885 (10.0)% _____________ (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. Third quarter 2024 Print and Other segment revenue decreased 7.5% as compared to third quarter 2023, and Print and Other segment revenue decreased 10.0% for the nine months ended September 30, 2024 as compared to the prior year period. Print and Other segment revenue included the following: Xerox 2024 Form 10-Q 59 Equipment sales revenue decreased 12.1% during the third quarter 2024 as compared to third quarter 2023, and was primarily attributable to a delay in the global launch of two new products, lower-than-expected improvements in sales productivity, unfavorable mix, and a large production equipment sale in the prior year. Equipment sales revenue was also impacted by the effects of backlog fluctuations in the current and prior year quarters, and non-strategic reductions in revenue, including geographic simplification. Revenue declined across all product groups, and was most pronounced in Mid-range, driven by declines in entry production color products. Equipment sales revenue decreased 17.7% for the nine months ended September 30, 2024 as compared to the prior year period and was primarily impacted by unfavorable mix, as well as the effects of backlog fluctuations in the current and prior year quarters, non-strategic reductions in revenue, including offering and geographic simplification, and lower-than-expected improvements in sales productivity. 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 5.8% during the third quarter 2024 as compared to third quarter 2023, primarily due to the decline in contractual print services 1 revenue. Contractual print services 1 revenue declined mid-single digits as compared to third quarter 2023, driven by lower service and outsourcing revenue, as well as reductions in non-strategic, lower margin IT endpoint device placements, rental revenue and paper sales, as well as the effects of geographic simplification. These impacts were partially offset by higher supplies revenue and digital services revenue. Post sale revenue decreased 7.4% for the nine months ended September 30, 2024 as compared to the prior year period. Contractual print services 1 revenue declined, driven by lower service and outsourcing revenue, as well as reductions in non-strategic, lower margin IT endpoint device placements and paper sales, as well as the termination of the Fuji royalty income and PARC revenue, and the effects of geographic simplification. _____________ (1) Includes revenues from Services, maintenance and rentals. Detail by product group is shown below. Three Months Ended September 30, Nine Months Ended September 30, % of Equipment Sales (in millions) 2024 2023 % Change CC % Change 2024 2023 % Change CC % Change 2024 2023 Entry $ 53 $ 56 (5.4)% (4.4)% $ 154 $ 181 (14.9)% (14.6)% 16% 15% Mid-range 224 260 (13.8)% (13.4)% 652 782 (16.6)% (16.6)% 66% 65% High-end 57 67 (14.9)% (15.1)% 164 222 (26.1)% (26.2)% 17% 19% Other 5 3 66.7% 66.7% 15 12 25.0% 25.0% 1% 1% Equipment sales (1)(2) $ 339 $ 386 (12.2)% (12.2)% $ 985 $ 1,197 (17.7)% (17.7)% 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 $4 million and $5 million for the three months ended September 30, 2024 and 2023, respectively, and $14 million and $17 million for the nine months ended September 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 September 30, 2024 reflects declines in color and a mix toward black-and-white installs. The decrease for the nine months ended September 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 the three months ended September 30, 2024 reflects declines in color, driven primarily by a mix within color toward lower-price A3 color devices. The decrease for the nine months ended September 30, 2024 reflects higher backlog reductions in the prior year period, as well as declines in color devices. • High-end - The decrease for the three months ended September 30, 2024 was primarily due to lower color installations, and an unfavorable mix toward black-and-white. The decrease for the nine months ended September 30, 2024 was primarily due to higher backlog reductions in the prior year period, as well as lower an unfavorable mix toward black-and-white. _____________ (1) Refer to the “Currency Impact” section for a description of constant currency. Xerox 2024 Form 10-Q 60 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, 2024 as compared to prior year period reflect the following: Entry • 4% decrease in entry color installs, driven by declines in Entry Color Printers, partially offset by growth in A4 Color MFPs. • 34% increase in entry black-and-white installs, driven by growth in A4 Mono MFPs. Mid-Range • 3% increase in mid-range color installs driven by growth in A3 Color MFPs, partially offset by declines in Entry Production Color Low. • 12% 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 and High. • 29% increase in high-end black-and-white primarily reflecting growth in High End Cut Sheet products. Installs for the nine months ended September 30, 2024 as compared to prior year period reflect the following: Entry • 20% decrease in entry color installs, with A4 Color MFPs driving the majority of the decline. • 11% decrease in entry black-and-white installs, with Entry Mono printers driving the majority of the decline. Mid-Range • 10% decrease in mid-range color installs, driven primarily by declines in A3 Color MFPs. • 24% decrease in mid-range black-and-white installs, driven primarily by A3 Mono MFPs. High-End • 30% decrease in high-end color installs primarily reflecting declines in Entry Production Color Mid. • 2% decrease in high-end black-and-white 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 Third quarter 2024 Print and Other segment margin of 4.7% increased by 0.6-percentage points as compared to third quarter 2023, primarily due to lower Selling, administrative and general expenses, including lower incentive compensation expenses, as well as benefits of cost and productivity savings, higher supplies revenue and favorable currency. This activity was partially offset by lower revenue, higher transportation costs, and the release of a tariff-related accrual in the prior year period. Print and Other segment margin of 4.2% for the nine months ended September 30, 2024 decreased 1.4-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, and lower RD&E expense, as well as higher supplies revenue, favorable currency, and the benefits of cost and productivity savings. Xerox 2024 Form 10-Q 61 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 September 30, Nine Months Ended September 30, (in millions) 2024 2023 % Change 2024 2023 % Change Equipment sales $ 4 $ 5 (20.0)% $ 14 $ 17 (17.6)% Financing 38 46 (17.4)% 118 147 (19.7)% Other Post sale revenue (1) 46 47 (2.1)% 136 137 (0.7)% Total XFS Revenue $ 88 $ 98 (10.2)% $ 268 $ 301 (11.0)% _____________ (1) Other Post sale revenue includes lease renewal and fee income as well as gains, commissions and servicing revenue associated with sold finance receivables. Third quarter 2024 XFS segment revenue decreased 10.2% as compared to third quarter 2023, and for the nine months ended September 30, 2024 segment revenue decreased 11.0% 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 September 30, 2024, these revenues decreased 17.4% as compared to third quarter 2023, including a 0.2-percentage point benefit from currency. Financing revenue for the nine months ended September 30, 2024 decreased 19.7% 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 nine months ended September 30, 2024, respectively, reflects a continued reduction of the average finance receivables balance in 2024 as a result of the sales of finance receivables in recent quarters to HPS Investment Partners (HPS), as well as lower originations. Finance receivables are approximately $630 million lower in September of 2024 as compared to September of 2023. Other Post sale revenue decreased 2.1% as compared to third quarter 2023, and for the nine months ended September 30, 2024 decreased 0.7% as compared to the prior year period, as a result of the continued reduction of our average finance receivables balance. Other Post sale revenue includes gains, commissions and servicing revenue on sales of finance receivables under our finance receivables funding agreement, which were $10 and $7 for the three months ended September 30, 2024 and 2023, respectively, and $31 and $21 for the nine months ended September 30, 2024 and 2023, respectively . _____________ (1) Refer to the “Currency Impact” section for a description of constant currency. Segment Margin Third quarter 2024 XFS segment margin of 14.8% increased 10.7-percentage points as compared to third quarter 2023. Segment profit for XFS was $9 million higher as compared to third quarter 2023 mainly due to lower Selling administrative and general expenses, as well as a lower bad debt provision, partially offset by lower revenues from reduced assets. XFS segment margin of 6.3% for the nine months ended September 30, 2024 decreased 1.0-percentage points as compared to the prior year period. Segment profit for XFS was $5 million lower as compared to the prior year period mainly due to lower revenue from reduced assets and higher bad debt expense of $12 million as compared to the prior year period. These adverse impacts were partially offset by lower administrative and general expenses. Xerox 2024 Form 10-Q 62 Capital Resources and Liquidity The following is a summary of our liquidity position: • As of September 30, 2024 and December 31, 2023, total cash, cash equivalents and restricted cash of Xerox Holdings Corporation were $590 million and $617 million, respectively, and apart from restricted cash of $69 million and $98 million at September 30, 2024 and December 31, 2023, respectively, was readily accessible for use. The decrease in total cash, cash equivalents and restricted cash of $27 million primarily reflects net cash used in financing activities of $149 million, as well as net cash used in investing activities of $26 million, both of which were partially offset by net cash provided by operating cash activities of $160 million. • Total debt at September 30, 2024 was $3,271 million, of which $1,963 million is allocated to and supports the Company's finance assets. The remaining debt of $1,308 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. Approximately $388 million, which is the remaining portion of our 5.00% Senior Notes, is due in August 2025. • 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 million to $425 million 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 million 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 September 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 within a range of $490 million to $540 million, versus prior guidance of at least $600 million, reflecting the after-tax effects of the reduction in adjusted 1 operating income guidance. We now expect capital expenditures to be approximately $40 million, as compared to previous guidance of 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 63 Cash Flow Analysis The following summarizes our cash, cash equivalents and restricted cash: Nine Months Ended September 30, Change (in millions) 2024 2023 Net cash provided by operating activities $ 160 $ 297 $ (137) Net cash (used in) provided by investing activities (26) 3 (29) Net cash used in financing activities (149) (819) 670 Effect of exchange rate changes on cash, cash equivalents and restricted cash (12) (3) (9) Decrease in cash, cash equivalents and restricted cash (27) (522) 495 Cash, cash equivalents and restricted cash at beginning of period 617 1,139 (522) Cash, Cash Equivalents and Restricted Cash at End of Period $ 590 $ 617 $ (27) Cash Flows from Operating Activities Net cash provided by operating activities was $160 million for the nine months ended September 30, 2024. The $137 million decrease in operating cash from the prior year period was primarily due to the following: • $88 million decrease in pre-tax income before depreciation and amortization, provisions, gains on sales of businesses and assets, divestitures, PARC donation, stock-based compensation, goodwill impairment charge, restructuring and related costs, net and non-service retirement-related costs. • $186 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. • $94 million decrease from accrued compensation due to the timing of payments of higher year-end accruals. • $53 million decrease from higher restructuring and related payments. • $39 million decrease from higher pension contributions. • $147 million increase from accounts payable primarily due to the timing of supplier and vendor payments. • $77 million increase from other current and long-term liabilities due to timing of payments. • $65 million increase from accounts receivable primarily due to the timing of collections. • $31 million increase due to lower placements of equipment on operating leases. Cash Flows from Investing Activities Net cash used in investing activities was $26 million for the nine months ended September 30, 2024. The $29 million change from the prior year period was primarily due to noncontrolling investments as part of our corporate venture capital fund and lower proceeds from the sale of assets. Cash Flows from Financing Activities Net cash used in financing activities was $149 million for the nine months ended September 30, 2024. The $670 million decrease in the use of cash from the prior year period was primarily due to the following: • $541 million decrease from share repurchases. • $124 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 $18 million from Senior Notes issuances, $211 million on secured financing arrangements and $21 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 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. • $24 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. Xerox 2024 Form 10-Q 64 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. Operating Leases We have operating leases for real estate and vehicles in our domestic and international operations, and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to ten years and a variety of renewal and/or termination options. As of September 30, 2024 and December 31, 2023, total operating lease liabilities were $177 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) September 30, 2024 December 31, 2023 Xerox Holdings Corporation $ 2,038 $ 1,500 Xerox Corporation 1,129 1,450 Xerox - Other Subsidiaries (1) 148 361 Subtotal - Principal debt balance 3,315 3,311 Debt issuance costs Xerox Holdings Corporation (20) (6) Xerox Corporation (11) (12) Xerox - Other Subsidiaries (1) — (1) Subtotal - Debt issuance costs (31) (19) Net unamortized premium (13) (15) Total Debt $ 3,271 $ 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) September 30, 2024 December 31, 2023 Total finance receivables, net (1) $ 1,989 $ 2,510 Equipment on operating leases, net 255 265 Total Finance Assets, net (2) $ 2,244 $ 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 a decrease of $11 million due to currency. Xerox 2024 Form 10-Q 65 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, 2024 December 31, 2023 Finance receivables debt (1) $ 1,740 $ 2,196 Equipment on operating leases debt 223 232 Financing debt 1,963 2,428 Core debt 1,308 849 Total Debt $ 3,271 $ 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). Sales of Finance Receivables and Third Party Leasing Programs Refer to Note 8 - Finance Receivables, Net and Note 22 - Subsequent Events 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 Q4 $ — $ 7 $ 29 $ 36 2025 388 28 103 519 2026 — 41 16 57 2027 — 55 — 55 2028 750 55 — 805 2029 and thereafter 900 943 — 1,843 Total $ 2,038 $ 1,129 $ 148 $ 3,315 _____________ (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. Xerox 2024 Form 10-Q 66 Commitments Technology 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. Xerox can terminate the arrangement with 90 days notice, subject to payment of a termination fee. 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. Shared Service Arrangement In the third quarter 2024, Xerox entered into an agreement with HCL Technologies Limited (HCL), to renew and extend the original shared services arrangement contract, entered into in 2019, in which HCL provides certain global administrative and support functions to Xerox. In addition to the existing shared services arrangement, HCL will support Xerox's Global Business Services (GBS) organization with professional services support, sales efficiency, and remote problem-solving. Xerox can terminate the arrangement at any time starting in July 2025, subject to payment of termination fees that decline over the term, or for cause. The approximate aggregate spending commitments are as follows: (in millions) September 30, 2024 Agreement Term HCL (1) $ 590 5 Years TCS (1) 490 7 Years Microsoft 125 7 Years SAP 50 7 Years Verizon 85 5 Years _____________ (1) Represents all contractual arrangements between Xerox and the vendor as of September 30, 2024. Xerox 2024 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. 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 68 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. • Goodwill impairment charge • Inventory-related impact - exit of certain production print manufacturing operations • Divestitures • PARC donation • (Gain) loss on early extinguishment of debt • Tax Indemnification - Conduent • Deferred tax asset valuation allowance 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 69 Adjusted Net Income and EPS reconciliation: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in millions, except per share amounts) Net (Loss) Income Diluted EPS Net Income Diluted EPS Net (Loss) Income Diluted EPS Net Income Diluted EPS Reported (1) $ (1,205) $ (9.71) $ 49 $ 0.28 $ (1,300) $ (10.55) $ 59 $ 0.30 Adjustments: Goodwill impairment 1,058 — 1,058 — Inventory-related impact - exit of certain production print manufacturing operations (2) — — 44 — Restructuring and related costs, net 56 10 107 35 Amortization of intangible assets 10 12 30 33 Divestitures — — 51 — PARC donation — — — 132 Non-service retirement-related costs 25 4 74 14 Transaction and related costs, net (15) — (38) — (Gain) loss on early extinguishment of debt — — (3) 3 Tax indemnification - Conduent — (7) — (7) Income tax on Goodwill impairment (43) — (43) — Income tax on PARC donation (3) — — — (40) Deferred tax asset valuation allowance (3) 161 — 161 — Income tax on adjustments (3) (13) 9 (55) 2 Adjusted $ 34 $ 0.25 $ 77 $ 0.46 $ 86 $ 0.60 $ 231 $ 1.39 Dividends on preferred stock used in adjusted EPS calculation (4) $ 4 $ 4 $ 11 $ 11 Weighted average shares for adjusted EPS (4) 126 159 126 158 Fully diluted shares at September 30, 2024 (5) 126 ____________________________ (1) Net (Loss) Income and EPS. For the three and nine months ended September 30, 2024 Net (Loss) and EPS includes an after-tax non-cash goodwill impairment charge of approximately $1,015 million (approximately $1,058 million pre-tax), or $8.16 per diluted share. In addition, the three and nine months ended September 30, 2024 includes a tax expense charge of $161 million, or $1.29 per diluted share, related to the establishment of a valuation allowance against certain deferred tax assets to reflect their realizability. This adjustment was excluded due to its unique nature and significant impact which is not considered part of our core operations. (2) Reflects the reduction of inventory of approximately $0 and $38 and the cancellation of related purchase contracts of approximately $0 and $6, as a result of the exit of certain production print manufacturing operations during the three and nine months ended September 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 September 30, 2024, plus potential dilutive common shares used for the calculation of adjusted diluted EPS for the third quarter 2024. Excludes shares associated with our Series A convertible preferred stock, which were anti-dilutive for the third quarter 2024 and 2023, respectively. Xerox 2024 Form 10-Q 70 Adjusted Effective Tax Rate reconciliation: Three Months Ended September 30, 2024 2023 (in millions) Pre-Tax (Loss) Income Income Tax Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ (1,087) $ 118 (10.9) % $ 64 $ 15 23.4 % Goodwill impairment (2) 1,058 43 — — Deferred tax asset valuation allowance (2) — (161) — — Non-GAAP Adjustments (2) 76 13 19 (9) Adjusted (3) $ 47 $ 13 27.7 % $ 83 $ 6 7.2 % Nine Months Ended September 30, 2024 2023 (in millions) Pre-Tax (Loss) Income Income Tax Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ (1,212) $ 88 (7.3) % $ 60 $ 1 1.7 % Goodwill impairment (2) 1,058 43 — — Deferred tax asset valuation allowance (2) — (161) — — PARC donation (2) — — 132 40 Non-GAAP Adjustments (2) 265 55 78 (2) Adjusted (3) $ 111 $ 25 22.5 % $ 270 $ 39 14.4 % ____________________________ (1) Pre-tax (loss) income and Income tax expense. For the three and nine months ended September 30, 2024 Pre-tax (loss) includes a non-cash goodwill impairment charge of approximately $1,058 million (approximately $1,015 million after-tax). (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 (loss) income under ASC 740, which employs an annual effective tax rate method to the results. Xerox 2024 Form 10-Q 71 Adjusted Operating Income and Margin reconciliation: Three Months Ended September 30, 2024 2023 (in millions) (Loss) Profit Revenue Margin Profit Revenue Margin Reported (1) $ (1,205) $ 1,528 $ 49 $ 1,652 Income tax expense 118 — 15 — Pre-tax (loss) income $ (1,087) $ 1,528 (71.1) % $ 64 $ 1,652 3.9 % Adjustments: Goodwill impairment 1,058 — Restructuring and related costs, net 56 10 Amortization of intangible assets 10 12 Other expenses, net (3) 43 (18) Adjusted $ 80 $ 1,528 5.2 % $ 68 $ 1,652 4.1 % Nine Months Ended September 30, 2024 2023 (in millions) (Loss) Profit Revenue Margin Profit Revenue Margin Reported (1) $ (1,300) $ 4,608 $ 59 $ 5,121 Income tax expense 88 1 Pre-tax (loss) income $ (1,212) $ 4,608 (26.3) % $ 60 $ 5,121 1.2 % Adjustments: Goodwill impairment 1,058 — Inventory-related impact - exit of certain production print manufacturing operations (2) 44 — Restructuring and related costs, net 107 35 Amortization of intangible assets 30 33 Divestitures 51 — PARC donation — 132 Other expenses, net (3) 120 33 Adjusted $ 198 $ 4,608 4.3 % $ 293 $ 5,121 5.7 % ____________________________ (1) Net (Loss) Income. For the three and nine months ended September 30, 2024 Net (Loss) includes an after-tax non-cash goodwill impairment charge of approximately $1,015 million (approximately $1,058 million pre-tax), or $8.16 per diluted share. In addition, the three and nine months ended September 30, 2024 includes a tax expense charge of $161 million, or $1.29 per diluted share, related to the establishment of a valuation allowance against certain deferred tax assets to reflect their realizability. This adjustment was excluded due to its unique nature and significant impact which is not considered part of our core operations. (2) Reflects the reduction of inventory of approximately $0 and $38 and the cancellation of related purchase contracts of approximately $0 and $6, as a result of the exit of certain production print manufacturing operations during the three and nine months ended September 30, 2024, respectively. (3) Includes non-service retirement-related costs. Xerox 2024 Form 10-Q 72 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.