Xerox Holdings(XRX) - 2023 Q4 - Annual Report

Strategic Repositioning and Reinvention - Xerox's Reinvention strategy aims to deliver $300 million of annual net adjusted operating income improvement above 2023 levels through 2026, with more than one-third of that improvement expected in 2024[11] - Xerox divested non-core businesses including PARC, Xerox Research Center of Canada (XRCC), and its 3D printing business, Elem[12] - Xerox's strategic priorities for 2024 include strengthening core businesses, structural cost improvements, and balanced capital allocation[13] - Xerox's Print, Digital, and IT Services businesses form the bedrock of its strategic repositioning, with a focus on partner-led distribution models and a business unit-led organizational structure[14] - Xerox announced a 15% targeted workforce reduction in January 2024 as part of its Reinvention strategy[27] - Xerox's restructuring and transformation plans, including Reinvention, aim to reduce costs, manage cash flow, and achieve operating efficiencies, but may lead to business disruption during implementation[54] Financial Performance and Cash Flow - Xerox's free cash flow in 2024 is expected to be used to pay a $1 per share dividend and reduce leverage, with excess free cash flow allocated to high-return projects or acquisitions[14] - Total revenues for 2023 were $6,886 million, a decrease of 3.1% compared to $7,107 million in 2022[226] - Net income for 2023 was $1 million, a significant improvement from a net loss of $322 million in 2022[226] - Cash and cash equivalents decreased by 50.3% to $519 million in 2023 from $1,045 million in 2022[231] - Net cash provided by operating activities in 2023 was $686 million, a significant increase from $159 million in 2022[232] - Total equity decreased to $2.548 billion in 2023 from $3.353 billion in 2022, primarily due to comprehensive loss and stock repurchases[233] - Cash dividends declared for common stock in 2023 were $146 million, a decrease from $159 million in 2022[233] - Common stock repurchases in 2023 amounted to $553 million, significantly higher than $113 million in 2022[233] - Total Segment revenue for 2023 was $6,972 million, compared to $7,197 million in 2022 and $7,130 million in 2021[295] - Segment profit for 2023 was $389 million, with a segment margin of 5.6%, compared to $275 million and 3.9% in 2022, and $375 million and 5.3% in 2021[295] Business Operations and Revenue Streams - Xerox's Workplace Solutions revenues include the sale of products, supplies, and associated technical service and financing through FITTLE[17] - Xerox's Production Solutions portfolio includes high-speed, high-volume cut-sheet printing presses and solutions for graphic communications and production print environments[20] - Xerox's Managed Print Solutions (MPS) portfolio targets clients ranging from global enterprises to small and mid-sized businesses, offering services to manage hybrid workforces[20] - Approximately 45% of Xerox's revenue is generated by customers outside the U.S.[22] - Xerox's revenues are historically lower in the first and third quarters due to seasonality of technology purchases and printing volume[42] - United States revenue in 2023 was $3.826 billion, a decrease of 4.7% from $4.014 billion in 2022[285] - Europe revenue in 2023 was $1.951 billion, a slight increase of 0.8% from $1.935 billion in 2022[285] - Equipment revenue in 2023 was $1.655 billion, an increase of 1.9% from $1.624 billion in 2022[285] - Maintenance agreements revenue in 2023 was $1.631 billion, a decrease of 5.7% from $1.730 billion in 2022[285] - Direct equipment lease revenue in 2023 was $920 million, an increase of 30% from $708 million in 2022[285] Innovation and Intellectual Property - Xerox and its subsidiaries were awarded 300 U.S. utility and design patents in 2023, with a total of 6,471 U.S. utility and design patents held as of December 31, 2023[23] - Xerox's future success depends on its ability to develop or acquire new products and technologies, particularly in adjacent markets like Intelligent Document Processing and managed IT Services[49] - Xerox's intellectual property rights are valuable, and any inability to protect them could reduce the value of its products, services, and brand[60] Environmental, Social, and Governance (ESG) - Xerox fast-tracked its net zero goal to 2040, aiming to reduce Scope 1 and Scope 2 GHG emissions by at least 60% by 2030, with a 6.9% reduction achieved in 2022, totaling a 46% reduction since 2016[25] - Approximately 93% of spent toner cartridges and consumables returned through Xerox's Green World Alliance program were recycled, reused, or remanufactured in 2022[26] - Xerox employees volunteered for approximately 42,300 hours in 2023, a 75% increase compared to 2022, and donated approximately $1.1 million, including company-matched contributions[24] - Approximately 70% of Xerox's 5-year Diversity, Inclusion, and Belonging (DIB) roadmap initiatives, comprising 140 initiatives, were progressed or completed by 2023[29] - Xerox's failure to meet ESG expectations or standards or achieve its ESG goals could adversely affect its business, results of operations, financial condition, or stock price[63] Workforce and Employee Engagement - Xerox had approximately 20,100 employees as of December 31, 2023, a 2.0% reduction from 2022, with 10,200 employees in the U.S. and 9,900 outside the U.S.[27] - In 2023, Xerox employees completed approximately 257,000 courses, totaling over 203,000 hours of training, with 95% of employees completing at least one formal learning offering[33] - Xerox's safety training module was completed by approximately 99% of employees in 2023, with 102 Day Away from Work Injury cases reported, up from 77 in 2022[28] - Approximately 35% of Xerox employees were eligible to participate in the Long-Term Incentive (LTI) equity-based program in 2023[32] - Xerox's ability to attract and retain key personnel is challenged by a competitive labor market and changes in the business model[53] Debt and Financial Structure - Xerox's total debt as of December 31, 2023, was $3.3 billion, consisting of $2.4 billion in Senior and Unsecured Debt and approximately $900 million in Secured Borrowings[56] - Approximately $2.4 billion of the company's $3.3 billion debt is allocated to its financing business[39] - The company amended its finance receivables funding agreement with HPS in Q2 2023 to include the sale of underlying leased equipment, reducing financing debt[39] - The company has a $300 million asset-based revolving credit agreement (ABL) with Citibank, N.A., and a $550 million term loan B credit agreement (TLB) with Jefferies Finance LLC, both of which impose significant operating and financial restrictions[57] - The projected benefit obligations for the company's defined benefit pension and retiree-health benefit plans exceeded the value of the assets by approximately $1.2 billion as of December 31, 2023[59] Risk Management and Compliance - Global macroeconomic conditions, including inflation and interest rates, significantly impact the company's business and financial performance[47] - The company faces supply chain disruptions, which may increase logistics and parts costs, potentially impacting customer needs[47] - The company uses currency derivative contracts to hedge foreign currency-denominated assets, liabilities, and transactions, though it does not hedge translation effects[47] - Xerox's government contracts are subject to termination rights, audits, and investigations, which could negatively impact its reputation and ability to compete for new contracts[54] - Xerox's offshoring and outsourcing efforts, particularly in developing countries, may be subject to geopolitical uncertainty and could impact service quality[54] - The company is subject to potential cybersecurity risks, including breaches, ransomware, and phishing attacks, which could lead to significant financial losses and reputational damage[67] - The company is subject to privacy and data protection laws such as the CCPA, CPRA, and GDPR, with potential fines up to EUR 20 million or 4% of total worldwide annual revenue for non-compliance[69] - The company may face increased costs due to tariffs, quotas, or duties on foreign imports, which could negatively impact its financial performance[70] - The company is subject to environmental regulations such as REACH and TSCA, which could lead to restrictions on chemical usage and increased compliance costs[70] - The company is involved in environmental remediation proceedings under CERCLA, which could result in financial exposure depending on changes in laws and contamination discoveries[72] International Operations and Currency Impact - Approximately 45% of Xerox's revenue is generated by customers outside the U.S.[22] - A 10% appreciation or depreciation of the U.S. Dollar against all currencies would impact the cumulative translation adjustment portion of equity by approximately $320 million[201] - The net amount invested in foreign subsidiaries and affiliates, primarily Xerox Limited and Xerox Canada Inc., was approximately $3.2 billion at December 31, 2023[201] - The company's international operations subject it to risks including foreign exchange and interest rate risk, unfavorable political, regulatory, and tax conditions, and global trade issues[65] Research, Development, and Engineering - Research, development, and engineering expenses decreased by 24.7% to $229 million in 2023 from $304 million in 2022[226] - Research, development, and engineering costs are expensed as incurred, with sustaining engineering costs of $55 million in 2023[281] Accounting and Financial Reporting - The company maintained effective internal control over financial reporting as of December 31, 2023, based on COSO's Internal Control - Integrated Framework (2013)[204] - Consolidated financial statements prepared in accordance with U.S. GAAP[219] - Audit Committee composed of independent directors oversees financial reporting and internal controls[219] - PricewaterhouseCoopers LLP served as the company's auditor since 2001[218] - Management responsible for integrity and objectivity of financial statements[219] - Deferred tax assets recorded at $892 million, net of a valuation allowance of $375 million as of December 31, 2023[210] - U.S. foreign tax credit carryforwards with a limited life included in deferred tax assets[210] - Management assessed realizability of deferred tax assets based on historical profitability, projected future taxable income, and tax planning strategies[210] - Significant judgment involved in assessing realizability of deferred tax assets related to U.S. foreign tax credit carryforwards[210] - Auditors used specialized professionals to evaluate management's assumptions on projected future taxable income[210] Finance Receivables and Credit Risk - Total finance receivables in the United States (Direct) increased from $210 million in 2021 to $327 million in 2022, a growth of 55.7%[318] - Total finance receivables in the United States (Indirect) grew from $341 million in 2021 to $481 million in 2022, an increase of 41.1%[318] - Canada's total finance receivables rose from $53 million in 2021 to $83 million in 2022, a 56.6% increase[318] - EMEA's total finance receivables increased from $285 million in 2021 to $438 million in 2022, a growth of 53.7%[318] - Total finance receivables globally grew from $889 million in 2021 to $1,329 million in 2022, a 49.5% increase[318] - As of December 31, 2023, total billed finance receivables in the United States were $57 million, with $1,148 million unbilled, totaling $1,205 million[320] - Canada's total finance receivables as of December 31, 2023, were $255 million, with $247 million unbilled[320] - EMEA's total finance receivables as of December 31, 2023, were $1,142 million, with $1,132 million unbilled[320] - Total finance receivable sales net proceeds for the year ended December 31, 2023, were $1,102 million, compared to $60 million in 2022[322] - The net bad debt provision for finance receivables was $6 million in 2023, down from $26 million in 2022, primarily due to a $12 million credit related to a reserve release in the U.S.[313] - Finance receivables due after one year decreased to $1,597 million in 2023 from $1,948 million in 2022[311] - The allowance for credit losses as a percentage of net finance receivables before allowance was 3.5% at December 31, 2023, compared to 3.6% at December 31, 2022[313] - The balance of finance receivables collectively evaluated for impairment decreased to $2,602 million in 2023 from $3,219 million in 2022[314] - Loss rates for finance receivables are generally less than 1% for low credit risk, 2% to 5% for average credit risk, and 7% to 10% for high credit risk[314] - The allowance for credit losses balance decreased to $92 million in 2023 from $117 million in 2022, with the U.S. portion decreasing to $58 million from $83 million[314] Inventory and Operating Leases - Total inventories decreased from $797 million in 2022 to $661 million in 2023, a 17.1% decline[324] - Equipment on operating leases decreased to $1,074 million in 2023 from $1,163 million in 2022, a decline of 7.7%[325] - Accumulated depreciation on operating lease equipment decreased to $809 million in 2023 from $928 million in 2022, a reduction of 12.8%[325] - Net equipment on operating leases increased to $265 million in 2023 from $235 million in 2022, a growth of 12.8%[325] - Estimated minimum future revenues from operating leases decreased to $351 million in 2023 from $386 million in 2022, a decline of 9.1%[326] - Contingent rentals on operating leases remained stable at $62 million in 2023, consistent with 2022 and 2021[326] - The company sold rights to payments under operating leases to a consolidated special purpose entity in 2021, using them as collateral for a secured loan[327] Revenue Recognition and Accounting Policies - Revenue recognition for equipment sales is based on transfer of control, with installation revenue recognized upon delivery and installation[262] - Maintenance service revenue is recognized based on billed page volumes over the agreement term[263] - Bundled lease arrangements allocate revenue between lease and non-lease elements based on standalone selling prices[264] - Lease pricing interest rates are reassessed quarterly based on local market rates and customer credit factors[264] - The allowance for doubtful accounts is estimated using historical loss experience and current economic conditions[268] - Finance receivables are securitized through SPEs, with no gains or losses recognized at securitization[269] - Inventories are recorded at the lower of average cost or net realizable value, with provisions for excess and obsolete inventory based on near-term product demand forecasts and new product introductions[270] - Equipment on operating leases is depreciated to estimated salvage value over the lease term using the straight-line method[271] - Lease classification criteria include lease term exceeding 75% of the asset's economic life and present value of lease payments exceeding 90% of the asset's fair market value[273] - Internal Use Software costs are capitalized and amortized over the expected useful life, while Product Software costs are amortized over the estimated economic life[274] - Goodwill is tested for impairment annually, with impairment losses recognized if the carrying value exceeds the fair value determined by income and market approaches[276] - Long-lived assets are reviewed for impairment when events indicate potential unrecoverable carrying value, with impairment losses recognized if future cash flows are insufficient[277] - Pension and post-retirement benefit obligations use a delayed recognition feature, with assumptions including discount rates, expected return on plan assets, and healthcare cost increases[278] - Government grants related to income are recognized as a reduction of expenses when compliance with grant conditions is assured[282] - Foreign currency translation adjustments are recorded in Accumulated other comprehensive loss, with remeasurements for subsidiaries using the U.S. Dollar as the functional currency[283] Acquisitions and Divestitures - Xerox divested non-core businesses including PARC, Xerox Research Center of Canada (XRCC), and its 3D printing business, Elem[12] - Xerox donated Palo Alto Research Center (PARC) to Stanford Research Institute International (SRI) in April 2023, resulting in a net charge of $132 million in Q2 2023, including $115 million allocated Goodwill and a net after-tax loss of $92 million[306] - Total Contributed Aggregate Revenue from acquisitions in 2023 was $257 million, compared to $200 million in 2022 and $19 million in 2021[304] Cybersecurity and Data Protection - The company's cybersecurity program is integrated within the enterprise risk management system and follows NIST and ISO 27001 standards[77] - No cybersecurity incident has resulted in any material impact on the company's business, operations, or financial results to date[77] - The company is subject to potential cybersecurity risks, including breaches, ransomware, and phishing attacks, which could lead to significant financial losses and reputational damage[67] - The company is subject to privacy and data protection laws such as the CCPA, CPRA, and GDPR, with potential fines up to EUR 20 million or 4% of total worldwide annual revenue for non-compliance[69] Tax and Regulatory Compliance - The EU's Pillar Two Directive, effective January 1, 2024, introduces a global minimum tax rate of at least 15%, but the company does not expect it to have a material impact on its consolidated financial statements[66] - The company is subject to environmental regulations such as REACH and TSCA, which could lead to restrictions on chemical usage and increased compliance costs[70] - The company is involved in environmental remediation proceedings under CER