Investing.com -- S&P Global Ratings downgraded Xerox Holdings Corp. to 'B' from 'B+' on Friday, citing weaker free cash flows and revenues, with a negative outlook.
The rating agency now expects Xerox's core free operating cash flow (FOCF) to remain negative over the next 12 months, despite potential improvements from the Lexmark integration. S&P revised its near-term revenue growth and cash flow expectations downward, noting that an uncertain U.S. trade environment could worsen secular demand challenges in the company's core print business.
Xerox faces an expected $60 million-$65 million cash expense in 2025 related to tariffs, even after mitigation actions including moving some manufacturing from China to Mexico. The company anticipates fully recovering the tariff impact on operating income by 2026, assuming current rates remain unchanged.
S&P also noted delayed orders from the U.S. public sector in the second quarter due to funding uncertainty, and delays in realizing cost savings from Xerox's Reinvention transformation plan as the company focused on planning the Lexmark integration.
These factors led S&P to lower its pro forma EBITDA margin expectations by 220 basis points in 2025 and 170 basis points in 2026 to approximately 9% and 11%, respectively. This still represents an improvement over Xerox's 8% adjusted EBITDA margin in 2024, reflecting Lexmark's higher-margin business profile.
The rating agency believes Xerox should have sufficient liquidity to service debt and cover maturities over the next 24 months, supported by lower shareholder distributions and decreasing finance receivables. However, increased cash interest from the Lexmark acquisition financing and expected integration costs of $75 million-$125 million over 2025-2026 will impact near-term cash generation.
S&P indicated that Xerox will likely need to refinance $750 million of senior unsecured notes due in August 2028, with refinancing success dependent on successfully integrating Lexmark and making progress in stabilizing revenues and returning to positive core cash flow.
The negative outlook reflects execution risks in Xerox's efforts to return to long-term organic revenue growth and significant core free cash flow while navigating challenges in the print industry and integrating Lexmark.
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