UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): February 21, 2018
CONDUENT INCORPORATED
(Exact name of registrant as specified in its charter)
New York | 001-37817 | 81-2983623 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
100 Campus Drive, Suite 200
Florham Park, New Jersey
07932
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (844) 663-2638
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (CFR 240.12b-2). ☐ Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02. Results of Operations and Financial Condition.
On February 21, 2018, Registrant released its fourth quarter 2017 earnings and is furnishing to the Securities and Exchange Commission a copy of the earnings press release as Exhibit 99.1 to this Report under Item 2.02 of Form 8-K.
The information contained in Item 2.02 of this Report and in Exhibit 99.1 shall not be deemed “filed” with the Commission for purposes of Section 18 of the Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.
Item 7.01. Regulation FD Disclosure.
On February 21, 2018, Registrant conducted an earnings call regarding its 2017 fourth quarter results and is furnishing to the Securities and Exchange Commission a copy of the presentation used during the earnings call as Exhibit 99.2 to this Report under Item 7.01 of Form 8-K.
The information contained in Item 7.01 of this Report and in Exhibit 99.2 to this Report shall not be deemed “filed” with the Commission for purposes of Section 18 of the Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.
Exhibit 99.1 and Exhibit 99.2 to this Report contain certain financial measures that are considered “non-GAAP financial measures” as defined in the SEC rules. Exhibit 99.1 and Exhibit 99.2 to this Report also contain the reconciliation of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles, as well as the reasons why Registrant’s management believes that presentation of the non-GAAP financial measures provides useful information to investors regarding Registrant’s results of operations and, to the extent material, a statement disclosing any other additional purposes for which Registrant’s management uses the non-GAAP financial measures.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Forward Looking Statements
This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect Management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. Such factors include, but are not limited to: termination rights contained in our government contracts; our ability to renew commercial and government contracts awarded through competitive bidding processes; our ability to recover capital and other investments in connection with our contracts; our ability to attract and retain necessary technical personnel and qualified subcontractors; our ability to deliver on our contractual obligations properly and on time; competitive pressures; our significant indebtedness; changes in interest in outsourced business process services; our ability to obtain adequate pricing for our services and to improve our cost structure; claims of infringement of third-party intellectual property rights; the failure to comply with laws relating to individually identifiable information, and personal health information and laws relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions; breaches of our security systems and service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our ability to collect our receivables for unbilled services; a decline in revenues from or a loss or failure of significant clients; fluctuations in our non-recurring revenue; our failure to maintain a satisfactory credit rating; our ability to attract and retain key
employees; increases in the cost of telephone and data services or significant interruptions in such services; our failure to develop new service offerings; our ability to receive dividends or other payments from our subsidiaries; changes in tax and other laws and regulations; changes in government regulation and economic, strategic, political and social conditions; changes in U.S. GAAP or other applicable accounting policies; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Any forward-looking statements made by us in this Quarterly Report on Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly authorized this Report to be signed on its behalf by the undersigned duly authorized.
Date: February 21, 2018
CONDUENT INCORPORATED | ||||
By: | /s/ ALLAN COHEN | |||
Allan Cohen | ||||
Vice President and Chief Accounting Officer | ||||
EXHIBIT 99.1
News from Conduent
Conduent Incorporated 100 Campus Drive, Suite 200 Florham Park, NJ 07932 |
www.conduent.com |
Conduent Reports Fourth Quarter and FY 2017 Results; In-line Revenue and Strong Performance on Adjusted EBITDA and Free Cash Flow; FY 2018 Guidance Reaffirms Long-Term Goals
Full Year 2017 Financial and Operational Highlights
• | Revenue of $6,022 million |
• | Net income from continuing operations of $177 million, GAAP diluted EPS from continuing operations of $0.81 |
• | Adjusted net income of $186 million and adjusted diluted EPS from continuing operations of $0.85 |
• | Adjusted EBITDA of $672 million, up 6% year-over-year |
• | Generated cash flow from operations of $302 million and adjusted free cash flow of $204 million; $559 million of adjusted cash on balance sheet at year-end |
• | Overachieved 2017 strategic transformation goals and on track for 2018 savings |
• | Introduced 2018 full year guidance in-line with long-term goals |
Q4 2017 Financial and Operational Highlights
• | Revenue of $1,493 million |
• | Net income from continuing operations of $208 million, GAAP diluted EPS from continuing operations of $0.98 |
• | Adjusted net income of $67 million and adjusted diluted EPS from continuing operations of $0.31 |
• | Adjusted EBITDA of $188 million, up 9% year-over-year |
• | Strong cash flow from operations of $237 million and adjusted free cash flow of $205 million |
• | Renewal rate of 96% and $1,047 million of renewal TCV |
EXHIBIT 99.1
FLORHAM PARK, NJ, February 21, 2018 - Conduent (NYSE: CNDT), the world's largest provider of diversified business services, today announced its fourth quarter and full year 2017 financial results.
“Our results after our first year as an independent company indicate that we are right on track against our financial and operational game plan,” said Ashok Vemuri, CEO of Conduent. “We focused around our core business and aggressively addressed our cost structure to deliver meaningful improvements in our margins and cash flow. This will enable investments to modernize technology, improve our workplace, and strengthen our positioning as a digital interactions company. I am pleased with the efforts of our entire team and look forward to accelerating our progress during 2018."
Full Year 2017 Results
Full year 2017 revenues were $6,022 million, down 6.0% compared to FY 2016. Pre-tax loss was $16 million compared to a pre-tax loss of $1,227 million in 2016. The company reported GAAP operating margin of 2.9% in FY 2017 compared with (15.3)% in FY 2016 and GAAP net income of $181 million compared with GAAP net loss of $983 million in 2016. Diluted EPS from continuing operations was $0.81 versus ($4.85) in 2016, driven primarily by non-recurring, non-cash items related to goodwill impairment and tax law changes in both 2016 and 2017.
Full year 2017 adjusted operating income was $418 million, with an adjusted operating margin of 6.9% as compared to $354 million, with an adjusted operating margin of 5.5% in 2016. Adjusted EBITDA improved 5.8% to $672 million, with an adjusted EBITDA margin of 11.2%, as compared with $635 million, with an adjusted EBITDA margin of 9.8% in 2016. The company reported adjusted diluted EPS from continuing operations of $0.85 compared to $1.06 in 2016.
Conduent generated $302 million in cash flow from operations during the year 2017 and ended the year with a cash balance of $658 million. Excluding funds that are associated with the termination of the deferred compensation plan and are expected to be dispersed to participants in 2018, Conduent ended the quarter with an adjusted cash balance of $559 million. Total debt was $2,061 million as of December 31, 2017.
Fourth Quarter 2017 Results
Fourth quarter 2017 revenues were $1,493 million, down 1.4% compared to Q4 2016. Pre-tax income was $4 million compared to ($1,141) million in Q4 2016. The company reported Q4 2017 GAAP net income of $208 million compared with GAAP net loss of $951 million in Q4 2016. Diluted EPS from
EXHIBIT 99.1
continuing operations was $0.98 versus ($4.69) in the same period last year, driven primarily by non-recurring, non-cash items related to goodwill impairment and tax law changes in both 2016 and 2017.
Fourth quarter adjusted operating income was $130 million, with an adjusted operating margin of 8.7% as compared to $109 million, with an adjusted operating margin of 6.8% in Q4 2016. Adjusted EBITDA improved 9.3% to $188 million, with an adjusted EBITDA margin of 12.6%, as compared to $172 million, with an adjusted EBITDA margin of 10.8% in Q4 2016. The company reported adjusted diluted EPS from continuing operations of $0.31 compared to $0.29 in Q4 2016.
Conduent generated $237 million in cash flow from operations during the fourth quarter 2017 and ended the quarter with a cash balance of $658 million. Total debt was $2,061 million as of December 31, 2017.
Excluding funds that are associated with the termination of the deferred compensation plan and are expected to be dispersed to participants in 2018, Conduent ended the quarter with an adjusted cash balance of $559 million.
Headcount of approximately 90,000 as of December 31, 2017 compared with approximately 96,000 as of December 31, 2016.
Total contract value (TCV) signings of $1,730 million for the quarter were up 4% compared with Q4 2016, impacted by greater renewal signings and new business wins primarily with existing Healthcare Payer, State & Local and Pharma clients.
Financial and Strategic Outlook
Conduent provided the following guidance ranges for FY 2018:
(in millions) | FY 2017 | Impact from Adjustments to FY 2017 | Adjusted FY 2017 | FY 2018E vs Adjusted FY 2017E | |
Revenue(1) | $6,022 | ~($225) | ~$5,797 | (3%) - flat | |
Adjusted EBITDA | $672 | ~($20) | $652 | Up 8% - 12% | |
Free Cash Flow2 | $204 | ~($1) | $203 | 25% - 35% of Adjusted EBITDA | |
Adjustments impacting FY 20173 | Revenue | Adj. EBITDA | Free Cash Flow |
Divestitures (completed in Q3 2017) | ~($60) | ~($5) | ~($1) |
Estimated impact from adoption of new accounting standard for revenue recognition | ~($165) | ~($15) | $0 |
Total | ~($225) | ~($20) | ~($1) |
Note: Please refer to the "Non-GAAP Outlook" in the non-GAAP section below for certain non-GAAP information concerning outlook
EXHIBIT 99.1
(1) Year-over-year revenue comparison at constant currency.
(2) FY17 Adjusted Free Cash Flow. Please refer to the "Adjusted Free Cash Flow Reconciliation" in the non GAAP section below.
(3) Divestitures include the five businesses which were sold in Q3 2017. Prior to the transactions, these businesses earned ~$60 million of revenue, ~$5 million in Adjusted EBITDA and ~$1 million of Free Cash Flow in 2017. Please see Report on Form 8-K filed October 4, 2017 and the Q3 2017 Quarterly Earnings presentation, available in the Investor Relations section of www.conduent.com, for additional details.
Estimated impact from the adoption of the new accounting standard for revenue recognition, had it been applicable in FY 2017, it would have had an estimated impact to Conduent FY 2017 revenues of ~$165 million and Adjusted EBITDA of ~$15 million. There is no impact to Free Cash Flow from this accounting standard adoption.
"Our performance in both the fourth quarter and in the full year bode well for our outlook for continued margin expansion in 2018 and beyond. We also ended the year in a strong cash position and expect to generate additional cash via divestitures in 2018. Our focus remains on investing in our core business, strengthening our balance sheet and identifying opportunities to grow, both organically and through acquisitions. We are well positioned to take advantage of market opportunities as we see them," said Brian Webb-Walsh, CFO of Conduent.
Conference Call
Management will present the results during a conference call and webcast on February 21, 2018 at 10 a.m. ET.
The call will be available by live audio webcast with the news release and online presentation slides at https://investor.conduent.com/.
The conference call will also be available by calling 877-883-0383 (international dial-in 412-902-6506) at approximately 9:45 a.m. ET.
A recording of the conference call will be available by calling 877-344-7529, or 412-317-0088 one hour after the conference call concludes on February 21, 2018. The replay ID is 10116693.
About Conduent
Conduent (NYSE: CNDT) is the world’s largest provider of diversified business services with leading capabilities in transaction processing, automation and analytics. The company’s global workforce is dedicated to helping its large and diverse client base deliver quality services to the people they serve. These clients include 76 of the Fortune 100 companies and over 500 government entities.
EXHIBIT 99.1
Conduent’s differentiated offerings touch millions of lives every day, including two-thirds of all insured patients in the U.S. and nearly nine million people who travel through toll systems daily. Whether it’s digital payments, claims processing, benefit administration, automated tolling, customer care or distributed learning - Conduent manages and modernizes these interactions to create value for both its clients and their constituents. Learn more at www.conduent.com.
Non-GAAP Measures
We have reported our financial results in accordance with U.S. generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using non-GAAP measures. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. 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 tax effects. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods' results against the corresponding prior periods' results. 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 U.S. GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable U.S. GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP. Our management regularly uses supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions, and providing such non-GAAP financial measures to investors allows for a further level of transparency as to how management reviews and evaluates our business results and trends. 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. Refer to the "Non-GAAP Financial Measures" section attached to this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measures.
Forward Looking Statements
This report and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. Such factors include, but are not limited to: termination rights contained in our government contracts; our ability to renew commercial and government contracts awarded through competitive bidding processes;
EXHIBIT 99.1
our ability to recover capital and other investments in connection with our contracts; our ability to attract and retain necessary technical personnel and qualified subcontractors; our ability to deliver on our contractual obligations properly and on time; competitive pressures; our significant indebtedness; changes in interest in outsourced business process services; our ability to obtain adequate pricing for our services and to improve our cost structure; claims of infringement of third-party intellectual property rights; the failure to comply with laws relating to individually identifiable information, and personal health information and laws relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions; breaches of our security systems and service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our ability to collect our receivables for unbilled services; a decline in revenues from or a loss or failure of significant clients; fluctuations in our non-recurring revenue; our failure to maintain a satisfactory credit rating; our ability to attract and retain key employees; increases in the cost of telephone and data services or significant interruptions in such services; our failure to develop new service offerings; our ability to receive dividends or other payments from our subsidiaries; changes in tax and other laws and regulations; changes in government regulation and economic, strategic, political and social conditions; changes in U.S. GAAP or other applicable accounting policies; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections in our 2016 Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission. Any forward-looking statements made by us in this report speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
# # #
Media Contacts:
Sean Collins, Conduent, +1-310-497-9205, sean.collins2@conduent.com
Investor Contacts:
Alan Katz, Conduent, +1-973-526-7173, alan.katz@conduent.com
Monk Inyang, Conduent, +1-973-261-7182, monk.inyang@conduent.com
EXHIBIT 99.1
CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||
(in millions, except per-share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues | ||||||||||||||||
Revenue | $ | 1,483 | $ | 1,502 | $ | 5,980 | $ | 6,358 | ||||||||
Related party | 10 | 12 | 42 | 50 | ||||||||||||
Total Revenues | 1,493 | 1,514 | 6,022 | 6,408 | ||||||||||||
Cost of services | 1,203 | 1,383 | 4,945 | 5,462 | ||||||||||||
Related party cost of services | 8 | 8 | 32 | 36 | ||||||||||||
Gross Margin | 282 | 123 | 1,045 | 910 | ||||||||||||
Operating Costs and Expenses | ||||||||||||||||
Research and development | 2 | 6 | 13 | 31 | ||||||||||||
Selling, general and administrative | 149 | 169 | 615 | 686 | ||||||||||||
Restructuring and related costs | 25 | 44 | 101 | 101 | ||||||||||||
Amortization of intangible assets | 61 | 80 | 243 | 280 | ||||||||||||
Goodwill impairment | — | 935 | — | 935 | ||||||||||||
Separation costs | 4 | 10 | 12 | 44 | ||||||||||||
Interest expense | 32 | 11 | 137 | 14 | ||||||||||||
Related party interest | — | (4 | ) | — | 26 | |||||||||||
(Gain) loss on sale of asset and businesses | (1 | ) | 1 | (42 | ) | 2 | ||||||||||
Other (income) expenses, net | 6 | 12 | (18 | ) | 18 | |||||||||||
Total Operating Costs and Expenses | 278 | 1,264 | 1,061 | 2,137 | ||||||||||||
Income (Loss) Before Income Taxes | 4 | (1,141 | ) | (16 | ) | (1,227 | ) | |||||||||
Income tax benefit | (204 | ) | (190 | ) | (193 | ) | (244 | ) | ||||||||
Income (Loss) From Continuing Operations | 208 | (951 | ) | 177 | (983 | ) | ||||||||||
Income from discontinued operations, net of tax | — | — | 4 | — | ||||||||||||
Net Income (Loss) | $ | 208 | $ | (951 | ) | $ | 181 | $ | (983 | ) | ||||||
Basic Earnings (Loss) per Share: | ||||||||||||||||
Continuing operations | $ | 1.00 | $ | (4.69 | ) | $ | 0.82 | $ | (4.85 | ) | ||||||
Discontinued operations | — | — | 0.02 | — | ||||||||||||
Total Basic Earnings (Loss) per Share | $ | 1.00 | $ | (4.69 | ) | $ | 0.84 | $ | (4.85 | ) | ||||||
Diluted Earnings (Loss) per Share: | ||||||||||||||||
Continuing operations | $ | 0.98 | $ | (4.69 | ) | $ | 0.81 | $ | (4.85 | ) | ||||||
Discontinued operations | — | — | 0.02 | — | ||||||||||||
Total Diluted Earnings (Loss) per Share | $ | 0.98 | $ | (4.69 | ) | $ | 0.83 | $ | (4.85 | ) | ||||||
EXHIBIT 99.1
CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) | ||||||||||||||||
Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net Income (Loss) | $ | 208 | $ | (951 | ) | $ | 181 | $ | (983 | ) | ||||||
Other Comprehensive Income (Loss), Net: | ||||||||||||||||
Translation adjustments, net | 1 | (110 | ) | 35 | (135 | ) | ||||||||||
Unrealized gains, net | — | (1 | ) | 2 | — | |||||||||||
Changes in defined benefit plans, net | (5 | ) | (22 | ) | (5 | ) | (20 | ) | ||||||||
Other Comprehensive Income (Loss), Net | (4 | ) | (133 | ) | 32 | (155 | ) | |||||||||
Comprehensive Income (Loss), Net | $ | 204 | $ | (1,084 | ) | $ | 213 | $ | (1,138 | ) | ||||||
EXHIBIT 99.1
CONDUENT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands) | December 31, 2017 | December 31, 2016 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 658 | $ | 390 | ||||
Accounts receivable, net | 1,104 | 1,286 | ||||||
Net receivable from former parent company | 11 | — | ||||||
Assets held for sale | 757 | — | ||||||
Other current assets | 180 | 241 | ||||||
Total current assets | 2,710 | 1,917 | ||||||
Land, buildings and equipment, net | 257 | 283 | ||||||
Intangible assets, net | 891 | 1,144 | ||||||
Goodwill | 3,366 | 3,889 | ||||||
Long-term receivable from former parent company | 11 | — | ||||||
Other long-term assets | 313 | 476 | ||||||
Total Assets | $ | 7,548 | $ | 7,709 | ||||
Liabilities and Equity | ||||||||
Short-term debt and current portion of long-term debt | $ | 82 | $ | 28 | ||||
Accounts payable | 138 | 164 | ||||||
Accrued compensation and benefits costs | 335 | 269 | ||||||
Unearned income | 151 | 206 | ||||||
Net payable to former parent company | — | 124 | ||||||
Liabilities held for sale | 169 | — | ||||||
Other current liabilities | 493 | 611 | ||||||
Total current liabilities | 1,368 | 1,402 | ||||||
Long-term debt | 1,979 | 1,913 | ||||||
Pension and other benefit liabilities | 4 | 172 | ||||||
Deferred taxes | 384 | 619 | ||||||
Other long-term liabilities | 142 | 173 | ||||||
Total Liabilities | 3,877 | 4,279 | ||||||
Series A convertible preferred stock | 142 | 142 | ||||||
Common stock | 2 | 2 | ||||||
Additional paid-in capital | 3,850 | 3,812 | ||||||
Retained earnings | 171 | — | ||||||
Accumulated other comprehensive loss | (494 | ) | (526 | ) | ||||
Total Equity | 3,529 | 3,288 | ||||||
Total Liabilities and Equity | $ | 7,548 | $ | 7,709 | ||||
Shares of common stock issued and outstanding | 210,440 | 202,875 | ||||||
Shares of series A convertible preferred stock issued and outstanding | 120 | 120 | ||||||
EXHIBIT 99.1
CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net income (loss) | $ | 208 | $ | (951 | ) | $ | 181 | $ | (983 | ) | ||||||
Adjustments required to reconcile net income (loss) to cash flows from operating activities: | ||||||||||||||||
Depreciation and amortization | 119 | 196 | 497 | 613 | ||||||||||||
Goodwill impairment | — | 935 | — | 935 | ||||||||||||
Deferred tax benefit | (223 | ) | (149 | ) | (230 | ) | (160 | ) | ||||||||
(Gain) loss from investments | — | (1 | ) | (10 | ) | (7 | ) | |||||||||
Amortization of debt financing costs | 2 | — | 9 | — | ||||||||||||
Net (gain) loss on sales of businesses and assets | (1 | ) | 1 | (49 | ) | 2 | ||||||||||
Stock-based compensation | 14 | 5 | 40 | 23 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
(Increase) decrease in accounts receivable | 107 | 114 | 31 | (23 | ) | |||||||||||
(Increase) decrease in other current and long-term assets | 4 | (19 | ) | (30 | ) | (83 | ) | |||||||||
Increase (decrease) in accounts payable and accrued compensation | 37 | 94 | (49 | ) | (60 | ) | ||||||||||
Increase (decrease) in restructuring liabilities | 9 | 19 | 34 | 27 | ||||||||||||
Increase (decrease) in other current and long-term liabilities | (45 | ) | (46 | ) | (125 | ) | (210 | ) | ||||||||
Net change in income tax assets and liabilities | 8 | (52 | ) | 11 | 39 | |||||||||||
Other operating, net | (2 | ) | — | (8 | ) | (5 | ) | |||||||||
Net cash provided by operating activities | 237 | 146 | 302 | 108 | ||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Cost of additions to land, buildings and equipment | (39 | ) | (63 | ) | (96 | ) | (149 | ) | ||||||||
Proceeds from sales of land, buildings and equipment | — | — | 33 | — | ||||||||||||
Cost of additions to internal use software | (10 | ) | (8 | ) | (36 | ) | (39 | ) | ||||||||
Proceeds (payments) from sale (purchase) of businesses | — | — | 56 | (54 | ) | |||||||||||
Proceeds from investments | — | 11 | 117 | 11 | ||||||||||||
Net proceeds (payments) on related party notes receivable | — | 205 | — | 248 | ||||||||||||
Other investing, net | 1 | — | — | (1 | ) | |||||||||||
Net cash (used in) provided by investing activities | (48 | ) | 145 | 74 | 16 | |||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Proceeds on long term debt | — | 1,963 | 306 | 1,969 | ||||||||||||
Debt issuance fee payments | 1 | (67 | ) | (8 | ) | (67 | ) | |||||||||
Payments on debt | (9 | ) | (14 | ) | (241 | ) | (32 | ) | ||||||||
Net payments to former parent | — | (1,910 | ) | (161 | ) | (1,720 | ) | |||||||||
Issuance of common stock related to employee stock plans | — | — | (5 | ) | — | |||||||||||
Dividends paid on preferred stock | (3 | ) | — | (10 | ) | — | ||||||||||
Restricted cash - related party | 15 | (18 | ) | 15 | (18 | ) | ||||||||||
Other financing | (2 | ) | 1 | (5 | ) | — | ||||||||||
Net cash provided by (used in) financing activities | 2 | (45 | ) | (109 | ) | 132 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | (1 | ) | (4 | ) | 1 | (6 | ) | |||||||||
Increase in cash and cash equivalents | 190 | 242 | 268 | 250 | ||||||||||||
Cash and cash equivalents at beginning of Year | 468 | 148 | 390 | 140 | ||||||||||||
Cash and Cash Equivalents at End of Year | $ | 658 | $ | 390 | $ | 658 | $ | 390 | ||||||||
EXHIBIT 99.1
Non-GAAP Financial Measures
We have reported our financial results in accordance with U.S. GAAP. In addition, we have discussed our results using non-GAAP measures.
We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. 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 tax effects. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. 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 U.S. GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable U.S. GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions, and providing such non-GAAP financial measures to investors allows for a further level of transparency as to how management reviews and evaluates our business results and trends. 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.
A reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are provided below.
These reconciliations also include the income tax effects for our non-GAAP performance measures in total, to the extent applicable. The income tax effects are calculated under the same accounting principles as applied to our reported pre-tax performance measures under ASC 740, which employs an annual effective tax rate method. The noted income tax effect for our non-GAAP performance measures is effectively the difference in income taxes for reported and adjusted pre-tax income calculated under the annual effective tax rate method. The tax effect of the non-GAAP adjustments was calculated based upon evaluation of the statutory tax treatment and the applicable statutory tax rate in the jurisdictions in which such charges were incurred.
Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate
We make adjustments to Income (Loss) before Income Taxes for the following items for the purpose of calculating Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate:
• | Goodwill Impairment. Represents Goodwill Impairment charge of $935 million. |
• | Amortization of intangible assets. The amortization of intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry from period to period. |
• | Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program. |
• | Separation costs. Separation costs are expenses incurred in connection with the separation from Xerox Corporation into a separate, independent, publicly traded company. These costs primarily relate to third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies. |
• | Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net, litigation matters and all other (income) expenses, net. |
• | NY Medicaid Management Information System (NY MMIS). Costs associated with the company not fully completing the State of New York Health Enterprise platform project. |
• | Health Enterprise (HE charge). Cost associated with not fully completing the Health Enterprise Medical platform implementation projects in California and Montana. |
• | (Gain) loss on sale of asset and businesses. |
EXHIBIT 99.1
The Company provides adjusted net income and adjusted EPS financial measures to assist our investors in evaluating our ongoing operating performance for the current reporting period and, where provided, over different reporting periods, by adjusting for certain items which may be recurring or non-recurring and which in our view do not necessarily reflect ongoing performance. We also internally use these measures to assess our operating performance, both absolutely and in comparison to other companies, and in evaluating or making selected compensation decisions.
Management believes that adjusted effective tax rate, provided as supplemental information, facilitates a comparison by investors of our actual effective tax rate with an adjusted effective tax rate which reflects the impact of the items which are excluded in providing adjusted net income, and may provide added insight into our underlying business results and how effective tax rates impact our ongoing business.
Adjusted Revenue and Operating Income and Adjusted Operating Margin
We make adjustments to Revenue, Costs and Expenses and Operating Margin for the following items, for the purpose of calculating Adjusted Operating Income and Adjusted Operating Margin:
• | Goodwill Impairment. |
• | Amortization of intangible assets. |
• | Restructuring and related costs. |
• | Separation costs. |
• | Interest expense. Interest expense includes interest on long-term debt and amortization of debt issuance costs. |
• | Related Party Interest. Interest payments to former parent. |
• | Other (income) expenses, net. |
• | NY MMIS. |
• | HE charge. |
• | (Gain) loss of sale of asset and businesses. |
We provide our investors with adjusted operating income and adjusted operating margin information, as supplemental information, because we believe it offers added insight, by itself and for comparability between periods, by adjusting for certain non-cash items as well as certain other identified items which we do not believe are indicative of our ongoing business, and may also provide added insight on trends in our ongoing business.
Adjusted EBITDA and EBITDA Margin
We use Adjusted EBITDA as an additional way of assessing certain aspects of our operations that, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our on-going business. Adjusted EBITDA represents income (loss) before interest, income taxes, depreciation and amortization adjusted for the following items:
• | Goodwill Impairment. |
• | Restructuring and related costs. |
• | Separation costs. |
• | Other (income) expenses, net. |
• | NY MMIS. |
• | NY MMIS depreciation. |
• | HE charge. |
• | (Gain) loss on sale of asset and businesses. |
Adjusted EBITDA is not intended to represent cash flows from operations, operating income (loss) or net income (loss) as defined by U.S. GAAP as indicators of operating performances. Management cautions that amounts presented in accordance with Conduent's definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate Adjusted EBITDA in the same manner.
EXHIBIT 99.1
Free Cash Flow
Free Cash Flow is defined as cash flows from operating activities as reported on the consolidated statement of cash flows, less cost of additions to land, buildings and equipment, cost of additions to internal use software, vendor financed capital lease additions and proceeds from sales of land, buildings and equipment. We use the non-GAAP measure of Free Cash Flow as a criterion of liquidity and performance-based components of employee compensation. We use Free Cash Flow as a measure of liquidity to determine amounts we can reinvest in our core businesses, such as amounts available to make acquisitions, invest in land, buildings and equipment and internal use software, make principal payments on debt. In order to provide a meaningful basis for comparison, we are providing information with respect to our Free Cash Flow reconciled to cash flow provided by operating activities, which we believe to be the most directly comparable measure under U.S. GAAP.
Adjusted Free Cash Flow
Adjusted free cash flow is defined as free cash flow from above plus deferred compensation payments.
Adjusted Cash
Adjusted cash is defined as the cash and cash equivalents less cash from terminated deferred compensation to be paid to plan participants.
Constant Currency
To better understand trends in our business, we believe that it is helpful to adjust revenue to exclude the impact of changes in the translation of foreign currencies into U.S. Dollars. We refer to this adjusted revenue as “constant currency.” Currency impact is the difference between actual growth rates and constant currency growth rates.
Non-GAAP Outlook
In providing outlook for adjusted EBITDA we exclude certain items which are otherwise included in determining the comparable GAAP financial measure. A description of the adjustments which historically have been applicable in determining adjusted EBITDA are reflected in the table below. We are providing such outlook only on a non-GAAP basis because the Company is unable to predict with reasonable certainty the totality or ultimate outcome or occurrence of these adjustments for the forward-looking period, such as amortization, restructuring, separation costs, NY MMIS, HE charge, and certain other adjusted items, which can be dependent on future events that may not be reliably predicted. Based on past reported results, where one or more of these items have been applicable, such excluded items could be material, individually or in the aggregate, to reported results.
EXHIBIT 99.1
Net Income (Loss) and EPS Reconciliation:
Three Months Ended | Years Ended | |||||||||||||||||||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||
(in millions, except earnings per share) | Net Income (Loss) | Diluted EPS | Net Income (Loss) | Diluted EPS | Net Income (Loss) | Diluted EPS | Net Income (Loss) | Diluted EPS | ||||||||||||||||||||||||
GAAP as Reported From Continuing Operations | $ | 208 | $ | 0.98 | $ | (951 | ) | $ | (4.69 | ) | $ | 177 | $ | 0.81 | $ | (983 | ) | $ | (4.85 | ) | ||||||||||||
Adjustments: | ||||||||||||||||||||||||||||||||
Goodwill impairment | — | 935 | — | 935 | ||||||||||||||||||||||||||||
Amortization of intangible assets | 61 | 80 | 243 | 280 | ||||||||||||||||||||||||||||
NY MMIS | (1 | ) | 161 | 9 | 161 | |||||||||||||||||||||||||||
Restructuring and related costs | 25 | 44 | 101 | 101 | ||||||||||||||||||||||||||||
HE charge | — | — | (8 | ) | — | |||||||||||||||||||||||||||
Separation costs | 4 | 10 | 12 | 44 | ||||||||||||||||||||||||||||
(Gain) loss on sale of asset and businesses | (1 | ) | 1 | (42 | ) | 2 | ||||||||||||||||||||||||||
Other (income) expenses, net | 6 | 12 | (18 | ) | 18 | |||||||||||||||||||||||||||
Less: Income tax adjustments(1) | (235 | ) | (231 | ) | (288 | ) | (335 | ) | ||||||||||||||||||||||||
Adjusted Net Income (Loss) and EPS | $ | 67 | $ | 0.31 | $ | 61 | $ | 0.29 | $ | 186 | $ | 0.85 | $ | 223 | $ | 1.06 | ||||||||||||||||
(GAAP shares) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding | 205 | 203 | 204 | 203 | ||||||||||||||||||||||||||||
Restricted stock and performance shares | 3 | — | 3 | — | ||||||||||||||||||||||||||||
8% Convertible preferred stock | 5 | — | — | — | ||||||||||||||||||||||||||||
Adjusted Weighted Average Shares Outstanding(2) | 213 | 203 | 207 | 203 | ||||||||||||||||||||||||||||
(Non-GAAP shares) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding | 205 | 203 | 204 | 203 | ||||||||||||||||||||||||||||
Restricted stock and performance shares | 3 | 3 | 3 | 3 | ||||||||||||||||||||||||||||
8% Convertible preferred stock | 5 | 5 | — | 5 | ||||||||||||||||||||||||||||
Adjusted Weighted Average Shares Outstanding(2) | 213 | 211 | 207 | 211 | ||||||||||||||||||||||||||||
(1) Reflects the income tax (expense) benefit of the adjustments. Refer to the Effective Tax Rate reconciliation details. | ||||||||||||||||||||||||||||||||
(2) Average shares for the 2017 calculation of adjusted EPS excludes 5 million shares associated with our Series A convertible preferred stock and includes the impact of the preferred stock quarterly dividend of approximately $2.4 million and $10 million for the three months and year ended December 31, 2017. Average shares for the 2016 calculation of adjusted EPS includes 5 million shares associated with our Series A convertible preferred stock and excludes the impact of the preferred stock quarterly dividend. | ||||||||||||||||||||||||||||||||
EXHIBIT 99.1
Effective Tax Rate Reconciliation:
Three Months Ended December 31, 2017 | Three Months Ended December 31, 2016 | |||||||||||||||||||||
(in millions) | Pre-Tax Income (Loss) | Income Tax (Benefit) Expense | Effective Tax Rate | Pre-Tax Income (Loss) | Income Tax (Benefit) Expense | Effective Tax Rate | ||||||||||||||||
GAAP as Reported From Continuing Operations | $ | 4 | $ | (204 | ) | (5,100.0 | )% | $ | (1,141 | ) | $ | (190 | ) | 16.7 | % | |||||||
Non-GAAP adjustments | ||||||||||||||||||||||
Benefit from tax law changes | — | 198 | — | — | ||||||||||||||||||
Other non-GAAP adjustments | 94 | 37 | 1,243 | 231 | ||||||||||||||||||
Total non-GAAP adjustments(1) | 94 | 235 | 1,243 | 231 | ||||||||||||||||||
Adjusted(2) | $ | 98 | $ | 31 | 31.6 | % | $ | 102 | $ | 41 | 40.2 | % | ||||||||||
Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||||||||
(in millions) | Pre-Tax Income (Loss) | Income Tax (Benefit) Expense | Effective Tax Rate | Pre-Tax Income (Loss) | Income Tax (Benefit) Expense | Effective Tax Rate | ||||||||||||||||
GAAP as Reported From Continuing Operations | $ | (16 | ) | $ | (193 | ) | 1,206.3 | % | $ | (1,227 | ) | $ | (244 | ) | 19.9 | % | ||||||
Non-GAAP adjustments | ||||||||||||||||||||||
Benefit from tax law changes | — | 198 | — | — | ||||||||||||||||||
Termination of COLI plan | — | (19 | ) | — | — | |||||||||||||||||
Other non-GAAP adjustments | 297 | 109 | 1,541 | 335 | ||||||||||||||||||
Total non-GAAP adjustments(1) | 297 | 288 | 1,541 | 335 | ||||||||||||||||||
Adjusted(2) | $ | 281 | $ | 95 | 33.8 | % | $ | 314 | $ | 91 | 29.0 | % | ||||||||||
(1) Refer to Net Income (Loss) reconciliation for details. | ||||||||||||||||||||||
(2) The tax impact of Adjusted Pre-Tax Income (Loss) from continuing operations is calculated under the same accounting principles applied to the As Reported Pre-Tax Income, which employs an annual effective tax rate method to the results. | ||||||||||||||||||||||
Revenue and Operating Income / Margin Reconciliation:
Three Months Ended December 31, 2017 | Three Months Ended December 31, 2016 | |||||||||||||||||||||
(in millions) | Profit (Loss) | Revenue | Margin | Profit (Loss) | Revenue | Margin | ||||||||||||||||
GAAP as Reported(1) | $ | 4 | $ | 1,493 | 0.3 | % | $ | (1,141 | ) | 1,514 | (75.4 | )% | ||||||||||
Adjustments: | ||||||||||||||||||||||
Goodwill impairment | — | 935 | ||||||||||||||||||||
Amortization of intangible assets | 61 | 80 | ||||||||||||||||||||
NY MMIS | (1 | ) | — | 161 | 83 | |||||||||||||||||
Restructuring and related costs | 25 | 44 | ||||||||||||||||||||
Separation costs | 4 | 10 | ||||||||||||||||||||
Interest expense | 32 | 11 | ||||||||||||||||||||
Related party interest | — | (4 | ) | |||||||||||||||||||
(Gain) loss on sale of asset and businesses | (1 | ) | 1 | |||||||||||||||||||
Other (income) expenses, net | 6 | 12 | ||||||||||||||||||||
Adjusted Operating Income/Margin | $ | 130 | $ | 1,493 | 8.7 | % | $ | 109 | $ | 1,597 | 6.8 | % | ||||||||||
(1) Pre-Tax Loss and revenue from continuing operations. | ||||||||||||||||||||||
EXHIBIT 99.1
Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||||||||
(in millions) | Profit (Loss) | Revenue | Margin | Profit (Loss) | Revenue | Margin | ||||||||||||||||
GAAP as Reported(1) | $ | (16 | ) | $ | 6,022 | (0.3 | )% | $ | (1,227 | ) | 6,408 | (19.1 | )% | |||||||||
Adjustments: | ||||||||||||||||||||||
Goodwill impairment | — | 935 | ||||||||||||||||||||
Amortization of intangible assets | 243 | 280 | ||||||||||||||||||||
NY MMIS | 9 | — | 161 | 83 | ||||||||||||||||||
Restructuring and related costs | 101 | 101 | ||||||||||||||||||||
HE charge | (8 | ) | — | |||||||||||||||||||
Separation costs | 12 | 44 | ||||||||||||||||||||
Interest expense | 137 | 14 | ||||||||||||||||||||
Related party interest | — | 26 | ||||||||||||||||||||
(Gain) loss on sale of asset and businesses | (42 | ) | 2 | |||||||||||||||||||
Other (income) expenses, net | (18 | ) | 18 | |||||||||||||||||||
Adjusted Operating Income/Margin | $ | 418 | $ | 6,022 | 6.9 | % | $ | 354 | $ | 6,491 | 5.5 | % | ||||||||||
(1) Pre-Tax Loss and revenue from continuing operations. | ||||||||||||||||||||||
Adjusted EBITDA / Margin Reconciliation:
(in millions) | Three Months Ended December 31, 2017 | Three Months Ended December 31, 2016 | Year Ended December 31, 2017 | Year Ended December 31, 2016 | ||||||||||||
GAAP Revenue As Reported | $ | 1,493 | $ | 1,514 | $ | 6,022 | $ | 6,408 | ||||||||
NY MMIS Charge | — | 83 | — | 83 | ||||||||||||
Adjusted Revenue | $ | 1,493 | $ | 1,597 | $ | 6,022 | $ | 6,491 | ||||||||
Reconciliation to Adjusted EBITDA | ||||||||||||||||
GAAP Net Income (Loss) from Continuing Operations | 208 | (951 | ) | 177 | (983 | ) | ||||||||||
Interest Expense | 32 | 11 | 137 | 14 | ||||||||||||
Related Party Interest | — | (4 | ) | — | 26 | |||||||||||
Income tax benefits | (204 | ) | (190 | ) | (193 | ) | (244 | ) | ||||||||
Depreciation | 29 | 36 | 125 | 128 | ||||||||||||
Amortization | 90 | 159 | 372 | 485 | ||||||||||||
EBITDA | 155 | (939 | ) | 618 | (574 | ) | ||||||||||
EBITDA Margin | 10.4 | % | (62.0 | )% | 10.3 | % | (9.0 | )% | ||||||||
EBITDA | $ | 155 | $ | (939 | ) | $ | 618 | $ | (574 | ) | ||||||
Goodwill impairment | — | 935 | — | 935 | ||||||||||||
Restructuring and related costs | 25 | 44 | 101 | 101 | ||||||||||||
Separation costs | 4 | 10 | 12 | 44 | ||||||||||||
NY MMIS | (1 | ) | 161 | 9 | 161 | |||||||||||
NY MMIS depreciation | — | (52 | ) | — | (52 | ) | ||||||||||
HE charge | — | — | (8 | ) | — | |||||||||||
(Gain) Loss on sale of assets and business | (1 | ) | 1 | (42 | ) | 2 | ||||||||||
Other (income) expenses, net | 6 | 12 | (18 | ) | 18 | |||||||||||
Adjusted EBITDA | $ | 188 | $ | 172 | $ | 672 | $ | 635 | ||||||||
Adjusted EBITDA Margin | 12.6 | % | 10.8 | % | 11.2 | % | 9.8 | % | ||||||||
EXHIBIT 99.1
Free Cash Flow / Adjusted Free Cash Flow Reconciliation:
(in millions) | Three Months Ended December 31, 2017 | Three Months Ended December 31, 2016 | Year Ended December 31, 2017 | Year Ended December 31, 2016 | ||||||||||||
Operating Cash Flow | $ | 237 | $ | 146 | $ | 302 | $ | 108 | ||||||||
Cost of additions to land, buildings and equipment | (39 | ) | (63 | ) | (96 | ) | (149 | ) | ||||||||
Proceeds from sales of land, buildings and equipment | — | — | 33 | — | ||||||||||||
Cost of additions to internal use software | (10 | ) | (8 | ) | (36 | ) | (39 | ) | ||||||||
Vendor financed capital leases | — | (1 | ) | (16 | ) | (1 | ) | |||||||||
Free Cash Flow | $ | 188 | $ | 74 | $ | 187 | $ | (81 | ) | |||||||
Free Cash Flow | $ | 188 | $ | 74 | $ | 187 | $ | (81 | ) | |||||||
Deferred compensation payments | 17 | — | 17 | — | ||||||||||||
Adjusted Free Cash Flow | $ | 205 | $ | 74 | $ | 204 | $ | (81 | ) | |||||||
Cash / Adjusted Cash Reconciliation:
(in millions) | As of September 30, 2017 | As of December 31, 2017 | As of December 31, 2016 | |||||||||
Cash and cash equivalents | $ | 468 | $ | 658 | $ | 390 | ||||||
Deferred compensation paid in 2017 | — | 17 | — | |||||||||
Deferred compensation payable | (116 | ) | (116 | ) | — | |||||||
Adjusted cash and cash equivalents | $ | 352 | $ | 559 | $ | 390 | ||||||
February 21, 2018
Conduent
Q4 & FY 2017
Earnings Results
Audit Committee Draft (2)
CONFIDENTIAL
Forward-Looking Statements
This report contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and
projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar
substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from
those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors and uncertainties that could cause our actual results to differ materially
from those in our forward-looking statements include, but are not limited to:
• termination rights contained in our government contracts;
• our ability to renew commercial and government contracts awarded through competitive bidding processes;
• our ability to recover capital and other investments in connection with our contracts;
• our ability to attract and retain necessary technical personnel and qualified subcontractors;
• our ability to deliver on our contractual obligations properly and on time;
• competitive pressures;
• our significant indebtedness;
• changes in interest in outsourced business process services;
• our ability to obtain adequate pricing for our services and to improve our cost structure;
• claims of infringement of third-party intellectual property rights;
• the failure to comply with laws relating to individually identifiable information, and personal health information and laws relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions;
• breaches of our security systems and service interruptions;
• our ability to estimate the scope of work or the costs of performance in our contracts;
• our ability to collect our receivables for unbilled services;
• a decline in revenues from or a loss or failure of significant clients;
• fluctuations in our non-recurring revenue;
• our failure to maintain a satisfactory credit rating;
• our ability to attract and retain key employees;
• increases in the cost of telephone and data services or significant interruptions in such services;
• our failure to develop new service offerings;
• our ability to receive dividends or other payments from our subsidiaries;
• changes in tax and other laws and regulations;
• changes in government regulation and economic, strategic, political and social conditions;
• changes in U.S. GAAP or other applicable accounting policies; and
• other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of our Annual Report on Form
10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission.
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. Any forward-looking statements made by us in this presentation speak only as of the date on which they are made. We are under no
obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
Non-GAAP Financial Measures
We have reported our financial results in accordance with U.S. generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using non-GAAP measures. We believe these non-GAAP measures allow investors to better
understand the trends in our business and to better understand and compare our results. 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
tax effects. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. 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 U.S. GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable U.S. GAAP measures and should be
read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business
and make operating decisions, and providing such non-GAAP financial measures to investors allows for a further level of transparency as to how management reviews and evaluates our business results and trends. 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. Non-GAAP measures are footnoted, where applicable, in
each slide herein.
Cautionary Statements
2
FY 2017 Overview
• Meaningfully improved profitability of Commercial business (FY 2017 segment margin up ~110 bps YoY; Q4 segment margin at 7.7%)
• Remediated 5 out of 6 large customer experience contracts (two incremental since last earnings call)
• Achieved adjusted EBITDA3 growth of ~6%
• Rolling 12-month Pipeline of ~$13B
• Progress made on divestitures (Five completed in 2017; taking action on previously announced $250-$500M;
continue to review portfolio)
• Generated $204M Adjusted Free Cash Flow1 in 2017; $559M of adjusted cash2 on balance sheet
1Please refer to Appendix for Non-GAAP reconciliation. Free cash flow excludes impact from payments related to termination of deferred compensation plan ($17M YTD).
2Excludes $99M associated with Deferred Comp Plan
3 Please refer to Appendix for Non-GAAP reconciliations of adjusted operating income/margin, adjusted EBITDA/margin and adjusted EPS
$6,022M, down 6% yr/yr as reported and in
constant currency
• Strategic decisions led to ~50% of the
yr/yr decline including the Q4 impact
of divestitures
Adjusted operating margin3 6.9%, up 140
bps yr/yr
GAAP diluted EPS from continuing
operations $0.81
Adjusted diluted EPS3 from continuing
operations $0.85
$672M, grew ~6% yr/yr; exceeded high end
of guidance normalizing for divestitures
Adjusted EBITDA margin3 11.2%,
up ~140 bps yr/yr
Revenue Profitability Adjusted EBITDA3
Key Highlights
3
Strategic Transformation
Progress and Outlook
• Over-achieved cumulative 2017 target
◦ Overperformance in real estate and overhead costs
• Continued progress on large Customer Care contract
remediation
◦ 5/6 contracts remediated to win-win solutions
◦ 1/6 contracts still progressing
• IT transformation, standardization and simplification
continues to be a meaningful opportunity in FY 2018
4
Real Estate Locations
Selling, General & Administrative (SG&A) Trends
SG&A ($ in M) % of revenue
Note: Q4 and FY 2016 % of adjusted revenue1
1Please refer to Appendix for Non-GAAP reconciliations of adjusted revenue
Cumulative
Gross Savings Target
Actuals / Current
Outlook
FY 2017 ~$430M ~$475M
FY 2018E ~$700M On track
Pivoting in 2018
5
2017 2018 Outlook
Financial Plan
Revenue Manage decline Improved trajectory of core
Adj EBITDA1 Led by transformation Expanded through continued transformation and delivery efficiency
Free Cash Flow Focus on cash conversion Continued strong cash conversion and DSO focus
Portfolio Define our "Core" and divest non-core Amplify Core. Strengthen portfolio gaps with M&A
Platforms Inventory / right-size Invest / modernize
People Right-size and restructure Invest in talent, new benefits and tools
Market Profile Introduce Conduent Build reputation
1 Please refer to Appendix for Non-GAAP reconciliations of adjusted operating income/margin, adjusted EBITDA/margin and adjusted EPS
6
Public Sector
• Revenue down 6% yr/yr as expected, driven by contract losses and strategic
decisions
• Margin decline yr/yr driven by prior year contract losses and revenue pressure
as well as dis-synergies
• Revenue productivity ~$222K per employee, up 6% vs. FY 2016
Segment Summary - FY 2017
Commercial
• Revenue down 7% yr/yr as expected, largely driven by strategic decisions
• Margin improved significantly versus prior year as better technology deployment,
revenue mix and transformation savings
• Revenue productivity ~$50K per employee1, down ~3% vs. FY 2016
• European revenues 11% of Commercial; Ramping focus and investing in 8
countries
Other
• Revenue declines driven by strategic run-off of Education business
• Run-rate segment profit near breakeven
• Aggressively drove profit improvement
Percentage of FY 2017 Revenue
1Revenue productivity excludes corporate overhead
Q4 2017 Signings, Pipeline and Renewal Rate
New Business TCV
• New Business: $683M, improved 75% qtr/qtr and
declined 6% yr/yr
• New business wins driven by expansion and
increased cross-sell with existing Healthcare
Payer, State & Local and Pharma clients
• Continued focus on strategic wins with
acceptable margin
Rolling 12-Month Pipeline
• Flat yr/yr and qtr/qtr driven with new deal closures
offset by new business opportunities
• Key opportunities in Public Transit, State & Local,
Healthcare Payer and Payments
Total Contract Value (TCV) Signings
• TCV improved 65% qtr/qtr and 4% yr/yr, impacted by
greater renewal activity and sequential new business
growth
Renewal Rate
• Reflects opportunities with acceptable margin and risk,
in-line with business model
• Renewals: $1,047M, improved sequentially driven by
several large commercial clients
• Large renewals with Healthcare payer, Comms & Media
and Industrial clients
$1,730M 96%
$683M ~$13B
7
Financials
8
Q4 2017 Earnings
1Please refer to Appendix for Non-GAAP reconciliations of adjusted operating income/margin, adjusted EBITDA/margin, adjusted tax rate, adjusted net income and adjusted EPS
2Q4 2016 Interest expense includes $4M Related-party interest benefit
Adjusted Operating margin 5.4%, up 60 bps from 2015
GAAP EPS ($4.85)
Adj. EPS $1.06
(in millions) Q4 2016 Q4 2017 B/(W)
Yr/Yr
Comments
Revenue $1,514 $1,493 ($21)
Strategic actions, lost business, divestitures,
partially offset by Q4 2016 impact of NY MMIS
Gross margin 8.1% 18.9% 1,080 bps NY MMIS charge in Q4 2016. Continued
progress on transformation initiatives SG&A 169 149 20
Adjusted operating income1 109 130 21
Adjusted operating margin1 6.8% 8.7% 190 bps
Adjusted EBITDA1 $172 $188 $16
Growth driven by transformation savings
Adjusted EBITDA margin1 10.8% 12.6% 180 bps
Amortization of intangible assets 80 61 19 Brand write offs in Q4 2016
Restructuring and related costs 44 25 19
Interest expense2 7 32 (25) Increased debt resulting from spin
Separation costs 10 4 6
Loss (gain) on sale of asset and businesses 1 (1) 2
Other net loss 12 6 6
Pretax income (loss) (1,141) 4 1,145
Q4 2016 Goodwill Impairment and NY MMIS
charge
GAAP tax (benefit) ($190) ($204) $14 Tax reform impact on def. tax liability valuation
GAAP net income (loss) from Continuing Operations ($951) $208 $1,159 Impacted by Q4 2016 goodwill impairment and
NY MMIS charge / Q4 2017 tax benefit GAAP Diluted EPS from Continuing Operations ($4.69) $0.98 $5.67
Adjusted tax rate1 40.2% 31.6% 860 bps
Adjusted net income1 $61 $67 $6
Adjusted Diluted EPS1 from Continuing Operations $0.29 $0.31 $0.02
9
FY 2017 Earnings
1Please refer to Appendix for Non-GAAP reconciliations of adjusted operating income/margin, adjusted EBITDA/margin, adjusted tax rate, adjusted net income and adjusted EPS
2FY 2016 Interest expense includes $26M in Related-party interest
Adjusted Operating margin 5.4%, up 60 bps from 2015
GAAP EPS ($4.85)
Adj. EPS $1.06
(in millions) FY 2016 FY 2017 B/(W)
Yr/Yr
Comments
Revenue $6,408 $6,022 ($386) Strategic actions, lost business, and divestitures
Gross margin 14.2% 17.4% 320 bps Improvement from transformation savings and
impact of NY MMIS charge in 2016 SG&A 686 615 $71
Adjusted operating income1 354 418 $64
Adjusted operating margin1 5.5% 6.9% 140 bps
Adjusted EBITDA1 $635 $672 $37 Transformation savings and improvement in
Other Segment Adjusted EBITDA margin1 9.8% 11.2% 140 bps
Amortization of intangible assets 280 243 37 Q4 2016 brand write-off and other write offs
Restructuring and related costs 101 101 —
Interest expense2 40 137 (97) Increased debt resulting from spin
Separation costs 44 12 32
Loss (gain) on sale of asset and businesses 2 (42) 44 Gain on divestitures and Dallas building
Other net loss (income) 18 (18) 36 Favorable litigation outcomes
Pretax loss (1,227) (16) 1,211
Goodwill impairment in Q4 2016 and NY MMIS
charge
GAAP tax (benefit) ($244) ($193) ($51)
Tax reform impact on def. tax liability valuation
GAAP net income (loss) from Continuing Operations ($983) $177 $1,160 Impacted by 2016 goodwill impairment and NY
MMIS charge / 2017 tax benefit GAAP Diluted EPS from Continuing Operations ($4.85) $0.81 $5.66
Adjusted tax rate1 29.0% 33.8% (480 bps)
Adjusted net income1 $223 $186 ($37) Interest expense partially offset by op. income
Adjusted Diluted EPS1 from Continuing Operations $1.06 $0.85 ($0.21)
10
Commercial Segment
Q4 2017 Segment Highlights
• Revenue grew 2% sequentially and declined 5% yr/yr, impacted by
strategic decisions and lost business
• Segment profit grew 42% yr/yr, driven by strategic transformation /
contract remediation / delivery efficiency
• Segment adjusted EBITDA1 grew 31% yr/yr and adjusted EBITDA
margin1 expanded 330 bps
Annual and Quarterly Revenue and Profit
Revenue ($ in M) % Segment Margin
11
Segment
Profit $48 $29 $32 $53 $68 $151 $182
AEBITDA1 $81 $70 $75 $93 $106 $313 $344
Q4 Revenue By Vertical (% of segment total)
1Please refer to Appendix for Non-GAAP reconciliations of adjusted EBITDA /margin
Q4 Revenue By Service Line (% of segment total)
*Includes standalone Customer Care
Q4 Revenue By Business (% of segment total)
Public Sector Segment
Q4 2017 Segment Highlights
• Revenue down 7% yr/yr and 1% sequentially, impacted by strategic
actions and contract losses
• Transportation down 4% yr/yr and flat sequentially
• Segment profit improved sequentially driven by strategic
transformation savings and revenue mix
12
Annual and Quarterly Revenue and Profit
Revenue ($ in M) % Segment Margin
1Please refer to Appendix for Non-GAAP reconciliations of adjusted EBITDA /margin
Segment
Profit $76 $61 $59 $59 $66 $293 $245
AEBITDA1 $102 $82 $83 $81 $84 $395 $330
Transportation (~41% of
segment revenue)
Federal, State & Local Government
(~38% of segment revenue)
Payments Services (~21%
of segment revenue)
Other Segment
Revenue in $M
13
1Please refer to Appendix for Non-GAAP reconciliations of adjusted revenue, adjusted EBITDA/margin and adjusted operating income/margin
Q4 Revenue By Vertical (% of segment total)
GAAP
Revenue: $4
Adjusted
Revenue:
$871
Adjusted
Segment
Loss1 ($12) ($1) ($3) ($1) ($4) ($87) ($9)
AEBITDA1 ($11) $1 ($1) $— ($2) ($73) ($2)
Q4 2017 Segment Highlights
• Revenue declined yr/yr and sequentially as education business
run-off accelerated, partially offset by MMIS contract remediation
• Adjusted EBITDA improved yr/yr, primarily driven by positive impact
of MMIS contract remediation, offset by impact of education
business run off
• HE segment profit of $1M; Education segment loss of $4M
Quarterly and Annual Revenue and Profit
GAAP
Revenue:
$295
Adjusted
Revenue:
$378
· 2017 Commentary:
• Free cash flow3 of $204M
• Divestiture proceeds generated ~$56M
• Termination of Deferred Compensation Plan
added $116M (Investing Cash Flow), most of
which will be used to pay participants in 2018
• Full-year adjusted free cash flow of ~30%
AEBITDA
• Capex ~2.2% of Revenue in FY 2017
Cash Flow
(in millions) Q4 2017 FY 2017
Net income $208 $181
Depreciation & amortization 119 497
Stock-based compensation 14 40
Deferred tax benefit (223 ) (230 )
Restructuring payments (15 ) (58 )
Restructuring and related costs 24 92
Change for income tax assets and liabilities 8 11
Change in accounts receivable 107 31
Change in other net working capital (4 ) (204 )
Other1 (1 ) (58 )
Operating Cash Flow $237 $302
Purchase of LB&E2 and other (49 ) (132 )
Proceeds from sales of LB&E — 33
Net proceeds from divestiture — 56
Other investing & Deferred compensation cash 1 117
Investing Cash Flow ($48 ) $74
Cash from Financing $2 ($109 )
Effect of exchange rates on cash and cash equivalents (1 ) 1
Change in cash and cash equivalents 190 268
Beginning cash and cash equivalents 468 390
Ending Cash and Cash Equivalents $658 $658
Memo: Adjusted Free Cash Flow3 $205 $204
Better / (Worse) vs. Prior Year Period $131 $285
1 Includes gain (loss) investments, amortization of financing costs, contributions to defined benefit pension plans and Other operating, net;
2 Includes cost of additions to land, building and equipment (LB&E) and internal use software
3 Free cash flow is defined as operating cash flow less cost of net additions to land, building and equipment and internal use software as well as cost of capital lease (Year-to-date includes $16M) . Please refer to
Appendix for Non-GAAP reconciliation. Adjusted free cash flow also excludes impact from payments related to termination of deferred compensation plan ($17M YTD).
14
12/31/2016 9/30/2017 12/31/2017
Total Cash $390 $468 $658
Deferred Comp Cash 0 (116) (99)
Adjusted Cash1 390 352 559
Total Debt2 1,941 2,062 2,061
Term Loan A3, 6 due
2021
694 727 732*
Term Loan B3 due
2023
750 844 842
10.5% Senior Notes
due 2024
510 510 510
Capital Leases 43 39 33
Current net leverage
ratio5
2.4x 2.6x 2.2x
Debt Structure ($ in millions)
1 Adjusted Cash excludes cash received from termination of the Deferred Compensation Plan (current net balance of $99M) that wi ll be used to pay participants through Q4 2018
2 Total debt excludes deferred financing costs
3 Revolving credit facility and Term Loan A interest rate is Libor + 225 bps; Term Loan B is Libor + 300 bps effective October 7, 2017
4 $733M of available capacity under Revolving Credit Facility as of 12/31/2017
5 Net debt (total debt less adjusted cash) divided by TTM Adjusted EBITDA
6 Includes initial EUR 260M borrowing converted at end of quarter exchange rates
Credit Metrics / Statistics
Actual 2017 interest expense $137M
Preferred dividend (annually) ~$10M
Target net leverage ratio <2.5x
Average remaining maturity on outstanding debt ~5.3 years
Key Messages
▪ Current leverage ratio 2.2x
▪ Revolver remains undrawn4
▪ ~$300M cash expected to be used for future acquisitions
▪ Future divestiture proceeds to potentially be used for debt
repayments or acquisitions
15
*Reflects appreciation of the EUR; there was no incremental borrowing on the Term Loan A in Q4 2017
Capital Structure Overview
(in millions) FY 2017
Impact from
Adjustments to
FY 2017
Adjusted
FY 2017
FY 2018E
(vs Adjusted FY 2017)
Revenue
(constant currency)
$6,022 ~($225) $5,797 Down 3% - flat (CC1)
Adjusted EBITDA2 $672 ~($20) $652 Up 8% - 12%
Adjusted Free Cash
Flow $204 ~($1) $203 25 - 35% of Adj. EBITDA
2
Adjustments impacting FY 2017 Revenue Adj. EBITDA Free Cash Flow
Divestitures (completed in Q3 2017) ~($60) ~($5) ~($1)
Estimated impact from adoption of the new
accounting standard for revenue recognition3 ~($165) ~($15) $0
Total ~($225) ~($20) ~($1)
1 Constant currency based on foreign exchange rates as of the prior-year period
2 Please refer to Appendix "Non-GAAP Outlook" for certain non-GAAP information concerning outlook
3 Estimated impact from the adoption of the new accounting standard for revenue recognition, had it been applicable in FY 2017.
FY 2018 Guidance
16
CEO Closing Remarks
17
Conduent: A Digital Interactions Company
18
18
2017 - Recap of Performance
19
19
◦ Financial Performance: Met or over-achieved guidance
◦ Strengthened Balance Sheet: Improved cash generation provides flexibility
◦ Transformation: Over-performance on 2017 program and on track for 2018
◦ Established our Brand: Solidified go-to-market and client engagement strategy
◦ Amplifying the Core: Divesting non-core assets and focusing management
bandwidth and investment on Core offerings
◦ Technology-focus: Transitioning to a platform-based, digital-interaction organization
Scale, Market Opportunity, Team and Technology to Drive Growth and Success
Q&A
20
Appendix
21
Signings & Renewal Rate
22
($ in millions) Q1' 16 Q2' 16 Q3' 16 Q4' 16 Q1' 17 Q2' 17 Q3' 17 Q4' 17 FY ' 16 FY' 17
Total Contract Value $1,488 $2,158 $1,546 $1,660 $931 $1,244 $1,047 $1,730 $6,852 $4,952
New Business $643 $527 $633 $724 $530 $657 $390 $683 $2,527 $2,260
Renewals $845 $1,631 $913 $936 $401 $587 $657 $1,047 $4,325 $2,692
Annual Recurring Revenue Signings $129 $112 $166 $182 $143 $130 $92 $168 $589 $533
Non-Recurring Revenue Signings $83 $140 $104 $111 $92 $109 $86 $96 $438 $383
Renewal rate 89 % 88 % 89 % 85 % 92 % 89 % 98 % 96 % 88 % 94 %
Renewal rate (previous methodology) 89 % 84 % 83 % 82 % 80 % 76 % 95 % 93 % 86 % 87 %
2018 Modeling Considerations
23
Outlook Commentary
Profitability Typical seasonality tends to be weighted toward 2H (as seen in FY 2017)
Restructuring costs Expected to be $50M - $75M for the full year
Interest Expense Expected to be ~$135M for the full year, given TLB repricings and interest rate expectations
Cash Flow Business typically cash flow negative in Q1, given seasonal items
Capex Expected to be 2.5% - 3.0% of Revenue in FY 2018
Other segment Expect break-even in 2018
Divestitures and M&A No impact in guidance for future divestitures and acquisitions. Will be added as deals close.
Definitions
24
TCV = Total contract value
Annual Recurring Revenue Signings = Only includes new business TCV
New Business TCV = Annual recurring revenue signings multiplied by the contract term plus non-recurring revenue signings
Renewal Rate = Annual recurring revenue (ARR) on contracts that are renewed during the period as a percentage of ARR on all contracts
for which a renewal decision was made during the period (excluding contracts for which a strategic decision to not renew was made based
on risk or profitability).
Renewal Rate (previous methodology) = Annual recurring revenue (ARR) on contracts that are renewed during the period as a
percentage of ARR on all contracts for which a renewal decision was made during the period (includes all contracts).
Revenue productivity = Calculated as trailing-twelve months (TTM) revenue / average quarter-end headcount for last four quarters.
Segment calculation excludes corporate headcount.
Updated accounting standard for revenue recognition = Estimated impact from adoption of new accounting standard for revenue
recognition would impact Conduent FY 2017 revenues by ~$165 million and FY 2017 Adjusted EBITDA by ~$15 million. There is no impact
to Free Cash Flow from this accounting standard adoption.
Non-GAAP Financial Measures
We have reported our financial results in accordance with U.S. generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures. We believe these non-GAAP measures allow
investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with U.S. GAAP, to exclude the effects
of certain items as well as their related tax effects. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. 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 U.S. GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as
a substitute for comparable U.S. GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP. Our management regularly uses our supplemental non-
GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions, and providing such non-GAAP financial measures to investors allows for a further level of transparency as to how management
reviews and evaluates our business results and trends. 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.
A reconciliation of the following non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are provided below.
These reconciliations also include the income tax effects for our non-GAAP performance measures in total, to the extent applicable. The income tax effects are calculated under the same accounting principles as applied to our reported pre-tax
performance measures under ASC 740, which employs an annual effective tax rate method. The noted income tax effect for our non-GAAP performance measures is effectively the difference in income taxes for reported and adjusted pre-tax income
calculated under the annual effective tax rate method. The tax effect of the non-GAAP adjustments was calculated based upon evaluation of the statutory tax treatment and the applicable statutory tax rate in the jurisdictions in which such charges
were incurred.
Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate.
We make adjustments to Income (Loss) before Income Taxes for the following items, for the purpose of calculating Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate:
• Goodwill Impairment. Represents Goodwill Impairment charge of $935 million.
• Amortization of intangible assets. The amortization of intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry from period to period.
• Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program.
• Separation costs. Separation costs are expenses incurred in connection with the separation from Xerox Corporation into a separate, independent, publicly traded company. These costs primarily relate to third-party investment banking,
accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies.
• Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net, litigation matters and all other (income) expenses, net.
• NY Medicaid Management Information System (NY MMIS). Costs associated with the company not fully completing the State of New York Health Enterprise platform project.
• Health Enterprise (HE charge). Cost associated with not fully completing the Health Enterprise Medical platform implementation projects in California and Montana.
• (Gain) loss on sale of asset and businesses.
The Company provides adjusted net income and adjusted EPS financial measures to assist our investors in evaluating our ongoing operating performance for the current reporting period and, where provided, over different reporting periods, by
adjusting for certain items which may be recurring or non-recurring and which in our view do not necessarily reflect ongoing performance. We also internally use these measures to assess our operating performance, both absolutely and in
comparison to other companies, and in evaluating or making selected compensation decisions.
The Company provides adjusted net income and adjusted EPS financial measures to assist our investors in evaluating our ongoing operating performance for the current reporting period and, where provided, over different reporting periods, by
adjusting for certain items which may be recurring or non-recurring and which in our view do not necessarily reflect ongoing performance. We also internally use these measures to assess our operating performance, both absolutely and in
comparison to other companies, and in evaluating or making selected compensation decisions.
Management believes that adjusted effective tax rate, provided as supplemental information, facilitates a comparison by investors of our actual effective tax rate with an adjusted effective tax rate which reflects the impact of the items which are
excluded in providing adjusted net income, and may provide added insight into our underlying business results and how effective tax rates impact our ongoing business.
Non-GAAP Financial Measures
25
Adjusted Revenue, Adjusted Operating Income and Adjusted Operating Margin.
We make adjustments to Revenue, Costs and Expenses and Margin for the following items (as defined above), for the purpose of calculating Adjusted Operating Income and Adjusted Operating Margin:
Goodwill Impairment.
• Goodwill Impairment.
• Amortization of intangible assets.
• Restructuring and related costs.
• Separation costs.
• Interest expense. Interest expense includes interest on long-term debt and amortization of debt issuance costs.
• Related Party Interest. Interest payments to former parent.
• Other (income) expenses, net.
• NY MMIS.
• HE charge.
• (Gain) loss of sale of asset and businesses.
We provide our investors with adjusted operating income and adjusted operating margin information, as supplemental information, because we believe it offers added insight, by itself and for comparability between periods, by
adjusting for certain non-cash items as well as certain other identified items which we do not believe are indicative of our ongoing business, and may also provide added insight on trends in our ongoing business.
Adjusted Other Segment Profit and Margin
We adjust our Other Segment profit and margin for NY MMIS and HE charge adjustments.
We provide Other segment adjusted loss and Other segment adjusted margin information, as supplemental information, because we believe that the adjustment for NY MMIS wind-down costs and HE charge, which we do not
believe are indicative of our ongoing business, supplementally provides investors added insight into underlying Other segment loss and gross margin results and trends, both by itself and in comparison to other periods.
.
Non-GAAP Financial Measures
26
Segment and Consolidated Adjusted EBITDA and EBITDA Margin
We use Adjusted EBITDA as an additional way of assessing certain aspects of our operations that, when viewed with the U.S. GAAP results and the accompanying reconciliations to corresponding U.S. GAAP financial measures, provide a more
complete understanding of our on-going business. We also use Adjusted EBITDA to provide additional information that is useful to understand the financial covenants contained in the Company’s credit facility and indenture. Adjusted EBITDA
represents Income (loss) before Interest, Income Taxes, Depreciation and Amortization adjusted for the following items (which are defined above):
• Goodwill impairment charge. During the fourth quarter 2016, we performed our annual goodwill impairment test which resulted in a non-cash impairment charge of $935 million in our Commercial Industries reporting unit.
• Restructuring and related costs.
• Separation costs.
• Other (income) expenses, net.
• NY MMIS / NY MMIS Depreciation. Costs associated with the company not fully completing the State of New York Health Enterprise platform project.
• HE charge / HE charge Depreciation.
• (Gain) loss on sale of asset and businesses.
• Business transformation costs (Segment only)
Adjusted EBITDA is not intended to represent cash flows from operations, operating income (loss) or net income (loss) as defined by U.S. GAAP as indicators of operating performance. Management cautions that amounts presented in accordance with
Conduent’s definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not a ll companies calculate Adjusted EBITDA in the same manner.
Adjusted Other Segment Revenue and Profit
We adjusted Other Segment revenue, profit and margin for the NY MMIS and HE charges.
Free Cash Flow
Free Cash Flow is defined as cash flows from operating activities as reported on the consolidated statement of cash flows, less cost of additions to land, buildings and equipment, cost of additions to internal use software, vendor financed capital lease
and proceeds from sales of land, buildings and equipment. We use the non-GAAP measure of Free Cash Flow as a criterion of liquidity and performance-based components of employee compensation. We use Free Cash Flow as a measure of liquidity
to determine amounts we can reinvest in our core businesses, such as amounts available to make acquisitions, invest in land, buildings and equipment and internal use software, make principal payments on debt. In order to provide a meaningful basis
for comparison, we are providing information with respect to our Free Cash Flow reconciled to cash flow provided by operating activities, which we believe to be the most directly comparable measure under U.S. GAAP.
Adjusted Free Cash Flow
Adjusted free cash flow is defined as free cash flow from above plus deferred compensation payments.
Adjusted Cash
Adjusted cash is defined as cash and cash equivalents less cash from terminated deferred compensation to be paid to plan participants.
Constant Currency
To better understand trends in our business, we believe that it is helpful to adjust revenue to exclude the impact of changes in the translation of foreign currencies into U.S. Dollars. We refer to this adjusted revenue as “constant currency.” Currency
impact can be determined as the difference between actual growth rates and constant currency growth rates. This currency impact is calculated by translating the current period activity in local currency using the comparable prior-year period's currency
translation rate.
Non-GAAP Outlook
In providing outlook for adjusted EBITDA we exclude certain items which are otherwise included in determining the comparable GAAP financial measure. A description of the adjustments which historically have been applicable in determining adjusted
EBITDA are reflected in the table below. We are providing such outlook only on a non-GAAP basis because the Company is unable to predict with reasonable certainty the totality or ultimate outcome or occurrence of these adjustments for the forward-
looking period, such as amortization, restructuring, separation costs, NY MMIS, HE charge, and certain other adjusted items, which can be dependent on future events that may not be reliably predicted. Based on past reported results, where one or
more of these items have been applicable, such excluded items could be material, individually or in the aggregate, to reported results.
Non-GAAP Financial Measures
27
Non-GAAP Reconciliation: Net Income (Loss) & EPS
Three Months Ended December 31, Years Ended December 31,
2017 2016 2017 2016
(in millions, except EPS)
Net Income
(Loss) Diluted EPS
Net Income
(Loss) Diluted EPS
Net Income
(Loss) Diluted EPS
Net Income
(Loss) Diluted EPS
GAAP as Reported From Continuing
Operations $ 208 $ 0.98 $ (951 ) $ (4.69 ) $ 177 $ 0.81 $ (983 ) $ (4.85 )
Adjustments:
Goodwill impairment — 935 — 935
Amortization of intangible assets 61 80 243 280
NY MMIS (1 ) 161 9 161
Restructuring and related costs 25 44 101 101
HE charge — — (8 ) —
Separation costs 4 10 12 44
(Gain) loss on sale of asset and businesses (1 ) 1 (42 ) 2
Other (income) expenses, net 6 12 (18 ) 18
Less: Income tax adjustments(1) (235 ) (231 ) (288 ) (335 )
Adjusted Net Income (Loss) and EPS $ 67 $ 0.31 $ 61 $ 0.29 $ 186 $ 0.85 $ 223 $ 1.06
(shares in thousands)
Weighted average common shares outstanding $ 204,607 $ 202,875 $ 204,007 $ 202,875
Stock options 131 — 195 —
Restricted stock and performance shares 3,133 — 2,491 —
8% Convertible preferred stock 5,393 — — —
Adjusted Weighted Average Shares
Outstanding(2) 213,264 202,875 206,693 202,875
(1) Reflects the income tax (expense) benefit of the adjustments. Refer to the Effective Tax Rate reconciliation details.
(2) Average shares for the 2017 calculation of adjusted EPS excludes 5 million shares associated with our Series A convertible preferred stock and includes the impact of the preferred stock quarterly
dividend of approximately $2.4 million and $10 million for the three months and year ended December 31, 2017. Average shares for the 2016 calculation of adjusted EPS includes 5 million shares associated
with our Series A convertible preferred stock and excludes the impact of the preferred stock quarterly dividend.
28
Non-GAAP Reconciliation: Effective Tax Rate
Three Months Ended December 31, 2017 Three Months Ended December 31, 2016
(in millions)
Pre-Tax Income
(Loss)
Income Tax
(Benefit) Expense Effective Tax Rate
Pre-Tax Income
(Loss)
Income Tax
(Benefit) Expense Effective Tax Rate
GAAP as Reported From
Continuing Operations $ 4 $ (204 ) (5,100.0 )% $ (1,141 ) $ (190 ) 16.7 %
Non-GAAP adjustments
Benefit from tax law changes — 198 — —
Other non-GAAP adjustments 94 37 1,243 231
Total non-GAAP adjustments(1) 94 235 1,243 231
Adjusted(2) $ 98 $ 31 31.6 % $ 102 $ 41 40.2 %
Year Ended December 31, 2017 Year Ended December 31, 2016
Pre-Tax Income
(Loss)
Income Tax
(Benefit) Expense Effective Tax Rate
Pre-Tax Income
(Loss)
Income Tax
(Benefit) Expense Effective Tax Rate
GAAP as Reported From
Continuing Operations $ (16 ) $ (193 ) 1,206.3 % $ (1,227 ) $ (244 ) 19.9 %
Non-GAAP adjustments
Benefit from tax law changes — 198 — —
Termination of COLI plan — (19 ) — —
Other non-GAAP adjustments 297 109 1,541 335
Total non-GAAP adjustments(1) 297 288 1,541 335
Adjusted(2) $ 281 $ 95 33.8 % $ 314 $ 91 29.0 %
(1) Refer to Net Income (Loss) reconciliation for details of non-GAAP adjustments.
(2) The tax impact of Adjusted Pre-Tax Income (Loss) from continuing operations is calculated under the same accounting principles applied to the As Reported Pre-Tax Income (Loss), which employs an
annual effective tax rate method to the results.
29
(in millions) Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Full Year 2016 Full Year 2017
GAAP Revenue From Continuing Operations $ 1,514 $ 1,553 $ 1,496 $ 1,480 $ 1,493 $ 6,408 $ 6,022
GAAP Pre-tax (Loss) Income From Continuing Operations (1,141 ) (22 ) (11 ) 13 4 (1,227 ) (16 )
GAAP Operating Margin As Reported (75.4 )% (1.4 )% (0.7 )% 0.9 % 0.3 % (19.1 )% (0.3 )%
GAAP Revenue From Continuing Operations $ 1,514 $ 1,553 $ 1,496 $ 1,480 $ 1,493 $ 6,408 $ 6,022
NY MMIS adjustment 83 — — — — 83 —
Adjusted Revenue $ 1,597 $ 1,553 $ 1,496 $ 1,480 $ 1,493 $ 6,491 $ 6,022
GAAP Pre-tax (Loss) Income From Continuing
Operations $ (1,141 ) $ (22 ) $ (11 ) $ 13 $ 4 $ (1,227 ) $ (16 )
Adjustments:
Goodwill impairment 935 — — — — 935 —
Amortization of intangible assets 80 61 61 60 61 280 243
NY MMIS 161 8 1 1 (1 ) 161 9
Restructuring and related costs 44 18 36 22 25 101 101
HE charge — (5 ) — (3 ) — — (8 )
Separation costs 10 5 1 2 4 44 12
Interest expense 11 36 34 35 32 14 137
Related party interest (4 ) — — — — 26 —
(Gain) loss on sale of asset and businesses 1 — (25 ) (16 ) (1 ) 2 (42 )
Other (income) expenses, net 12 (12 ) (9 ) (3 ) 6 18 (18 )
Adjusted Operating Income/Margin $ 109 $ 89 $ 88 $ 111 $ 130 $ 354 $ 418
Adjusted Operating Margin 6.8 % 5.7 % 5.9 % 7.5 % 8.7 % 5.5 % 6.9 %
Non-GAAP Reconciliation: Revenue and Operating Income /
Margin
30
Non-GAAP Reconciliation: Adjusted EBITDA
(in millions) Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Full Year 2016 Full Year 2017
Reconciliation to Adjusted Revenue
GAAP Revenue From Continuing Operations $ 1,514 $ 1,553 $ 1,496 $ 1,480 $ 1,493 $ 6,408 $ 6,022
NY MMIS adjustment 83 — — — — 83 —
Adjusted Revenue $ 1,597 $ 1,553 $ 1,496 $ 1,480 $ 1,493 $ 6,491 $ 6,022
Reconciliation to Adjusted EBITDA
GAAP Net Income (Loss) from Continuing Operations $ (951 ) $ (10 ) $ (4 ) $ (17 ) $ 208 $ (983 ) $ 177
Interest Expense 11 36 34 35 32 14 137
Related Party Interest (4 ) — — — — 26 —
Income tax benefits (190 ) (12 ) (7 ) 30 (204 ) (244 ) (193 )
Depreciation 36 31 34 31 29 128 125
Amortization 159 94 96 92 90 485 372
EBITDA $ (939 ) $ 139 $ 153 $ 171 $ 155 $ (574 ) $ 618
EBITDA Margin (62.0 )% 9.0 % 10.2 % 11.6 % 10.4 % (9.0 )% 10.3 %
EBITDA $ (939 ) $ 139 $ 153 $ 171 $ 155 $ (574 ) $ 618
Adjustments:
Goodwill impairment 935 — — — — 935 —
Restructuring and related costs 44 18 36 22 25 101 101
Separation costs 10 5 1 2 4 44 12
NY MMIS 161 8 1 1 (1 ) 161 9
NY MMIS depreciation (52 ) — — — — (52 ) —
HE charge — (5 ) — (3 ) — — (8 )
(Gain) Loss on sale of assets and business 1 — (25 ) (16 ) (1 ) 2 (42 )
Other (income) expenses, net 12 (12 ) (9 ) (3 ) 6 18 (18 )
Adjusted EBITDA 172 153 157 174 188 635 672
Adjusted EBITDA Margin 10.8 % 9.9 % 10.5 % 11.8 % 12.6 % 9.8 % 11.2 %
(1) Pre-tax loss and Revenue from continuing operations
31
Non-GAAP Reconciliation: Segment Adjusted EBITDA
(in millions) Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 FY 2016 FY 2017
Commercial Industries
Segment GAAP revenue $ 936 $ 923 $ 876 $ 864 $ 885 $ 3,805 $ 3,548
Segment profit $ 48 $ 29 $ 32 $ 53 $ 68 $ 151 $ 182
Depreciation & amortization 33 41 43 40 38 162 162
Adjusted Segment EBITDA 81 70 75 93 106 313 344
Adjusted EBITDA Margin 8.7 % 7.6 % 8.6 % 10.8 % 12.0 % 8.2 % 9.7 %
Public Sector
Segment GAAP revenue $ 574 $ 549 $ 540 $ 540 $ 534 $ 2,308 $ 2,163
Segment profit $ 76 $ 61 $ 59 $ 59 $ 66 $ 293 $ 245
Depreciation & amortization 26 21 24 22 18 102 85
Adjusted Segment EBITDA 102 82 83 81 84 395 330
Adjusted EBITDA Margin 17.8 % 14.9 % 15.4 % 15.0 % 15.7 % 17.1 % 15.3 %
Other Segment
Segment GAAP revenue $ 4 $ 81
8
1 $ 80 $ 76 $ 74 $ 295 $ 311
NY MMIS charge 83 — — — — 83 —
Adjusted Segment Revenue $ 87 $ 81 $ 80 $ 76 $ 74 $ 378 $ 311
GAAP Segment profit (loss) $ (173 ) $ (4 ) $ (4 ) $ 1 $ (3 ) $ (248 ) $ (10 )
NY MMIS charge 133 8 1 1 (1 ) 133 9
HE charge 28 (5 ) — (3 ) — 28 (8 )
Adjusted Other Segment
Loss (12 ) (1 ) (3 ) (1 ) (4 ) (87 ) (9 )
Depreciation & amortization 56 2 2 1 2 69 7
NY MMIS depreciation (24 ) — — — — (24 ) —
HE depreciation (28 ) — — — — (28 ) —
Business transformation
costs (3 ) — — — — (3 ) —
Adjusted Segment EBITDA $ (11 ) $ 1 $ (1 ) $ — $ (2 ) $ (73 ) $ (2 )
Adjusted EBITDA Margin (12.6 )% 1.2 % (1.3 )% — % (2.7 )% (19.3 )% (0.6 )%
32
Non-GAAP Reconciliation: Other Segment
Revenue and Profit (Loss)
33
Q4 Q1 Q2 Q3 Q4 FY FY
(in millions) 2016 2017 2017 2017 2017 2016 2017
Reconciliation to Other Segment Adjusted Revenue
Segment revenue as reported $ 4 $ 81 $ 80 $ 76 $ 74 $ 295 $ 311
Adjustments:
NY MMIS 83 — — — — 83 —
Adjusted Other Segment Revenue $ 87 $ 81 $ 80 $ 76 $ 74 $ 378 $ 311
Reconciliation to Other Segment Adjusted Profit
Segment profit (loss) as reported $ (173 ) $ (4 ) $ (4 ) $ 1 $ (3 ) $ (248 ) $ (10 )
Adjustments:
NY MMIS 161 8 1 1 (1 ) 161 9
HE Charge — (5 ) — (3 ) — — (8 )
Adjusted Other Segment Profit (Loss) $ (12 ) $ (1 ) $ (3 ) $ (1 ) $ (4 ) $ (87 ) $ (9 )
Non-GAAP Reconciliation: Adjusted Free
Cash Flow
34
Three Months Ended
December 31,
Years Ended December
31,
(in millions) 2017 2016 2017 2016
Operating Cash Flow $ 237 $ 146 $ 302 $ 108
Cost of additions to land, buildings & equipment (39 ) (63 ) (96 ) (149 )
Cost of additions to internal use software (10 ) (8 ) (36 ) (39 )
Proceeds from sales of land, buildings and equipment — — 33 —
Vendor financed capital leases — (1 ) (16 ) (1 )
Deferred compensation payments 17 — 17 —
Adjusted Free Cash Flow $ 205 $ 74 $ 204 $ (81 )
35
Non-GAAP Reconciliation: Adjusted Cash
(in millions)
As of
September 30,
2017
As of
December 31,
2017
As of
December 31,
2016
Cash and cash equivalents $ 468 $ 658 $ 390
Deferred compensation paid in 2017 — 17 —
Deferred compensation payable (116 ) (116 ) —
Adjusted cash and cash equivalents $ 352 $ 559 $ 390
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