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 20, 2019
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 20, 2019, Registrant released its fourth quarter 2018 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 20, 2019, Registrant conducted an earnings call regarding its 2018 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 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: government appropriations and 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 information systems or security systems or any service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our continuing emphasis on and shift toward technology-led digital transactions; customer decision-making cycles and lead time for customer commitments; 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 modernize our information technology infrastructure and consolidate data centers; our ability to comply with data security standards; 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 2017 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.
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 20, 2019
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 Full Year 2018 Results; Improved New Business Signings, Strong Cash Generation and Overachieved on Transformation Initiative
Q4 2018 Financial and Operational Highlights
• | Revenue of $1,282 million |
• | GAAP diluted EPS from continuing operations of $(0.69), down $(1.67) yr/yr; adjusted diluted EPS from continuing operations of $0.26, down (16.1)% |
• | Net Income from continuing operations of $(140) million; Adjusted net income of $58 million |
• | Adjusted EBITDA of $156 million, up 0.6%, excluding impact from ASC 606 and divestitures |
• | Total signings TCV up 7.4%, driven by new business TCV signings up 6.3% yr/yr |
Full Year 2018 Financial and Operational Highlights
• | Revenue of $5,393 million |
• | GAAP diluted EPS from continuing operations of $(2.06), down $(2.87) yr/yr; adjusted diluted EPS from continuing operations of $1.05, up 23.5% |
• | Net Income from continuing operations of $(416) million; Adjusted net income of $230 million |
• | Adjusted EBITDA of $640 million, up 7.0%, excluding impact from ASC 606 and divestitures |
• | Total signings TCV up 25.8% yr/yr |
• | Exceeded 3-year transformation initiative targets; achieved ~$730M of cumulative savings |
FLORHAM PARK, NJ, February 20, 2019 - Conduent (NYSE: CNDT), a digital interactions company, today announced its fourth quarter and full year 2018 financial results.
EXHIBIT 99.1
"We made solid progress on a number of fronts in 2018 and are executing to our strategy,” said Ashok Vemuri, CEO of Conduent. “Our new business efforts are gaining traction particularly with our digital platforms and solutions driving signings growth of 6% in the fourth quarter. In addition, we have successfully resolved the Texas litigation, completed our non-core divestitures and exceeded our three-year transformation target, allowing us to now focus solely on growing the core business."
Full Year 2018 Results
Full year 2018 revenue was $5,393 million, down (10.4)% compared to 2017. Adjusting for the impact of the 606 accounting standard and excluding divestitures completed in Q3 2017 and 2018, revenue was down (3.8)% compared with 2017.
Pre-tax income was $(395) million compared to $(16) million in 2017. The company reported full year 2018 GAAP net income of $(416) million compared to $181 million in 2017. Diluted EPS from continuing operations was $(2.06) versus $0.81 in 2017, driven primarily by the Q4 2017 tax reform impact, litigation costs, and an impairment associated with the sale of the portfolio of customer care contracts.
Full year adjusted operating income was $419 million, with an adjusted operating margin of 7.8% as compared to adjusted operating income of $418 million, with an adjusted operating margin of 6.9% in 2017. Adjusted EBITDA was $640 million, with an adjusted EBITDA margin of 11.9%, as compared to $672 million, with an adjusted EBITDA margin of 11.2% in 2017. Further adjusting for the impact of the 606 accounting standard and excluding divestitures completed in Q3 2017 and 2018, Adjusted EBITDA improved 7.0% compared with 2017.
The company reported adjusted diluted EPS from continuing operations in 2018 of $1.05 compared to $0.85 in 2017.
Conduent had cash flow from operations of $283 million during 2018 and ended the year with a cash balance of $756 million. Total debt was $1,567 million as of December 31, 2018.
Headcount of approximately 82,000 as of December 31, 2018 compared with approximately 90,000 as of December 31, 2017.
Total contract value (TCV) signings of $5,445 million for the year were up 26% compared with 2017, driven primarily by a 67% increase in renewal TCV.
EXHIBIT 99.1
Fourth Quarter 2018 Results
Fourth quarter 2018 revenue was $1,282 million, down (14.1)% compared to Q4 2017. Adjusting for the impact of the 606 accounting standard and excluding divestitures completed in Q3 2017 and 2018, revenue was down (3.7)% compared with Q4 2017.
Pre-tax income was $(143) million compared to $4 million in Q4 2017. GAAP operating margin as reported was (11.2)% compared to 0.3% in Q4 2017. The company reported Q4 2018 GAAP net income of $(140) million compared to $208 million in Q4 2017. Diluted EPS from continuing operations was ($0.69) versus $0.98 in the same period last year, driven primarily by the Q4 2017 tax reform impact, divestiture transaction costs, litigation costs, and an impairment associated with the sale of the portfolio of customer care contracts.
Fourth quarter adjusted operating income was $101 million, with an adjusted operating margin of 7.9% as compared to adjusted operating income of $130 million, with an adjusted operating margin of 8.7% in Q4 2017. Adjusted EBITDA was $156 million, with an adjusted EBITDA margin of 12.2%, as compared to $188 million, with an adjusted EBITDA margin of 12.6% in Q4 2017. Further adjusting for the impact of the 606 accounting standard and excluding divestitures completed in Q3 2017 and 2018, Adjusted EBITDA improved 0.6% compared with Q4 2017.
The company reported adjusted diluted EPS from continuing operations of $0.26 compared to $0.31 in Q4 2017.
Conduent had cash flow from operations of $253 million during the fourth quarter of 2018 compared to $236 million in the Q4 2017.
Total contract value (TCV) signings of $1,527 million for the quarter were up 7% compared with Q4 2017, due to a 6% and 8% year-over-year increase in new business and renewal signings respectively. New business TCV growth included contracts with a large insurance carrier to provide end-to-end workers compensation services and a large global transit agency to provide automated ticketing services.
EXHIBIT 99.1
Financial and Strategic Outlook
Conduent provided the following guidance ranges for FY 2019:
(in millions) | FY 2018 Reported | Divestiture Impact | Adjusted FY 2018(3) | Includes No Additional M&A FY 2019 Guidance | |||
Revenue (constant currency)(1) | $5.39B | $752M | $4.64B | Up 0.5 - 1.5% | |||
Adj. EBITDA(2) | $640M | $105M | $535M | $590 - $610M Up 10 - 14% | |||
Adj. EBITDA Margin(2) | 11.9% | 11.5% | 12.5 - 13.1% | ||||
Adj. Free Cash Flow(2) | $218M | ~35% of Adj. EBITDA | |||||
% of Adj. EBITDA | 34.1% | ||||||
Note: Please refer to the "Non-GAAP Outlook" below for certain information concerning outlook.
(1) Year-over-year revenue growth comparison at constant currency
(2) Refer to Appendix for Non-GAAP reconciliations of adjusted EBITDA / margin and adjusted FCF and for impact from ASC 606 accounting change and divestitures. FY 2019 FCF adjusted for Texas-related litigation impact
(3) Adjusted for accounting 606, 2017 and 2018 divestitures, and select Stand Alone Customer Care contracts in run-off
"We ended the year in a strong financial position with a healthy balance sheet, improving margin profile and Free Cash Flow above our most recent guidance range," said Brian Webb-Walsh, CFO of Conduent. "The progress that we have made in paying down debt and improving cash generation positions us to deploy capital to support our growth initiatives and drive shareholder value."
Conference Call
Management will present the results during a conference call and webcast on February 20, 2019 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 1-877-883-0383 (international dial-in 1-412-902-6506) at approximately 9:45 a.m. ET. The entry number for this call is 6287313.
A recording of the conference call will be available by calling 1-877-344-7529, or 1-412-317-0088 one hour after the conference call concludes on February 20, 2019. The replay ID is 10128582.
EXHIBIT 99.1
For international calls, please select a dial-in number from:
https://services.choruscall.com/ccforms/replay.html
About Conduent
Conduent creates digital platforms and services for businesses and governments to manage millions of interactions every day for those they serve. We are leveraging the power of cloud, mobile and IoT, combined with technologies such as automation, cognitive and blockchain to elevate every constituent interaction, driving modern digital experiences that are more efficient, helpful and satisfying.
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 serves a majority of the Fortune 100 companies and more than 500 government entities. Learn more at www.conduent.com.
EXHIBIT 99.1
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 certain 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.
EXHIBIT 99.1
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: government appropriations and 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 information systems or security systems or any service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our continuing emphasis on and shift toward technology-led digital transactions; customer decision-making cycles and lead time for customer commitments; 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 modernize our information technology infrastructure and consolidate data centers; our ability to comply with data security standards; 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 2017 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.
EXHIBIT 99.1
# # #
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, | Twelve Months Ended December 31, | |||||||||||||||
(in millions, except per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue | $ | 1,282 | $ | 1,493 | $ | 5,393 | $ | 6,022 | ||||||||
Cost of Services (excluding depreciation and amortization) | 989 | 1,154 | 4,182 | 4,730 | ||||||||||||
Gross Margin | 293 | 339 | 1,211 | 1,292 | ||||||||||||
Operating Costs and Expenses | ||||||||||||||||
Research and development (excluding depreciation and amortization) | 4 | 2 | 11 | 12 | ||||||||||||
Selling, general and administrative (excluding depreciation and amortization) | 133 | 148 | 560 | 611 | ||||||||||||
Restructuring and related costs | 13 | 25 | 81 | 101 | ||||||||||||
Depreciation and amortization | 115 | 119 | 460 | 495 | ||||||||||||
Interest expense | 20 | 32 | 112 | 137 | ||||||||||||
Separation costs | — | 4 | — | 12 | ||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | 42 | (42 | ) | ||||||||||
Litigation costs (recoveries), net | 114 | 3 | 227 | (11 | ) | |||||||||||
(Gain) loss on extinguishment of debt | — | — | 108 | — | ||||||||||||
Other (income) expenses, net | 4 | 3 | 5 | (7 | ) | |||||||||||
Total Operating Costs and Expenses | 436 | 335 | 1,606 | 1,308 | ||||||||||||
Income (Loss) Before Income Taxes | (143 | ) | 4 | (395 | ) | (16 | ) | |||||||||
Income tax expense (benefit) | (3 | ) | (204 | ) | 21 | (193 | ) | |||||||||
Income (Loss) From Continuing Operations | (140 | ) | 208 | (416 | ) | 177 | ||||||||||
Income (loss) from discontinued operations, net of tax | — | — | — | 4 | ||||||||||||
Net Income (Loss) | $ | (140 | ) | $ | 208 | $ | (416 | ) | $ | 181 | ||||||
Basic Earnings (Loss) per Share: | ||||||||||||||||
Continuing operations | $ | (0.69 | ) | $ | 1.00 | $ | (2.06 | ) | $ | 0.82 | ||||||
Discontinued operations | — | — | — | 0.02 | ||||||||||||
Total Basic Earnings (Loss) per Share | $ | (0.69 | ) | $ | 1.00 | $ | (2.06 | ) | $ | 0.84 | ||||||
Diluted Earnings (Loss) per Share: | ||||||||||||||||
Continuing operations | $ | (0.69 | ) | $ | 0.98 | $ | (2.06 | ) | $ | 0.81 | ||||||
Discontinued operations | — | — | — | 0.02 | ||||||||||||
Total Diluted Earnings (Loss) per Share | $ | (0.69 | ) | $ | 0.98 | $ | (2.06 | ) | $ | 0.83 | ||||||
EXHIBIT 99.1
CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended December 31, | Twelve Months Ended December 31, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net Income (Loss) | $ | (140 | ) | $ | 208 | $ | (416 | ) | $ | 181 | ||||||
Other Comprehensive Income (Loss), Net | ||||||||||||||||
Currency translation adjustments, net | (4 | ) | 1 | (31 | ) | 35 | ||||||||||
Reclassification of currency translation adjustments on divestitures | 1 | — | 42 | — | ||||||||||||
Reclassification of divested benefit plans and other | (2 | ) | — | 62 | — | |||||||||||
Unrecognized gains (loss), net | 4 | — | 1 | 2 | ||||||||||||
Changes in benefit plans, net | — | (5 | ) | — | (5 | ) | ||||||||||
Other Comprehensive Income (Loss), Net | (1 | ) | (4 | ) | 74 | 32 | ||||||||||
Comprehensive Income (Loss), Net | $ | (141 | ) | $ | 204 | $ | (342 | ) | $ | 213 | ||||||
EXHIBIT 99.1
CONDUENT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands) | December 31, 2018 | December 31, 2017 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 756 | $ | 658 | ||||
Accounts receivable, net | 782 | 1,114 | ||||||
Assets held for sale | 15 | 757 | ||||||
Contract assets | 177 | — | ||||||
Other current assets | 234 | 181 | ||||||
Total current assets | 1,964 | 2,710 | ||||||
Land, buildings and equipment, net | 328 | 257 | ||||||
Intangible assets, net | 651 | 891 | ||||||
Goodwill | 3,408 | 3,366 | ||||||
Other long-term assets | 329 | 324 | ||||||
Total Assets | $ | 6,680 | $ | 7,548 | ||||
Liabilities and Equity | ||||||||
Current portion of long-term debt | $ | 55 | $ | 82 | ||||
Accounts payable | 230 | 118 | ||||||
Accrued compensation and benefits costs | 193 | 355 | ||||||
Unearned income | 112 | 151 | ||||||
Liabilities held for sale | 40 | 169 | ||||||
Other current liabilities | 567 | 493 | ||||||
Total current liabilities | 1,197 | 1,368 | ||||||
Long-term debt | 1,512 | 1,979 | ||||||
Deferred taxes | 327 | 384 | ||||||
Other long-term liabilities | 280 | 146 | ||||||
Total Liabilities | 3,316 | 3,877 | ||||||
Contingencies | ||||||||
Series A convertible preferred stock | 142 | 142 | ||||||
Common stock | 2 | 2 | ||||||
Additional paid-in capital | 3,878 | 3,850 | ||||||
Retained earnings (deficit) | (233 | ) | 171 | |||||
Accumulated other comprehensive loss | (425 | ) | (494 | ) | ||||
Total Equity | 3,222 | 3,529 | ||||||
Total Liabilities and Equity | $ | 6,680 | $ | 7,548 | ||||
Shares of common stock issued and outstanding | 211,306 | 210,440 | ||||||
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, | Twelve Months Ended December 31, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net income (loss) | $ | (140 | ) | $ | 208 | $ | (416 | ) | $ | 181 | ||||||
Adjustments required to reconcile net income (loss) to cash flows from operating activities: | ||||||||||||||||
Depreciation and amortization | 115 | 119 | 460 | 495 | ||||||||||||
Contract inducement amortization | 1 | — | 3 | 2 | ||||||||||||
Deferred income taxes | 15 | (223 | ) | (75 | ) | (230 | ) | |||||||||
(Gain) loss from investments | (1 | ) | — | (2 | ) | (10 | ) | |||||||||
Amortization of debt financing costs | 2 | 2 | 11 | 9 | ||||||||||||
(Gain) loss on extinguishment of debt | — | — | 108 | — | ||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | 42 | (42 | ) | ||||||||||
Stock-based compensation | 8 | 14 | 38 | 40 | ||||||||||||
Changes in operating assets and liabilities | 220 | 119 | 118 | (130 | ) | |||||||||||
Other operating, net | — | (2 | ) | (4 | ) | (15 | ) | |||||||||
Net cash provided by (used in) operating activities | 253 | 236 | 283 | 300 | ||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Cost of additions to land, buildings and equipment | (60 | ) | (39 | ) | (179 | ) | (96 | ) | ||||||||
Proceeds from sale of land, buildings and equipment | 1 | — | 13 | 33 | ||||||||||||
Cost of additions to internal use software | (14 | ) | (10 | ) | (45 | ) | (36 | ) | ||||||||
Proceeds from investments | 1 | — | 1 | 117 | ||||||||||||
Proceeds from divestitures and sale of assets, net of cash | 3 | — | 675 | 56 | ||||||||||||
Other investing, net | (5 | ) | 1 | (5 | ) | — | ||||||||||
Net cash provided by (used in) investing activities | (74 | ) | (48 | ) | 460 | 74 | ||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Proceeds on long-term debt | — | — | — | 306 | ||||||||||||
Debt issuance fee payments | — | 1 | (3 | ) | (8 | ) | ||||||||||
Payments on debt | (6 | ) | (9 | ) | (519 | ) | (241 | ) | ||||||||
Premium on debt redemption | — | — | (95 | ) | — | |||||||||||
Net payments to former parent company | — | — | — | (161 | ) | |||||||||||
Taxes paid for settlement of stock based compensation | (1 | ) | — | (10 | ) | (5 | ) | |||||||||
Dividends paid on preferred stock | (3 | ) | (3 | ) | (10 | ) | (10 | ) | ||||||||
Other financing | — | (2 | ) | — | (5 | ) | ||||||||||
Net cash provided by (used in) financing activities | (10 | ) | (13 | ) | (637 | ) | (124 | ) | ||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1 | (1 | ) | (8 | ) | 1 | ||||||||||
Increase (decrease) in cash, cash equivalents and restricted cash | 170 | 174 | 98 | 251 | ||||||||||||
Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 595 | 493 | 667 | 416 | ||||||||||||
Cash, Cash Equivalents and Restricted Cash at End of period(1) | $ | 765 | $ | 667 | $ | 765 | $ | 667 | ||||||||
___________
(1) | Includes $9 million and $9 million of restricted cash as of December 31, 2018 and 2017, respectively, that were included in Other current assets on the Condensed Consolidated Balance Sheets. |
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 certain 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:
• | Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program. |
• | Amortization of acquired intangible assets. The amortization of acquired intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period. |
• | Separation costs. Separation costs are expenses incurred in connection with 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. |
• | (Gain) loss on divestitures and transaction costs. Represents (gain) loss on divested businesses and transaction costs. |
• | Litigation costs (recoveries), net. Litigation costs (recoveries), net represents reserves for the State of Texas litigation, Student Loan Service exposures and certain terminated contracts that are subject to litigation. |
• | (Gain) loss on extinguishment of debt. Represents premium on debt extinguishment and write down of the associated unamortized discount and issuance costs. |
• | Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net and all other (income) expenses, net. |
• | NY MMIS charge (credit). Costs associated with the Company not fully completing the State of New York Health Enterprise Platform project. |
• | HE charge (credit). Costs associated with not fully completing the Health Enterprise Medical platform projects in California and Montana. |
• | ASC 606 adjustment. |
EXHIBIT 99.1
• | (Revenue) / (Income) loss from divestitures. |
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 the 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 certain other identified items, 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 Revenue, Adjusted Operating Income and Adjusted Operating Margin:
• | Restructuring and related costs. |
• | Amortization of acquired intangible assets. |
• | Interest expense. Interest expense includes interest on long-term debt and amortization of debt issuance costs. |
• | Separation costs. |
• | (Gain) loss on divestitures and transaction costs. |
• | Litigation costs (recoveries), net. |
• | (Gain) loss on extinguishment of debt. |
• | Other (income) expenses, net. |
• | NY MMIS charge (credit). |
• | HE charge (credit). |
• | ASC 606 adjustment. |
• | (Revenue) / (Income) loss from divestitures. |
We provide our investors with adjusted revenue, 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 and Adjusted EBITDA Margin 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. Adjusted EBITDA margin is Adjusted EBITDA divided by adjusted revenue.
• | Restructuring and related costs. |
• | Separation costs. |
• | (Gain) loss on divestitures and transaction costs. |
• | Litigation costs (recoveries), net. |
• | (Gain) loss on extinguishment of debt. |
• | Other (income) expenses, net. |
• | NY MMIS charge (credit). |
• | HE charge (credit). |
• | ASC 606 adjustment. |
• | (Revenue) / (Income) loss from divestitures. |
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
EXHIBIT 99.1
presented in accordance with Conduent's definition of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similar measures disclosed by other companies because not all companies calculate Adjusted EBITDA and Adjusted EBITDA margin in the same manner.
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, tax payments related to divestitures, 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, after required principal payments on debt, 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. 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, transaction costs, costs related to the Texas litigation and other identified items.
Adjusted Cash
Adjusted cash is defined as the cash and cash equivalents less cash from terminated deferred compensation to be paid to plan participants. We believe this provides added insight into cash and cash equivalents taking into account this particular cash obligation.
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 and is calculated by translating current period activity in local currency using the comparable prior 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. We have provided an outlook for revenue on a constant currency basis due to the inability to accurately predict foreign currency impact on revenues. Outlook for Free Cash Flow and Adjusted Free Cash Flow is provided as a factor of expected adjusted EBITDA, see above.
EXHIBIT 99.1
Net Income (Loss) and EPS Reconciliation:
Three Months Ended | Years Ended | |||||||||||||||||||||||||||||||
December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
(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 | $ | (140 | ) | $ | (0.69 | ) | $ | 208 | $ | 0.98 | $ | (416 | ) | $ | (2.06 | ) | $ | 177 | $ | 0.81 | ||||||||||||
Adjustments: | ||||||||||||||||||||||||||||||||
Restructuring and related costs | 13 | 25 | 81 | 101 | ||||||||||||||||||||||||||||
Amortization of acquired intangible assets | 61 | 61 | 242 | 243 | ||||||||||||||||||||||||||||
Separation costs | — | 4 | — | 12 | ||||||||||||||||||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | 42 | (42 | ) | ||||||||||||||||||||||||||
Litigation costs (recoveries), net | 114 | 3 | 227 | (11 | ) | |||||||||||||||||||||||||||
(Gain) loss on extinguishment of debt | — | — | 108 | — | ||||||||||||||||||||||||||||
Other (income) expenses, net | 4 | 3 | 5 | (7 | ) | |||||||||||||||||||||||||||
NY MMIS charge (credit) | — | (1 | ) | (2 | ) | 9 | ||||||||||||||||||||||||||
HE charge (credit) | (1 | ) | — | (1 | ) | (8 | ) | |||||||||||||||||||||||||
Less: Income tax adjustments(1) | (26 | ) | (235 | ) | (56 | ) | (288 | ) | ||||||||||||||||||||||||
Adjusted Net Income (Loss) and EPS | $ | 58 | $ | 0.26 | $ | 67 | $ | 0.31 | $ | 230 | $ | 1.05 | $ | 186 | $ | 0.85 | ||||||||||||||||
(GAAP shares) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding | 207 | 205 | 206 | 204 | ||||||||||||||||||||||||||||
Restricted stock and performance units / shares | — | 3 | — | 3 | ||||||||||||||||||||||||||||
Adjusted Weighted Average Shares Outstanding(2) | 207 | 208 | 206 | 207 | ||||||||||||||||||||||||||||
(Non-GAAP shares) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding | 207 | 205 | 206 | 204 | ||||||||||||||||||||||||||||
Restricted stock and performance shares | 3 | 3 | 3 | 3 | ||||||||||||||||||||||||||||
8% Convertible preferred stock | — | 5 | — | — | ||||||||||||||||||||||||||||
Adjusted Weighted Average Shares Outstanding | 210 | 213 | 209 | 207 | ||||||||||||||||||||||||||||
EXHIBIT 99.1
Three Months Ended | Years Ended | |||||||||||||||||||||||||||||||
Adjusted for 606 and Divestitures | Adjusted for 606 and Divestitures | |||||||||||||||||||||||||||||||
December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
(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 | $ | (140 | ) | $ | (0.69 | ) | $ | 208 | $ | 0.98 | (416 | ) | $ | (2.06 | ) | 177 | $ | 0.81 | ||||||||||||||
Adjustments: | ||||||||||||||||||||||||||||||||
Restructuring and related costs | 13 | 25 | 81 | 101 | ||||||||||||||||||||||||||||
Amortization of acquired intangible assets | 61 | 61 | 242 | 243 | ||||||||||||||||||||||||||||
Separation costs | — | 4 | — | 12 | ||||||||||||||||||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | 42 | (42 | ) | ||||||||||||||||||||||||||
Litigation costs (recoveries), net | 114 | 3 | 227 | (11 | ) | |||||||||||||||||||||||||||
(Gain) loss on extinguishment of debt | — | — | 108 | — | ||||||||||||||||||||||||||||
Other (income) expenses, net | 4 | 3 | 5 | (7 | ) | |||||||||||||||||||||||||||
NY MMIS charge (credit) | — | (1 | ) | (2 | ) | 9 | ||||||||||||||||||||||||||
HE charge (credit) | (1 | ) | — | (1 | ) | (8 | ) | |||||||||||||||||||||||||
ASC 606 adjustment | — | (3 | ) | — | (11 | ) | ||||||||||||||||||||||||||
2017 divestitures | — | — | — | (7 | ) | |||||||||||||||||||||||||||
2018 divestitures | — | (29 | ) | — | (56 | ) | ||||||||||||||||||||||||||
Less: Income tax adjustments(1) | (26 | ) | (235 | ) | (56 | ) | (288 | ) | ||||||||||||||||||||||||
Adjusted Net Income (Loss) and EPS | $ | 58 | $ | 0.26 | $ | 35 | $ | 0.15 | $ | 230 | $ | 1.05 | $ | 112 | $ | 0.49 | ||||||||||||||||
(GAAP shares) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding | 207 | 205 | 206 | 204 | ||||||||||||||||||||||||||||
Restricted stock and performance units / shares | — | 3 | — | 3 | ||||||||||||||||||||||||||||
Adjusted Weighted Average Shares Outstanding(2) | 207 | 208 | 206 | 207 | ||||||||||||||||||||||||||||
(Non-GAAP shares) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding | 207 | 205 | 206 | 204 | ||||||||||||||||||||||||||||
Restricted stock and performance shares | 3 | 3 | 3 | 3 | ||||||||||||||||||||||||||||
8% Convertible preferred stock | — | 5 | — | — | ||||||||||||||||||||||||||||
Adjusted Weighted Average Shares Outstanding | 210 | 213 | 209 | 207 | ||||||||||||||||||||||||||||
___________
(1) | Reflects the income tax (expense) benefit of the adjustments. Refer to Effective Tax Rate reconciliation below for details. |
(2) | Average shares for the 2018 and 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 dividend of $2.4 million for both of the three months ended December 31, 2018 and 2017 and $10 million for both of the years ended December 31, 2018 and 2017, respectively. |
Effective Tax Rate Reconciliation:
Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | |||||||||||||||||||||
(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 | $ | (143 | ) | $ | (3 | ) | 2.1 | % | $ | 4 | $ | (204 | ) | |||||||||
Benefit from tax law changes | — | — | — | 198 | ||||||||||||||||||
Other Non-GAAP adjustments | 224 | 26 | 94 | 37 | ||||||||||||||||||
Total non-GAAP adjustments(1) | 224 | 26 | 94 | 235 | ||||||||||||||||||
Adjusted(2) | $ | 81 | $ | 23 | 28.4 | % | $ | 98 | $ | 31 | 31.6 | % | ||||||||||
EXHIBIT 99.1
Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||
(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 | $ | (395 | ) | $ | 21 | (5.3 | )% | $ | (16 | ) | $ | (193 | ) | |||||||||
Benefit from tax law changes | — | — | — | 198 | ||||||||||||||||||
Termination of COLI plan | — | — | — | (19 | ) | |||||||||||||||||
Other Non-GAAP adjustments | 702 | 56 | 297 | 109 | ||||||||||||||||||
Total Non-GAAP adjustments(1) | 702 | 56 | 297 | 288 | ||||||||||||||||||
Adjusted(2) | $ | 307 | $ | 77 | 25.1 | % | $ | 281 | $ | 95 | 33.8 | % | ||||||||||
__________
(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 was 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 and without regard to the business divestitures, the State of Texas litigation reserve, loss on extinguishment of debt, charges for amortization of intangible assets, restructuring and divestiture related costs. |
Revenue and Operating Income / Margin Reconciliation:
Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | |||||||||||||||||||||
(in millions) | Profit (Loss) | Revenue | Margin | Profit (Loss) | Revenue | Margin | ||||||||||||||||
GAAP as Reported(1) | $ | (143 | ) | $ | 1,282 | (11.2 | )% | $ | 4 | $ | 1,493 | 0.3 | % | |||||||||
Adjustments: | ||||||||||||||||||||||
Restructuring and related costs | 13 | 25 | ||||||||||||||||||||
Amortization of acquired intangible assets | 61 | 61 | ||||||||||||||||||||
Interest expense | 20 | 32 | ||||||||||||||||||||
Separation costs | — | 4 | ||||||||||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | |||||||||||||||||||
Litigation costs (recoveries), net | 114 | 3 | ||||||||||||||||||||
(Gain) loss on extinguishment of debt | — | — | ||||||||||||||||||||
Other (income) expenses, net | 4 | 3 | ||||||||||||||||||||
NY MMIS charge (credit) | — | (1 | ) | |||||||||||||||||||
HE charge (credit) | (1 | ) | — | |||||||||||||||||||
Adjusted Operating Income/Margin | $ | 101 | $ | 1,282 | 7.9 | % | $ | 130 | $ | 1,493 | 8.7 | % | ||||||||||
Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||
(in millions) | Profit (Loss) | Revenue | Margin | Profit (Loss) | Revenue | Margin | ||||||||||||||||
GAAP as Reported(1) | $ | (395 | ) | $ | 5,393 | (7.3 | )% | $ | (16 | ) | $ | 6,022 | (0.3 | )% | ||||||||
Adjustments: | ||||||||||||||||||||||
Restructuring and related costs | 81 | 101 | ||||||||||||||||||||
Amortization of acquired intangible assets | 242 | 243 | ||||||||||||||||||||
Interest expense | 112 | 137 | ||||||||||||||||||||
Separation costs | — | 12 | ||||||||||||||||||||
(Gain) loss on divestitures and transaction costs | 42 | (42 | ) | |||||||||||||||||||
Litigation costs (recoveries), net | 227 | (11 | ) | |||||||||||||||||||
(Gain) loss on extinguishment of debt | 108 | — | ||||||||||||||||||||
Other (income) expenses, net | 5 | (7 | ) | |||||||||||||||||||
NY MMIS charge (credit) | (2 | ) | 9 | |||||||||||||||||||
HE charge (credit) | (1 | ) | (8 | ) | ||||||||||||||||||
Adjusted Operating Income/Margin | $ | 419 | $ | 5,393 | 7.8 | % | $ | 418 | $ | 6,022 | 6.9 | % | ||||||||||
EXHIBIT 99.1
Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | |||||||||||||||||||||
Adjusted for 606 and Divestitures | ||||||||||||||||||||||
(in millions) | Profit (Loss) | Revenue | Margin | Profit (Loss) | Revenue | Margin | ||||||||||||||||
GAAP as Reported(1) | $ | (143 | ) | $ | 1,282 | (11.2 | )% | $ | 4 | $ | 1,493 | 0.3 | % | |||||||||
Adjustments: | ||||||||||||||||||||||
Restructuring and related costs | 13 | 25 | ||||||||||||||||||||
Amortization of acquired intangible assets | 61 | 61 | ||||||||||||||||||||
Interest expense | 20 | 32 | ||||||||||||||||||||
Separation costs | — | 4 | ||||||||||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | |||||||||||||||||||
Litigation costs (recoveries), net | 114 | 3 | ||||||||||||||||||||
(Gain) loss on extinguishment of debt | — | — | ||||||||||||||||||||
Other (income) expenses, net | 4 | 3 | ||||||||||||||||||||
NY MMIS charge (credit) | — | (1 | ) | |||||||||||||||||||
HE charge (credit) | (1 | ) | — | |||||||||||||||||||
ASC 606 adjustment | — | — | (3 | ) | (41 | ) | ||||||||||||||||
2017 divestitures | — | — | — | — | ||||||||||||||||||
Operating Income Adjusted for 606 and 2017 Divestitures | 101 | 1,282 | 7.9 | % | 127 | 1,452 | 8.7 | % | ||||||||||||||
2018 divestitures | — | — | (29 | ) | (121 | ) | ||||||||||||||||
Adjusted Operating Income/Margin | $ | 101 | $ | 1,282 | 7.9 | % | $ | 98 | $ | 1,331 | 7.4 | % | ||||||||||
Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||
Adjusted for 606 and Divestitures | ||||||||||||||||||||||
(in millions) | Profit (Loss) | Revenue | Margin | Profit (Loss) | Revenue | Margin | ||||||||||||||||
GAAP as Reported(1) | $ | (395 | ) | $ | 5,393 | (7.3 | )% | $ | (16 | ) | $ | 6,022 | (0.3 | )% | ||||||||
Adjustments: | ||||||||||||||||||||||
Restructuring and related costs | 81 | 101 | ||||||||||||||||||||
Amortization of acquired intangible assets | 242 | 243 | ||||||||||||||||||||
Interest expense | 112 | 137 | ||||||||||||||||||||
Separation costs | — | 12 | ||||||||||||||||||||
(Gain) loss on divestitures and transaction costs | 42 | (42 | ) | |||||||||||||||||||
Litigation costs (recoveries), net | 227 | (11 | ) | |||||||||||||||||||
(Gain) loss on extinguishment of debt | 108 | — | ||||||||||||||||||||
Other (income) expenses, net | 5 | (7 | ) | |||||||||||||||||||
NY MMIS charge (credit) | (2 | ) | 9 | |||||||||||||||||||
HE charge (credit) | (1 | ) | (8 | ) | ||||||||||||||||||
ASC 606 adjustment | — | — | (11 | ) | (166 | ) | ||||||||||||||||
2017 divestitures | — | — | (7 | ) | (59 | ) | ||||||||||||||||
Operating Income Adjusted for 606 and 2017 Divestitures | 419 | 5,393 | 7.8 | % | 400 | 5,797 | 6.9 | % | ||||||||||||||
2018 divestitures | — | — | (56 | ) | (190 | ) | ||||||||||||||||
Adjusted Operating Income/Margin | $ | 419 | $ | 5,393 | 7.8 | % | $ | 344 | $ | 5,607 | 6.1 | % | ||||||||||
___________
(1) | Pre-Tax Income (Loss) and revenue from continuing operations. |
EXHIBIT 99.1
Adjusted EBITDA / Margin Reconciliation:
Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
GAAP Revenue As Reported | $ | 1,282 | $ | 1,493 | $ | 5,393 | $ | 6,022 | ||||||||
Reconciliation to Adjusted EBITDA | ||||||||||||||||
GAAP Net Income (Loss) from Continuing Operations | (140 | ) | 208 | (416 | ) | 177 | ||||||||||
Interest expense | 20 | 32 | 112 | 137 | ||||||||||||
Income tax expense (benefit) | (3 | ) | (204 | ) | 21 | (193 | ) | |||||||||
Depreciation and amortization | 115 | 119 | 460 | 495 | ||||||||||||
Contract inducement amortization | 1 | — | 3 | 2 | ||||||||||||
EBITDA | (7 | ) | 155 | 180 | 618 | |||||||||||
EBITDA Margin | (0.5 | )% | 10.4 | % | 3.3 | % | 10.3 | % | ||||||||
EBITDA | $ | (7 | ) | $ | 155 | $ | 180 | $ | 618 | |||||||
Adjustments: | ||||||||||||||||
Restructuring and related costs | 13 | 25 | 81 | 101 | ||||||||||||
Separation costs | — | 4 | — | 12 | ||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | 42 | (42 | ) | ||||||||||
Litigation costs (recoveries), net | 114 | 3 | 227 | (11 | ) | |||||||||||
(Gain) loss on extinguishment of debt | — | — | 108 | — | ||||||||||||
Other (income) expenses, net | 4 | 3 | 5 | (7 | ) | |||||||||||
NY MMIS charge (credit) | — | (1 | ) | (2 | ) | 9 | ||||||||||
HE charge (credit) | (1 | ) | — | (1 | ) | (8 | ) | |||||||||
Adjusted EBITDA | $ | 156 | $ | 188 | $ | 640 | $ | 672 | ||||||||
Adjusted EBITDA Margin | 12.2 | % | 12.6 | % | 11.9 | % | 11.2 | % | ||||||||
EXHIBIT 99.1
Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Adjusted for 606 and Divestitures | Adjusted for 606 and Divestitures | |||||||||||||||
GAAP Revenue As Reported | $ | 1,282 | $ | 1,493 | $ | 5,393 | $ | 6,022 | ||||||||
ASC 606 adjustment | — | (41 | ) | — | (166 | ) | ||||||||||
2017 divestitures | — | — | — | (59 | ) | |||||||||||
Revenue Adjusted for 606 and 2017 Divestitures | 1,282 | 1,452 | 5,393 | 5,797 | ||||||||||||
2018 divestitures | — | (121 | ) | — | (190 | ) | ||||||||||
Adjusted Revenue | $ | 1,282 | $ | 1,331 | $ | 5,393 | $ | 5,607 | ||||||||
Reconciliation to Adjusted EBITDA | ||||||||||||||||
GAAP Net Income (Loss) from Continuing Operations | (140 | ) | 208 | (416 | ) | 177 | ||||||||||
Interest expense | 20 | 32 | 112 | 137 | ||||||||||||
Income tax expense (benefit) | (3 | ) | (204 | ) | 21 | (193 | ) | |||||||||
Depreciation and amortization | 115 | 119 | 460 | 495 | ||||||||||||
Contract inducement amortization | 1 | — | 3 | 2 | ||||||||||||
ASC 606 adjustment | — | (3 | ) | — | (11 | ) | ||||||||||
2017 divestitures | — | — | — | (7 | ) | |||||||||||
2017 divestitures depreciation and amortization | — | — | — | 1 | ||||||||||||
EBITDA Adjusted for 606 and 2017 Divestitures | (7 | ) | 152 | 180 | 601 | |||||||||||
2018 divestitures | — | (29 | ) | — | (56 | ) | ||||||||||
2018 divestitures depreciation and amortization | — | (1 | ) | — | (1 | ) | ||||||||||
EBITDA | (7 | ) | 122 | 180 | 544 | |||||||||||
EBITDA Margin | (0.5 | )% | 9.2 | % | 3.3 | % | 9.7 | % | ||||||||
EBITDA | $ | (7 | ) | $ | 122 | $ | 180 | $ | 544 | |||||||
Adjustments: | ||||||||||||||||
Restructuring and related costs | 13 | 25 | 81 | 101 | ||||||||||||
Separation costs | — | 4 | — | 12 | ||||||||||||
(Gain) loss on divestitures and transaction costs | 33 | (1 | ) | 42 | (42 | ) | ||||||||||
Litigation costs (recoveries), net | 114 | 3 | 227 | (11 | ) | |||||||||||
(Gain) loss on extinguishment of debt | — | — | 108 | — | ||||||||||||
Other (income) expenses, net | 4 | 3 | 5 | (7 | ) | |||||||||||
NY MMIS charge (credit) | — | (1 | ) | (2 | ) | 9 | ||||||||||
HE charge (credit) | (1 | ) | — | (1 | ) | (8 | ) | |||||||||
Adjusted EBITDA | $ | 156 | $ | 155 | $ | 640 | $ | 598 | ||||||||
Adjusted EBITDA Margin | 12.2 | % | 11.6 | % | 11.9 | % | 10.7 | % | ||||||||
EXHIBIT 99.1
Free Cash Flow Reconciliation:
Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Operating Cash Flow | $ | 253 | $ | 236 | $ | 283 | $ | 300 | ||||||||
Cost of additions to land, buildings and equipment | (60 | ) | (39 | ) | (179 | ) | (96 | ) | ||||||||
Proceeds from sales of land, buildings and equipment | 1 | — | 13 | 33 | ||||||||||||
Cost of additions to internal use software | (14 | ) | (10 | ) | (45 | ) | (36 | ) | ||||||||
Tax payment related to divestitures | 50 | — | 90 | — | ||||||||||||
Vendor financed capital leases | — | — | (14 | ) | (16 | ) | ||||||||||
Free Cash Flow | $ | 230 | $ | 187 | $ | 148 | $ | 185 | ||||||||
Free Cash Flow | $ | 230 | $ | 187 | $ | 148 | $ | 185 | ||||||||
Transaction costs | 14 | — | 33 | — | ||||||||||||
Transaction costs tax benefit | (5 | ) | — | (5 | ) | — | ||||||||||
Debt buyback tax benefit | (26 | ) | — | (26 | ) | — | ||||||||||
Deferred compensation tax benefit | (31 | ) | — | (31 | ) | — | ||||||||||
Deferred compensation payments and adjustments | 77 | 17 | 99 | 28 | ||||||||||||
Adjusted Free Cash Flow | $ | 259 | $ | 204 | $ | 218 | $ | 213 | ||||||||
Cash / Adjusted Cash Reconciliation:
(in millions) | As of September 30, 2018 | As of December 31, 2018 | As of December 31, 2017 | |||||||||
Cash and cash equivalents | $ | 586 | $ | 756 | $ | 658 | ||||||
Deferred compensation payments and adjustments | 22 | 99 | 17 | |||||||||
Deferred compensation payable | (99 | ) | (99 | ) | (116 | ) | ||||||
Adjusted cash and cash equivalents | $ | 509 | $ | 756 | $ | 559 | ||||||
February 20, 2019 Conduent Q4 2018 Earnings Results
Cautionary Statements Forward-Looking Statements This report contains “forward-looking statements”, as defined in the Private Securities Litigation Reform Act of 1995, 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: government appropriations and 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 information systems or security systems or any service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our continuing emphasis on and shift toward technology-led digital transactions; customer decision-making cycles and lead time for customer commitments; 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 modernize our information technology infrastructure and consolidate data centers; our ability to comply with data security standards; 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 2017 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 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 certain of these non- GAAP measures. Non-GAAP measures are footnoted, where applicable, in each slide herein. 2
Key Q4 & FY 2018 Highlights Q4 2018 $1.28B $156M $259M FY 2018 $5.39B $640M $218M Revenue Adj. EBITDA(1) Adj. FCF(1) • Revenue and Adjusted EBITDA in-line with guidance; Adjusted Free Cash Flow above guidance • Divestiture plan fully executed with the close of select stand alone call center contracts • Completed acquisition: Health Solutions Plus creating incremental opportunities in Healthcare space • New business efforts gaining traction; Q4 2018 new business TCV up 6% yr/yr • Improved balance sheet and cash position (net leverage ratio 1.2x)(2) • Exceeded 3-year transformation initiative targets; achieved ~$730M of cumulative savings • Further progress on IT modernization with continued investment in client-facing platforms and infrastructure • Executed agreement to settle Texas litigation 3 (1) Refer to Appendix for Non-GAAP reconciliations of revenue, adjusted EBITDA/margin and adjusted Free Cash Flow and for impact from ASC 606 accounting change and divestitures (2) Net debt (total debt less adjusted cash) divided by TTM Adjusted EBITDA. Adjusted ratio uses Adjusted total Debt
Successful Execution of Plan Strategic Initiatives Undertaken Execution of Plan from FY 2016 $1 Billion $476M Divestitures Debt Pay Down (10.5% Senior Concluded Notes) Adj. EBITDA Margin 9.8% to 11.9% 51% Expansion 42% Accu-shored Real Estate sq. ft Low Cost Three-year Reduced Countries Cumulative ~$730M Savings +210 bps 35% Reduction Margin User of Cash to generating of Workforce Adj. Free Expansion Cash Flow >$200M annually $200M Net Leverage ~10K+ From 2.7x to 1.2x Long-Tail Tech Ratio Accounts Exited Modernization 4 Investment Note: Operational metrics reflect the benefit of divested businesses, including Stand-Alone Customer Care contracts
Q4 / FY 2018 Signings, Pipeline, Renewal Rate Q4 2018 Q4 2018 $1,527M $5,445M 93% 95% Total Contract Value (TCV)(1) Signings Renewal Rate • Q4 total signings up 7.4% yr/yr • Reflects continued strength in client relationships • Q4 Renewals of $906M with significant contribution from • Strong execution and account management driving Government clients client retention • Expanding digital offerings with Commercial client base • Sixth consecutive quarter of >90% renewal rate Q4 2018 $621M $1,598M ~$12B New Business TCV(1) Rolling 12-Month Pipeline(1) • Q4 New Business improved 6.3% yr/yr • Increase of digital opportunities across segments • Continued discipline on signing strategic wins with target • Strong interest in platform-based transformation deals margins and better T&Cs • Healthy mix of new logos and existing clients • Europe Q4 2018 new business signings up meaningfully • Focus on service line penetration • Investment in sales gaining traction; salesforce closing more digital opportunities 5 (1) See Appendix for TCV reconciliation. All TCV and pipeline data excludes impact from divestitures
Progress on Our Digital Experience Focus Digital Interactions Evolving BPO Value Chain • Conduent sits at the intersection of Intelligent Platforms and Digital Experience 3 billions of mission-critical interactions everyday Data aggregation and analytics Cross-platform integration • Clients want to leverage data and Real-time, insight driven analytics to improve offerings to their end Personalized offerings services users Modernized and scalable Service offering ecosystems • Platform-based offerings allow for a capabilities constant feedback loop • Investing in technology to allow for every interaction to be Immediate, Intelligent and Individualized 1 2 Traditional BPO Services Business Process as-a- 1 Do Better • Labor intensive Service (BPaas) • Rule-based • Automated Delivery 2 Do More • Subscription/ Outcome-based 3 Do Different 6
Financials 7
Q4 2018 Earnings (in millions) Q4 2018 Q4 2017 B/(W) Q4 2017 B/(W) Comments Q4 2018 vs Q4 2017 Yr/Yr adjusted for Yr/Yr adjusted 606, for 606, Divestitures (1) Divestitures Flat excluding FX, ASC 606, 2017 & 2018 Revenue $1,282 $1,493 ($211) $1,331 ($49) divestitures and strategic decisions Gross Margin 22.9% 22.7% +20 bps SG&A 133 148 15 Adjusted operating income(1) $101 $130 ($29) $98 $3 Adjusted operating margin(1) 7.9% 8.7% (80 bps) 7.4% +50 bps Divestiture impact offsetting transformation Adjusted EBITDA1 $156 $188 $(32) $155 $1 Adjusted EBITDA margin1 Adjusted Operating12.2% margin12.6% 5.4%,(40 bps)up 60 bps 11.6%from 2015 +60 bps Restructuring and related costs GAAP EPS ($4.85)13 25 12 Reduced spend Depreciation and amortization 115 119 4 Interest expense Adj. EPS $1.0620 32 12 Interest savings from tender offer and repricing Separation costs — 4 4 (Gain) loss on divestitures and transaction costs 33 (1) (34) Litigation costs (recoveries), net 114 3 (111) Texas litigation (Gain) loss on extinguishment of debt — — — Other net expense / (income) 4 3 (1) Pretax income (loss) (143) 4 (147) GAAP tax (benefit) ($3) ($204) ($201) Q4 2017 tax reform impact on def. tax liability GAAP net income (loss) from Continuing Operations ($140) $208 ($348) Q4 2017 tax reform impact and loss on divestitures GAAP Diluted EPS from Continuing Operations ($0.69) $0.98 ($1.67) Adjusted tax rate(1) 28.4% 31.6% +320 bps Adjusted net income(1) $58 $67 ($9) Adjusted Diluted EPS1 from Continuing Operations $0.26 $0.31 ($0.05) 8 (1) Refer to Appendix for Non-GAAP reconciliations of adjusted revenue, adjusted operating income/margin, adjusted EBITDA/margin and adjusted EPS and for impact from ASC 606 accounting change and divestitures
FY 2018 Earnings (in millions) FY 2018 FY 2017 B/(W) FY 2017 B/(W) Comments FY 2018 vs FY 2017 Yr/Yr adjusted for 606, Yr/Yr adjusted for Divestitures (1) 606, Divestitures Flat excluding FX, ASC 606, 2017 & 2018 Revenue $5,393 $6,022 ($629) $5,607 ($214) divestitures and strategic decisions Gross Margin 22.5% 21.5% +100 bps SG&A 560 611 51 Adjusted operating income(1) $419 $418 $1 $344 $75 Adjusted operating margin(1) 7.8% 6.9% +90 bps 6.1% +170 bps Transformation offset by divestitures Adjusted EBITDA1 $640 $672 $(32) $598 $42 Adjusted EBITDA margin1 Adjusted Operating11.9% margin11.2% 5.4%,+70 up bps 60 bps from10.7% 2015 +120 bps Restructuring and related costs GAAP EPS ($4.85)81 101 20 Reduced yr/yr spend Depreciation and amortization 460 495 35 Interest expense Adj. EPS $1.06112 137 25 Interest savings from tender offer and repricing Separation costs — 12 12 (Gain) loss on divestitures, sales, and transaction costs 42 (42) (84) Litigation costs (recoveries), net 227 (11) (238) Texas litigation (Gain) loss on extinguishment of debt 108 — (108) Tender of senior notes Other net expense / (income) 5 (7) (12) Pretax income (loss) (395) (16) (379) GAAP tax (benefit) $21 ($193) ($214) GAAP net income (loss) from Continuing Operations ($416) $177 ($593) Q4 2017 tax reform impact, litigation costs, loss on GAAP Diluted EPS from Continuing Operations ($2.06) $0.81 ($2.87) divestitures Adjusted tax rate(1) 25.1% 33.8% +870 bps Tax reform impact Adjusted net income(1) $230 $186 $44 Adjusted Diluted EPS1 from Continuing Operations $1.05 $0.85 $0.20 Interest savings, lower restructuring and tax rate 9 (1) Refer to Appendix for Non-GAAP reconciliations of adjusted revenue, adjusted operating income/margin, adjusted EBITDA/margin and adjusted EPS and for impact from ASC 606 accounting change and divestitures
Q4 and FY 2018 Segment Summary (in millions) Q4 Full Year Revenue(1) Adj EBITDA(1) Revenue(1) Adj EBITDA(1) 2017 2018 2017 2018 2017 2018 2017 2018 Commercial $ 659 $ 649 $ 176 $ 165 $ 2,593 $ 2,547 $ 656 $ 597 Government $ 345 $ 337 $ 103 $ 116 $ 1,407 $ 1,351 $ 437 $ 451 Transportation $ 188 $ 189 $ 42 $ 40 $ 725 $ 729 $ 154 $ 149 Other* $ 139 $ 107 $ 3 $ — $ 882 $ 766 $ 96 $ 90 Shared IT / Infrastructure $ (169) $ (165) $ (745) $ (647) & Corporate Costs Total $ 1,331 $ 1,282 $ 155 $ 156 $ 5,607 $ 5,393 $ 598 $ 640 FY 2018 Segment Commentary Commercial • Adjusted revenue(1) down (1.8)% yr/yr; FY adj. EBITDA margin 23.4% • Revenue up 1.8% excluding currency and strategic decisions Government • Adjusted revenue(1) down (4.0)% yr/yr; FY adj. EBITDA margin 33.4% • Revenue down (2.2)% excluding strategic decisions (no currency impact) Transportation • Adjusted revenue(1) up 0.6% yr/yr; FY adj. EBITDA margin 20.4% • Revenue flat excluding currency and strategic decisions Shared IT / Infrastructure & Corporate Costs • Meaningful reduction from FY 2017 to FY 2018 (down 13.2%) 10 *Primarily divested businesses (1) Refer to Appendix for Non-GAAP reconciliations of ASC 606 accounting change and divestitures. Segment revenue excludes impact from ASC 606. NOTE: Revenue and adj. EBITDA from closed and pending divestitures moved to Other segment. Majority of stranded costs moved to Unallocated Corporate Costs and expected to be addressed in 2019.
Cash Flow (in millions) Q4 2018 FY 2018 FY 2018 Key Messages: Net income (loss) ($140) ($416) • Operating cash flow improvement Depreciation & amortization 115 460 primarily driven by working capital Stock-based compensation 8 38 Deferred tax benefit 15 (75) (Gain) loss on extinguishment of debt — 108 • Capex 4.2% of revenue driven by IT Changes in operating assets and liabilities 220 118 investments Other(1) 35 50 Operating Cash Flow $253 $283 (4) (2) • Adjusted free cash flow up $5M yr/yr Purchase of LB&E and other (74) (224) driven by working capital partially offset Proceeds from sales of LB&E 1 13 by increased Capex Net proceeds/payments for divestitures/acquisitions (2) 670 Other investing, net 1 1 Investing Cash Flow ($74) $460 • $675M in pre-tax proceeds from sale of Cash from Financing ($10) ($637) divested businesses Effect of exchange rates on cash and cash equivalents 1 (8) Change in cash, restricted cash and cash equivalents 170 98 Beginning cash, restricted cash and cash equivalents 595 667 Ending Cash, Restricted Cash and Cash Equivalents(3) $765 $765 Memo: Adjusted Free Cash Flow(4) $259 $218 Better / (Worse) vs prior year period $55 $5 (1) Includes gain (loss) on investments, amortization of financing costs, net (gain) loss on divestitures and transaction costs, contract inducement amortization and Other operating, net (2) Includes cost of additions to land, building and equipment (LB&E) and internal use software 11 (3) Includes $9 million of restricted cash for 2018 that was included in Other current assets on the Condensed Consolidated Balance Sheets (4) Please refer to slide 35 in Appendix for Non-GAAP reconciliation
Capital Structure Overview Debt Structure ($ in millions) Credit Metrics FY 2019E interest expense ~$90M 12/31/2017 9/30/2018 12/31/2018 (in millions) Preferred dividend (annual) ~$10M (1) $667 $595 $765 Total Cash Target net leverage ratio ~2.0x (99) (77) — Deferred Comp Cash Average remaining maturity on outstanding debt ~4 years Restricted Cash (9) (9) (9) Adjusted Cash 559 509 756 Total Debt(2) 2,061 1,577 1,567 Key Messages ▪ Current leverage ratio: 1.2x Term Loan A(3), (5) due 2022 732 711 705 ▪ Revolver remains undrawn(6) Term Loan B(3) due 2023 842 835 833 ▪ Ended FY 2018 with a strong cash balance 10.5% Senior Notes due 510 34 34 2024 ▪ Used $90M in Q1 2019 for HSP acquisition ▪ Sufficient liquidity to address litigation payments Capital Leases 33 30 26 ▪ Balanced capital allocation focused on driving shareholder value 2.2x 1.6x 1.2x Current net leverage ratio(4) (1) Total Cash includes restricted cash (2) Total debt excludes deferred financing costs (3) Revolving credit facility and Term Loan A interest rate is Libor + 175 bps; Term Loan B is Libor + 250 bps effective June 28, 2018 (4) Net debt (total debt less adjusted cash) divided by TTM Adjusted EBITDA. Adjusted ratio uses Adjusted total Debt 12 (5) Includes initial EUR 260M borrowing converted at end of quarter exchange rates; Reflects appreciation of the EUR; there was no incremental borrowing on the Term Loan A in Q4 2018 (6) $738M of available capacity under Revolving Credit Facility as of 12/31/2018
FY 2019 Guidance Includes No Additional M&A FY 2018 Divestiture Adjusted FY (in millions) Reported Impact (3) 2018(4) FY 2019 Guidance Revenue (constant currency)(1) $5.39B $752M $4.64B Up 0.5 - 1.5% $590 - $610M Adj. EBITDA(2) $640M $105M $535M Up 10 - 14% Adj. EBITDA Margin(2) 11.9% 11.5% 12.5 - 13.1% Adj. Free Cash Flow(2) $218M ~35% of Adj. EBITDA % of Adj. EBITDA 34.1% Note: Please refer to the "Non-GAAP Outlook" in appendix for certain non-GAAP information regarding outlook (1) Year-over-year revenue growth comparison at constant currency (2) Refer to Appendix for Non-GAAP reconciliations of adjusted EBITDA / margin and adjusted FCF and for impact from ASC 606 accounting change and divestitures. FY 2019 FCF adjusted for Texas-related litigation impact (3) Includes all divestitures and select Stand Alone Customer Care contracts in run-off. (4) Adjusted for accounting 606 and 2017 and 2018 divestitures referenced on page 33. 13
Q&A 14
Appendix 15
Signings & Renewal Rate(1) Excluding Divestiture Impact ($ in millions) Q1' 17 Q2' 17 Q3' 17 Q4' 17 Q1' 18 Q2' 18 Q3' 18 Q4' 18 Total Contract Value $836 $1,142 $928 $1,422 $1,293 $1,887 $738 $1,527 New Business $496 $602 $349 $584 $367 $346 $264 $621 Renewals $340 $540 $579 $838 $926 $1,541 $474 $906 Annual Recurring Revenue Signings $135 $115 $84 $137 $81 $79 $65 $140 Non-Recurring Revenue Signings $80 $89 $70 $87 $53 $61 $63 $57 Unadjusted ($ in millions) Q1' 17 Q2' 17 Q3' 17 Q4' 17 Q1' 18 Q2' 18 Q3' 18 Q4' 18 Total Contract Value $931 $1,244 $1,048 $1,730 $1,428 $1,947 $771 $1,571 New Business $530 $657 $390 $683 $406 $372 $282 $621 Renewals $401 $587 $658 $1,047 $1,022 $1,575 $489 $950 Annual Recurring Revenue Signings $143 $130 $92 $168 $93 $86 $79 $140 Non-Recurring Revenue Signings $93 $108 $86 $96 $63 $69 $64 $57 Renewal rate 92% 89% 99% 96% 94% 99% 91% 93% (1) See definitions in Appendix 16
Definitions TCV = Total contract value Annual Recurring Revenue Signings = Includes new business TCV. New Business TCV = Annual recurring revenue signings multiplied by the contract term plus non-recurring revenue signings. Pipeline = TCV pipeline of deals in all sell stages over a rolling 12 months 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). Revenue productivity = Calculated as trailing-twelve months (TTM) revenue (excluding impact from divestitures and ASC 606) / average quarter-end headcount for last four quarters. Segment calculation excludes corporate headcount. TSA = Transition Services Agreement associated with divested businesses 17
2019 Modeling Considerations Outlook Commentary FY 2019E Revenue Outlook (vs. FY 2018 "Baseline") Up 0.5% - 1.5% (including HSP impact), weighted towards 2H 2019 FY 2019E Adjusted EBITDA Seasonality Expect typical seasonality, excluding stranded cost impacts Restructuring costs Expected to be $40 - $45M for the full year Interest Expense Expected to be ~$90M for the full year (assumes one mid-year interest rate hike) Expect to be ~35% of Adj. EBITDA, typically weighted towards Q4 2019, given seasonality. Expect FY 2019E Adj Free Cash Flow to exclude Texas-related impacts from Adj FCF calculation. Capex Expected to be ~4.5% of Revenue in FY 2019 Taxes Expected full year adjusted tax rate of 28 - 30% Cash Taxes Expect ~$85M in FY 2019, excluding impact from Texas-related payments Expect ~$50M of stranded overhead costs through Q4, based on timing of divestitures and Stranded Overhead Costs increased TSA requirements. Expected to impact Q2 - Q4 evenly 18
Non-GAAP Financial Measures 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 certain of 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 Revenue, Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate: • Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program. • Amortization of acquired intangible assets. The amortization of acquired intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period. • Separation costs. Separation costs are expenses incurred in connection with 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. • (Gain) loss on divestitures and transaction costs. Represents (gain) loss on divested businesses and transaction costs. • Litigation costs (recoveries), net. Litigation costs (recoveries), net represents reserves for the State of Texas litigation, Student Loan Service exposures and certain terminated contracts that are subject to litigation. • (Gain) loss on extinguishment of debt. Represents premium on debt extinguishment and write down of the associated unamortized discount and issuance costs. • Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net and all other (income) expenses, net. • NY MMIS charge (credit). Costs associated with the Company not fully completing the State of New York Health Enterprise Platform project. • HE charge (credit). Costs associated with not fully completing the Health Enterprise Medical platform projects in California and Montana. • 606 Adjustment • (Revenue) / (Income) loss from divestitures 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 certain other identified items, and may provide added insight into our underlying business results and how effective tax rates impact our ongoing business. 19
Non-GAAP Financial Measures 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 Revenue, Adjusted Operating Income and Adjusted Operating Margin: • Restructuring and related costs. • Amortization of acquired intangible assets. • Interest expense. Interest expense includes interest on long-term debt and amortization of debt issuance costs. • Separation costs. • (Gain) loss on divestitures and transaction costs. • Litigation costs (recoveries), net. • (Gain) loss on extinguishment of debt. • Other (income) expenses, net. • NY MMIS charge (credit). • HE charge (credit). • ASC 606 adjustment. • (Revenue) / (Income) loss from divestitures. We provide our investors with adjusted revenue, 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 Profit and Margin We adjust Other profit and margin for NY MMIS and HE charge adjustments. We provide Other adjusted loss and Other 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 loss and gross margin results and trends, both by itself and in comparison to other periods. 20
Non-GAAP Financial Measures Segment and Consolidated Adjusted EBITDA and EBITDA Margin We use Adjusted EBITDA and Adjusted EBITDA Margin 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. Adjusted EBITDA represents Income (loss) before Interest, Income Taxes, Depreciation and Amortization adjusted for the following items (which are defined above). Adjusted EBITDA margin is Adjusted EBITDA divided by adjusted revenue: • Restructuring and related costs. • Separation costs. • (Gain) loss on divestitures and transaction costs. • Litigation costs (recoveries), net. • (Gain) loss on extinguishment of debt. • Other (income) expenses, net. • NY MMIS charge (credit) / NY MMIS Depreciation. • HE charge (credit). • ASC 606 adjustment. • (Revenue) / (Income) loss from divestitures. 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 and Adjusted EBITDA Margin may not be comparable to similar measures disclosed by other companies because not all companies calculate Adjusted EBITDA and EBITDA Margin in the same manner. Adjusted Government Services Segment Revenue and Profit We adjusted Government Services Segment revenue, profit and margin for the NY MMIS and HE charges as we believe it offers added insight, by itself and for comparability between periods, for items which we do not believe are indicative of our ongoing business. 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, tax payments related to divestitures, 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 and invest in land, buildings and equipment and internal use software and make required 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, transaction costs, costs related to Texas litigation, and certain other identified adjustments. Adjusted Cash Adjusted cash is defined as cash and cash equivalents less cash from terminated deferred compensation to be paid to plan participants. We believe this provides added insight into cash and cash equivalent positions. 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 21 or in the aggregate, to reported results. We have provided and outlook for revenue on a constant currency basis due to the inability to accurately predict foreign currency impact on revenues. Outlook for Free Cash Flow and Adjusted Free Cash Flow is provided as a factor of expected adjusted EBITDA, see above.
Non-GAAP Reconciliation: Adj. Net Income (Loss) & Adj. EPS Three Months Ended December 31, Years Ended December 31, 2018 2017 2018 2017 Net Income Net Income Net Income Net Income (in millions, except EPS. Shares in thousands) (Loss) Diluted EPS (Loss) Diluted EPS (Loss) Diluted EPS (Loss) Diluted EPS GAAP as Reported From Continuing Operations $ (140) $ (0.69) $ 208 $ 0.98 $ (416) $ (2.06) $ 177 $ 0.81 Adjustments: Restructuring and related costs 13 25 81 101 Amortization of acquired intangible assets 61 61 242 243 Separation costs — 4 — 12 (Gain) loss on divestitures and transaction costs 33 (1) 42 (42) Litigation costs (recoveries), net 114 3 227 (11) (Gain) loss on extinguishment of debt — — 108 — Other (income) expenses, net 4 3 5 (7) NY MMIS charge (credit) — (1) (2) 9 HE charge (credit) (1) — (1) (8) Less: Income tax adjustments(1) (26) (235) (56) (288) Adjusted Net Income (Loss) and EPS $ 58 $ 0.26 $ 67 $ 0.31 $ 230 $ 1.05 $ 186 $ 0.85 (GAAP shares in thousands) Weighted average common shares outstanding 207,103 204,607 206,056 204,007 Stock options — 131 — 195 Restricted stock and performance units / shares — 2,742 — 2,591 Adjusted Weighted Average Shares Outstanding(2) 207,103 207,480 206,056 206,793 (Non-GAAP shares in thousands) Weighted average common shares outstanding 207,103 204,607 206,056 204,007 Stock options 65 131 118 195 Restricted stock and performance units / shares 3,480 2,742 3,480 2,491 8% Convertible preferred stock — 5,393 — — Adjusted Weighted Average Shares Outstanding 210,648 212,873 209,654 206,693 (1) Reflects the income tax (expense) benefit of the adjustments. Refer to the Effective Tax Rate reconciliation details. (2) Average shares for the 2018 and 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 dividend of $2.4 million for both of the three months ended December 31, 2018 and 2017 and $10 million for both of the twelve months ended December 31, 2018 and 2017, respectively. 22
Three Months Ended December 31, Years Ended December 31, Adjusted for 606 and Divestitures(3) Adjusted for 606 and Divestitures(3) 2018 2017 2018 2017 Net Income Net Income Net Income Net Income (in millions, except EPS. Shares in thousands) (Loss) Diluted EPS (Loss) Diluted EPS (Loss) Diluted EPS (Loss) Diluted EPS GAAP as Reported From Continuing Operations $ (140) $ (0.69) $ 208 $ 0.98 $ (416) $ (2.06) $ 177 $ 0.81 Adjustments: Restructuring and related costs 13 25 81 101 Amortization of acquired intangible assets 61 61 242 243 Separation costs — 4 — 12 (Gain) loss on divestitures and transaction costs 33 (1) 42 (42) Litigation costs (recoveries), net 114 3 227 (11) (Gain) loss on extinguishment of debt — — 108 — Other (income) expenses, net 4 3 5 (7) NY MMIS charge (credit) — (1) (2) 9 HE charge (credit) (1) — (1) (8) ASC 606 adjustment — (3) — (11) 2017 divestitures — — — (7) 2018 divestitures — (29) — (56) Less: Income tax adjustments(1) (26) (235) (56) (288) Adjusted Net Income (Loss) and EPS $ 58 $ 0.26 $ 35 $ 0.15 $ 230 $ 1.05 $ 112 $ 0.49 (GAAP shares in thousands) Weighted average common shares outstanding 207,103 204,607 206,056 204,007 Stock options — 131 — 195 Restricted stock and performance units / shares — 2,742 — 2,591 Adjusted Weighted Average Shares Outstanding(2) 207,103 207,480 206,056 206,793 (Non-GAAP shares in thousands) Weighted average common shares outstanding 207,103 204,607 206,056 204,007 Stock options 65 131 118 195 Restricted stock and performance units / shares 3,480 2,742 3,480 2,491 8% Convertible preferred stock — 5,393 — — Adjusted Weighted Average Shares Outstanding 210,648 212,873 209,654 206,693 (1) Reflects the income tax (expense) benefit of the adjustments. Refer to the Effective Tax Rate reconciliation details. (2) Average shares for the 2018 and 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 dividend of $2.4 million for both of the three months ended December 31, 2018 and 2017 and $10 million for both of the twelve months ended December 31, 2018 and 2017, respectively. (3) Adjusted for the impact from 606 accounting standard change and revenue and (income) loss from divestitures 23
Non-GAAP Reconciliation: Adj. Effective Tax Rate Three Months Ended December 31, 2018 Three Months Ended December 31, 2017 Pre-Tax Income Income Tax Effective Tax Pre-Tax Income Income Tax Effective Tax (in millions) (Loss) (Benefit) Expense Rate (Loss) (Benefit) Expense Rate GAAP as Reported From Continuing Operations $ (143) $ (3) 2.1% $ 4 $ (204) Benefit from tax law changes — — — 198 Other Non-GAAP adjustments 224 26 94 37 Total non-GAAP adjustments(1) 224 26 94 235 Adjusted(2) $ 81 $ 23 28.4% $ 98 $ 31 31.6% Year Ended December 31, 2018 Year Ended December 31, 2017 Pre-Tax Income Income Tax Effective Tax Pre-Tax Income Income Tax Effective Tax (in millions) (Loss) (Benefit) Expense Rate (Loss) (Benefit) Expense Rate GAAP as Reported From Continuing Operations $ (395) $ 21 (5.3)% $ (16) $ (193) Benefit from tax law changes — — — 198 Termination of COLI plan — — — (19) Other Non-GAAP adjustments 702 56 297 109 Total Non-GAAP adjustments(1) 702 56 297 288 Adjusted(2) $ 307 $ 77 25.1 % $ 281 $ 95 33.8% (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 was 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 and without regard to the business divestitures, the State of Texas litigation reserve, loss on extinguishment of debt, charges for amortization of intangible assets, restructuring and divestiture related costs. 24
Non-GAAP Reconciliation: Adjusted Operating Income / Margin (As Reported) Previously Previously Reported Reported (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 GAAP Revenue From Continuing Operations $ 1,493 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 6,022 $ 5,393 GAAP Pre-tax Income (Loss) From Continuing Operations 4 (54) 54 (252) (143) (16) (395) GAAP Operating Margin As Reported 0.3% (3.8)% 3.9% (19.3)% (11.2)% (0.3)% (7.3)% GAAP Pre-tax income (Loss) From Continuing Operations $ 4 $ (54) $ 54 $ (252) $ (143) $ (16) $ (395) Adjustments: Restructuring and related costs 25 20 17 31 13 101 81 Amortization of acquired intangible assets 61 61 60 60 61 243 242 Interest expense 32 33 37 22 20 137 112 Separation costs 4 — — — — 12 — (Gain) loss on divestitures and transaction costs (1) 15 (60) 54 33 (42) 42 Litigation costs (recoveries), net 3 31 4 78 114 (11) 227 (Gain) loss on extinguishment of debt — — — 108 — — 108 Other (income) expenses, net 3 (1) (2) 4 4 (7) 5 NY MMIS charge (credit) (1) — (1) (1) — 9 (2) HE charge (credit) — — — — (1) (8) (1) Adjusted Operating Income/Margin $ 130 $ 105 $ 109 $ 104 $ 101 $ 418 $ 419 Adjusted Operating Margin 8.7% 7.4 % 7.9% 8.0 % 7.9 % 6.9 % 7.8 % 25
Non-GAAP Reconciliation: Adjusted Revenue and Operating Income / Margin(1) (Adjusted results: Adjusts 2017 for comparable results to 2018 reported) Adjusted for 606 and Divestitures(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 GAAP Revenue From Continuing Operations $ 1,493 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 6,022 $ 5,393 ASC 606 adjustment (41) — — — — (166) — 2017 divestitures — — — — — (59) — Revenue Adjusted for 606 and 2017 Divestitures 1,452 1,420 1,387 1,304 1,282 5,797 5,393 2018 divestitures (121) — — — — (190) — Adjusted Revenue $ 1,331 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 5,607 $ 5,393 Pre-tax Income (Loss) From Continuing Operations 4 (54) 54 (252) (143) (16) (395) ASC 606 adjustment (3) — — — — (11) — 2017 divestitures — — — — — (7) — Pre-Tax Income (Loss) Adjusted for 606 and 2017 Divestitures 1 (54) 54 (252) (143) (34) (395) 2018 divestitures (29) — — — — (56) — Adjusted Pre-Tax Income (Loss) $ (28) $ (54) $ 54 $ (252) $ (143) $ (90) $ (395) Adjusted Operating Margin (2.1)% (3.8)% 3.9% (19.3)% (11.2)% (1.6)% (7.3)% Adjusted Revenue $ 1,331 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 5,607 $ 5,393 Pre-tax income (Loss) From Continuing Operations $ 4 $ (54) $ 54 $ (252) $ (143) $ (16) $ (395) Adjustments: Restructuring and related costs 25 20 17 31 13 101 81 Amortization of acquired intangible assets 61 61 60 60 61 243 242 Interest expense 32 33 37 22 20 137 112 Separation costs 4 — — — — 12 — (Gain) loss on divestitures and transaction costs (1) 15 (60) 54 33 (42) 42 Litigation costs (recoveries), net 3 31 4 78 114 (11) 227 (Gain) loss on extinguishment of debt — — — 108 — — 108 Other (income) expenses, net 3 (1) (2) 4 4 (7) 5 NY MMIS charge (credit) (1) — (1) (1) — 9 (2) HE charge (credit) — — — — (1) (8) (1) ASC 606 adjustment (3) — — — — (11) — 2017 divestitures — — — — — (7) — Operating Income Adjusted for 606 and 2017 Divestitures 127 105 109 104 101 400 419 2018 divestitures (29) — — — — (56) — Adjusted Operating Income/Margin $ 98 $ 105 $ 109 $ 104 $ 101 $ 344 $ 419 Adjusted Operating Margin 7.4 % 7.4 % 7.9% 8.0 % 7.9 % 6.1 % 7.8 % 26 (1) Adjusted for the impact from 606 accounting standard change and divestiture impact over the same period year over year
Non-GAAP Reconciliation: Adjusted EBITDA Previously Previously Reported Reported (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Reconciliation to Adjusted Revenue GAAP Revenue From Continuing Operations $ 1,493 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 6,022 $ 5,393 Adjusted Revenue $ 1,493 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 6,022 $ 5,393 GAAP Net Income (Loss) from Continuing Operations $ 208 $ (50) $ 11 $ (237) $ (140) $ 177 $ (416) Interest expense 32 33 37 22 20 137 112 Income tax expense (benefit) (204) (4) 43 (15) (3) (193) 21 Depreciation and amortization 119 116 116 113 115 495 460 Contract inducement amortization — 1 1 — 1 2 3 EBITDA $ 155 $ 96 $ 208 $ (117) $ (7) $ 618 $ 180 EBITDA Margin 10.4% 6.8% 15.0% (9.0)% (0.5)% 10.3% 3.3% EBITDA $ 155 $ 96 $ 208 $ (117) $ (7) $ 618 $ 180 Restructuring and related costs 25 20 17 31 13 101 81 Separation costs 4 — — — — 12 — (Gain) loss on divestitures and transaction costs (1) 15 (60) 54 33 (42) 42 Litigation costs (recoveries), net 3 31 4 78 114 (11) 227 (Gain) loss on extinguishment of debt — — — 108 — — 108 Other (income) expenses, net 3 (1) (2) 4 4 (7) 5 NY MMIS charge (credit) (1) — (1) (1) — 9 (2) HE charge (credit) — — — — (1) (8) (1) Adjusted EBITDA 188 161 166 157 156 672 640 Adjusted EBITDA Margin 12.6% 11.3% 12.0% 12.0 % 12.2% 11.2% 11.9% 27
Non-GAAP Reconciliation: Adjusted EBITDA(1) (Adjusted results: Adjusts 2017 for comparable results to 2018 reported) Adjusted for 606 and Divestitures(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Reconciliation to Adjusted Revenue GAAP Revenue From Continuing Operations $ 1,493 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 6,022 $ 5,393 ASC 606 adjustment (41) — — — — (166) — 2017 divestitures — — — — — (59) — Revenue Adjusted for 606 and 2017 Divestitures 1,452 1,420 1,387 1,304 1,282 5,797 5,393 2018 divestitures (121) — — — — (190) — Adjusted Revenue $ 1,331 $ 1,420 $ 1,387 $ 1,304 $ 1,282 $ 5,607 $ 5,393 GAAP Net Income (Loss) from Continuing Operations $ 208 $ (50) $ 11 $ (237) $ (140) $ 177 $ (416) Interest expense 32 33 37 22 20 137 112 Income tax expense (benefit) (204) (4) 43 (15) (3) (193) 21 Depreciation and amortization 119 116 116 113 115 495 460 Contract inducement amortization — 1 1 — 1 2 3 ASC 606 adjustment (3) — — — — (11) — 2017 divestitures — — — — — (7) — 2017 divestitures depreciation and amortization — — — — — 1 — EBITDA Adjusted for 606 and 2017 Divestitures 152 96 208 (117) (7) 601 180 2018 divestitures (29) — — — — (56) — 2018 divestitures depreciation and amortization (1) — — — — (1) — EBITDA $ 122 $ 96 $ 208 $ (117) $ (7) $ 544 $ 180 EBITDA Margin 9.2% 6.8% 15.0% (9.0)% (0.5)% 9.7% 3.3% EBITDA $ 122 $ 96 $ 208 $ (117) $ (7) $ 544 $ 180 Restructuring and related costs 25 20 17 31 13 101 81 Separation costs 4 — — — — 12 — (Gain) loss on divestitures and transaction costs (1) 15 (60) 54 33 (42) 42 Litigation costs (recoveries), net 3 31 4 78 114 (11) 227 (Gain) loss on extinguishment of debt — — — 108 — — 108 Other (income) expenses, net 3 (1) (2) 4 4 (7) 5 NY MMIS charge (credit) (1) — (1) (1) — 9 (2) HE charge (credit) — — — — (1) (8) (1) Adjusted EBITDA 155 161 166 157 156 598 640 Adjusted EBITDA Margin 11.6% 11.3% 12.0% 12.0 % 12.2% 10.7% 11.9% 28 (1) Adjusted for the estimated impact from the adoption of the 606 accounting standard, had it been applicable in FY 2017 and divestiture impact over the same period year over year
Non-GAAP Reconciliation: Segment Adjusted EBITDA(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Commercial Industries Segment GAAP revenue $ 682 $ 653 $ 626 $ 619 $ 649 $ 2,685 $ 2,547 Segment profit $ 154 $ 110 $ 120 $ 127 $ 143 $ 563 $ 500 Segment depreciation and amortization 23 28 25 22 22 98 97 Adjusted Segment EBITDA $ 177 $ 138 $ 145 $ 149 $ 165 $ 661 $ 597 Adjusted EBITDA Margin 26.0% 21.1% 23.2% 24.1% 25.4% 24.6% 23.4% Government Services Segment GAAP revenue $ 352 $ 335 $ 341 $ 338 $ 337 $ 1,433 $ 1,351 Segment profit $ 96 $ 108 $ 100 $ 106 $ 110 $ 398 $ 424 Segment depreciation and amortization 9 7 9 7 7 41 30 EBITDA $ 105 $ 115 $ 109 $ 113 $ 117 $ 439 $ 454 EBITDA Margin 29.8% 34.3% 32.0% 33.4% 34.7% 30.6% 33.6% Segment EBITDA $ 105 $ 115 $ 109 $ 113 $ 117 $ 439 $ 454 NY MMIS charge (credit)(2) (1) — (1) (1) — 9 (2) HE charge (credit)(2) — — — — (1) (8) (1) Adjusted Segment EBITDA $ 104 $ 115 $ 108 $ 112 $ 116 $ 440 $ 451 Adjusted EBITDA Margin 29.5% 34.3% 31.7% 33.1% 34.4% 30.7% 33.4% Transportation Segment GAAP revenue $ 198 $ 176 $ 180 $ 184 $ 189 $ 767 $ 729 GAAP Segment profit (loss) $ 34 $ 27 $ 25 $ 30 $ 31 $ 114 $ 113 Segment depreciation and amortization 9 8 10 9 9 43 36 Adjusted Segment EBITDA $ 43 $ 35 $ 35 $ 39 $ 40 $ 157 $ 149 Adjusted EBITDA Margin 21.7% 19.9% 19.4% 21.2% 21.2% 20.5% 20.4% 29
Non-GAAP Reconciliation: Segment Adjusted EBITDA(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Other Segment GAAP revenue $ 261 $ 256 $ 240 $ 163 $ 107 $ 1,137 $ 766 GAAP Segment profit (loss) $ 30 $ 36 $ 37 $ 10 $ (3) $ 144 $ 80 Segment depreciation and amortization 3 3 3 1 3 15 10 Adjusted Segment EBITDA $ 33 $ 39 $ 40 $ 11 $ — $ 159 $ 90 Adjusted EBITDA Margin 12.6 % 15.2 % 16.7 % 6.7 % — % 14.0 % 11.7 % Shared IT / Infrastructure & Corporate Costs (Corporate) Corporate GAAP revenue $ — $ — $ — $ — $ — $ — $ — Corporate profit (loss) $ (183) $ (176) $ (172) $ (168) $ (179) $ (802) $ (695) Corporate depreciation and amortization 14 10 10 14 14 57 48 EBITDA $ (169) $ (166) $ (162) $ (154) $ (165) (745) (647) EBITDA Margin — % — % — % — % — % — % — % (1) Certain reclassifications have been made to prior year information to conform to current year presentation. (2) HE and NY MMIS business moved from Other segment into the Government Services segment effective Q1 2018. 30
Non-GAAP Reconciliation: Segment Adjusted EBITDA(1) Adjusted for 606 and Divestitures(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Commercial Industries Segment GAAP revenue $ 682 $ 653 $ 626 $ 619 $ 649 $ 2,685 $ 2,547 ASC 606 adjustment (23) — — — — (92) — Segment Revenue Adjusted for 606 $ 659 $ 653 $ 626 $ 619 $ 649 $ 2,593 $ 2,547 Segment profit $ 154 $ 110 $ 120 $ 127 $ 143 $ 563 $ 500 Segment depreciation and amortization 23 28 25 22 22 98 97 ASC 606 adjustment (1) — — — — (5) — Segment EBITDA Adjusted for 606 $ 176 $ 138 $ 145 $ 149 $ 165 $ 656 $ 597 Adjusted EBITDA Margin 26.7% 21.1% 23.2% 24.1% 25.4% 25.3% 23.4% Government Services Segment GAAP revenue $ 352 $ 335 $ 341 $ 338 $ 337 $ 1,433 $ 1,351 ASC 606 adjustment (7) — — — — (26) — Segment Revenue Adjusted for 606 $ 345 $ 335 $ 341 $ 338 $ 337 $ 1,407 $ 1,351 Segment profit $ 96 $ 108 $ 100 $ 106 $ 110 $ 398 $ 424 Segment depreciation and amortization 9 7 9 7 7 41 30 ASC 606 adjustment (1) — — — — (3) — Segment EBITDA Adjusted for 606 $ 104 $ 115 $ 109 $ 113 $ 117 $ 436 $ 454 EBITDA Margin 30.1% 34.3% 32.0% 33.4% 34.7% 31.0% 33.6% Segment EBITDA Adjusted for 606 $ 104 $ 115 $ 109 $ 113 $ 117 $ 436 $ 454 NY MMIS charge (credit)(2) (1) — (1) (1) — 9 (2) HE charge (credit)(2) — — — — (1) (8) (1) Adjusted Segment EBITDA $ 103 $ 115 $ 108 $ 112 $ 116 $ 437 $ 451 Adjusted EBITDA Margin 29.9% 34.3% 31.7% 33.1% 34.4% 31.1% 33.4% (1) Adjusted for the estimated impact from the adoption of the 606 accounting standard, had it been applicable in FY 2017 and revenue and (income) loss from divestitures. Certain reclassifications have been made to prior year information to conform to current year presentation. 31 (2) HE and NY MMIS business moved from Other segment into the Government Services segment effective Q1 2018.
Non-GAAP Reconciliation: Segment Adjusted EBITDA(1) Adjusted for 606 and Divestitures(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Transportation Segment GAAP revenue $ 198 $ 176 $ 180 $ 184 $ 189 $ 767 $ 729 ASC 606 adjustment (10) — — — — (42) — Segment Revenue Adjusted for 606 $ 188 $ 176 $ 180 $ 184 $ 189 $ 725 $ 729 Segment profit $ 34 $ 27 $ 25 $ 30 $ 31 $ 114 $ 113 Segment depreciation and amortization 9 8 10 9 9 43 36 ASC 606 adjustment (1) — — — — (3) — Segment EBITDA Adjusted for 606 $ 42 $ 35 $ 35 $ 39 $ 40 $ 154 $ 149 Adjusted EBITDA Margin 22.3% 19.9% 19.4% 21.2% 21.2% 21.2% 20.4% (1) Adjusted for the estimated impact from the adoption of the 606 accounting standard, had it been applicable in FY 2017 and revenue and (income) loss from divestitures. Certain reclassifications have been made to prior year information to conform to current year presentation. 32 (2) HE and NY MMIS business moved from Other segment into Government Services segment effective Q1 2018.
Non-GAAP Reconciliation: Segment Adjusted EBITDA(1) Continued (Adjusts all periods for full divestiture impact) Adjusted for 606 and Divestitures(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Other Segment Segment GAAP revenue $ 261 $ 256 $ 240 $ 163 $ 107 $ 1,137 $ 766 ASC 606 adjustment (1) — — — — (6) — 2017 divestitures — — — — — (59) — Segment Revenue Adjusted for 606 and 2017 Divestitures 260 256 240 163 107 1,072 766 2018 divestitures (249) (248) (238) (162) (104) (997) (752) Adjusted Segment Revenue $ 11 $ 8 $ 2 $ 1 $ 3 $ 75 $ 14 Segment profit (loss) $ 30 $ 36 $ 37 $ 10 $ (3) $ 144 $ 80 Segment depreciation and amortization 3 3 3 1 3 15 10 ASC 606 adjustment — — — — — — — 2017 divestitures — — — — — (7) — 2017 divestitures depreciation and amortization — — — — — 1 — Segment EBITDA Adjusted for 606 and 2017 Divestitures 33 39 40 11 — 153 90 2018 divestitures (32) (39) (41) (15) (3) (121) (98) 2018 divestitures depreciation and amortization (3) (2) (2) — (3) (14) (7) Adjusted Segment EBITDA $ (2) $ (2) $ (3) $ (4) $ (6) $ 18 $ (15) Adjusted EBITDA Margin (18.2)% (25.0)% (150.0)% (400.0)% (200.0)% 24.0% (107.1)% 33 (1) Adjusted for the estimated impact from the adoption of the 606 accounting standard, had it been applicable in FY 2017 and adjusts all periods for divestiture impact. Certain reclassifications have been made to prior year information to conform to current year presentation.
Non-GAAP Reconciliation: Segment Adjusted EBITDA(1) Continued (Adjusts all periods for full divestiture impact) Adjusted for 606 and Divestitures(1) (in millions) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2017 FY 2018 Shared IT / Infrastructure & Corporate Costs (Corporate) Corporate GAAP revenue $ — $ — $ — $ — $ — $ — $ — Adjusted Corporate Revenue $ — $ — $ — $ — $ — $ — $ — Corporate profit (loss) $ (183) $ (176) $ (172) $ (168) $ (179) $ (802) $ (695) Corporate depreciation and amortization 14 10 10 14 14 57 48 Adjusted Corporate EBITDA $ (169) $ (166) $ (162) $ (154) $ (165) $ (745) $ (647) Adjusted EBITDA Margin —% —% —% —% —% —% —% 34
Non-GAAP Reconciliation: Adj. Free Cash Flow Three Months Ended December 31, Years Ended December 31, (in millions) 2018 2017 2018 2017 Operating Cash Flow $ 253 $ 236 $ 283 $ 300 Cost of additions to land, buildings and equipment (60) (39) (179) (96) Proceeds from sales of land, buildings and equipment 1 — 13 33 Cost of additions to internal use software (14) (10) (45) (36) Tax payment related to divestitures 50 — 90 — Vendor financed capital leases — — (14) (16) Transaction costs 14 — 33 — Transaction costs tax benefit (5) — (5) — Debt buyback tax benefit (26) — (26) — Deferred compensation tax benefit (31) — (31) — Deferred compensation payments and adjustments 77 17 99 28 Adjusted Free Cash Flow $ 259 $ 204 $ 218 $ 213 35
Non-GAAP Reconciliation: Adjusted Cash As of September 30, As of December 31, As of December 31, (in millions) 2018 2018 2017 Cash and cash equivalents $ 586 $ 756 $ 658 Deferred compensation payments and adjustments 22 99 17 Deferred compensation payable (99) (99) (116) Adjusted cash and cash equivalents $ 509 $ 756 $ 559 36
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