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 22, 2017
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
Florham Park, New Jersey
07932
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (908) 758-1200
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)) |
Item 2.02. Results of Operations and Financial Condition.
On February 22, 2017, Registrant released its fourth quarter 2016 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.
| Item 7.01 | Other Events. |
On February 22. 2017, Registrant held its Fourth Quarter and Full Year 2016 Earnings Call. Attached as Exhibit 99.2 is a copy of Registrant’s investor presentation dated February 22, 2017 prepared for the Fourth Quarter and Full Year 2016 Earnings Call.
The information contained in Item 2.02 and Item 7.01 of this Report and in Exhibit 99.1 and 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.
| Exhibit |
Description | |
| 99.1 | Registrant’s fourth quarter 2016 earnings press release dated February 22, 2017 | |
| 99.2 | Registrant’s investor presentation dated February 22, 2017 | |
Forward Looking Statements
This report contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary
materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors, among others: competitive pressures; changes in interest in outsourced business process services; our ability to obtain adequate pricing for our services and to improve our cost structure; the effects of any acquisitions, joint ventures and divestitures by us; our ability to attract and retain key employees; our ability to attract and retain necessary technical personnel and qualified subcontractors; a decline in revenues from or a loss or failure of significant clients; our ability to estimate the scope of work or the costs of performance in our contracts; 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; our ability to deliver on our contractual obligations properly and on time; our ability to renew commercial and government contracts awarded through competitive bidding processes; increases in the cost of telephone and data services or significant interruptions in such services; changes in tax and other laws and regulations; increased volatility or decreased liquidity in the capital markets, including any limitation on our ability to access the capital markets for debt securities, refinance our outstanding indebtedness or obtain bank financing on acceptable terms; the impact of terrorist acts, hostilities, natural disasters (including extreme weather) and pandemic viruses; changes in foreign exchange rates; our lack of an operating history as an independent publicly traded company; changes in U.S. GAAP or other applicable accounting policies; the other risks and uncertainties detailed in the section titled “Risk Factors”, the section titled “Legal Proceedings”, our financial statements and the accompanying notes thereto, and the other sections of our Registration Statement on Form 10, as amended, and the section titled “Risk Factors” the section titled “Management’s Discussion and Analysis of Financial Condition”, our financial statements and the accompanying notes thereto, and the other sections of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. Any forward-looking statements made by us in this current 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 22, 2017
| CONDUENT INCORPORATED | ||||
| By: | /s/ Jay T. Chu | |||
| Jay T. Chu | ||||
| Vice President and Chief Accounting Officer | ||||
EXHIBIT INDEX
| Exhibit |
Description | |
| 99.1 | Registrant’s fourth quarter 2016 earnings press release dated February 22, 2017 | |
| 99.2 | Registrant’s investor presentation dated February 22, 2017 | |
Exhibit 99.1
| News from Conduent |
| |||
| For Immediate Release | Conduent Incorporated 100 Campus Drive Florham Park, NJ. 07932
www.Conduent.com | |||
Conduent Announces Fourth Quarter and Full-Year 2016 Results; Reaffirms Long-Term Outlook
Successfully Completed Spin-Off from Xerox; Listed as Independent Company on NYSE
| • | Fourth quarter and full-year financial results represent operations while still part of Xerox Corporation |
| • | FY 2016 revenues of $6.408 billion, adjusted revenues of $6.491 billion; Q4 2016 revenues of $1.514 billion, adjusted revenues of $1.597 billion |
| • | FY 2016 Profit (Loss) Before Income Tax of ($1.227 billion), which includes $935 million goodwill impairment charge and $161 million NY MMIS charge. FY 2016 adjusted EBITDA of $635 million, adjusted EBITDA margin of 9.8%; Q4 2016 adjusted EBITDA of $172 million, adjusted EBITDA margin of 10.8% |
| • | FY 2016 GAAP EPS (Loss) of ($4.85), adjusted EPS of $1.06; Q4 2016 GAAP EPS (Loss) of ($4.69), adjusted EPS of $0.29 |
| • | Long-term financial outlook remains unchanged from December 5, 2016 Investor Event |
FLORHAM PARK, N.J., Feb. 22, 2017 – Conduent (NYSE: CNDT), a leading provider of diversified business process services, today announced fourth quarter and full-year 2016 financial results reflecting its last period as part of Xerox Corporation.
“In 2016, we were focused on executing a successful separation from Xerox to become a stand-alone public company,” said Ashok Vemuri, CEO of Conduent. “As we move into 2017, we are aligning our go-to-market and capital allocation strategies with the competitive requirements of our industry. Our near-term focus is on strengthening client relationships, completing the build-out of our management structure, and continuing the success of our strategic transformation program critical in reaching our margin expansion goals.”
Fourth Quarter 2016 Results
Fourth quarter 2016 GAAP revenues were $1.514 billion. Operating margin was (3.4) percent. The company reported a GAAP EPS (Loss) of ($4.69) which includes the impact from the goodwill impairment charge of $935 million, $828 million net of income tax ($4.08 per share), and the NY MMIS charge of $161 million, $98 million net of income tax ($0.48 per share).
Fourth quarter adjusted revenues were $1.597 billion. Adjusted operating margin was 6.8 percent. Adjusted EBITDA was $172 million, with an adjusted EBITDA margin of 10.8 percent. The company reported adjusted earnings per share of $0.29.
Conduent generated $146 million in cash flow from operations during the fourth quarter and ended 2016 with a cash balance of $390 million. Total debt was approximately $2.0 billion as of December 31. In early January, the company borrowed an additional $100 million on its Term Loan B.
Full-Year 2016 Results
Full-year 2016 GAAP revenues were $6.408 billion. Operating margin was 3.0 percent. The company reported a GAAP EPS (Loss) of ($4.85), which includes the impact from the goodwill impairment charge of $935 million, $828 million net of income tax ($4.08 per share), and the NY MMIS charge of $161 million, $98 million net of income tax ($0.48 per share).
Full-year adjusted revenues were $6.491 billion. Adjusted operating margin was 5.5 percent. Adjusted EBITDA was $635 million, with adjusted EBITDA margin of 9.8 percent. The company reported adjusted earnings per share of $1.06.
Conduent generated $108 million in cash flow from operations for the full-year 2016.
Financial and Strategic Outlook
Conduent’s long-term financial outlook remains unchanged from what was outlined at the December 2016 Investor Event, and the company is continuing to execute against its strategic transformation program.
“The strategic transformation continues to progress as expected. Our efforts extend throughout the organization and are focused on multiple aspects of the business, including modernizing platforms, refocusing our innovation group, and expanding verticalization in our core markets,” said Brian Webb Walsh, Conduent CFO. “These initiatives will strengthen our foundation for the future.”
Conference Call
Management will present the results during a conference call and webcast at 10 a.m. Eastern.
The call will be available by live audio webcast along with the news release and online presentation slides at https://investor.conduent.com/.
The conference call will also be available by calling 877-883-0383 (international dial-in 412-902-6506) at approximately 9:45 a.m. ET. The conference ID for this call is 6913733.
A recording of the conference call will be available by calling 877-344-7529, or 412-317-0088 after 1:30 p.m. ET on February 22, 2017. The replay ID is 10100028. For international calls, please select a dial-in number from: https://services.choruscall.com/ccforms/replay.html. The telephone recording will be available until 7:00 p.m. ET on March 15, 2017.
About Conduent
Conduent is a leading provider of diversified business process services with leading capabilities in transaction processing, automation, analytics and constituent experience. We work with both government and commercial customers in assisting them to deliver quality services to the people they serve.
We manage interactions with patients and the insured for a significant portion of the U.S. healthcare industry. We are the customer interface for large segments of the technology industry and the operational and processing partner of choice for public transportation systems around the world.
Whether it’s digital payments, claims processing, benefit administration, automated tolling, customer care or distributed learning – Conduent manages and modernizes these interactions to create value for both our clients and their constituents. Learn more at www.conduent.com.
Forward Looking Statements
This news release contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include:
| • | government regulation, economic, strategic, political and social conditions and the following factors; |
| • | competitive pressures; |
| • | changes in interest in outsourced business process services; |
| • | our ability to obtain adequate pricing for our services and to improve our cost structure; |
| • | the effects of any acquisitions, joint ventures and divestitures by us; |
| • | our ability to attract and retain key employees; |
| • | our ability to attract and retain necessary technical personnel and qualified subcontractors and their ability to deliver or perform as expected; |
| • | termination right, audits and investigations associated with government contracts; |
| • | a decline in revenues from or a loss or failure of significant clients; |
| • | our ability to estimate the scope of work or the costs of performance in our contracts; |
| • | 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; |
| • | our ability to deliver on our contractual obligations properly and on time; |
| • | our ability to renew commercial and government contracts awarded through competitive bidding processes; |
| • | increases in the cost of telephone and data services or significant interruptions in such services; |
| • | changes in tax and other laws and regulations; |
| • | 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 Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of the Conduent Incorporated Form 10 Registration Statement, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
This list of important risk factors is not intended to be exhaustive. Conduent is under no obligation to, and expressly disclaims any obligation to, update any forward-looking statements as a result of new information or future events or developments, except as required by law.
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. Any forward-looking statements made by us in this current 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.
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 described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. 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 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. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. Refer to the “Non-GAAP Financial Measures” section attached to this release for a discussion of these non-GAAP measures and their reconciliation to the reported GAAP measure.
# # #
Media Contacts:
Karen Cleeve, Conduent, +1-973-526-7156, karen.cleeve@conduent.com
Sean Collins, Conduent, +1-310-497-9205, sean.collins2@conduent.com
Investor Contact:
Alan Katz, Conduent, +1-973-526-7173, alan.katz@conduent.com
Xerox® and Xerox and Design® are trademarks of Xerox in the United States and/or other countries. Conduent is a trademark of Conduent Incorporated in the United States and/or other countries.
Conduent Incorporated
Condensed Consolidated Statements of Income (Unaudited)
| Three Months Ended | Year Ended | |||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||
| (in millions, except per-share data) |
2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||||||||||||||
| Revenues |
||||||||||||||||||||||||
| Outsourcing |
$ | 1,502 | $ | 1,717 | (13 | )% | $ | 6,358 | $ | 6,609 | (4 | )% | ||||||||||||
| Related party |
12 | 13 | (8 | )% | 50 | 53 | (6 | )% | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total Revenues |
1,514 | 1,730 | (12 | )% | 6,408 | 6,662 | (4 | )% | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Costs and Expenses |
||||||||||||||||||||||||
| Cost of outsourcing |
1,383 | 1,432 | (3 | )% | 5,462 | 5,937 | (8 | )% | ||||||||||||||||
| Related party cost of services |
8 | 11 | (27 | )% | 36 | 40 | (10 | )% | ||||||||||||||||
| Research and development |
6 | 13 | (54 | )% | 31 | 52 | (40 | )% | ||||||||||||||||
| Selling, administrative and general |
169 | 177 | (5 | )% | 686 | 699 | (2 | )% | ||||||||||||||||
| Restructuring and related costs |
44 | (1 | ) | * | 101 | 159 | (36 | )% | ||||||||||||||||
| Amortization of intangible assets |
80 | 63 | 27 | % | 280 | 250 | 12 | % | ||||||||||||||||
| Goodwill impairment |
935 | — | * | 935 | — | * | ||||||||||||||||||
| Separation costs |
10 | — | * | 44 | — | * | ||||||||||||||||||
| Related party interest |
(4 | ) | 11 | (136 | )% | 26 | 61 | (57 | )% | |||||||||||||||
| Other expenses, net |
24 | 16 | 50 | % | 34 | 38 | (11 | )% | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total Costs and Expenses |
2,655 | 1,722 | 54 | % | 7,635 | 7,236 | 6 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (Loss) Income Before Income Taxes(1) |
(1,141 | ) | 8 | * | (1,227 | ) | (574 | ) | 114 | % | ||||||||||||||
| Income tax benefit |
(190 | ) | (1 | ) | * | (244 | ) | (238 | ) | * | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (Loss) Income from Continuing Operations |
(951 | ) | 9 | * | (983 | ) | (336 | ) | 193 | % | ||||||||||||||
| Loss from discontinued operations, net of tax |
— | (14 | ) | (100 | )% | — | (78 | ) | (100 | )% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net Loss |
$ | (951 | ) | $ | (5 | ) | * | $ | (983 | ) | $ | (414 | ) | 137 | % | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Basic (Loss) Earnings per Share: |
||||||||||||||||||||||||
| Continuing operations |
$ | (4.69 | ) | $ | 0.04 | * | $ | (4.85 | ) | $ | (1.65 | ) | * | |||||||||||
| Discontinued operations |
— | (0.07 | ) | * | — | (0.39 | ) | * | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total Basic Loss per Share |
$ | (4.69 | ) | $ | (0.03 | ) | * | $ | (4.85 | ) | $ | (2.04 | ) | * | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Diluted (Loss) Earnings per Share: |
||||||||||||||||||||||||
| Continuing operations |
$ | (4.69 | ) | $ | 0.04 | * | $ | (4.85 | ) | $ | (1.65 | ) | * | |||||||||||
| Discontinued operations |
— | (0.07 | ) | * | — | (0.39 | ) | * | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total Diluted (Loss) per Share |
$ | (4.69 | ) | $ | (0.03 | ) | * | $ | (4.85 | ) | $ | (2.04 | ) | * | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| * | Percent change not meaningful. |
| (1) | Referred to as “Pre-Tax (Loss) Income” throughout the remainder of this document. |
Conduent Incorporated
Condensed Consolidated Balance Sheets (Unaudited)
| (in millions, except share data in thousands) |
December 31, 2016 |
December 31, 2015 |
||||||
| Assets |
||||||||
| Cash and cash equivalents |
$ | 390 | $ | 140 | ||||
| Accounts receivable, net |
1,286 | 1,246 | ||||||
| Related party notes receivable |
— | 248 | ||||||
| Other current assets |
241 | 240 | ||||||
|
|
|
|
|
|||||
| Total current assets |
1,917 | 1,874 | ||||||
| Land, buildings and equipment, net |
283 | 280 | ||||||
| Intangible assets, net |
1,144 | 1,425 | ||||||
| Goodwill |
3,889 | 4,872 | ||||||
| Other long-term assets |
476 | 607 | ||||||
|
|
|
|
|
|||||
| Total Assets |
$ | 7,709 | $ | 9,058 | ||||
|
|
|
|
|
|||||
| Liabilities and Equity |
||||||||
| Short-term debt and current portion of long-term debt |
$ | 28 | $ | 24 | ||||
| Related party notes payable |
— | 1,132 | ||||||
| Accounts payable |
164 | 264 | ||||||
| Accrued compensation and benefits costs |
269 | 249 | ||||||
| Unearned income |
206 | 227 | ||||||
| Net payable to former parent company |
124 | — | ||||||
| Other current liabilities |
611 | 845 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
1,402 | 2,741 | ||||||
| Long-term debt |
1,913 | 37 | ||||||
| Pension and other benefit liabilities |
172 | 153 | ||||||
| Deferred taxes |
619 | 764 | ||||||
| Other long-term liabilities |
173 | 201 | ||||||
|
|
|
|
|
|||||
| Total Liabilities |
4,279 | 3,896 | ||||||
|
|
|
|
|
|||||
| Series A Convertible Preferred Stock |
142 | — | ||||||
|
|
|
|
|
|||||
| Common stock |
2 | — | ||||||
| Additional paid-in capital |
3,812 | — | ||||||
| Former parent company investment |
— | 5,343 | ||||||
| Accumulated other comprehensive loss |
(526 | ) | (181 | ) | ||||
|
|
|
|
|
|||||
| Total Equity |
3,288 | 5,162 | ||||||
| Total Liabilities and Equity |
$ | 7,709 | $ | 9,058 | ||||
|
|
|
|
|
|||||
| Shares of common stock issued and outstanding |
202,875 | |||||||
Conduent Incorporated
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended December 31, |
Year Ended December 31, |
|||||||||||||||
| (in millions) |
2016 | 2015 | 2016 | 2015 | ||||||||||||
| Cash Flows from Operating Activities: |
||||||||||||||||
| Net loss |
$ | (951 | ) | $ | (5 | ) | $ | (983 | ) | $ | (414 | ) | ||||
| Adjustments required to reconcile net income to cash flows from operating activities: |
||||||||||||||||
| Depreciation and amortization |
196 | 134 | 613 | 600 | ||||||||||||
| Goodwill impairment |
935 | — | 935 | — | ||||||||||||
| Provision for receivables |
1 | 2 | 4 | 4 | ||||||||||||
| Deferred tax expense |
(4 | ) | (115 | ) | (4 | ) | (115 | ) | ||||||||
| Net loss on sales of businesses and assets |
1 | 25 | 2 | 100 | ||||||||||||
| Stock-based compensation |
6 | (14 | ) | 24 | 19 | |||||||||||
| Restructuring and asset impairment charges |
28 | (1 | ) | 73 | 159 | |||||||||||
| Payments for restructurings |
(9 | ) | (6 | ) | (46 | ) | (19 | ) | ||||||||
| Contributions to defined benefit pension plans |
(2 | ) | (2 | ) | (6 | ) | (8 | ) | ||||||||
| Decrease (increase) in accounts receivable |
113 | 208 | (27 | ) | 239 | |||||||||||
| Increase in other current and long-term assets |
(20 | ) | (13 | ) | (90 | ) | (86 | ) | ||||||||
| Increase (decrease) in accounts payable and accrued compensation |
94 | 67 | (60 | ) | 22 | |||||||||||
| (Decrease) increase in other current and long-term liabilities |
(46 | ) | 37 | (210 | ) | 228 | ||||||||||
| Net change in income tax assets and liabilities |
(197 | ) | 172 | (117 | ) | (236 | ) | |||||||||
| Other operating, net |
1 | (1 | ) | — | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by operating activities |
146 | 488 | 108 | 493 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash Flows from Investing Activities: |
||||||||||||||||
| Cost of additions to land, buildings and equipment |
(63 | ) | (35 | ) | (149 | ) | (158 | ) | ||||||||
| Cost of additions to internal use software |
(8 | ) | (7 | ) | (39 | ) | (27 | ) | ||||||||
| Proceeds from sale of businesses |
— | — | (53 | ) | 939 | |||||||||||
| Acquisitions, net of cash acquired |
— | (2 | ) | (1 | ) | (197 | ) | |||||||||
| Proceeds from investments |
11 | — | 11 | — | ||||||||||||
| Net proceeds (payments) on related party notes receivable |
205 | (13 | ) | 248 | (37 | ) | ||||||||||
| Other investing, net |
— | 2 | (1 | ) | 2 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by (used in) investing activities |
145 | (55 | ) | 16 | 522 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash Flows from Financing Activities: |
||||||||||||||||
| Net proceeds on debt |
1,896 | 5 | 1,902 | 28 | ||||||||||||
| Net payments on debt |
(14 | ) | (6 | ) | (32 | ) | (293 | ) | ||||||||
| Net payments on related party notes payable |
(1,106 | ) | (107 | ) | (1,132 | ) | (91 | ) | ||||||||
| Net transfers to former parent |
(804 | ) | (348 | ) | (588 | ) | (672 | ) | ||||||||
| Excess tax benefits from stock-based compensation |
— | 3 | — | 6 | ||||||||||||
| Restricted cash - related party |
(18 | ) | — | (18 | ) | — | ||||||||||
| Other financing |
1 | — | — | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash (used in) provided by financing activities |
(45 | ) | (453 | ) | 132 | (1,023 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Effect of exchange rate changes on cash and cash equivalents |
(4 | ) | (3 | ) | (6 | ) | (11 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Increase (decrease) increase in cash and cash equivalents |
242 | (23 | ) | 250 | (19 | ) | ||||||||||
| Cash and cash equivalents at beginning of period |
148 | 163 | 140 | 159 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash and Cash Equivalents at End of Period |
$ | 390 | $ | 140 | $ | 390 | $ | 140 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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 described below, consistent with Xerox’s historical presentation. 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 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. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. Also, non-GAAP measures are footnoted, where applicable in each slide herein.
These Non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. A reconciliation of the following Non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth as part of the Appendix to this presentation.
In connection with the preparation of our financial statements for the fiscal year ended December 31, 2016, during the fourth quarter, we performed our annual goodwill impairment test. Following the completion of the impairment test, we determined that we will record a non-cash goodwill impairment charge of $935 million (approximately $828 million after-tax or ($4.08) per share) in our Commercial Sector reporting unit. Subsequent to the goodwill impairment charge, the Commercial Sector reporting unit’s goodwill balance is approximately $908 million. This non-cash charge is attributable primarily to weaker than expected Commercial Sector revenues and operating profits, including in the fourth quarter of 2016. We do not expect to make any current or future cash expenditures as a result of this impairment.
We are in discussions with the State of New York regarding the status and scope of the Health Enterprise platform project, which evolved to include options to not fully complete the project. Based on those discussions, we believe it is probable that we will not fully complete the implementation of the platform in New York. As a result of these developments, we will record a pre-tax charge of approximately $161 million (approximately $98 million after-tax or ($0.48) per share) in our fourth-quarter 2016 results reflecting estimated asset impairments, wind down costs and other impacts from this project. The charge includes approximately $115 million for the write-off of receivables and other related assets and non-cash impairment charges, with the remainder of the charge expected to be cash outflows in future quarters for wind down and related costs.
Late in the third quarter of 2015, we determined that we would not fully complete Health Enterprise Medicaid platform implementation projects in California and Montana and recorded a charge of $389 million. The charge included a $116 million reduction to revenues with the remaining $273 million recorded to cost of outsourcing.
As a result of the significant impact of the Goodwill Impairment, NY MMIS Charge and HE Charge on our reported revenues, costs and expenses as well as key metrics for the period, we discuss our 2016 and 2015 results using non-GAAP financial measures that exclude the impact of these items, as discussed below.
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.
In 2016, we adjusted Income (Loss) before Income Taxes for the Goodwill Impairment charge of $935 million recorded during the fourth quarter 2016.
Also in 2016, we adjusted Income (Loss) before Income Taxes for the New York Health Enterprise (NY MMIS) charge of $161 million recorded during the fourth quarter 2016. In 2015, we adjusted Income (Loss) before Income Taxes for the Health Enterprise (HE) charge of $389 million recorded during the third quarter 2015.
In addition to the items discussed above, for the quarter and full year ended December 31, 2016 and 2015 we Adjusted Net Income (Loss), Earnings per Share and Effective Tax Rate for the following items:
| • | Amortization of intangible assets. The amortization of intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period. |
| • | Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our Strategic Transformation program. |
| • | Separation costs. Separation costs are expenses incurred in connection with separation from Xerox Corporation into a separate, independent, publicly traded company. Separation costs primarily relate to third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies. |
| • | Other expenses, net, excluding third party interest expense. Other expenses, net includes losses (gains) on sales of businesses and assets, currency (gains) losses, net, litigation matters and all other expenses, net. |
Adjusted Revenue, Costs and Expenses and Margin – Adjusted Operating Income. We make adjustments to Revenue, Costs and Expenses and Margin for the following items, for the purpose of calculating Adjusted Operating Income.
In 2016, we adjusted Income (Loss) before Income Taxes for the Goodwill Impairment charge of $935 million recorded during the fourth quarter 2016.
As a result of the nature and the significant impact of the NY MMIS and HE charges on our reported revenues, costs and expenses, as well as key metrics for the period, we discussed our 2016 and 2015 Adjusted Operating Income after excluding the impact of the NY MMIS and HE charges. In 2016, we Adjusted Operating Income by adjusting Income (Loss) before Income Taxes for the fourth quarter NY MMIS charge of $161 million, which included an $83 million reduction in revenues. In 2015, we Adjusted Operating Income by adjusting Income (Loss) before Income Taxes for the third quarter HE charge of $389 million, which included a $116 million reduction in revenues.
In addition to the items discussed above, for the three months and year ended December 31, 2016 and 2015 we Adjusted Operating Income for the following items:
| • | As defined above in Adjusted Net Income (Loss), Adjusted Earnings per Share, and Adjusted Effective Tax Rate: |
o Amortization of intangible assets.
o Restructuring and related costs.
o Separation costs.
| • | We also adjust Operating Income for: |
o Related Party Interest. Includes interest payments to former parent.
o Other expenses, net. Including third party interest, losses (gains) on sales of businesses and assets, currency (gains) losses, net, litigation matters and all other expenses, net.
Adjusted Revenues
As a result of the nature and the significant impact of the NY MMIS and HE charges on our reported revenues, we discussed our 2016 and 2015 revenues excluding the impact of the NY MMIS and HE charges. For the fourth quarter and full year 2016, we reduced revenues by $83 million for NY MMIS. For the third quarter and full year 2015, we reduced revenues by $116 million to reflect the reduction in HE revenues.
Adjusted EBITDA
We use Adjusted EBITDA to provide additional information that is useful to understand the financial covenants contained in the Company’s credit facility and indenture. We also use Adjusted EBITDA as an additional way of assessing certain aspects of our operations that, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our core business. Adjusted EBITDA represents Income (loss) before Income Taxes adjusted for the following items:
| • | As defined above in Adjusted Net Income (Loss), Adjusted Earnings per Share, and Adjusted Effective Tax Rate section or Adjusted Revenue, Costs and Expenses and Margin – Adjusted Operating Income section: |
o The fourth quarter of 2016 Goodwill Impairment Charge and NY MMIS charge.
o The third quarter 2015 HE charge.
o Amortization of intangible assets.
o Restructuring and related costs.
o Separation costs.
o Related Party Interest. Includes interest payments to former parent.
o Other expenses, net. Including third party interest, losses (gains) on sales of businesses and assets, currency (gains) losses, net, litigation matters and all other expenses, net.
| • | We also adjust EBITDA for: |
o Depreciation
o NY MMIS depreciation
o HE amortization
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 and are not necessarily comparable to similarly-titled measures reported by other companies. Management cautions that amounts presented in accordance with Conduent’s definition Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate Adjusted EBITDA in the same manner.
Adjusted Other Segment Revenue and Profit
As a result of the nature and the significant impact of the NY MMIS and HE charges on our Other Segment Revenue and Profit, we discuss Other Segment Revenue and Profit excluding the impact of the NY MMIS and HE charges. In 2016, we adjusted Other Segment by adjusting for the fourth quarter NY MMIS charge of $161 million, which included an $83 million reduction in revenues. In 2015, we Adjusted Other Segment by adjusting for the third quarter HE charge of $389 million, which included a $116 million reduction in revenues.
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 and capital lease additions, plus proceed from sales of land, building and equipment. We use the non-GAAP measure of Free Cash Flow as a criterion of liquidity and performance-based components of employee compensation. We use Free Cash Flow as a measure of liquidity to determine amounts we can reinvest in our core businesses, such as amounts available to make acquisitions, invest in land, buildings and equipment and internal use software, make principal payments on debt, or amounts we can return to our stockholders through dividends and/or stock repurchases. In order to provide a meaningful basis for comparison, we are providing information with respect to our Free Cash Flow for the three months and year ended December 31, 2016, reconciled for each such period to cash flow provided by operating activities, which we believe to be the most directly comparable measure under GAAP.
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.
Net (Loss) Income and EPS Reconciliation
| Three Months Ended | Year Ended | |||||||||||||||||||||||||||||||
| December 31, 2016 | December 31, 2015 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||
| (in millions) |
Net Income (Loss) |
EPS | Net Income (Loss) |
EPS | Net Income (Loss) |
EPS | Net Income (Loss) |
EPS | ||||||||||||||||||||||||
| Reported (loss) income from continuing operations |
$ | (951 | ) | $ | (4.69 | ) | $ | 9 | $ | 0.04 | $ | (983 | ) | $ | (4.85 | ) | $ | (336 | ) | $ | (1.65 | ) | ||||||||||
| Adjustments: |
||||||||||||||||||||||||||||||||
| Goodwill impairment |
935 | — | 935 | — | ||||||||||||||||||||||||||||
| NY MMIS charge |
161 | — | 161 | — | ||||||||||||||||||||||||||||
| Amortization of intangible assets |
80 | 63 | 280 | 250 | ||||||||||||||||||||||||||||
| Restructuring and related costs |
44 | (1 | ) | 101 | 159 | |||||||||||||||||||||||||||
| HE charge |
— | — | — | 389 | ||||||||||||||||||||||||||||
| Separation costs |
10 | — | 44 | — | ||||||||||||||||||||||||||||
| Other expenses, net excluding third party interest(1) |
13 | 15 | 20 | 30 | ||||||||||||||||||||||||||||
| Income tax adjustments(2) |
(231 | ) | (28 | ) | (335 | ) | (318 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Adjusted |
$ | 61 | $ | 0.29 | $ | 58 | $ | 0.28 | $ | 223 | $ | 1.06 | $ | 174 | $ | 0.83 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Weighted average shares for adjusted EPS(3) |
211,247 | 211,247 | 210,774 | 210,774 | ||||||||||||||||||||||||||||
| (1) Excludes third party interest expense of $11 million and $1 million for the three months ended December 31, 2016 and 2015, respectively and $14 million and $8 million for the year ended December 31, 2016 and 2015, respectively. |
| |||||||||||||||||||||||||||||||
| (2) Refer to Effective Tax Rate reconciliation |
| |||||||||||||||||||||||||||||||
| (3) Average shares for the calculations of adjusted EPS include 5.9 million of shares associated with our Series A convertible preferred stock. No dividends were declared or paid by Conduent in 2016.
|
| |||||||||||||||||||||||||||||||
| Effective Tax Rate Reconciliation |
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
| (in millions) |
Pre-Tax Income (Loss) |
Income Tax (Expense) Benefit |
Effective Tax Rate |
Pre-Tax Income (Loss) |
Income Tax (Expense) Benefit |
Effective Tax Rate |
||||||||||||||||||
| Reported from continuing operations |
$ | (1,141 | ) | $ | (190 | ) | 16.7 | % | $ | 8 | $ | (1 | ) | -12.5 | % | |||||||||
| Non-GAAP adjustments(1) |
1,243 | 231 | 77 | 28 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Adjusted(2) |
$ | 102 | $ | 41 | 40.2 | % | $ | 85 | $ | 27 | 31.8 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
| (in millions) |
Pre-Tax Income (Loss) |
Income Tax (Expense) Benefit |
Effective Tax Rate |
Pre-Tax Income (Loss) |
Income Tax (Expense) Benefit |
Effective Tax Rate |
||||||||||||||||||
| Reported from continuing operations |
$ | (1,227 | ) | $ | (244 | ) | 19.9 | % | $ | (574 | ) | $ | (238 | ) | 41.5 | % | ||||||||
| Non-GAAP adjustments(1) |
1,541 | 335 | 828 | 318 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Adjusted(2) |
$ | 314 | $ | 91 | 29.0 | % | $ | 254 | $ | 80 | 31.5 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (1) | Refer to Net (Loss) Income reconciliation for details. |
| (2) | The tax impact of Adjusted Pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported Pre-tax income under ASC 740, which employs an annual effective tax rate method to the results. |
Operating Income / Margin Reconciliation
| Three Months Ended December 31, 2016 |
Three Months Ended December 31, 2015 |
|||||||||||||||||||||||
| (in millions) |
Pre-Tax Profit (Loss) |
Revenue | Margin | Pre-Tax Profit (Loss) |
Revenue | Margin | ||||||||||||||||||
| Reported from continuing operations |
$ | (1,141 | ) | $ | 1,514 | -75.4 | % | $ | 8 | $ | 1,730 | 0.5 | % | |||||||||||
| Adjustments: |
||||||||||||||||||||||||
| Goodwill impairment |
935 | — | ||||||||||||||||||||||
| NY MMIS |
161 | 83 | — | |||||||||||||||||||||
| Amortization of intangible assets |
80 | 63 | ||||||||||||||||||||||
| Restructuring and related costs |
44 | (1 | ) | |||||||||||||||||||||
| Separation costs |
10 | — | ||||||||||||||||||||||
| Related party interest |
(4 | ) | 11 | |||||||||||||||||||||
| Other expenses, net(1) |
24 | 16 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Adjusted Operating Income/Margin |
$ | 109 | $ | 1,597 | 6.8 | % | $ | 97 | $ | 1,730 | 5.6 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (1) | Includes third party interest expense of $11 million and $1 million for the three months ended December 31, 2016 and 2015, respectively. |
| Year Ended December 31, 2016 |
Year Ended December 31, 2015 |
|||||||||||||||||||||||
| (in millions) |
Pre-Tax Profit (Loss) |
Revenue | Margin | Pre-Tax Profit (Loss) |
Revenue | Margin | ||||||||||||||||||
| Reported from continuing operations |
$ | (1,227 | ) | $ | 6,408 | -19.1 | % | $ | (574 | ) | $ | 6,662 | -8.6 | % | ||||||||||
| Adjustments: |
||||||||||||||||||||||||
| Goodwill impairment |
$ | 935 | $ | — | ||||||||||||||||||||
| Amortization of intangible assets |
280 | 250 | ||||||||||||||||||||||
| NY MMIS |
161 | 83 | — | |||||||||||||||||||||
| Restructuring and related costs |
101 | 159 | ||||||||||||||||||||||
| Separation costs |
44 | — | ||||||||||||||||||||||
| Related party interest |
26 | 61 | ||||||||||||||||||||||
| HE charge |
— | 389 | 116 | |||||||||||||||||||||
| Other expenses, net(1) |
34 | 38 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Adjusted Operating Income/Margin |
$ | 354 | $ | 6,491 | 5.5 | % | $ | 323 | $ | 6,778 | 4.8 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (1) | Includes third party interest expense of $14 million and $8 million for the year ended December 31, 2016 and 2015, respectively. |
| Adjusted Revenue and EBITDA |
| Q4 | Q1 | Q2 | Q3 | Q4 | FY | FY | ||||||||||||||||||||||
| (in millions) |
2015 | 2016 | 2016 | 2016 | 2016 | 2015 | 2016 | |||||||||||||||||||||
| Reconciliation to Adjusted Revenue |
||||||||||||||||||||||||||||
| Total Revenue as reported |
$ | 1,730 | $ | 1,685 | $ | 1,613 | $ | 1,596 | $ | 1,514 | $ | 6,662 | $ | 6,408 | ||||||||||||||
| NY MMIS charge |
— | — | — | — | 83 | — | 83 | |||||||||||||||||||||
| HE charge |
— | — | — | — | — | 116 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Adjusted Revenue |
$ | 1,730 | $ | 1,685 | $ | 1,613 | $ | 1,596 | $ | 1,597 | $ | 6,778 | $ | 6,491 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Reconciliation to Adjusted EBITDA |
||||||||||||||||||||||||||||
| Pre-tax income (loss) as reported from continuing operations |
$ | 8 | $ | (54 | ) | $ | (34 | ) | $ | 2 | $ | (1,141 | ) | $ | (574 | ) | $ | (1,227 | ) | |||||||||
| Depreciation |
31 | 32 | 29 | 31 | 36 | 126 | 128 | |||||||||||||||||||||
| Amortization |
103 | 118 | 104 | 104 | 159 | 474 | 485 | |||||||||||||||||||||
| Goodwill impairment |
— | — | — | — | 935 | — | 935 | |||||||||||||||||||||
| Restructuring and related costs |
(1 | ) | 26 | 23 | 8 | 44 | 159 | 101 | ||||||||||||||||||||
| Separation costs |
— | 3 | 16 | 15 | 10 | — | 44 | |||||||||||||||||||||
| Related party interest expense |
11 | 10 | 10 | 10 | (4 | ) | 61 | 26 | ||||||||||||||||||||
| NY MMIS charge |
— | — | — | — | 161 | — | 161 | |||||||||||||||||||||
| NY MMIS depreciation |
— | — | — | — | (52 | ) | — | (52 | ) | |||||||||||||||||||
| HE charge |
— | — | — | — | — | 389 | — | |||||||||||||||||||||
| HE depreciation |
— | — | — | — | — | (34 | ) | — | ||||||||||||||||||||
| Other expenses, net(1) |
16 | 11 | — | (1 | ) | 24 | 38 | 34 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Adjusted EBITDA |
$ | 168 | $ | 146 | $ | 148 | $ | 169 | $ | 172 | $ | 639 | $ | 635 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Adjusted EBITDA Margin |
9.7 | % | 8.7 | % | 9.2 | % | 10.6 | % | 10.8 | % | 9.4 | % | 9.8 | % | ||||||||||||||
| (1) Includes third party interest expense as follows: |
$ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 11 | $ | 8 | $ | 14 | ||||||||||||||
| Other Segment Revenue and Profit Reconciliation | ||||||||||||||||||||||||||
| Q4 | Q1 | Q2 | Q3 | Q4 | FY | FY | ||||||||||||||||||||||
| (in millions) |
2015 | 2016 | 2016 | 2016 | 2016 | 2015 | 2016 | |||||||||||||||||||||
| Reconciliation to Other Segment Adjusted Revenue |
|
|||||||||||||||||||||||||||
| Other Segment revenue as reported |
$ | 94 | $ | 108 | $ | 97 | $ | 92 | $ | 4 | $ | 289 | $ | 301 | ||||||||||||||
| NY MMIS charge |
— | — | — | — | 83 | — | 83 | |||||||||||||||||||||
| HE charge |
— | — | — | — | — | 116 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Adjusted Other Segment Revenue |
$ | 94 | $ | 108 | $ | 97 | $ | 92 | $ | 87 | $ | 405 | $ | 384 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Reconciliation to Other Segment Adjusted Profit |
|
|||||||||||||||||||||||||||
| Segment profit as reported |
$ | (20 | ) | $ | (16 | ) | $ | (37 | ) | $ | (21 | ) | $ | (171 | ) | $ | (489 | ) | $ | (245 | ) | |||||||
| NY MMIS charge |
— | — | — | — | 161 | — | 161 | |||||||||||||||||||||
| HE charge |
— | — | — | — | — | 389 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Adjusted Other Segment Profit |
$ | (20 | ) | $ | (16 | ) | $ | (37 | ) | $ | (21 | ) | $ | (10 | ) | $ | (100 | ) | $ | (84 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Free Cash Flow Reconciliation | ||||||||
| Three Months Ended | Year Ended | |||||||
| December 31, 2016 | December 31, 2016 | |||||||
| (in millions) | ||||||||
| Cash flows from operations |
$ | 146 | $ | 108 | ||||
| Cost of addition to LB&E |
(63 | ) | (149 | ) | ||||
| Cost of addition to internal use software and other |
(9 | ) | (40 | ) | ||||
|
|
|
|
|
|||||
| Free Cash Flow |
$ | 74 | $ | (81 | ) | |||
|
|
|
|
|
|||||
February 22, 2017 Conduent Q4 & FY 2016 Earnings Results Exhibit 99.2
Forward-Looking Statements This presentation contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include: •government regulation, economic, strategic, political and social conditions and the following factors; •competitive pressures; •changes in interest in outsourced business process services; •our ability to obtain adequate pricing for our services and to improve our cost structure; •the effects of any acquisitions, joint ventures and divestitures by us; •our ability to attract and retain key employees; •our ability to attract and retain necessary technical personnel and qualified subcontractors and their ability to deliver or perform as expected; •termination right, audits and investigations associated with government contracts; •a decline in revenues from or a loss or failure of significant clients; •our ability to estimate the scope of work or the costs of performance in our contracts; •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; •our ability to deliver on our contractual obligations properly and on time; •our ability to renew commercial and government contracts awarded through competitive bidding processes; •increases in the cost of telephone and data services or significant interruptions in such services; •changes in tax and other laws and regulations; •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 Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of the Conduent Incorporated Form 10 Registration Statement, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This list of important risk factors is not intended to be exhaustive. Conduent is under no obligation to, and expressly disclaims any obligation to, update any forward-looking statements as a result of new information or future events or developments, except as required by law. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. Any forward-looking statements made by us in this current 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. 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 described below consistent with Xerox’s historical presentation. 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 Consolidated Combined 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. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. Also, non-GAAP measures are footnoted, where applicable, in each slide herein. Cautionary Statements
Conduent Focus & Vision Strong client relationships and positioning in the market Invest in people, technology, and processes to remain a market leader Strategic transformation program well underway and on-track Reaffirming financial goals from December investor event
FY 2016 Overview Successful separation and listing on NYSE (NYSE: CNDT) Launched Conduent as stand-alone company Made progress in securing key management hires Continued progress on strategic transformation initiative 1 Please refer to Appendix for Non-GAAP reconciliations of adjusted revenue, adjusted operating income/margin, adjusted EBITDA/margin, and adjusted EPS 2 Constant currency based on foreign exchange rates as of December 31, 2016 GAAP: $6.4B Adjusted1: $6.5B, (4.2%) or (3.3% CC2) Adjusted operating margin1 5.5%, up 70 bps from 2015 GAAP EPS loss ($4.85) Adjusted EPS1 $1.06 Flat year-over-year on a dollar basis Adjusted EBITDA margin 9.8%, up 40 bps from 2015 Revenue Profitability Adjusted EBITDA1 Key Messages
Sources of Transformation Savings through FY 2018 Strategic Transformation Progress and outlook Near-term priorities continue to be optimizing, driving efficiency and taking out costs across IT, facilities and G&A Contract remediation remains a key opportunity Continue to balance reinvestment and margin expansion to meet 2017 and long-term financial targets (in millions) Savings FY 2017 Cumulative Target ~$430 FY 2018 Cumulative Target ~$700 On-track to achieve long-term cost savings target
Future Performance Drivers Revenue Goals Margin Goals Large and growing market opportunity; target areas of focus Focus portfolio on businesses with most attractive return profiles Our strategic plan is expected to drive top- and bottom-line growth, with cash flow reinvested in high-return opportunities Organic and inorganic investments Increase new business signings; sustain renewal rates Stabilize revenue and drive growth over time Simplify, standardize and streamline operations Turnaround areas of underperformance Reduce margin volatility; deliver cost transformation Fund investments and drive margin expansion Free Cash Flow Goals Revenue growth and cost savings from strategic transformation One-time impact from factoring program and HE payments do not recur Robust, consistent Free Cash Flow generation Reinvestment capacity
Financials
FY 2016 Performance FY 2016 Financial Metrics – GAAP ($ in millions, except per share amounts) FY 2015 FY 2016 B/(W) Yr/Yr Revenue $6,662 $6,408 (3.8%) Pretax loss ($574) ($1,227) NM Net loss ($336) ($983) NM EPS loss ($1.65) ($4.85) NM FY 2016 Financial Metrics – Non-GAAP1 ($ in millions, except per share amounts) FY 2015 FY 2016 B/(W) Yr/Yr Adjusted revenue $6,778 $6,491 (4.2%) Adjusted net income $174 $223 28% Adjusted EBITDA $639 $635 Flat Adjusted EBITDA margin 9.4% 9.8% 40 bps Adjusted EPS $0.83 $1.06 28% Adjusted Operating Income1 Adjusted Revenue1 Adjusted EBITDA1 All results represent continuing operations. Dollar values for graphs are in millions 1Please refer to Appendix for Non-GAAP reconciliations of adjusted revenue, adjusted operating income/margin, adjusted net income, adjusted EBITDA/margin, and adjusted EPS
Q4 2016 Earnings 1Please refer to Appendix for Non-GAAP reconciliations of adjusted revenue, adjusted gross margin, adjusted operating income/margin, adjusted tax rate, adjusted net income and adjusted EPS Adjusted Operating margin 5.4%, up 60 bps from 2015 GAAP EPS ($4.85) Adj. EPS $1.06 (in millions) Q4 2016 B/(W) Yr/Yr Comments GAAP revenue $1,514 ($216) NY MMIS, volumes, contract run-off, Student Loan Adjusted revenue1 1,597 (133) Gross margin 8.1% (850 bps) Reflects the NY MMIS charge Adjusted gross margin1 17.8% 120 bps SAG $169 $8 Adjusted operating income1 $109 $12 Improvement reflects strategic transformation initiatives Adjusted operating margin1 6.8% 120 bps Amortization of intangible assets $80 ($17) Increase reflects write-off of retired brand names Restructuring and related costs 44 (45) Transformation driven Goodwill impairment charge 935 (935) Result of annual goodwill impairment test Related party interest (4) 15 Separation costs 10 (10) Other net expense 24 (8) Pretax loss ($1,141) ($1,149) GAAP EPS loss ($4.69) ($4.66) Adjusted net income1 $61 $3 Adjusted tax rate1 40.2% (840 bps) Adjusted EPS1 $0.29 $0.01 Weighted avg. shares outstanding 202.9 - Adjusted weighted average shares outstanding 211.2 -
Segment Performance Revenue in $M % Segment Margin Q4 2016 Commentary Profit performance not improving as quickly as expected Impacted by delayed ramp of new business and lower volumes Focus on cost transformation, contract remediation and bidding new business with appropriate profitability and risk profile Revenue decline driven by contract run-off and lower volumes Cost and productivity initiatives benefiting margins, with positive momentum in Q4 2016 results Q4 2016 Commentary Dollar values for graphs are in millions Commercial Industries Healthcare % revenue growth (3.7%) (6.7%) (7.8%) (10.2%) (1.9%) (7.1%) Segment Profit $18 $7 $16 $21 $15 $69 $59 % revenue growth 5.0% (3.0%) (5.9%) (10.5%) 0.4% (3.7%) Segment Profit $44 $37 $37 $38 $47 $157 $159
Segment Performance Dollar values for graphs are in millions 1Please refer to appendix for Non-GAAP reconciliations of adjusted revenue and adjusted operating income/margin 2Other segment includes Health Enterprise clients in AK, CA, MT, ND, NH, NY, our Student Loan business, non-allocated corporate expenses and inter-segment eliminations Q4 2016 Commentary Revenue trend stable in 2016, but Q4 declined as the ramp-up of new business was more than offset by contract run-off Margin improvement driven by benefit from strategic transformation and other productivity initiatives Public Sector Other1, 2 Student Loan business remains in run-off Healthcare Enterprise focused on supporting current book of business and moving towards profitability Adjusted results exclude impact of NY MMIS contract in full-year and Q4 of 2016 and Health Enterprise for full-year 2015 Q4 2016 Commentary Revenue in $M % Segment Margin 1 1 1 % revenue growth (0.2%) (1.4%) 3.3% (0.7%) (2.3%) 0.2% Segment Profit $55 $43 $61 $59 $60 $200 $223 % revenue growth 13.7% (3.0%) (20.7%) (7.4%) (14.7%) (5.2%) Adj. Segment (Loss) ($20) ($16) ($37) ($21) ($10) ($100) ($84)
2016 Free Cash Flow impacted by: Restructuring payments ($46M) Separation payments ($44M) Montana and California HE exits ($155M) Reduction in factoring program ($130M) Lease buyouts associated with separation ($47M), primarily in LB&E Cash Flow (in millions) Q4 2016 FY 2016 Net loss ($951) ($983) Depreciation & amortization 196 613 Goodwill impairment 935 935 Stock-based compensation 6 24 Restructuring payments (9) (46) Restructuring and asset impairment charges 28 73 Change for income tax assets and liabilities (197) (117) Change in net working capital 140 (393) Other (2) 2 Operating Cash Flow $146 $108 Net purchase of LB&E1 and other (71) (188) Net proceeds from investments, sales, and acquisitions 11 (43) Net payments on related party notes receivable 205 247 Investing Cash Flow $145 $16 Cash from Financing ($45) $132 Effect of exchange rates on cash and cash equivalents (4) (6) Beginning cash and cash equivalents 148 140 Change in cash and cash equivalents 242 250 Ending Cash and Cash Equivalents $390 $390 Memo: Free Cash Flow2 $74 ($81) 1Includes cost of additions to land, building and equipment (LB&E) and internal use software 2Free cash flow is defined as operating cash flow less cost of additions to land, building and equipment and internal use software as well as cost of capital lease initiations of $1M for Q4 and full-year. Please refer to appendix for the Non-GAAP reconciliation
12/31/16 12/31/16 Pro Forma5 Cash $390 $329 Total Debt1 $1,941 $2,041 10.5% Senior Notes due 2024 $510 $510 Term Loan A2 due 2021 $7006 $7006 Term Loan B2 due 2023 $750 $850 Revolving Credit Facility3 due 2021 $0 $0 Capital Leases $43 $43 Current net leverage ratio4 2.4x 2.7x Capital Structure Overview Debt Structure ($ in millions) 1 Total debt is net of deferred financing costs 2 Revolving credit facility and Term Loan A interest rate is Libor + 225 bps; Term Loan B is Libor + 550 bps 3 $750M of available capacity under Revolving Credit Facility as of 12/31/2016 4 Net debt (total debt less cash) divided by adjusted EBITDA 5 Adjusted to reflect the payment of $161M to Xerox as part of the separation and $100M of Term Loan B borrowing 6 Includes EUR 260M Credit Metrics / Statistics Expected Annual Cash Interest Expense $155 - 165M Preferred dividend (annually) ~$10M Target Net Leverage Ratio <2.5x Average Maturity on Outstanding Debt ~6.5 years Key Messages Still targeting to reduce leverage ratio over time with Adjusted EBITDA growth and required debt payments Liquidity includes: $750M of availability under revolver (undrawn as of 12/31/16) $329M of pro forma5 cash (net of January payment made to Xerox and additional $100M Term Loan B borrowing)
Unchanged Financial Performance Goals 2017 Renewal and Refocus 2018 Stabilization 2019 Acceleration Rate of decline similar to 2016 levels Flat / positive momentum Accelerating momentum Organic investment with modest tuck-in M&A Increasing organic and inorganic investments 20 - 30% of Adjusted EBITDA 25 - 35% of Adjusted EBITDA Revenue Growth Adjusted EBITDA Growth Investments Free Cash Flow Growth >5% Growth >10% Continued expansion Note: Please refer to Appendix for Adjusted EBITDA Non-GAAP reconciliations
Q&A
Appendix
FY 2016 Earnings (in millions) FY 2016 B/(W) Yr/Yr Comments GAAP revenue $6,408 ($254) Lower volumes, contract run-off, Student Loan Adjusted revenue1 6,491 (287) Excludes NY, CA, MT HE charges Gross margin 14.2% 390 bps Reflects 2016 NY MMIS charge; 2015 CA and MT HE charges Adjusted gross margin1 16.5% 70 bps SAG $686 $13 Adjusted operating income1 $354 $31 Improvement reflects strategic transformation initiatives Adjusted operating margin 5.5% 70 bps Amortization of intangible assets 280 (30) Increase reflects write-off of retired brand names Restructuring and related costs 101 58 Transformation driven Goodwill impairment charge 935 (935) Result of annual goodwill impairment test Related party interest 26 35 Separation costs 44 (44) Other net expense 34 4 Pretax loss ($1,227) ($653) GAAP EPS loss ($4.85) ($2.81) Adjusted net income1 $223 $49 Adjusted effective tax rate 29.0% 250 bps Favorable audit settlements Adjusted EPS1 $1.06 $0.23 Weighted avg. shares outstanding 202.9 - Adjusted weighted average shares outstanding 210.8 - 1Please refer to Appendix for Non-GAAP reconciliations of adjusted revenue, adjusted gross margin, adjusted operating income/margin, adjusted tax rate, and adjusted EPS.
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 described below, consistent with Xerox’s historical presentation. 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 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. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. Also, non-GAAP measures are footnoted, where applicable in each slide herein. These Non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. A reconciliation of the following Non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth as part of the Appendix to this presentation. In connection with the preparation of our financial statements for the fiscal year ended December 31, 2016, during the fourth quarter, we performed our annual goodwill impairment test. Following the completion of the impairment test, we determined that we will record a non-cash goodwill impairment charge of $935 million (approximately $828 million after-tax or ($4.08) per share) in our Commercial Sector reporting unit. Subsequent to the goodwill impairment charge, the Commercial Sector reporting unit’s goodwill balance is approximately $908 million. This non-cash charge is attributable primarily to weaker than expected Commercial Sector revenues and operating profits, including in the fourth quarter of 2016. We do not expect to make any current or future cash expenditures as a result of this impairment. We are in discussions with the State of New York regarding the status and scope of the Health Enterprise platform project, which evolved to include options to not fully complete the project. Based on those discussions, we believe it is probable that we will not fully complete the implementation of the platform in New York. As a result of these developments, we will record a pre-tax charge of approximately $161 million (approximately $98 million after-tax or ($0.48) per share) in our fourth-quarter 2016 results reflecting estimated asset impairments, wind down costs and other impacts from this project. The charge includes approximately $115 million for the write-off of receivables and other related assets and non-cash impairment charges, with the remainder of the charge expected to be cash outflows in future quarters for wind down and related costs. Late in the third quarter of 2015, we determined that we would not fully complete Health Enterprise Medicaid platform implementation projects in California and Montana and recorded a charge of $389 million. The charge included a $116 million reduction to revenues with the remaining $273 million recorded to costs of outsourcing. The remainder of the charge was primarily related to settlement costs including payments to subcontractors that would result in cash outflows in future quarters As a result of the significant impact of the Goodwill Impairment, NY MMIS Charge and HE Charge on our reported revenues, costs and expenses as well as key metrics for the period, we discuss our 2016 and 2015 results using non-GAAP financial measures that exclude the impact of these items, as discussed below. 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. In 2016, we adjusted Income (Loss) before Income Taxes for the Goodwill Impairment charge of $935 million recorded during the fourth quarter 2016. Non-GAAP Financial Measures
Also in 2016, we adjusted Income (Loss) before Income Taxes for the New York Health Enterprise (NY MMIS) charge of $161 million recorded during the fourth quarter 2016. In 2015, we adjusted Income (Loss) before Income Taxes for the Health Enterprise (HE) charge of $389 million recorded during the third quarter 2015. In addition to the items discussed above, for the quarter and full year ended December 31, 2016 and 2015 we Adjusted Net Income (Loss), Earnings per Share and Effective Tax Rate for the following items: Amortization of intangible assets. The amortization of intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period. Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our Strategic Transformation program. Separation costs. Separation costs are expenses incurred in connection with separation from Xerox Corporation into a separate, independent, publicly traded company. Separation costs primarily relate to third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies. Other expenses, net, excluding third party interest expense. Other expenses, net includes losses (gains) on sales of businesses and assets, currency (gains) losses, net, litigation matters and all other expenses, net. Adjusted Revenue, Costs and Expenses and Margin – Adjusted Operating Income. We make adjustments to Revenue, Costs and Expenses and Margin for the following items, for the purpose of calculating Adjusted Operating Income. In 2016, we adjusted Income (Loss) before Income Taxes for the Goodwill Impairment charge of $935 million recorded during the fourth quarter 2016. As a result of the nature and the significant impact of the NY MMIS and HE charges on our reported revenues, costs and expenses, as well as key metrics for the period, we discussed our 2016 and 2015 Adjusted Operating Income after excluding the impact of the NY MMIS and HE charges. In 2016, we Adjusted Operating Income by adjusting Income (Loss) before Income Taxes for the fourth quarter NY MMIS charge of $161 million, which included an $83 million reduction in revenues. In 2015, we Adjusted Operating Income by adjusting Income (Loss) before Income Taxes for the third quarter HE charge of $389 million, which included a $116 million reduction in revenues. In addition to the items discussed above, for the three months and year ended December 31, 2016 and 2015 we Adjusted Operating Income for the following items: As defined above in Adjusted Net Income (Loss), Adjusted Earnings per Share, and Adjusted Effective Tax Rate: Amortization of intangible assets. Restructuring and related costs. Separation costs. We also adjust Operating Income for: Related Party Interest. Includes interest payments to former parent. Other expenses, net. Including third party interest, losses (gains) on sales of businesses and assets, currency (gains) losses, net, litigation matters and all other expenses, net. Adjusted Revenues As a result of the nature and the significant impact of the NY MMIS and HE charges on our reported revenues, we discussed our 2016 and 2015 revenues excluding the impact of the NY MMIS and HE charges. For the fourth quarter and full year 2016, we reduced revenues by $83 million for NY MMIS. For the third quarter and full year 2015, we reduced revenues by $116 million to reflect the reduction in HE revenues. Non-GAAP Financial Measures
Adjusted EBITDA We use Adjusted EBITDA to provide additional information that is useful to understand the financial covenants contained in the Company’s credit facility and indenture. We also use Adjusted EBITDA as an additional way of assessing certain aspects of our operations that, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our core business. Adjusted EBITDA represents Income (loss) before Income Taxes adjusted for the following items: As defined above in Adjusted Net Income (Loss), Adjusted Earnings per Share, and Adjusted Effective Tax Rate section or Adjusted Revenue, Costs and Expenses and Margin – Adjusted Operating Income section: The fourth quarter of 2016 Goodwill Impairment Charge and NY MMIS charge. The third quarter 2015 HE charge. Amortization of intangible assets. Restructuring and related costs. Separation costs. Related Party Interest. Includes interest payments to former parent. Other expenses, net. Including third party interest, losses (gains) on sales of businesses and assets, currency (gains) losses, net, litigation matters and all other expenses, net. We also adjust EBITDA for: Depreciation NY MMIS depreciation HE amortization 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 and are not necessarily comparable to similarly-titled measures reported by other companies. Management cautions that amounts presented in accordance with Conduent’s definition Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate Adjusted EBITDA in the same manner. Adjusted Other Segment Revenue and Profit As a result of the nature and the significant impact of the NY MMIS and HE charges on our Other Segment Revenue and Profit, we discuss Other Segment Revenue and Profit excluding the impact of the NY MMIS and HE charges. In 2016, we adjusted Other Segment by adjusting for the fourth quarter NY MMIS charge of $161 million, which included an $83 million reduction in revenues. In 2015, we Adjusted Other Segment by adjusting for the third quarter HE charge of $389 million, which included a $116 million reduction in revenues. 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 and capital lease additions, plus proceed from sales of land, building and equipment. We use the non-GAAP measure of Free Cash Flow as a criterion of liquidity and performance-based components of employee compensation. We use Free Cash Flow as a measure of liquidity to determine amounts we can reinvest in our core businesses, such as amounts available to make acquisitions, invest in land, buildings and equipment and internal use software, make principal payments on debt, or amounts we can return to our stockholders through dividends and/or stock repurchases. In order to provide a meaningful basis for comparison, we are providing information with respect to our Free Cash Flow for the three months and year ended December 31, 2016, reconciled for each such period to cash flow provided by operating activities, which we believe to be the most directly comparable measure under GAAP. 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. Non-GAAP Financial Measures
Non-GAAP Reconciliation: Net Income (in millions) Net Income (Loss) EPS Net Income (Loss) EPS Net Income (Loss) EPS Net Income (Loss) EPS Reported (loss) income from continuing operations (951) $ (4.69) $ 9 $ 0.04 $ (983) $ (4.85) $ (336) $ (1.65) $ Adjustments: Goodwill impairment 935 - 935 - NY MMIS charge 161 - 161 - Amortization of intangible assets 80 63 280 250 Restructuring and related costs 44 (1) 101 159 HE charge - - - 389 Separation costs 10 - 44 - Other expenses, net excluding third party interest (1) 13 15 20 30 Income tax adjustments (2) (231) (28) (335) (318) Adjusted 61 $ 0.29 $ 58 $ 0.28 $ 223 $ 1.06 $ 174 $ 0.83 $ Weighted average shares for adjusted EPS (3) 211,247 211,247 210,774 210,774 Year Ended December 31, 2016 December 31, 2015 Three Months Ended (3) Average shares for the calculations of adjusted EPS include 5.9 million of shares associated with our Series A convertible (2) Refer to Effective Tax Rate reconciliation (1) Excludes third party interest expense of $11 million and $1 million for the three months ended December 31, 2016 and 2015, respectively and $14 million and $8 million for the year ended December 31, 2016 and 2015, respectively. December 31, 2016 December 31, 2015
Non-GAAP Reconciliation: Effective Tax Rate (in millions) Pre-Tax Income (Loss) Income Tax (Expense) Benefit Effective Tax Rate Pre-Tax Income (Loss) Income Tax (Expense) Benefit Effective Tax Rate Reported from continuing operations (1,141) $ (190) $ 16.7% 8 $ (1) $ -12.5% Non-GAAP adjustments (1) 1,243 231 77 28 Adjusted (2) 102 $ 41 $ 40.2% 85 $ 27 $ 31.8% (in millions) Pre-Tax Income (Loss) Income Tax (Expense) Benefit Effective Tax Rate Pre-Tax Income (Loss) Income Tax (Expense) Benefit Effective Tax Rate Reported from continuing operations (1,227) $ (244) $ 19.9% (574) $ (238) $ 41.5% Non-GAAP adjustments (1) 1,541 335 828 318 Adjusted (2) 314 $ 91 $ 29.0% 254 $ 80 $ 31.5% ____________ (1) Refer to Net (Loss) Income reconciliation for details. December 31, 2016 December 31, 2015 (2) The tax impact of Adjusted Pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported Pre-tax income under ASC 740, which employs an annual effective tax rate method to the results. Three Months Ended Three Months Ended December 31, 2016 December 31, 2015 Year Ended Year Ended
Non-GAAP Reconciliation: Operating Income (in millions) Pre-Tax Profit (Loss) Revenue Margin Pre-Tax Profit (Loss) Revenue Margin Reported from continuing operations (1,141) $ 1,514 $ -75.4% 8 $ 1,730 $ 0.5% Adjustments: Goodwill impairment 935 - NY MMIS 161 83 - Amortization of intangible assets 80 63 Restructuring and related costs 44 (1) Separation costs 10 - Related party interest (4) 11 Other expenses, net (1) 24 16 Adjusted Operating Income/Margin 109 $ 1,597 $ 6.8% 97 $ 1,730 $ 5.6% (in millions) Pre-Tax Profit (Loss) Revenue Margin Pre-Tax Profit (Loss) Revenue Margin Reported from continuing operations (1,227) $ 6,408 $ -19.1% (574) $ 6,662 $ -8.6% Adjustments: Goodwill impairment 935 $ - $ Amortization of intangible assets 280 250 NY MMIS 161 83 - Restructuring and related costs 101 159 Separation costs 44 - Related party interest 26 61 HE charge - 389 116 Other expenses, net (1) 34 38 Adjusted Operating Income/Margin 354 $ 6,491 $ 5.5% 323 $ 6,778 $ 4.8% (1) Includes third party interest expense of $14 million and $8 million for the year ended December 31, 2016 and 2015, respectively. December 31, 2016 December 31, 2015 Three Months Ended Three Months Ended December 31, 2016 December 31, 2015 Year Ended Year Ended (1) Includes third party interest expense of $11 million and $1 million for the three months ended December 31, 2016 and 2015, respectively.
Non-GAAP Reconciliation: Revenue and Adjusted EBITDA Q4 Q1 Q2 Q3 Q4 FY FY (in millions) 2015 2016 2016 2016 2016 2015 2016 Reconciliation to Adjusted Revenue Total Revenue as reported 1,730 $ 1,685 $ 1,613 $ 1,596 $ 1,514 $ 6,662 $ 6,408 $ NY MMIS charge - - - - 83 - 83 HE charge - - - - - 116 - Adjusted Revenue 1,730 $ 1,685 $ 1,613 $ 1,596 $ 1,597 $ 6,778 $ 6,491 $ Reconciliation to Adjusted EBITDA Pre-tax income (loss) as reported from continuing operations 8 $ (54) $ (34) $ 2 $ (1,141) $ (574) $ (1,227) $ Depreciation 31 32 29 31 36 126 128 Amortization 103 118 104 104 159 474 485 Goodwill impairment - - - - 935 - 935 Restructuring and related costs (1) 26 23 8 44 159 101 Separation costs - 3 16 15 10 - 44 Related party interest expense 11 10 10 10 (4) 61 26 NY MMIS charge - - - - 161 - 161 NY MMIS depreciation - - - - (52) - (52) HE charge - - - - - 389 - HE depreciation - - - - - (34) - Other expenses, net (1) 16 11 - (1) 24 38 34 Adjusted EBITDA 168 $ 146 $ 148 $ 169 $ 172 $ 639 $ 635 $ Adjusted EBITDA Margin 9.7% 8.7% 9.2% 10.6% 10.8% 9.4% 9.8% (1) Includes third party interest expense as follows: 1 $ 1 $ 1 $ 1 $ 11 $ 8 $ 14 $
Non-GAAP Reconciliation: Other Segment Revenue and Profit Q4 Q1 Q2 Q3 Q4 FY FY (in millions) 2015 2016 2016 2016 2016 2015 2016 Reconciliation to Other Segment Adjusted Revenue Other Segment revenue as reported 94 $ 108 $ 97 $ 92 $ 4 $ 289 $ 301 $ NY MMIS charge - - - - 83 - 83 HE charge - - - - - 116 - Adjusted Other Segment Revenue 94 $ 108 $ 97 $ 92 $ 87 $ 405 $ 384 $ Reconciliation to Other Segment Adjusted Profit Segment profit as reported (20) $ (16) $ (37) $ (21) $ (171) $ (489) $ (245) $ NY MMIS charge - - - - 161 - 161 HE charge - - - - - 389 - Adjusted Other Segment Profit (20) $ (16) $ (37) $ (21) $ (10) $ (100) $ (84) $
Non-GAAP Reconciliation: Free Cash Flow Three Months Ended Year Ended December 31, 2016 December 31, 2016 (in millions) Cash flows from operations 146 $ 108 $ Cost of addition to LB&E (63) (149) Cost of addition to internal use software and other (9) (40) Free Cash Flow 74 $ (81) $
