FLORHAM PARK, N.J.,
Nov. 6, 2019 /PRNewswire/ --
Key Quarterly Financial and Operational Highlights
- Revenue of $1,098 million down
(15.8)% compared to Q3 2018. Excluding divestitures, revenue was
down (3.9)% compared with Q3 2018 or (3.5)% in constant
currency
- GAAP net income of $(16) million
compared to $(237) million in Q3
2018
- GAAP diluted EPS from continuing operations of $(0.09) compared to ($1.16) in Q3 2018
- Adjusted diluted EPS from continuing operations of $0.16 compared to $0.28 in Q3 2018
- Adjusted EBITDA of $127 million,
down (11)% Y/Y, excluding the impact from divestitures
- Total signings TCV $746 million,
new business TCV signings $234
million
- Strong renewal rate of 93%, up 300 bps Y/Y
- Reaffirming FY 2019 Revenue and Adjusted EBITDA margin guidance
ranges
- Expect to complete comprehensive Strategic and Operational
review in late Q4 2019 or early Q1 2020
Conduent (NYSE: CNDT), a services and solutions company, today
announced its third quarter 2019 financial results.
"Over the last 90 days, the team has started to build on the
foundational work that was developed over the past three years,"
said Conduent CEO, Cliff Skelton.
"While our efforts on growing new business signings will not lead
to immediate results, we are focused on driving improvement in both
sales and operational performance. We hope to see the team's hard
work manifest in our leading indicators in the near-term."
"In conjunction with our Board, we also are making progress on
the strategic and operational review," Skelton continued. "We
anticipate completion of the review in late Q4 2019 or early Q1
2020 and would aim to begin taking action on any potential
divestitures in the first half of 2020. The focus of this review is
to create shareholder value by looking at potentially divesting
assets that we believe have a scarcity value in the market and
potentially may command a premium, while seeking to simplify the
remaining company to take advantage of strong market opportunities
and growth prospects."
Third Quarter 2019 Results
Third quarter 2019 revenue was $1,098
million, down (15.8)% compared to Q3 2018. Excluding
divestitures completed in 2018, revenue was down (3.9)% compared
with Q3 2018 or (3.5)% in constant currency.
Pre-tax income was $(14) million
compared to $(252) million in Q3
2018. GAAP operating margin as reported was (1.3)% compared to
(19.3)% in Q3 2018. The company reported Q3 2019 GAAP net income of
$(16) million compared to
$(237) million in Q3 2018. Diluted
EPS from continuing operations was ($0.09) versus ($1.16) in the same period last year.
Third quarter adjusted operating income was $72 million, with an adjusted operating margin of
6.6% as compared to adjusted operating income of $104 million, with an adjusted operating margin
of 8.0% in Q3 2018. Adjusted EBITDA was $127 million, with an adjusted EBITDA margin of
11.6%, as compared to $157 million,
with an adjusted EBITDA margin of 12.0% in Q3 2018. Further
adjusting for the impact of all divestitures, Adjusted EBITDA
declined (10.6)% compared with Q3 2018 while adjusted EBITDA margin
decreased (80) bps.
The company reported adjusted diluted EPS from continuing
operations of $0.16 compared to
$0.28 in Q3 2018.
Conduent had cash inflow from operations of $18 million during the third quarter of 2019
compared to cash outflows of $(30)
million in Q3 2018.
Total contract value (TCV) signings of $746 million for the quarter were up 1.0%
compared with Q3 2018, due to an (11.0)% decrease in new business
signings and an 8.0% increase in renewal signings. The
renewal rate for the quarter was 93%, and up 300 bps compared to Q3
2018. Note, this compare excludes divestitures.
Financial Outlook
(in
millions)
|
|
FY 2018
Reported
|
Completed
Divestiture
Impact (3)
|
Adjusted FY
2018(4)
|
Updated FY 2019 Guidance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
(constant currency)(1,2)
|
|
$5.39B
|
$752M
|
$4.64B
|
Down (5) -
(4)%
|
|
|
|
|
|
|
|
|
Adj. EBITDA
Margin(2)
|
|
11.9%
|
|
11.5%
|
10.8% -
11.6%
|
|
|
|
|
|
|
|
|
Adj. Free Cash
Flow(2) as a % of Adj. EBITDA
|
|
34.1%
|
|
|
~20%
|
|
|
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 completed divestitures. FY 2019
FCF adjusted for Texas-related litigation impact
|
(3) Includes all
completed divestitures
|
(4) Adjusted for 2018
and 2019 completed divestitures referenced in Appendix.
|
Brian Webb-Walsh, CFO of
Conduent, stated, "We had an in-line quarter with revenue and
adjusted EBITDA results slightly ahead of our internal
expectations. We are reaffirming our 2019 revenue and
adjusted EBITDA margin guidance and continue to focus on balancing
cost savings with investment in our processes, people, and
technology."
Conference Call
Management will present the results
during a conference call and webcast on November 6, 2019 at
5 p.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 4:45 p.m. ET. The entry
number for this call is 0612634.
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 November 6, 2019. The replay ID is
10132425.
For international calls, please select a dial-in number
from:
https://services.choruscall.com/ccforms/replay.html
About Conduent
Conduent delivers
mission-critical services and solutions on behalf of businesses and
governments – creating exceptional outcomes for its clients and the
millions of people who count on them. Through people, process and
technology, Conduent solutions and services automate processes,
improve efficiencies, reduce costs and enable revenue growth. It's
why most Fortune 100 companies and over 500 government entities
depend on Conduent every day to manage their essential interactions
and move their operations forward.
Conduent's differentiated services and solutions improve
experiences for millions of people every day, including two-thirds
of all insured patients in the U.S., 11 million employees who use
its HR Services, and nearly nine million people who travel through
toll systems daily. Conduent's solutions deliver exceptional
outcomes for its clients including $16
billion in medical bill savings, up to 40% efficiency
increase in HR operations, and up to 40% improvement in processing
costs, while driving higher end-user satisfaction. Learn more at
www.conduent.com.
Non-GAAP Measures
We have reported our financial results in accordance with U.S.
generally accepted accounting principles (GAAP). In addition, we
have discussed our financial results using non-GAAP measures. We
believe these non-GAAP measures allow investors to better
understand the trends in our business and to better understand and
compare our results. Accordingly, we believe it is necessary to
adjust several reported amounts, determined in accordance with
GAAP, to exclude the effects of certain items as well as their
related tax effects. Management believes that these non-GAAP
financial measures provide an additional means of analyzing the
current periods' results against the corresponding prior periods'
results. These non-GAAP financial measures should be viewed in
addition to, and not as a substitute for, the Company's reported
results prepared in accordance with U.S. GAAP. Our non-GAAP
financial measures are not meant to be considered in isolation or
as a substitute for comparable U.S. GAAP measures and should be
read only in conjunction with our Condensed Consolidated Financial
Statements prepared in accordance with U.S. GAAP. Our management
regularly uses supplemental non-GAAP financial measures internally
to understand, manage and evaluate our business and make operating
decisions, and providing such non-GAAP financial measures to
investors allows for a further level of transparency as to how
management reviews and evaluates our business results and trends.
These non-GAAP measures are among the primary factors management
uses in planning for and forecasting future periods. Compensation
of our executives is based in part on the performance of our
business based on 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.
Forward-Looking Statements
This release and any attachments to this release 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. 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.
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: our ability to
successfully manage the leadership transition and strategic and
operational review and the potential for disruptions to our
business from the transition and strategic and operational review;
government appropriations and termination rights contained in our
government contracts; our ability to renew commercial and
government contracts, including 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, including those for unbilled
services; a decline in revenues from, or a loss of, or a reduction
in business from, 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 2018 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 or furnished to the Securities and Exchange
Commission. Any forward-looking statements made by us in this
release 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.
CONDUENT
INCORPORATED
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
|
|
|
|
Three Months
Ended
September
30,
|
|
Nine Months
Ended
September
30,
|
(in millions, except
per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue
|
|
$
|
1,098
|
|
$
|
1,304
|
|
$
|
3,368
|
|
$
|
4,111
|
|
|
|
|
|
|
|
|
|
Operating Costs
and Expenses
|
|
|
|
|
|
|
|
|
Cost of Services
(excluding depreciation and amortization)
|
|
859
|
|
1,005
|
|
2,644
|
|
3,193
|
Selling, general and
administrative (excluding depreciation and amortization)
|
|
112
|
|
139
|
|
360
|
|
427
|
Research and
development (excluding depreciation and amortization)
|
|
1
|
|
2
|
|
6
|
|
7
|
Depreciation and
amortization
|
|
115
|
|
113
|
|
342
|
|
345
|
Restructuring and
related costs
|
|
8
|
|
31
|
|
50
|
|
68
|
Interest
expense
|
|
20
|
|
22
|
|
60
|
|
92
|
(Gain) loss on
extinguishment of debt
|
|
—
|
|
108
|
|
—
|
|
108
|
Goodwill
impairment
|
|
—
|
|
—
|
|
1,351
|
|
—
|
(Gain) loss on
divestitures and transaction costs
|
|
3
|
|
54
|
|
19
|
|
9
|
Litigation costs
(recoveries), net
|
|
2
|
|
78
|
|
15
|
|
113
|
Other (income)
expenses, net
|
|
(8)
|
|
4
|
|
(8)
|
|
1
|
Total Operating
Costs and Expenses
|
|
1,112
|
|
1,556
|
|
4,839
|
|
4,363
|
|
|
|
|
|
|
|
|
|
Income (Loss)
Before Income Taxes
|
|
(14)
|
|
(252)
|
|
(1,471)
|
|
(252)
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
2
|
|
(15)
|
|
(118)
|
|
24
|
Net Income
(Loss)
|
|
$
|
(16)
|
|
$
|
(237)
|
|
$
|
(1,353)
|
|
$
|
(276)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.09)
|
|
$
|
(1.16)
|
|
$
|
(6.52)
|
|
$
|
(1.38)
|
Diluted
|
|
$
|
(0.09)
|
|
$
|
(1.16)
|
|
$
|
(6.52)
|
|
$
|
(1.38)
|
CONDUENT
INCORPORATED
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
|
|
Three Months
Ended
September
30,
|
|
Nine Months
Ended
September
30,
|
(in
millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net Income
(Loss)
|
|
$
|
(16)
|
|
$
|
(237)
|
|
$
|
(1,353)
|
|
$
|
(276)
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
|
|
|
|
|
Currency translation
adjustments, net
|
|
(15)
|
|
(4)
|
|
(9)
|
|
(27)
|
Reclassification of
currency translation adjustments on divestitures
|
|
—
|
|
36
|
|
15
|
|
41
|
Reclassification of
divested benefit plans and other
|
|
—
|
|
61
|
|
(1)
|
|
64
|
Unrecognized gains
(losses), net
|
|
—
|
|
—
|
|
1
|
|
(3)
|
Other
Comprehensive Income (Loss), Net
|
|
(15)
|
|
93
|
|
6
|
|
75
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss), Net
|
|
$
|
(31)
|
|
$
|
(144)
|
|
$
|
(1,347)
|
|
$
|
(201)
|
CONDUENT
INCORPORATED
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
(in millions, except
share data in thousands)
|
|
September 30,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
228
|
|
$
|
756
|
Accounts receivable,
net
|
|
840
|
|
782
|
Assets held for
sale
|
|
—
|
|
15
|
Contract
assets
|
|
165
|
|
177
|
Other current
assets
|
|
313
|
|
234
|
Total current
assets
|
|
1,546
|
|
1,964
|
Land, buildings and
equipment, net
|
|
331
|
|
328
|
Operating lease
right-of-use assets
|
|
290
|
|
—
|
Intangible assets,
net
|
|
487
|
|
651
|
Goodwill
|
|
2,090
|
|
3,408
|
Other long-term
assets
|
|
370
|
|
329
|
Total
Assets
|
|
$
|
5,114
|
|
$
|
6,680
|
Liabilities and
Equity
|
|
|
|
|
Current portion of
long-term debt
|
|
$
|
50
|
|
$
|
55
|
Accounts
payable
|
|
145
|
|
230
|
Accrued compensation
and benefits costs
|
|
140
|
|
193
|
Unearned
income
|
|
95
|
|
112
|
Liabilities held for
sale
|
|
—
|
|
40
|
Other current
liabilities
|
|
693
|
|
567
|
Total current
liabilities
|
|
1,123
|
|
1,197
|
Long-term
debt
|
|
1,468
|
|
1,512
|
Deferred
taxes
|
|
181
|
|
327
|
Operating lease
liabilities
|
|
245
|
|
—
|
Other long-term
liabilities
|
|
87
|
|
280
|
Total
Liabilities
|
|
3,104
|
|
3,316
|
|
|
|
|
|
Series A convertible
preferred stock
|
|
142
|
|
142
|
|
|
|
|
|
Common
stock
|
|
2
|
|
2
|
Additional paid-in
capital
|
|
3,886
|
|
3,878
|
Retained earnings
(deficit)
|
|
(1,601)
|
|
(233)
|
Accumulated other
comprehensive loss
|
|
(419)
|
|
(425)
|
Total
Equity
|
|
1,868
|
|
3,222
|
Total Liabilities
and Equity
|
|
$
|
5,114
|
|
$
|
6,680
|
|
|
|
|
|
Shares of common
stock issued and outstanding
|
|
211,364
|
|
211,306
|
Shares of series A
convertible preferred stock issued and outstanding
|
|
120
|
|
120
|
CONDUENT
INCORPORATED
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
Nine Months Ended
September 30,
|
(in
millions)
|
|
2019
|
|
2018
|
Cash Flows from
Operating Activities:
|
|
|
|
|
Net income
(loss)
|
|
$
|
(1,353)
|
|
$
|
(276)
|
Adjustments required
to reconcile net income (loss) to cash flows from operating
activities:
|
|
|
|
|
Depreciation and
amortization
|
|
342
|
|
345
|
Contract inducement
amortization
|
|
2
|
|
2
|
Deferred income
taxes
|
|
(148)
|
|
(90)
|
Goodwill
impairment
|
|
1,351
|
|
—
|
(Gain) loss from
investments
|
|
(3)
|
|
(1)
|
Amortization of debt
financing costs
|
|
5
|
|
9
|
(Gain) loss on
extinguishment of debt
|
|
—
|
|
108
|
(Gain) loss on
divestitures and transaction costs
|
|
19
|
|
9
|
Stock-based
compensation
|
|
19
|
|
30
|
Changes in operating
assets and liabilities
|
|
(450)
|
|
(102)
|
Other operating,
net
|
|
—
|
|
(4)
|
Net cash provided by
(used in) operating activities
|
|
(216)
|
|
30
|
Cash Flows from
Investing Activities:
|
|
|
|
|
Cost of additions to
land, buildings and equipment
|
|
(109)
|
|
(119)
|
Proceeds from sale of
land, buildings and equipment
|
|
2
|
|
12
|
Cost of additions to
internal use software
|
|
(49)
|
|
(31)
|
Payments for
acquisitions, net of cash acquired
|
|
(90)
|
|
—
|
Proceeds from
divestitures and sale of assets, net of cash
|
|
—
|
|
672
|
Payments from
divestitures, including cash sold
|
|
(7)
|
|
—
|
Net cash provided by
(used in) investing activities
|
|
(253)
|
|
534
|
Cash Flows from
Financing Activities:
|
|
|
|
|
Debt issuance fee
payments
|
|
—
|
|
(3)
|
Payments on
debt
|
|
(42)
|
|
(513)
|
Premium on debt
redemption
|
|
—
|
|
(95)
|
Taxes paid for
settlement of stock based compensation
|
|
(11)
|
|
(9)
|
Dividends paid on
preferred stock
|
|
(7)
|
|
(7)
|
Net cash provided by
(used in) financing activities
|
|
(60)
|
|
(627)
|
Effect of exchange
rate changes on cash, cash equivalents and restricted
cash
|
|
—
|
|
(9)
|
Increase (decrease)
in cash, cash equivalents and restricted cash
|
|
(529)
|
|
(72)
|
Cash, Cash
Equivalents and Restricted Cash at Beginning of Period
|
|
765
|
|
667
|
Cash, Cash
Equivalents and Restricted Cash at End of
period(1)
|
|
$
|
236
|
|
$
|
595
|
___________
|
(1) Includes
$8 million and $9 million of restricted cash as of September 30,
2019 and 2018, respectively, that were included in Other current
assets on the Condensed Consolidated Balance Sheets.
|
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 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, as applicable to the particular financial measure,
for the purpose of calculating Adjusted Net Income (Loss), Adjusted
Earnings per Share and Adjusted Effective Tax Rate:
- 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.
- Restructuring and related costs. Restructuring and related
costs include restructuring and asset impairment charges as well as
costs associated with our strategic transformation program.
- (Gain) loss on extinguishment of debt. Represents premium on
debt extinguishment and the write down of the associated
unamortized discount and issuance costs.
- Goodwill impairment. This represents Goodwill impairment charge
related to the unanticipated losses of certain customer contracts,
lower potential future volumes and lower than expected new customer
contracts for all reporting units.
- (Gain) loss on divestitures and transaction costs. Represents
(gain) loss on divested businesses and transaction costs.
- Litigation costs (recoveries), net. Litigation costs
(recoveries), net primarily represents accruals for the
State of Texas litigation, Student
Loan Service exposures and certain terminated contracts that are
subject to litigation.
- Other charge (credit). This comprises other (income) expenses,
net, and costs associated with the Company not fully completing the
State of New York Health Enterprise Platform project and the Health
Enterprise Medical platform projects in California and Montana and other adjustments.
- 2018 Divestitures. 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, as applicable, for the following items, for the purpose of
calculating Adjusted Revenue, Adjusted Operating Income and
Adjusted Operating Margin:
- Amortization of acquired intangible assets.
- Restructuring and related costs.
- Interest expense. Interest expense includes interest on
long-term debt and amortization of debt issuance costs.
- (Gain) loss on extinguishment of debt.
- Goodwill impairment.
- (Gain) loss on divestitures and transaction costs.
- Litigation costs (recoveries), net.
- Other charge (credit).
- 2018 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.
We provide adjusted revenues as supplemental information to our
presentation of reported GAAP revenue in order to facilitate
additional information to our investors concerning period-to-period
comparisons reflecting the impact of our 2018 divestitures.
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 and contract inducement amortization
adjusted for the following items. Adjusted EBITDA margin is
Adjusted EBITDA divided by revenue or adjusted revenue, as
applicable.
- Restructuring and related costs.
- Goodwill impairment.
- (Gain) loss on extinguishment of debt
- (Gain) loss on divestitures and transaction costs.
- Litigation costs (recoveries), net.
- Other charge (credit).
- 2018 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 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 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,
after required 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. We use adjusted free cash
flow, in addition to free cash flow, to provide supplemental
information to our investors concerning our ability to generate
cash from our ongoing operating activities; by excluding certain
deferred compensation costs and our one-time Texas settlement costs, as well as transaction
costs and transaction cost tax benefit related to acquisitions, and
debt buyback tax benefit, we believe we provide useful additional
information to our investors to help them further understand our
ability to generate cash period-over-period as well as added
information on comparability to our competitors. Such as free cash
flow information, as so adjusted, is specifically not intended to
provide amounts available for discretionary spending. We have added
certain adjustments to account for items which we do not believe
reflect our core business or operating performance, and we computed
all periods with such adjusted costs.
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, NY MMIS, HE charge, goodwill
impairment, 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.
Non-GAAP Reconciliations: Adjusted Revenue, Adjusted Net
Income (Loss), Adjusted Effective Tax, Adjusted Operating Income
(Loss) and Adjusted EBITDA were as follows:
|
|
Three Months
Ended
September
30,
|
|
Nine Months
Ended
September
30,
|
(in
millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ADJUSTED
REVENUE
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,098
|
|
$
|
1,304
|
|
$
|
3,368
|
|
$
|
4,111
|
Adjustment:
|
|
|
|
|
|
|
|
|
2018
Divestitures(1)
|
|
—
|
|
(162)
|
|
(36)
|
|
(648)
|
Adjusted
Revenue
|
|
$
|
1,098
|
|
$
|
1,142
|
|
$
|
3,332
|
|
$
|
3,463
|
|
|
|
|
|
|
|
|
|
ADJUSTED NET
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Income (Loss) From
Continuing Operations
|
|
$
|
(16)
|
|
$
|
(237)
|
|
$
|
(1,353)
|
|
$
|
(276)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Amortization of
acquired intangible assets(2)
|
|
61
|
|
60
|
|
184
|
|
181
|
Restructuring and
related costs
|
|
8
|
|
31
|
|
50
|
|
68
|
(Gain) loss on
extinguishment of debt
|
|
—
|
|
108
|
|
—
|
|
108
|
Goodwill
impairment
|
|
—
|
|
—
|
|
1,351
|
|
—
|
(Gain) loss on
divestitures and transaction costs
|
|
3
|
|
54
|
|
19
|
|
9
|
Litigation costs
(recoveries), net
|
|
2
|
|
78
|
|
15
|
|
113
|
Other charges
(credits)
|
|
(8)
|
|
3
|
|
(4)
|
|
(1)
|
Total Non-GAAP
Adjustments
|
|
66
|
|
334
|
|
1,615
|
|
478
|
Income tax
adjustments(3)
|
|
(13)
|
|
(36)
|
|
(163)
|
|
(30)
|
Adjusted Income
(Loss) Before Adjustment for Divestitures
|
|
$
|
37
|
|
$
|
61
|
|
$
|
99
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
ADJUSTED EFFECTIVE
TAX
|
|
|
|
|
|
|
|
|
Income (Loss)
Before Income Taxes
|
|
$
|
(14)
|
|
$
|
(252)
|
|
$
|
(1,471)
|
|
$
|
(252)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total Non-GAAP
Adjustments
|
|
66
|
|
334
|
|
1,615
|
|
478
|
Adjusted PBT
(Before Adjustment for Divestitures)
|
|
52
|
|
82
|
|
144
|
|
226
|
2018
Divestitures(1)
|
|
—
|
|
(15)
|
|
(1)
|
|
(95)
|
Adjusted
PBT
|
|
$
|
52
|
|
$
|
67
|
|
$
|
143
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
$
|
2
|
|
$
|
(15)
|
|
$
|
(118)
|
|
$
|
24
|
Income tax
adjustments(3)
|
|
13
|
|
36
|
|
163
|
|
30
|
Adjusted Income
Tax Expense (Benefit)
|
|
15
|
|
21
|
|
45
|
|
54
|
Adjusted Net
Income (Loss) Before Adjustment for Divestitures
|
|
$
|
37
|
|
$
|
61
|
|
$
|
99
|
|
$
|
172
|
|
|
|
|
|
CONTINUED
|
|
Three Months
Ended
September
30,
|
|
Nine Months
Ended
September
30,
|
(in
millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ADJUSTED OPERATING
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Income (Loss)
Before Income Taxes
|
|
$
|
(14)
|
|
$
|
(252)
|
|
$
|
(1,471)
|
|
$
|
(252)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments
|
|
66
|
|
334
|
|
1,615
|
|
478
|
Interest
expense
|
|
20
|
|
22
|
|
60
|
|
92
|
Adjusted Operating
Income (Loss) Before Adjustment for Divestitures
|
|
72
|
|
104
|
|
204
|
|
318
|
2018
divestitures(1)
|
|
—
|
|
(15)
|
|
(1)
|
|
(95)
|
Adjusted Operating
Income (Loss)
|
|
$
|
72
|
|
$
|
89
|
|
$
|
203
|
|
$
|
223
|
|
|
|
|
|
|
|
|
|
ADJUSTED
EBITDA
|
|
|
|
|
|
|
|
|
Income (Loss) From
Continuing Operations
|
|
$
|
(16)
|
|
$
|
(237)
|
|
$
|
(1,353)
|
|
$
|
(276)
|
Income tax expense
(benefit)
|
|
2
|
|
(15)
|
|
(118)
|
|
24
|
Depreciation and
amortization
|
|
115
|
|
113
|
|
342
|
|
345
|
Contract inducement
amortization
|
|
1
|
|
—
|
|
2
|
|
2
|
Interest
expense
|
|
20
|
|
22
|
|
60
|
|
92
|
EBITDA Before
Adjustment for Divestiture
|
|
122
|
|
(117)
|
|
(1,067)
|
|
187
|
2018
divestitures(1)
|
|
—
|
|
(15)
|
|
(1)
|
|
(95)
|
2018 divestitures
depreciation and amortization(1)
|
|
—
|
|
—
|
|
—
|
|
(4)
|
EBITDA
|
|
122
|
|
(132)
|
|
(1,068)
|
|
88
|
Adjustments:
|
|
|
|
|
|
|
|
|
Restructuring and
related costs
|
|
8
|
|
31
|
|
50
|
|
68
|
(Gain) loss on
extinguishment of debt
|
|
—
|
|
108
|
|
—
|
|
108
|
Goodwill
impairment
|
|
—
|
|
—
|
|
1,351
|
|
—
|
(Gain) loss on
divestitures and transaction costs
|
|
3
|
|
54
|
|
19
|
|
9
|
Litigation costs
(recoveries), net
|
|
2
|
|
78
|
|
15
|
|
113
|
Other charges
(credits)
|
|
(8)
|
|
3
|
|
(4)
|
|
(1)
|
Adjusted EBITDA
Before Adjustment for Divestiture
|
|
$
|
127
|
|
$
|
157
|
|
$
|
364
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
127
|
|
$
|
142
|
|
$
|
363
|
|
$
|
385
|
___________
|
(1) Adjusted
for the full impact from revenue and income/loss from
divestitures.
|
(2) Included
in Depreciation and amortization on the Condensed Consolidated
Statements of Income (Loss).
|
(3) 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, goodwill impairment and divestiture related
costs.
|
Non-GAAP Reconciliations: Adjusted Weighted Average
Shares Outstanding, Diluted EPS, Adjusted Effective Tax, Adjusted
Operating Margin and Adjusted EBITDA Margins for the Non-GAAP
reconciliations above were as follows:
|
|
Three Months
Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(Amounts are in whole
dollars, shares are in thousands and margins are in %)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ADJUSTED DILUTED
EPS(1)
|
|
|
|
|
|
|
|
|
Weighted Average
Common Shares Outstanding
|
|
209,626
|
|
206,605
|
|
208,741
|
|
205,739
|
Adjustments:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
—
|
|
122
|
|
4
|
|
138
|
Restricted stock and
performance units / shares
|
|
1,509
|
|
3,017
|
|
2,227
|
|
3,080
|
Adjusted Weighted
Average Common Shares Outstanding
|
|
211,135
|
|
209,744
|
|
210,972
|
|
208,957
|
|
|
|
|
|
|
|
|
|
Diluted EPS from
Continuing Operations
|
|
$
|
(0.09)
|
|
$
|
(1.16)
|
|
$
|
(6.52)
|
|
$
|
(1.38)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments
|
|
0.31
|
|
1.61
|
|
7.72
|
|
2.31
|
Income tax
adjustments(2)
|
|
(0.06)
|
|
(0.17)
|
|
(0.77)
|
|
(0.14)
|
Adjusted Diluted
EPS Before Adjustment for Divestitures
|
|
$
|
0.16
|
|
$
|
0.28
|
|
$
|
0.43
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
ADJUSTED EFFECTIVE
TAX RATE
|
|
|
|
|
|
|
|
|
Effective tax
rate
|
|
(14.3)%
|
|
6.0%
|
|
8.0%
|
|
(9.5)%
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments
|
|
43.1%
|
|
19.6%
|
|
23.3%
|
|
33.4%
|
Adjusted Effective
Tax Rate(2)
|
|
28.8%
|
|
25.6%
|
|
31.3%
|
|
23.9%
|
|
|
|
|
|
|
|
|
|
ADJUSTED OPERATING
MARGIN
|
|
|
|
|
|
|
|
|
Income (Loss) Before
Income Taxes Margin
|
|
(1.3)%
|
|
(19.3)%
|
|
(43.7)%
|
|
(6.1)%
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments
|
|
6.1%
|
|
25.6%
|
|
48.0%
|
|
11.6%
|
Interest
expense
|
|
1.8%
|
|
1.7%
|
|
1.8%
|
|
2.2%
|
Margin for
Adjusted Operating Income Before Adjustment for
Divestitures
|
|
6.6%
|
|
8.0%
|
|
6.1%
|
|
7.7%
|
2018
divestitures(3)
|
|
—%
|
|
(0.2)%
|
|
—%
|
|
(1.3)%
|
Margin for
Adjusted Operating Income
|
|
6.6%
|
|
7.8%
|
|
6.1%
|
|
6.4%
|
|
|
|
|
|
CONTINUED
|
|
Three Months
Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(margins are in
%)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ADJUSTED EBITDA
MARGIN
|
|
|
|
|
|
|
|
EBITDA margin Before
Adjustment for Divestitures
|
|
11.1%
|
|
(9.0)%
|
|
(31.7)%
|
|
4.5%
|
Adjustments:
|
|
|
|
|
|
|
|
2018
divestitures(3)
|
|
—%
|
|
(2.6)%
|
|
(0.4)%
|
|
(2.0)%
|
EBITDA
Margin
|
|
11.1%
|
|
(11.6)%
|
|
(32.1)%
|
|
2.5%
|
Total non-GAAP
adjustments
|
|
0.5%
|
|
21.0%
|
|
42.5%
|
|
7.3%
|
2018
divestitures(3)
|
|
—%
|
|
2.6%
|
|
0.4%
|
|
2.0%
|
Adjusted EBITDA
Margin Before Adjustment for Divestitures
|
|
11.6%
|
|
12.0%
|
|
10.8%
|
|
11.8%
|
2018
divestitures(3)
|
|
—%
|
|
0.4%
|
|
0.1%
|
|
(0.7)%
|
Adjusted EBITDA
Margin
|
|
11.6%
|
|
12.4%
|
|
10.9%
|
|
11.1%
|
__________
|
(1) Average
shares for the 2019 and 2018 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 September 30,
2019 and 2018, respectively
|
|
(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, goodwill impairment and divestiture related
costs.
|
|
(3) Adjusted
for the full impact from revenue and income/loss from
divestitures.
|
Free Cash Flow
Reconciliation:
|
|
|
|
Three Months
Ended
September
30,
|
|
Nine Months
Ended
September
30,
|
(in
millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating Cash
Flow
|
|
$
|
18
|
|
$
|
(30)
|
|
$
|
(216)
|
|
$
|
30
|
Cost of additions to
land, buildings and equipment
|
|
(33)
|
|
(43)
|
|
(109)
|
|
(119)
|
Proceeds from sales of
land, buildings and equipment
|
|
—
|
|
—
|
|
2
|
|
12
|
Cost of additions to
internal use software
|
|
(12)
|
|
(17)
|
|
(49)
|
|
(31)
|
Tax payment related to
divestitures
|
|
(1)
|
|
30
|
|
8
|
|
40
|
Vendor financed
capital leases
|
|
—
|
|
—
|
|
—
|
|
(14)
|
Free Cash
Flow
|
|
$
|
(28)
|
|
$
|
(60)
|
|
$
|
(364)
|
|
$
|
(82)
|
Free Cash
Flow
|
|
$
|
(28)
|
|
$
|
(60)
|
|
$
|
(364)
|
|
$
|
(82)
|
Transaction
costs
|
|
1
|
|
15
|
|
13
|
|
19
|
Transaction costs tax
benefit
|
|
—
|
|
—
|
|
(3)
|
|
—
|
Litigation
payments
|
|
—
|
|
—
|
|
118
|
|
—
|
Deferred compensation
payments and adjustments
|
|
—
|
|
13
|
|
—
|
|
22
|
Adjusted Free Cash
Flow
|
|
$
|
(27)
|
|
$
|
(32)
|
|
$
|
(236)
|
|
$
|
(41)
|
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SOURCE Conduent