FLORHAM PARK, N.J.,
Aug. 8, 2019 /PRNewswire/ --
Key Quarterly Financial and Operational Highlights
- Revenue of $1,112 million
- GAAP diluted EPS from continuing operations of $(4.94), down $(4.98) yr/yr; adjusted diluted EPS from
continuing operations of $0.13, down
(55.2)%
- Net Income from continuing operations of $(1,029) million; Adjusted net income of
$30 million
- Adjusted EBITDA of $114 million,
down (7.3)%, excluding the impact from divestitures
- Total signings TCV $813 million,
new business TCV signings $328
million
- Second large data center migration and consolidation
completed
- Management and the Board to conduct both a strategic and
operational review of the company and each line of business; CEO
search process suspended in conjunction with the review
Conduent (NYSE: CNDT), a digital interactions company, today
announced its second quarter 2019 financial results.
Cliff Skelton, interim CEO
stated, "Conduent has attractive assets, a loyal and diverse
client-base, and dedicated employees. I came to the organization
because we have the opportunity to build on the progress that the
company has made over the last two and a half years. As a
company, we need to drive further change and accelerate our revenue
and sales efforts by empowering employees and balancing our focus
on cost with improving delivery for our clients and their
end-users."
Second Quarter 2019 Results
Second quarter 2019 revenue was $1,112
million, down (19.8)% compared to Q2 2018. Excluding
divestitures completed in 2018, revenue was down (3.2)% compared
with Q2 2018 or (2.6)% in constant currency.
Pre-tax income was $(1,119)
million compared to $54
million in Q2 2018 driven primarily by a $1,067 million goodwill impairment as a result of
the loss of customer contracts, lower than expected new business,
and higher costs of delivery in each of our reporting
units. GAAP operating margin as reported was (100.6)% compared
to 3.9% in Q2 2018. The company reported Q2 2019 GAAP net income of
$(1,029) million compared to
$11 million in Q2 2018. Diluted EPS
from continuing operations was ($4.94) versus $0.04 in the same period last year, driven
primarily by the goodwill impairment.
Second quarter adjusted operating income was $63 million, with an adjusted operating margin of
5.7% as compared to adjusted operating income of $109 million, with an adjusted operating margin
of 7.9% in Q2 2018. Adjusted EBITDA was $114
million, with an adjusted EBITDA margin of 10.3%, as
compared to $166 million, with an
adjusted EBITDA margin of 12.0% in Q2 2018. Further adjusting
for the impact of all divestitures, Adjusted EBITDA declined (7.3)%
compared with Q2 2018 while adjusted EBITDA margin decreased (40)
bps.
The company reported adjusted diluted EPS from continuing
operations of $0.13 compared to
$0.29 in Q2 2018.
Conduent had cash outflow from operations of $(185) million during the second quarter of 2019
compared to $98 million in Q2
2018.
Total contract value (TCV) signings of $813 million for the quarter were down (56.9)%
compared with Q2 2018, due to a (5.2)% and (68.5)% year-over-year
decrease in new business and renewal signings
respectively. The year-over-year comparable for signings this
quarter was impacted by a multi-year renewal of one of our largest
clients in the prior-year quarter.
Financial and Strategic Outlook
Conduent provided the following update to guidance ranges for FY
2019:
(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)
|
|
$218M
|
|
|
20% -
25%
|
|
|
|
|
|
|
|
% of Adj.
EBITDA
|
|
34.1%
|
|
|
|
|
Note: Please refer to
the "Non-GAAP Outlook" in appendix for certain non-GAAP information
regarding outlook
|
|
(1)
|
Year-over-year
revenue growth comparison at constant currency
|
(2)
|
Refer to Appendix for
Non-GAAP reconciliations of adjusted EBITDA / margin and adjusted
FCF and for impact from 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, "Given continued pressure on the top-line and a
more balanced approach on expense management initiatives, we've
lowered our outlook for the year. We are focused on executing on
our strategy to improving the trajectory of our business. As part
of that effort, we are undertaking both a strategic and operational
review of our company and each of our lines of business with our
Board to look for opportunities to maximize shareholder value and
we will provide additional information as that review
progresses."
Conference Call
Management will present the results during a conference call and
webcast on August 8, 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 6541992.
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 August 8, 2019. The replay ID is
10130906.
For international calls, please select a dial-in number
from:
https://services.choruscall.com/ccforms/replay.html
About Conduent
As one of the largest business process companies in the world,
Conduent manages mission-critical digital interactions at massive
scale - helping global businesses and governments stay ahead of
rapidly evolving expectations. We leverage the power of cloud,
mobile and IoT, combined with innovations in automation, AI and
blockchain technologies, to elevate every constituent interaction,
and deliver advanced digital experiences that are more efficient,
seamless and satisfying. It's why a majority of Fortune 100
companies and over 500 government entities depend on Conduent to
manage essential interactions on their behalf and move their
operations forward.
Conduent's differentiated offerings touch millions of lives
every day, including two-thirds of all insured
patients in the U.S., 11 million employees who use our HR
Services, and nearly nine million people who travel
through toll systems daily. Whether it's digital
payments, medical claims administration, eligibility and
enrollment, transportation and mobility systems, end-user
engagement or benefit administration - Conduent makes every
interaction more individualized, immediate and intelligent. 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 exhibits 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 the potential for
disruptions to our business from the transition; government
appropriations and termination rights contained in our government
contracts; our ability to renew commercial and government contracts
awarded through competitive bidding processes; our ability to
recover capital and other investments in connection with our
contracts; our ability to attract and retain necessary technical
personnel and qualified subcontractors; our ability to deliver on
our contractual obligations properly and on time; competitive
pressures; our significant indebtedness; changes in interest in
outsourced business process services; our ability to obtain
adequate pricing for our services and to improve our cost
structure; claims of infringement of third-party intellectual
property rights; the failure to comply with laws relating to
individually identifiable information, and personal health
information and laws relating to processing certain financial
transactions, including payment card transactions and debit or
credit card transactions; breaches of our information systems or
security systems or any service interruptions; our ability to
estimate the scope of work or the costs of performance in our
contracts; our continuing emphasis on and shift toward
technology-led digital transactions; customer decision-making
cycles and lead time for customer commitments; our ability to
collect our receivables for unbilled services; a decline in
revenues from or a loss or failure of significant clients;
fluctuations in our non-recurring revenue; our failure to maintain
a satisfactory credit rating; our ability to attract and retain key
employees; increases in the cost of telephone and data services or
significant interruptions in such services; our failure to develop
new service offerings; our ability to modernize our information
technology infrastructure and consolidate data centers; our ability
to comply with data security standards; our ability to receive
dividends or other payments from our subsidiaries; changes in tax
and other laws and regulations; changes in government regulation
and economic, strategic, political and social conditions; changes
in U.S. GAAP or other applicable accounting policies; and other
factors that are set forth in the "Risk Factors" section, the
"Legal Proceedings" section, the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section
and other sections in our 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 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
June 30,
|
|
Six Months Ended
June 30,
|
(in millions, except
per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue
|
|
$
|
1,112
|
|
|
$
|
1,387
|
|
|
$
|
2,270
|
|
|
$
|
2,807
|
|
|
|
|
|
|
|
|
|
|
Operating Costs
and Expenses
|
|
|
|
|
|
|
|
|
Cost of Services
(excluding depreciation and amortization)
|
|
879
|
|
|
1,073
|
|
|
1,785
|
|
|
2,188
|
|
Selling, general and
administrative (excluding depreciation and amortization)
|
|
121
|
|
|
145
|
|
|
248
|
|
|
288
|
|
Research and
development (excluding depreciation and amortization)
|
|
2
|
|
|
3
|
|
|
5
|
|
|
5
|
|
Depreciation and
amortization
|
|
112
|
|
|
116
|
|
|
227
|
|
|
232
|
|
Restructuring and
related costs
|
|
26
|
|
|
17
|
|
|
42
|
|
|
37
|
|
Interest
expense
|
|
20
|
|
|
37
|
|
|
40
|
|
|
70
|
|
Goodwill
impairment
|
|
1,067
|
|
|
—
|
|
|
1,351
|
|
|
—
|
|
(Gain) loss on
divestitures and transaction costs
|
|
2
|
|
|
(60)
|
|
|
16
|
|
|
(45)
|
|
Litigation costs
(recoveries), net
|
|
1
|
|
|
4
|
|
|
13
|
|
|
35
|
|
Other (income)
expenses, net
|
|
1
|
|
|
(2)
|
|
|
—
|
|
|
(3)
|
|
Total Operating
Costs and Expenses
|
|
2,231
|
|
|
1,333
|
|
|
3,727
|
|
|
2,807
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
Before Income Taxes
|
|
(1,119)
|
|
|
54
|
|
|
(1,457)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
(90)
|
|
|
43
|
|
|
(120)
|
|
|
39
|
|
Net Income
(Loss)
|
|
$
|
(1,029)
|
|
|
$
|
11
|
|
|
$
|
(1,337)
|
|
|
$
|
(39)
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(4.94)
|
|
|
$
|
0.05
|
|
|
$
|
(6.44)
|
|
|
$
|
(0.21)
|
|
Diluted
|
|
$
|
(4.94)
|
|
|
$
|
0.04
|
|
|
$
|
(6.44)
|
|
|
$
|
(0.21)
|
|
CONDUENT
INCORPORATED
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
|
|
Three Months
Ended
June 30,
|
|
Six Months Ended
June 30,
|
(in
millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net Income
(Loss)
|
|
$
|
(1,029)
|
|
|
$
|
11
|
|
|
$
|
(1,337)
|
|
|
$
|
(39)
|
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
|
|
|
|
|
Currency translation
adjustments, net
|
|
(1)
|
|
|
(32)
|
|
|
6
|
|
|
(23)
|
|
Reclassification of
currency translation adjustments on divestitures
|
|
—
|
|
|
—
|
|
|
15
|
|
|
5
|
|
Reclassification of
divested benefit plans and other
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
Unrecognized gains
(losses), net
|
|
—
|
|
|
(2)
|
|
|
1
|
|
|
(3)
|
|
Changes in benefit
plans, net
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Other
Comprehensive Income (Loss), Net
|
|
(1)
|
|
|
(31)
|
|
|
21
|
|
|
(18)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss), Net
|
|
$
|
(1,030)
|
|
|
$
|
(20)
|
|
|
$
|
(1,316)
|
|
|
$
|
(57)
|
|
CONDUENT
INCORPORATED
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
(in millions, except
share data in thousands)
|
|
June 30,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
276
|
|
|
$
|
756
|
|
Accounts receivable,
net
|
|
824
|
|
|
782
|
|
Assets held for
sale
|
|
—
|
|
|
15
|
|
Contract
assets
|
|
192
|
|
|
177
|
|
Other current
assets
|
|
315
|
|
|
234
|
|
Total current
assets
|
|
1,607
|
|
|
1,964
|
|
Land, buildings and
equipment, net
|
|
333
|
|
|
328
|
|
Operating lease
right-of-use assets
|
|
317
|
|
|
—
|
|
Intangible assets,
net
|
|
566
|
|
|
651
|
|
Goodwill
|
|
2,105
|
|
|
3,408
|
|
Other long-term
assets
|
|
375
|
|
|
329
|
|
Total
Assets
|
|
$
|
5,303
|
|
|
$
|
6,680
|
|
Liabilities and
Equity
|
|
|
|
|
Current portion of
long-term debt
|
|
$
|
52
|
|
|
$
|
55
|
|
Accounts
payable
|
|
161
|
|
|
230
|
|
Accrued compensation
and benefits costs
|
|
165
|
|
|
193
|
|
Unearned
income
|
|
92
|
|
|
112
|
|
Liabilities held for
sale
|
|
—
|
|
|
40
|
|
Other current
liabilities
|
|
747
|
|
|
567
|
|
Total current
liabilities
|
|
1,217
|
|
|
1,197
|
|
Long-term
debt
|
|
1,488
|
|
|
1,512
|
|
Deferred
taxes
|
|
186
|
|
|
327
|
|
Operating lease
liabilities
|
|
264
|
|
|
—
|
|
Other long-term
liabilities
|
|
105
|
|
|
280
|
|
Total
Liabilities
|
|
3,260
|
|
|
3,316
|
|
|
|
|
|
|
Contingencies
|
|
|
|
|
Series A convertible
preferred stock
|
|
142
|
|
|
142
|
|
|
|
|
|
|
Common
stock
|
|
2
|
|
|
2
|
|
Additional paid-in
capital
|
|
3,886
|
|
|
3,878
|
|
Retained earnings
(deficit)
|
|
(1,583)
|
|
|
(233)
|
|
Accumulated other
comprehensive loss
|
|
(404)
|
|
|
(425)
|
|
Total
Equity
|
|
1,901
|
|
|
3,222
|
|
Total Liabilities
and Equity
|
|
$
|
5,303
|
|
|
$
|
6,680
|
|
|
|
|
|
|
Shares of common
stock issued and outstanding
|
|
210,417
|
|
|
211,306
|
|
Shares of series A
convertible preferred stock issued and outstanding
|
|
120
|
|
|
120
|
|
CONDUENT
INCORPORATED
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
Six Months Ended June
30,
|
(in
millions)
|
|
2019
|
|
2018
|
Cash Flows from
Operating Activities:
|
|
|
|
|
Net income
(loss)
|
|
$
|
(1,337)
|
|
|
$
|
(39)
|
|
Adjustments required
to reconcile net income (loss) to cash flows from operating
activities:
|
|
|
|
|
Depreciation and
amortization
|
|
227
|
|
|
232
|
|
Contract inducement
amortization
|
|
1
|
|
|
2
|
|
Deferred income
taxes
|
|
(140)
|
|
|
(47)
|
|
Goodwill
impairment
|
|
1,351
|
|
|
—
|
|
(Gain) loss from
investments
|
|
(1)
|
|
|
(1)
|
|
Amortization of debt
financing costs
|
|
3
|
|
|
8
|
|
(Gain) loss on
divestitures and transaction costs
|
|
16
|
|
|
(45)
|
|
Stock-based
compensation
|
|
14
|
|
|
19
|
|
Changes in operating
assets and liabilities
|
|
(368)
|
|
|
(65)
|
|
Other operating,
net
|
|
—
|
|
|
(4)
|
|
Net cash provided by
(used in) operating activities
|
|
(234)
|
|
|
60
|
|
Cash Flows from
Investing Activities:
|
|
|
|
|
Cost of additions to
land, buildings and equipment
|
|
(76)
|
|
|
(76)
|
|
Proceeds from sale of
land, buildings and equipment
|
|
2
|
|
|
12
|
|
Cost of additions to
internal use software
|
|
(37)
|
|
|
(14)
|
|
Payments for
acquisitions, net of cash acquired
|
|
(90)
|
|
|
—
|
|
Proceeds from
divestitures and sale of assets, net of cash
|
|
—
|
|
|
400
|
|
Payments from
divestitures, including cash sold
|
|
(8)
|
|
|
—
|
|
Net cash provided by
(used in) investing activities
|
|
(209)
|
|
|
322
|
|
Cash Flows from
Financing Activities:
|
|
|
|
|
Debt issuance fee
payments
|
|
—
|
|
|
(3)
|
|
Payments on
debt
|
|
(28)
|
|
|
(29)
|
|
Taxes paid for
settlement of stock based compensation
|
|
(6)
|
|
|
(3)
|
|
Dividends paid on
preferred stock
|
|
(5)
|
|
|
(5)
|
|
Net cash provided by
(used in) financing activities
|
|
(39)
|
|
|
(40)
|
|
Effect of exchange
rate changes on cash, cash equivalents and restricted
cash
|
|
2
|
|
|
(6)
|
|
Increase (decrease)
in cash, cash equivalents and restricted cash
|
|
(480)
|
|
|
336
|
|
Cash, Cash
Equivalents and Restricted Cash at Beginning of Period
|
|
765
|
|
|
667
|
|
Cash, Cash
Equivalents and Restricted Cash at End of
period(1)
|
|
$
|
285
|
|
|
$
|
1,003
|
|
__________
|
(1)
|
Includes $9
million and $10 million of restricted cash as of June 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 Condensed Consolidated
Financial Statements prepared in accordance with U.S. GAAP. Our
management regularly uses our supplemental non-GAAP financial
measures internally to understand, manage and evaluate our business
and make operating decisions, and providing such non-GAAP financial
measures to investors allows for a further level of transparency as
to how management reviews and evaluates our business results and
trends. These non-GAAP measures are among the primary factors
management uses in planning for and forecasting future periods.
Compensation of our executives is based in part on the performance
of our business based on certain non-GAAP measures.
A reconciliation of the non-GAAP financial measures to the most
directly comparable financial measures calculated and presented in
accordance with GAAP are provided below.
These reconciliations also include the income tax effects for
our non-GAAP performance measures in total, to the extent
applicable. The income tax effects are calculated under the same
accounting principles as applied to our reported pre-tax
performance measures under ASC 740, which employs an annual
effective tax rate method. The noted income tax effect for our
non-GAAP performance measures is effectively the difference in
income taxes for reported and adjusted pre-tax income calculated
under the annual effective tax rate method. The tax effect of the
non-GAAP adjustments was calculated based upon evaluation of the
statutory tax treatment and the applicable statutory tax rate in
the jurisdictions in which such charges were incurred.
Adjusted Net Income (Loss), Adjusted Earnings per Share and
Adjusted Effective Tax Rate
We make adjustments to Income (Loss) before Income Taxes for the
following items, as applicable to the particular 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.
- 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 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.
- 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.
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 adjusted revenue.
- Restructuring and related costs.
- Goodwill impairment.
- (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 additions and proceeds
from sales of land, buildings and equipment. We use the non-GAAP
measure of Free Cash Flow as a criterion of liquidity and
performance-based components of employee compensation. We use Free
Cash Flow as a measure of liquidity to determine, after required
payments on debt, amounts we can reinvest in our core businesses,
such as amounts available to make acquisitions, invest in land,
buildings and equipment and internal use software. In order to
provide a meaningful basis for comparison, we are providing
information with respect to our Free Cash Flow reconciled to cash
flow provided by operating activities, which we believe to be the
most directly comparable measure under U.S. GAAP.
Adjusted Free Cash Flow
Adjusted free cash flow is defined as free cash flow from above
plus deferred compensation payments, transaction costs, costs
related to the Texas litigation
and other identified items.
Adjusted Cash
Adjusted cash is defined as the cash and cash equivalents less
cash from terminated deferred compensation to be paid to plan
participants. We believe this provides added insight into cash and
cash equivalents taking into account this particular cash
obligation.
Constant Currency
To better understand trends in our business, we believe that it
is helpful to adjust revenue to exclude the impact of changes in
the translation of foreign currencies into U.S. Dollars. We refer
to this adjusted revenue as "constant currency." Currency impact is
the difference between actual growth rates and constant currency
growth rates and is calculated by translating current period
activity in local currency using the comparable prior period's
currency translation rate.
Non-GAAP Outlook
In providing outlook for adjusted EBITDA we exclude certain
items which are otherwise included in determining the comparable
GAAP financial measure. A description of the adjustments which
historically have been applicable in determining adjusted EBITDA
are reflected in the table below. We are providing such
outlook only on a non-GAAP basis because the Company is unable to
predict with reasonable certainty the totality or ultimate outcome
or occurrence of these adjustments for the forward-looking period,
such as amortization, restructuring, NY MMIS, HE charge, and
certain other adjusted items, which can be dependent on future
events that may not be reliably predicted. Based on past reported
results, where one or more of these items have been applicable,
such excluded items could be material, individually or in the
aggregate, to reported results. We have provided an outlook for
revenue on a constant currency basis due to the inability to
accurately predict foreign currency impact on revenues.
Outlook for Free Cash Flow and Adjusted Free Cash Flow is provided
as a factor of expected adjusted EBITDA, see above.
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
June 30,
|
|
Six Months Ended
June 30,
|
(in
millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ADJUSTED
REVENUE
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,112
|
|
|
$
|
1,387
|
|
|
$
|
2,270
|
|
|
$
|
2,807
|
|
Adjustment:
|
|
|
|
|
|
|
|
|
2018
Divestitures(1)
|
|
—
|
|
|
(238)
|
|
|
(36)
|
|
|
(486)
|
|
Adjusted
Revenue
|
|
$
|
1,112
|
|
|
$
|
1,149
|
|
|
$
|
2,234
|
|
|
$
|
2,321
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED NET
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Income (Loss) From
Continuing Operations
|
|
$
|
(1,029)
|
|
|
$
|
11
|
|
|
$
|
(1,337)
|
|
|
$
|
(39)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Amortization of
acquired intangible assets(2)
|
|
61
|
|
|
60
|
|
|
123
|
|
|
121
|
|
Restructuring and
related costs
|
|
26
|
|
|
17
|
|
|
42
|
|
|
37
|
|
Goodwill
impairment
|
|
1,067
|
|
|
—
|
|
|
1,351
|
|
|
—
|
|
(Gain) loss on
divestitures and transaction costs
|
|
2
|
|
|
(60)
|
|
|
16
|
|
|
(45)
|
|
Litigation costs
(recoveries), net
|
|
1
|
|
|
4
|
|
|
13
|
|
|
35
|
|
Other charges
(credits)
|
|
5
|
|
|
(3)
|
|
|
4
|
|
|
(4)
|
|
Total Non-GAAP
Adjustments(3)
|
|
1,162
|
|
|
18
|
|
|
1,549
|
|
|
144
|
|
Income tax
adjustments(3)
|
|
(103)
|
|
|
35
|
|
|
(150)
|
|
|
6
|
|
Adjusted Income
(Loss) Before Adjustment for Divestitures
|
|
$
|
30
|
|
|
$
|
64
|
|
|
$
|
62
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED EFFECTIVE
TAX
|
|
|
|
|
|
|
|
|
Income (Loss)
Before Income Taxes
|
|
$
|
(1,119)
|
|
|
$
|
54
|
|
|
$
|
(1,457)
|
|
|
$
|
—
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total Non-GAAP
Adjustments(3)
|
|
1,162
|
|
|
18
|
|
|
1,549
|
|
|
144
|
|
Adjusted PBT
(Before Adjustment for Divestitures)
|
|
43
|
|
|
72
|
|
|
92
|
|
|
144
|
|
2018
Divestitures(1)
|
|
—
|
|
|
(41)
|
|
|
(1)
|
|
|
(80)
|
|
Adjusted
PBT
|
|
$
|
43
|
|
|
$
|
31
|
|
|
$
|
91
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
$
|
(90)
|
|
|
$
|
43
|
|
|
$
|
(120)
|
|
|
$
|
39
|
|
Income tax
adjustments(3)
|
|
103
|
|
|
(35)
|
|
|
150
|
|
|
(6)
|
|
Adjusted Income
Tax Expense (Benefit)
|
|
13
|
|
|
8
|
|
|
30
|
|
|
33
|
|
Adjusted Net
Income (Loss) Before Adjustment for Divestitures
|
|
$
|
30
|
|
|
$
|
64
|
|
|
$
|
62
|
|
|
$
|
111
|
|
|
|
|
|
|
CONTINUED
|
|
Three Months
Ended
June 30,
|
|
Six Months Ended
June 30,
|
(in
millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ADJUSTED OPERATING
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Income (Loss)
Before Income Taxes
|
|
$
|
(1,119)
|
|
|
$
|
54
|
|
|
$
|
(1,457)
|
|
|
$
|
—
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments(3)
|
|
1,162
|
|
|
18
|
|
|
1,549
|
|
|
144
|
|
Interest
expense
|
|
20
|
|
|
37
|
|
|
40
|
|
|
70
|
|
Adjusted Operating
Income (Loss) Before Adjustment for Divestitures
|
|
63
|
|
|
109
|
|
|
132
|
|
|
214
|
|
2018
divestitures(1)
|
|
—
|
|
|
(41)
|
|
|
(1)
|
|
|
(80)
|
|
Adjusted Operating
Income (Loss)
|
|
$
|
63
|
|
|
$
|
68
|
|
|
$
|
131
|
|
|
$
|
134
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED
EBITDA
|
|
|
|
|
|
|
|
|
Income (Loss) From
Continuing Operations
|
|
$
|
(1,029)
|
|
|
$
|
11
|
|
|
$
|
(1,337)
|
|
|
$
|
(39)
|
|
Income tax expense
(benefit)
|
|
(90)
|
|
|
43
|
|
|
(120)
|
|
|
39
|
|
Depreciation and
amortization
|
|
112
|
|
|
116
|
|
|
227
|
|
|
232
|
|
Contract inducement
amortization
|
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Interest
expense
|
|
20
|
|
|
37
|
|
|
40
|
|
|
70
|
|
EBITDA Before
Adjustment for Divestiture
|
|
(987)
|
|
|
208
|
|
|
(1,189)
|
|
|
304
|
|
2018
divestitures(1)
|
|
—
|
|
|
(41)
|
|
|
(1)
|
|
|
(80)
|
|
2018 divestitures
depreciation and amortization(1)
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(4)
|
|
EBITDA
|
|
(987)
|
|
|
165
|
|
|
(1,190)
|
|
|
220
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Restructuring and
related costs
|
|
26
|
|
|
17
|
|
|
42
|
|
|
37
|
|
Goodwill
impairment
|
|
1,067
|
|
|
—
|
|
|
1,351
|
|
|
—
|
|
(Gain) loss on
divestitures and transaction costs
|
|
2
|
|
|
(60)
|
|
|
16
|
|
|
(45)
|
|
Litigation costs
(recoveries), net
|
|
1
|
|
|
4
|
|
|
13
|
|
|
35
|
|
Other charges
(credits)
|
|
5
|
|
|
(3)
|
|
|
4
|
|
|
(4)
|
|
Adjusted EBITDA
Before Adjustment for Divestiture
|
|
$
|
114
|
|
|
$
|
166
|
|
|
$
|
237
|
|
|
$
|
327
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
114
|
|
|
$
|
123
|
|
|
$
|
236
|
|
|
$
|
243
|
|
___________
|
(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
June 30,
|
|
Six Months Ended
June 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
|
|
208,496
|
|
205,296
|
|
208,207
|
|
205,184
|
Adjustments:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
7
|
|
146
|
|
18
|
|
144
|
Restricted stock and
performance units / shares
|
|
2,814
|
|
3,447
|
|
2,742
|
|
3,117
|
Adjusted Weighted
Average Common Shares Outstanding
|
|
211,317
|
|
208,889
|
|
210,967
|
|
208,445
|
|
|
|
|
|
|
|
|
|
Diluted EPS from
Continuing Operations
|
|
$
|
(4.94)
|
|
|
$
|
0.04
|
|
|
$
|
(6.44)
|
|
|
$
|
(0.21)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments(2)
|
|
5.56
|
|
|
0.08
|
|
|
7.42
|
|
|
0.69
|
|
Income tax
adjustments(2)
|
|
(0.49)
|
|
|
0.17
|
|
|
(0.71)
|
|
|
0.03
|
|
Adjusted Diluted
EPS Before Adjustment for Divestitures
|
|
$
|
0.13
|
|
|
$
|
0.29
|
|
|
$
|
0.27
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED EFFECTIVE
TAX RATE
|
|
|
|
|
|
|
|
|
Effective tax
rate
|
|
8.0
|
%
|
|
79.6
|
%
|
|
8.2
|
%
|
|
—
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments(2)
|
|
22.2
|
%
|
|
(68.5)
|
%
|
|
24.4
|
%
|
|
22.9
|
%
|
Adjusted Effective
Tax Rate(2)
|
|
30.2
|
%
|
|
11.1
|
%
|
|
32.6
|
%
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
ADJUSTED OPERATING
MARGIN
|
|
|
|
|
|
|
|
|
Income (Loss) Before
Income Taxes Margin
|
|
(100.6)
|
%
|
|
3.9
|
%
|
|
(64.2)
|
%
|
|
—
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
Total non-GAAP
adjustments
|
|
104.5
|
%
|
|
1.3
|
%
|
|
68.2
|
%
|
|
5.1
|
%
|
Interest
expense
|
|
1.8
|
%
|
|
2.7
|
%
|
|
1.8
|
%
|
|
2.5
|
%
|
Margin for
Adjusted Operating Income Before Adjustment for
Divestitures
|
|
5.7
|
%
|
|
7.9
|
%
|
|
5.8
|
%
|
|
7.6
|
%
|
2018
divestitures(3)
|
|
—
|
%
|
|
(2.0)
|
%
|
|
0.1
|
%
|
|
(1.8)
|
%
|
Margin for
Adjusted Operating Income
|
|
5.7
|
%
|
|
5.9
|
%
|
|
5.9
|
%
|
|
5.8
|
%
|
|
|
|
|
|
CONTINUED
|
|
Three Months
Ended
June 30,
|
|
Six Months Ended
June 30,
|
(margins are in
%)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ADJUSTED EBITDA
MARGIN
|
|
|
|
|
|
|
|
|
|
EBITDA margin Before
Adjustment for Divestitures
|
|
(88.8)
|
%
|
|
15.0
|
%
|
|
(52.4)
|
%
|
|
10.8
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
2018
divestitures(3)
|
|
—
|
%
|
|
(0.6)
|
%
|
|
(0.9)
|
%
|
|
(1.3)
|
%
|
EBITDA
Margin
|
|
(88.8)
|
%
|
|
14.4
|
%
|
|
(53.3)
|
%
|
|
9.5
|
%
|
Total non-GAAP
adjustments
|
|
99.1
|
%
|
|
(3.0)
|
%
|
|
62.8
|
%
|
|
0.8
|
%
|
2018
divestitures(3)
|
|
—
|
%
|
|
0.6
|
%
|
|
0.9
|
%
|
|
1.3
|
%
|
Adjusted EBITDA
Margin Before Adjustment for Divestitures
|
|
10.3
|
%
|
|
12.0
|
%
|
|
10.4
|
%
|
|
11.6
|
%
|
2018
divestitures(3)
|
|
—
|
%
|
|
(1.3)
|
%
|
|
0.2
|
%
|
|
(1.1)
|
%
|
Adjusted EBITDA
Margin
|
|
10.3
|
%
|
|
10.7
|
%
|
|
10.6
|
%
|
|
10.5
|
%
|
_________
|
(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 June 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
June 30,
|
|
Six Months Ended
June 30,
|
(in
millions)
|
|
|
|
|
|
2019
|
|
2018
|
Operating Cash
Flow
|
|
$
|
(185)
|
|
|
$
|
98
|
|
|
$
|
(234)
|
|
|
$
|
60
|
|
Cost of additions to
land, buildings and equipment
|
|
(23)
|
|
|
(43)
|
|
|
(76)
|
|
|
(76)
|
|
Proceeds from sales
of land, buildings and equipment
|
|
1
|
|
|
12
|
|
|
2
|
|
|
12
|
|
Cost of additions to
internal use software
|
|
(20)
|
|
|
(8)
|
|
|
(37)
|
|
|
(14)
|
|
Tax payment related
to divestitures
|
|
7
|
|
|
10
|
|
|
9
|
|
|
10
|
|
Vendor financed
capital leases
|
|
—
|
|
|
(14)
|
|
|
—
|
|
|
(14)
|
|
Free Cash
Flow
|
|
$
|
(220)
|
|
|
$
|
55
|
|
|
$
|
(336)
|
|
|
$
|
(22)
|
|
Free Cash
Flow
|
|
$
|
(220)
|
|
|
$
|
55
|
|
|
$
|
(336)
|
|
|
$
|
(22)
|
|
Transaction
costs
|
|
9
|
|
|
3
|
|
|
12
|
|
|
4
|
|
Transaction costs tax
benefit
|
|
(3)
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
Litigation
payments
|
|
98
|
|
|
—
|
|
|
118
|
|
|
—
|
|
Deferred compensation
payments and adjustments
|
|
—
|
|
|
2
|
|
|
—
|
|
|
9
|
|
Adjusted Free Cash
Flow
|
|
$
|
(116)
|
|
|
$
|
60
|
|
|
$
|
(209)
|
|
|
$
|
(9)
|
|
Cash / Adjusted Cash Reconciliation:
(in
millions)
|
|
As of June 30,
2019
|
|
As of December 31,
2018
|
Cash and cash
equivalents
|
|
$
|
276
|
|
|
$
|
756
|
|
Deferred compensation
payments and adjustments
|
|
—
|
|
|
99
|
|
Deferred compensation
payable
|
|
—
|
|
|
(99)
|
|
Adjusted cash and
cash equivalents
|
|
$
|
276
|
|
|
$
|
756
|
|
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SOURCE Conduent Incorporated