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2017 Annual Report
Creating
Intelligent
Interactions
Conduent Incorporated
100 Campus Drive, Suite 200
Florham Park, NJ 07932
Conduent.com
© 2018 Conduent Inc. All rights reserved.
Conduent and Conduent Agile Star are
trademarks of Conduent Inc. in the United
States and/or other countries.
Paper from responsible sources.
2
Letter to Shareholders
6 Our Value Chain
7 Our Transformation Roadmap
8
9
12
Overview of Services and Results
Non-GAAP Measures
Board of Directors
13 Officers and Investor Information
Form 10-K
Financial Highlights
(dollar values in millions, except EPS)
2017
2016
2015
GAAP revenue
Adjusted revenue1
Gross margin
Adjusted gross margin1
SG&A
Adjusted operating income1
$ 6,022
$ 6,408
$ 6,662
$ 6,022
$ 6,491
$ 6,778
17.4%
17.4%
14.2%
16.5%
10.3%
15.8%
$
$
615
418
$ 686
$ 699
$
354
$
323
Adjusted operating margin1
6.9%
5.5%
4.8%
Pre-tax loss
GAAP EPS
Adjusted net income1
Adjusted EPS1
EBITDA1
EBITDA margin1
Adjusted EBITDA1
$
(16)
$ (1,227)
$ 0.81
$ (4.85)
$
186
$ 0.85
$
671
$
$
$
223
1.06
$
$
$
(574)
(1.65)
174
$ 0.83
526
$
284
11.1%
8.2%
4.3%
$
672
$
635
$
639
Adjusted EBITDA margin1
11.2%
9.8%
9.4%
1 Please refer to the Non-GAAP Measures table beginning on page 9 for the reconciliation
of this financial measure that is not in compliance with Generally Accepted Accounting
Principles (GAAP).
Introduction
Conduent is a partner to many of the Fortune
100 and governments across the world. Our role
is to manage essential aspects of our clients’
operations while interacting with and supporting
the people our clients serve. We manage millions
of digital interactions every day, 24x7, with patients,
employees, customers and citizens. And with each
interaction, we aim to deliver an experience that is
seamless, secure, personalized and compliant.
Conduent Inc. 2017 Annual Report 1
To my fellow shareholders
Ashok Vemuri
Chief Executive Officer
2
“ The aggressive internal changes we
made through the year fueled strong
financial performance in 2017.”
It is with a sense of pride and optimism that I write my
second annual letter to you. 2017 was a year of great change
and accomplishment for our new company, and we enter
our second year on track against our game plan to build
a profitable, predictable and sustainable growth-oriented
enterprise. Our successful first year required aggressive
changes across almost every dimension of the company. In
addition to covering our financial performance, I will also
summarize the progress we’ve made in our evolution from
many disassociated businesses to a unified, more efficient and
higher performing company.
Financial Performance
Our financial results in 2017 position us well for the next stage
of our growth plan. We achieved or exceeded our goals on
all key financial metrics and enter 2018 with the confidence
that we are on the right path to generate profitable growth in
our core businesses. Revenue declined 6% year-over-year, in
line with expectations. Approximately 50% of this decline was
driven by strategic actions on our non-core portfolio as we
redefined our company around a select, core set of businesses
in line with our new business strategy. We grew adjusted
EBITDA 6% as a result of a range of actions. We remediated
troubled contracts, and we exited unprofitable relationships
and low-priority geographies. This work, combined with a
higher focus on cash management, generated more than $200
million of adjusted free cash flow from operations. We ended
the year with a stronger balance sheet and improved capacity
for future investments back into the business.
Becoming a Single Company
One of our key goals during our first year was to evolve from
the complex fragmented conglomerate that we had inherited
into a single, unified company with a common vision, purpose
and culture. We consolidated more than 50 brands under
Conduent addressing every possible touchpoint — from
systems to software to real estate. More importantly, we
tackled the most important determinant of our success — our
culture. Developed during the last year, our Conduent Culture
System describes our unique vision, mission, ambition and
values, all of which will shape the way we engage our various
stakeholders and the way we work within the company.
Go-to-Market Strategy
In order to return our company to growth, we needed to
remake our client coverage model and go-to-market approach.
Conduent is advantaged with an impressive client list, serving
many of the Fortune 100 and every state in the U.S. Expanding
our service line penetration in the highest opportunity market
segments and clients is a key organic growth driver. This
required many changes in our selling engine. We verticalized
our go-to-market model for an industry-based selling
approach. We reset and aligned sales roles and compensation
with our growth objectives. Deal review and approvals were
standardized in support of targeted economics, tenor and
technology content. Upon reviewing our entire account
portfolio, we exited thousands of unprofitable or untenable
account relationships. Overall, these actions created much
higher focus on our selling engine for sharper value creation,
delivery excellence and, ultimately, financial contribution.
Conduent Inc. 2017 Annual Report 3
An Effective Cost Structure
A by-product of our previous, fragmented model was an
inefficient cost structure and operating model, hampering
both profitability and market responsiveness. We aggressively
drove the strategic transformation initiative that we began
prior to our spin-off and over-achieved our cost savings targets
during our first year as Conduent. Real estate and IT were
sizable sources of cost savings. In 2017, we closed more than
120 facilities and plan to close up to 100 additional locations.
We overhauled our IT structure end-to-end, consolidating
labor, partners, data centers and networks. We also launched
a multi-year modernization program that will result in greater
efficiency and best-in-class systems over time.
Leveraging Technology
Conduent is a technology-led, platform-enabled company;
our technology and platform solutions support more than
two-thirds of our revenue. Technology is central to our growth
and go-to-market strategy. As we refocused our portfolio in
2017, we also conducted a rationalization of our platforms,
identifying those that are aligned with our core business. This
was the first and critical step toward defining our long-term
technology and platform strategy. With this rationalization
now complete, we expect to invest $200 million in platform
modernization over a three-year period to ensure our platforms
are supported with best-of-breed technology.
We also made strides in upgrading our technology and tools
supporting the way we operate internally. During 2017, we
deployed a common set of applications across our internal
functional processes, supported with standardized, company-
wide performance reporting. New business intelligence tools,
analytics and automation improved our operational efficiency
and accelerated decision-making as a result of more accessible
performance data and a “single version of the truth.”
Investing in Our People
As a services-based company, our diverse and global team of
90,000 is our single most important asset. We spent part of
2017 using our AccushoringTM workforce model to ensure that
the right talent is in the right locations. We redesigned roles
for better alignment with our organizational and business goals
and brought in new leadership in key units like sales, finance
and our technology organization. Other accomplishments
included enhancing our health and benefit plans in the
U.S., introducing new skill development opportunities and
launching our diversity & inclusion office. Communication has
been a priority given the range of changes across the company.
During 2017, my leadership team and I visited more than 50%
of our top 100 sites as a way to listen, learn and engage our
employees in our transformation journey. This work will remain
a consistent focus for us since the investments we make in our
employees will pay some of the longest lasting dividends for
our company.
Refining Our Core
As we created new focus in our business strategy, we
completed a top-to-bottom review of our business portfolio,
defining those businesses that we consider core versus non-
core. Conduent’s core is composed of businesses where we are
well-positioned, have scalable technology assets and have the
opportunity for achieving or maintaining market leadership.
4
They are segments where we can differentiate on the basis of
our technical, domain and process expertise. As we identify
non-core assets, we are taking actions for divestment or
run-off. We completed five divestitures in 2017 and expect to
complete more in the future.
Becoming a Digital Interactions Company
In conversations around our core, one of the questions I
am asked most often is, “What does Conduent do?” While
we are often described as a business process company, we
are more than a collection of business service lines. From
human resources to government payments to benefits
administration, Conduent manages millions of interactions
every day with the most valuable asset of our clients — the
people they serve. Conduent’s role is to ensure that each
interaction is personalized, secure, intelligent, seamless and
compliant. Today, the shape and form of these interactions
are almost entirely digital. Tolling is automated. Payments
are electronically distributed. Annual enrollment is on-line.
We support these interactions with a range of technology
platforms, tailored to specific industry and client situations.
Our portfolio spans many segments, but we are not simply
in the tolling business. Or the HR outsourcing business. Or
the payments business. We are in the business of managing
digital, personalized interactions at massive scale, 24x7, across
a diversity of industry segments and engagement channels. For
that reason, we are beginning to define and position ourselves
as a digital interactions company. Going forward, our next
steps will be to showcase our assets, expertise and capabilities
to demonstrate this distinctive positioning.
We could not have completed our first year so successfully
without the support of our many stakeholders. I’d like to thank
my management team and all Conduent employees for their
hard work and resilience, our clients for their continued trust
and confidence and our investors and business partners for
their continued support during a year of tremendous change
and accomplishment. The journey has just begun.
Ashok Vemuri
Chief Executive Officer
Conduent Incorporated
Conduent Inc. 2017 Annual Report 5
Our Value Chain
Across the full spectrum of the work we do — whether it’s tolling, finance and
accounting, benefits administration, workers compensation, healthcare solutions
or HR outsourcing — we work on behalf of our clients to manage data-intensive,
repeatable, individualized interactions with the people they serve. We support
these digital interactions with a range of industry-specific technology platforms
coupled with complementary business offerings, all designed to make the human
experience more effortless, delightful, intelligent and personalized.
Conduent Value Chain
6
Our clients’ end usersCommutersPharmacistsDoctorsPatientsGovernment benefit recipientsEmployeesInsurance membersTechnology consumersBanking customersSuppliersTravelersShoppersCitizensTolling OperationsMobile ParkingDigital PaymentsPublic HealthConsumer TechnologyChild Support ServicesOmni-channel InteractionsWorkers Comp SolutionsE-Benefits TransferHR as-a-serviceLearning ServicesLegal & Compliance SolutionsFinance as-a-serviceHealthcare AnalyticsInsurance Member ServicesCare IntegrationHealth Plan ManagementConsumer HealthInnovation and technology to deliver secure, compliant, personalized experiencesConduent’s Platforms & Technology Solutions Managing digital interactions between our clients and their end users at massive scaleClients20 of the top 20 health insurers9 of the top 10 pharma companies4 of the top 5 life insurers7 of the top 10 U.S. banks40% of U.S. hospitals6 of the top 10 automakers4 of the top 5 aerospace firmsAll 50 states Our Transformation Roadmap
We are on a multi-year transformation journey to make
Conduent a sustainable, predictable, profitable enterprise and
a leader in our industry. This has required changes across our
go-to-market approach, portfolio and internal operations. Our
performance in 2017 indicates we are well on our way.
Where we started
Where we're going
Conglomerate of
siloed business
units
Inconsistent
performance
Disparate
go-to-market
approaches
Disjointed
operations
Unfocused
portfolio
Diversified
business process
services
Single, unified
company and
brand
Market-leading
performance
Clear go-to-mar-
ket strategy
Business
intelligence and
modern work
tools
Technology-
led/platform-
based
solutions
Digital
interactions with
clients‘ end users
Conduent Inc. 2017 Annual Report 7
Overview of Services and Results
Segments and Service Offerings
Provider, Pharma & Life Sciences
8%
Banking, Insurance &
Capital Markets
17%
Communications & Media
18%
Finance and Accounting
Workers Compensation
Other
6%
4%
Learning & Legal
5%
5%
6%
6%
10%
Omni-channel Communications
Transaction Processing
35%
High Tech,
Industrial & Retail
33%
Customer Experience
22%
Payer
Industry Specific Services
25%
Human Resource Services
Commercial Industries 59% of total 2017 revenue 5.1% segment margin
Public Sector 36% of total 2017 revenue 11.3% segment margin
Provider, Pharma & Life Sciences
Commercial Industries Verticals
8%
Finance and Accounting
Workers Compensation
Other
6%
4%
Banking, Insurance &
Capital Markets
Provider, Pharma & Life Sciences
17%
Banking, Insurance &
Capital Markets
Communications & Media
18%
8%
35%
High Tech,
Industrial & Retail
17%
35%
High Tech,
Industrial & Retail
Communications & Media
18%
22%
Payer
Learning & Legal
5%
Federal
5%
Omni-channel Communications
Government Healthcare
Finance and Accounting
3%
6%
Workers Compensation
12%
Other
6%
4%
33%
Customer Experience
Transaction Processing
Learning & Legal
6%
Omni-channel Communications
Payment Services
22%
Industry Specific Services
10%
Transaction Processing
33%
Customer Experience
39%
Transportation
25%
Human Resource Services
5%
5%
6%
6%
10%
Health Enterprise
77%
23%
Education
22%
Payer
Industry Specific Services
24%
25%
Human Resource Services
State & Local
Commercial Industries Service Lines
Other 5% of total 2017 revenue
Federal
Other
Communications & Media
18%
Transaction Processing
6%
Omni-channel Communications
Government Healthcare
6%
Payment Services
22%
3%
12%
Government Healthcare
Finance and Accounting
3%
Workers Compensation
12%
6%
4%
Learning & Legal
5%
Federal
5%
33%
Customer Experience
39%
Transportation
23%
Education
23%
Education
Payment Services
Industry Specific Services
22%
24%
25%
Human Resource Services
10%
39%
Transportation
Health Enterprise
77%
Provider, Pharma & Life Sciences
8%
Banking, Insurance &
Capital Markets
17%
35%
High Tech,
Industrial & Retail
22%
Payer
State & Local
24%
State & Local
Company Performance
Health Enterprise
77%
Government Healthcare
3%
Federal
12%
Payment Services
22%
39%
Transportation
24%
State & Local
Revenue
Adjusted Operating Income1
2015
2015
2016
2016
2017
2017
Health Enterprise
77%
Adjusted revenue
Adjusted revenue
$6,662
$6,662
23%
Education
$6,7781
$6,7781
$6,408
$6,408
$6,4911
$6,4911
$6,022
$6,022
2015
2015
2016
2016
2017
2017
$323
$323
4.8%
4.8%
$354
$354
5.5%
5.5%
$418
$418
6.9%
6.9%
Adjusted operating margin shown in purple
Adjusted operating margin shown in purple
All results represent continuing operations. Dollar values for graphs are in millions.
1 Please refer to page 9 for the reconciliation of this financial measure that is not in compliance with Generally Accepted Accounting Principles (GAAP).
8
Non-GAAP Measures
Revenue and Operating Income/Margin Reconciliations
2017
2016
Year Ended December 31,
2015
(in millions)
Pre-Tax
Income (Loss)
Revenue Margin
Pre-Tax
Income (Loss)
Revenue Margin
Pre-Tax
Income (Loss)
Revenue Margin
GAAP as Reported from Continuing Operations
$
(16) $ 6,022
(0.3)%
$ (1,227) $ 6,408
(19.1)%
$
(574) $ 6,662
(8.6)%
Adjustments
Goodwill impairment
Amortization of intangible assets
NY Medicaid Management Information System
(NY MMIS)
Restructuring and related costs
Health Enterprise (HE) charge
Separation costs
Interest expense
Related party interest
(Gain) loss on sale of asset and businesses
Other (income) expenses, net
—
243
9
101
(8)
12
137
—
(42)
(18)
—
—
83
—
935
280
161
101
—
44
14
26
2
18
—
116
—
250
—
159
389
—
8
61
—
30
Adjusted Revenue/Operating Income/Margin $ 418
$ 6,022
6.9%
$
354
$ 6,491
5.5%
$
323
$ 6,778
4.8%
Key Financial Ratios Reconciliation
(in millions)
Gross Margin
2017
SG&A as % of Revenue
Gross Margin
2016
SG&A as % of Revenue
Year Ended December 31,
2015
SG&A as % of Revenue
Gross Margin
GAAP As Reported
Adjustments
NY MMIS
HE charge
Adjusted
17.4%
0.1
(0.1)
17.4%
10.2%
—
—
10.2%
14.2%
2.3
—
16.5%
10.7%
(0.1)
—
10.6%
10.3%
—
5.5
15.8%
10.5%
—
(0.2)
10.3%
Conduent Inc. 2017 Annual Report 9
Non-GAAP Measures (continued)
Net Income (Loss) and EPS Reconciliation
(in millions, except per share amounts)
Net Income
(Loss)
2017
EPS
Net Income
(Loss)
2016
EPS
Year Ended December 31,
2015
Net Income
(Loss)
EPS
GAAP as Reported from Continuing Operations
$
177
$
0.81
$
(983)
$
(4.85)
$
(336)
$
(1.65)
Adjustments
Goodwill impairment
Amortization of intangible assets
NY MMIS
Restructuring and related costs
HE charge
Separation costs
(Gain) loss on sale of asset and businesses
Other (income) expenses, net
Less: Income tax adjustments(1)
Adjusted Net Income (Loss) and EPS
(GAAP Shares in thousand)
Weighted average common shares outstanding
Stock options
Restricted stock and performance shares
Adjusted Weighted Average Shares Outstanding(2)
(Non-GAAP Shares in thousand)
Weighted average common shares outstanding
Stock options
Restricted stock and performance shares
8% Convertible preferred stock
Adjusted Weighted Average Shares Outstanding(2)
—
243
9
101
(8)
12
(42)
(18)
(288)
186
$
935
280
161
101
—
44
2
18
(335)
223
—
250
—
159
389
—
—
30
(318)
174
$
0.83
202,875
—
—
202,875
202,875
374
2,132
5,393
210,774
$
1.06
$
202,875
—
—
202,875
202,875
374
2,132
5,393
210,774
$
0.85
$
204,007
195
2,491
206,693
204,007
195
2,491
—
206,693
1 Reflects the income tax (expense) benefit of the adjustments.
2 Average shares for the 2017 calculation of adjusted EPS exclude 5 million shares associated with our Series A convertible preferred stock and include the impact
of the preferred stock dividend of $10 million for the year ended December 31, 2017. Average shares for the 2016 and 2015 calculation of adjusted EPS include 5
million shares associated with our Series A convertible preferred stock and exclude the impact of the preferred stock quarterly dividend. Shares associated with
our stock compensation plan are included in the calculation of adjusted EPS for all years presented.
10
Revenue/Profit/Adjusted EBITDA/Adjusted EBITDA Margin Reconciliations
2017
2016
Year Ended December 31,
2015
Consolidated
Reconciliation to Adjusted Revenue
Revenue
NY MMIS adjustment
HE charge
Adjusted Revenue
Reconciliation to Adjusted EBITDA
Net Income (Loss) from Continuing Operations
Goodwill impairment
Restructuring and related costs
Separation costs
Interest Expense
Related Party Interest
Income tax benefits
(Gain) Loss on sale of assets and business
Other (income) expenses, net
Depreciation
Amortization
EBITDA
EBITDA Margin
EBITDA
Adjustments:
NY MMIS
NY MMIS depreciation
HE charge
HE charge depreciation
Adjusted EBITDA
Adjusted EBITDA Margin
Free Cash Flow/Adjusted Free Cash Flow Reconciliation
Operating Cash Flow
Cost of additions to land, buildings and equipment
Proceeds from sales of land, buildings and equipment
Cost of additions to internal use software
Vendor financed capital leases
Free Cash Flow
Free Cash Flow
Deferred compensation payments
Adjusted Free Cash Flow
$
$
$
$
$
$
6,662
—
116
6,778
(336)
—
159
—
8
61
(238)
—
30
126
474
284
4.3%
284
—
—
389
(34)
639
9.4%
$
$
$
$
$
$
$
$
$
$
6,022
—
—
6,022
177
—
101
12
137
—
(193)
(42)
(18)
125
372
671
11.1%
671
9
—
(8)
—
672
11.2%
$
$
$
$
$
$
6,408
83
—
6,491
(983)
935
101
44
14
26
(244)
2
18
128
485
526
8.2%
526
161
(52)
—
—
635
9.8%
Year Ended December 31,
2016
2017
302
(96)
33
(36)
(16)
187
187
17
204
$
$
$
$
108
(149)
—
(39)
(1)
(81)
(81)
—
(81)
Conduent Inc. 2017 Annual Report 11
Board of Directors
Ashok Vemuri
Chief Executive Officer,
Conduent Incorporated
William G. Parrett
Retired Chief Executive
Officer, Deloitte Touche
Tohmatsu
Vincent J. Intrieri
Founder & President,
VDA Asset Management, LLC
Michael Nevin
Financial Analyst,
Icahn Enterprises LP
Courtney Mather
Portfolio Manager,
Icahn Capital LP
Michael A. Nutter
Former Mayor of
Philadelphia, Pennsylvania
Virginia M. Wilson
Executive Vice President,
Chief Financial Officer,
Teachers Insurance and
Annuity Association
Joie Gregor
Managing Director for
Leadership Development
(ret.), Warburg Pincus LLC
Paul S. Galant
Chief Executive Officer,
VeriFone Systems Inc.
12
Officers
Executive Council
Ashok Vemuri
Chief Executive Officer
Brian Webb-Walsh
Chief Financial Officer
James Michael Peffer
General Counsel and Secretary
Dave Amoriell
President, Conduent Incorporated
Jeff Friedel
Chief People Officer
Sector Leadership
Pratap Sarker
Group Chief Executive, Financial
Services & Healthcare Sector
Christine Landry
Group Chief Executive,
Consumer & Industrials Sector
Srikanth Iyengar
Group Chief Executive,
Europe Sector
Investor
Information
Shareholder Information
For investor information, including
comprehensive earnings releases:
https://investor.conduent.com/
or contact:
Alan Katz, Investor Relations
alan.katz@conduent.com
973.526.7173
This annual report also is
available online at
https://investor.conduent.com/.
For shareholder services:
• Call Computershare at 866.574.5496;
• Write to
Computershare
P.O. Box 505000
Louisville, KY 40233; or
• Email available at
www.computershare.com
Annual Meeting
Friday, May 25, 2018, 9 a.m. EDT
The Madison Hotel
One Convent Road
Morristown, NJ 07960
Proxy material will be mailed on
April 13, 2018 to shareholders of record
as of March 27, 2018.
Electronic Delivery Enrollment
Conduent offers shareholders the
convenience of electronic delivery,
including:
• Immediate receipt of the Proxy
Statement and Annual Report
• Online proxy voting
Registered Shareholders, visit:
www.envisionreports.com/CNDT
Registered shareholders can sign up for
future electronic delivery on that site.
You are a registered shareholder if your
shares are being held by our transfer
agent, Computershare.
Conduent Inc. 2017 Annual Report 13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-K
_________________________________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: December 31, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from: ______ to: _______
Commission File Number 001-37817
_________________________________________________
CONDUENT INCORPORATED
(Exact Name of Registrant as specified in its charter)
_________________________________________________
New York
(State of incorporation)
100 Campus Drive, Suite 200
Florham Park, New Jersey 07932
(Address of principal executive offices)
81-2983623
(IRS Employer Identification No.)
(844) 663-2638
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Growth
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates as of
June 30, 2017 was $3,323,804,990.
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest
practicable date:
Class
Common Stock, $0.01 par value
Outstanding at January 31, 2018
210,469,177
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated herein by reference:
Document
Conduent Incorporated Notice of 2018 Annual Meeting of Shareholders
and Proxy Statement (to be filed no later than 120 days after the close of
the fiscal year covered by this report on Form 10-K)
Part of Form 10-K in which Incorporated
III
FORWARD-LOOKING STATEMENTS
From time to time, we and our representatives may provide information, whether orally or in writing,
including certain statements in this Annual Report on Form 10-K, which are deemed to be "forward-
looking" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform
Act"). These forward-looking statements and other information are based on our beliefs as well as
assumptions made by us using information currently available.
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 our
current views with respect to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those expressed or implied herein
as anticipated, believed, estimated, expected or intended or using other similar expressions.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such
forward-looking statements, because they relate to future events, are by their very nature subject to many
important factors and uncertainties that could cause actual results to differ materially from those
contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any
exhibits to this Form 10-K and other public statements we make.
Such factors include, but are not limited to: termination rights contained in our government contracts; our
ability to renew commercial and government contracts awarded through competitive bidding processes;
our ability to recover capital and other investments in connection with our contracts; our ability to attract
and retain necessary technical personnel and qualified subcontractors; our ability to deliver on our
contractual obligations properly and on time; competitive pressures; our significant indebtedness;
changes in interest in outsourced business process services; our ability to obtain adequate pricing for our
services and to improve our cost structure; claims of infringement of third-party intellectual property
rights; the failure to comply with laws relating to individually identifiable information, and personal health
information and laws relating to processing certain financial transactions, including payment card
transactions and debit or credit card transactions; breaches of our security systems and service
interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our
ability to collect our receivables for unbilled services; a decline in revenues from or a loss or failure of
significant clients; fluctuations in our non-recurring revenue; our failure to maintain a satisfactory credit
rating; our ability to attract and retain key employees; increases in the cost of telephone and data
services or significant interruptions in such services; our failure to develop new service offerings; our
ability to receive dividends or other payments from our subsidiaries; changes in tax and other laws and
regulations; changes in government regulation and economic, strategic, political and social conditions;
changes in U.S. GAAP or other applicable accounting policies; and other factors that are set forth in the
“Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of
Financial Condition and Results of Operations” section and other sections of this Annual Report on Form
10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We do not
intend to update these forward-looking statements, except as required by law.
CONDUENT INCORPORATED
FORM 10-K
December 31, 2017
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships, Related Transactions and Director Independence . . . . . . . . . .
Principal Auditor Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
11
24
24
24
24
25
26
27
47
49
92
93
93
94
95
95
95
95
Part IV
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96
100
PART I
ITEM 1. BUSINESS
In this Annual Report on Form 10-K, unless the content otherwise dictates, "Conduent", the "Company", "we" or
"our" mean Conduent Inc. and its consolidated subsidiaries.
Our Business
Conduent is a leading provider of business process services with expertise in transaction-intensive processing,
analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling
personalized, seamless interactions on a massive scale that improve end-user experiences.
On December 31, 2016, Conduent Incorporated (formerly known as the BPO business) spun-off from Xerox
Corporation, pursuant to the Separation and Distribution Agreement between the Company and Xerox Corporation
(Separation). As a result of the spin-off, we now operate as an independent, publicly traded company on the New
York Stock Exchange, under the ticker "CNDT".
We create value for our Commercial and Public Sector clients by applying our expertise, technology and innovation
to help them drive customer and constituent satisfaction and loyalty, increase process efficiency and respond
rapidly to changing market dynamics.
Our portfolio includes industry-focused service offerings in attractive growth markets such as Healthcare and
Transportation, as well as multi-industry service offerings such as Transaction Processing, Human Resources
Solutions and Payment Services.
Our strategy is to drive portfolio focus, operational discipline, sales and delivery excellence and innovation,
complemented by tightly aligned investments. As a result, we aim to deliver profitable growth and margin expansion
and to deploy a disciplined capital allocation strategy.
With approximately 90,000 employees globally as of December 31, 2017, we provide differentiated services to
clients spanning small, medium and large businesses and to governments around the world.
Our Transformation
We have a portfolio of businesses that we are optimizing and effectively targeting attractive growth areas in a
rapidly evolving business process services industry. We have taken significant actions to improve our profitability
and drive growth with a more focused portfolio of services.
Key initiatives include:
• Realigned Delivery. During 2017 we reorganized the business to better align to our vertical go-to-market strategy
and to our global delivery capabilities. We believe this operating structure will allow us to better integrate and
tailor business solutions for our customers.
• Divested Non-Core Assets. We divested five businesses in 2017 for aggregate proceeds of $56 million in cash.
These sales enabled us to increase our focus on areas where we have a competitive advantage.
• Increased Use of Automation. We have developed and deployed a set of advanced software-based automation
tools as part of our service delivery operations. These tools reduce the amount of repetitive, manual labor
required to deliver many of our services and improve service quality through lower error rates and faster
processing times.
• Real Estate, Infrastructure and Selling, General and Administrative (SG&A). We have significantly reduced
the number of leased and owned properties from 462 to 339, reduced our information technology infrastructure
costs by streamlining our operations and reduced our SG&A costs from $686 million in 2016 to $615 million in
2017.
Conduent Inc. 2017 Annual Report 1
We continue to execute on our strategic transformation program to deliver cost savings through infrastructure
optimization, labor productivity and automation initiatives, restructuring of unprofitable contracts and other
efficiencies. This transformation program has and will enable us to better capitalize on our differentiated service
offerings, industry expertise and global delivery excellence and position us for long-term shareholder value creation.
Our Market Opportunity
We estimate our addressable market size in the global business process service industry at approximately $243
billion in 2017, according to third party industry reports, and we are a leader across several segments of this large,
diverse and growing market. Providing business process services is complex and multi-faceted with services that
span many industries.
Ongoing competitive pressures and increasing demand for further productivity gains have motivated businesses to
outsource elements of their day-to-day operations to accelerate performance and innovation. As a result, our clients
have become more focused on their core businesses and the range of outsourced activities has expanded greatly.
Increasing globalization has also required many companies to optimize cost structures to retain competitiveness
and business process services have become a key component of this strategy.
The ongoing shift to next-generation software and automation technologies is driving greater demand for, and
expectation of, efficiency and personalization by the constituents and customers of the businesses and
governments we serve. Addressing these business and operational challenges is necessary for business process
services companies to capitalize on these trends. In addition, business process services have the potential to
meaningfully enhance productivity for businesses and governments and satisfaction for their constituents and
customers.
Segments
Our reportable segments correspond to how management organizes and manages the business and are aligned to
the industries in which our clients operate, which are Commercial Industries and Public Sector.
• Our Commercial Industries segment provides business process services and customized solutions to clients in a
variety of industries.
• Our Public Sector segment provides government-centric business process services and subject matter experts to
U.S. federal, state and local and foreign governments.
Other represents our Government Health Enterprise (HE) Medicaid Platform for all current state clients and our
Education business, including our Student Loan business, as well as inter-segment eliminations.
We present segment financial information in Note 2 – Segment Reporting to our Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K, which is incorporated herein by reference. The discussion below
highlights our segment revenues for the year ended December 31, 2017.
Commercial Industries
Our Commercial Industries segment is our largest segment, with $3.5 billion in revenues in 2017, representing 59%
of total revenues. Across the Commercial Industries segment, we deliver end-to-end business-to-business and
business-to-customer services that enable our clients to optimize their key processes. Our multi-industry
competencies include Customer Care, Human Resource Management, Worker’s Compensation process
management, Finance and Accounting, Workforce Learning Services and Legal Business Services. These services
are complemented by innovative industry-specific services such as payment integrity solutions to clients in the
Healthcare payer space, care and quality analytics, workflow solutions and software adoption services to
Healthcare provider clients, personalized product information for clients in the Automotive industry, digitized source-
to-pay solutions for clients in the Manufacturing industry, revenue generation and clinical services for clients in the
Pharmaceutical and Life Sciences industries, customer experience and marketing services for clients in the Retail
industry, and mortgage and consumer loan processing for clients in the Financial Services industry.
2
Public Sector
Our Public Sector segment generated revenues of $2.2 billion in 2017, representing 36% of the total revenues. This
segment provides government-centric business process services to U.S. federal, state and local and foreign
governments for transportation, public assistance program administration, transaction processing and payment
services. In order to provide targeted support to our government clients, our Public Sector segment is organized into
several primary businesses:
• Transportation: We provide revenue-generating transportation services to government clients in 27 countries.
Our services include support for electronic toll collection, public transit, parking, photo enforcement and
commercial vehicle operations. Across these offerings, we manage key processes on behalf of our clients
including fee collection, compliance and violation management, notifications, statements and reporting. These
innovative services significantly improve individual travel experiences, optimize how vehicles and goods move
efficiently within cities, digitize integrated modes of transportation and help our government clients to better serve
their constituents.
• Federal, State and Local Government: We support our government clients with services targeting key civilian
agencies within federal, state and local governments, as well as government administrative offices. Our depth of
agency-specific expertise combined with our scale allows us to deliver and manage programs at all levels of
government. Our broad set of public sector services includes public assistance program administration such as
child support, pension administration, records management, electronic benefits, eligibility and payment cards,
unclaimed property, disease management and software offerings in support of federal, state and local government
agencies.
• Payments: With more than $87 billion disbursed annually, we are a leader in government payment
disbursements for federally sponsored programs like Supplemental Nutritional Assistance Program (SNAP, a.k.a
Food Stamps) and Women, Infant and Children (WIC) as well as government initiated cash disbursements such
as child support, unemployment and federal social security. We provide our payment card services which include
branded prepaid debit card (Visa and Mastercard), Electronic Benefit Transfer (EBT for SNAP and WIC) and
Electronic Child Care to 36 states and the US Treasury with a diversified portfolio consisting of 147 different
payment programs nationwide.
• Government Healthcare: We provide medical management and fiscal agent care management services to
Medicaid programs and federally-funded U.S. government healthcare programs in 24 states, Puerto Rico and the
District of Columbia. Our services include a range of innovative solutions such as Medicaid management fiscal
agent, pharmacy benefits management and clinical program management. These services help states optimize
their costs by streamlining access to care and improve patient health outcomes through population health
management and help families in need by improving beneficiary support.
Other
Other includes our Government HE Medicaid Platform business, where we are limiting our focus to maintaining
systems for our current clients, our Education Business inclusive of our Student Loan business, which is in runoff;
and inter-segment eliminations. In 2017, Other accounted for $311 million of revenues, representing 5% of total
revenues.
Our Service Offerings
Our portfolio of business process services includes a combination of industry-specific and multi-industry
services. We have subject matter experts who are responsible for implementing each of these services, delivering
service excellence to clients, ensuring best practices to improve cost competitiveness, innovating our next
generation offerings and supporting worldwide sales.
Conduent Inc. 2017 Annual Report 3
Industry-Specific Services
Commercial Industry-Specific Services
Examples of the services we offer include personalized product information for automotive clients, digitized
source to pay solutions for manufacturing clients, care integration and coordination, member health risk
assessments and payment integrity (such as recovering claims from the appropriate payers) for healthcare clients,
mortgage and consumer loan processing for financial institution clients and customized workforce learning solutions
for aerospace clients.
Public Sector-Specific Services
Transportation Services: The transportation services we offer include support for electronic toll collection, public
transit, parking, photo enforcement and commercial vehicle operations. Across these offerings, we manage key
processes on behalf of our clients including fee collection, compliance and violation management, notifications,
statements and reporting.
Other Public Sector Services: Our broad set of public sector services includes public assistance program
administration, pension administration, records management, disease management and software offerings in
support of federal, state and local government agencies. It also includes fiscal agent administrative services and
providing management information systems in support of Medicaid programs or pharmacy benefits management for
Government Healthcare clients.
Multi-Industry Services
Transaction Processing Services
We help our clients to improve communications with their customers and constituents, whether it is on paper, on-
line or through other communication channels. By supporting our clients’ customer communication processes, we
help our clients deliver a better experience to their customers and operate with improved efficiency and greater
effectiveness.
We offer a broad array of flexible transaction processing services that include data entry, scanning, image
processing, enrollment processing, claims processing, high volume offsite print and mail services and file indexing.
Our multi-channel communication capabilities (including secure print, email, text and web) enable the delivery of
personalized and targeted communications that are designed to elicit the desired response from customers or other
end-users (e.g., on-time bill payment and increased marketing response rates). Our service offerings utilize both
proprietary and commercially available third-party technologies, combined with our expertise to ensure continued
quality and innovation for our clients.
Payment Services
Prepaid Cards: We are an extensive provider of VISA and MasterCard prepaid debit cards, as well as other
electronic payment cards in support of U.S. government benefit programs including Social Security, the
Supplemental Nutrition Assistance Program (formerly known as food stamps), the Special Supplemental Nutrition
Program for Women, Infants and Children and other specialized Electronic Benefits Transfer programs. Our secure
payment services reduce fraud and eliminate paper checks by disbursing electronic payments directly to end users,
even those without bank accounts. Our proprietary processing platform, significant operational expertise, advanced
fraud analytics and adoption of Europay, MasterCard and Visa chip-enabled technology put us in the forefront of the
Prepaid Card industry.
Health Savings Accounts (HSA): We provide clients with a simplified approach to help their employees manage
their health care costs and accumulate wealth with tax-advantaged accounts. We consolidate administration of all
health spending accounts onto one common platform, including Health Savings Accounts, Health Reimbursement
Arrangements, Flexible Spending Accounts and Health Incentive Accounts. By consolidating and integrating the
management of health spending accounts, we help our clients improve benefit enrollment and account opening,
consolidate customer service, simplify communications and streamline account funding and management. As of
December 31, 2017, we had approximately 1 million active HSA accounts and $2.3 billion of assets under
management within our HSA offering.
4
Child Support Payments: We are an industry leader of U.S. State Government Disbursement Units for child support
payments. We collect payments from non-custodial parents via check, credit card and transfers from employee
payroll systems and disburse payments to the beneficiaries.
Customer Care Services
We offer customer care services that help our clients provide their own customers with a superior experience. Our
service offerings range from answering simple billing questions to providing complex technical and customer
support. We also offer both inbound and outbound sales and cross-selling programs through our contact center
operations. We provide these services through multiple channels, including phone, SMS, chat, interactive voice
response, social networks and email. We augment our customer care agents’ efficiency and effectiveness with
advanced technologies that help them resolve customer needs quickly and with consistent high quality.
Human Resources Services
We help our clients to support their employees at all stages of employment from initial on-boarding through
retirement. We offer clients customized advisory, technology and administrative services that help them more
effectively involve employees in their health insurance, retirement plan and compensation programs. We design
and administer employee benefit programs that attract, reward and retain workforce talent through engaging
technologies and decision support tools. Our service offerings include; cloud-based HR outsourcing; payroll and
benefits administration; health savings and tax efficient account administration; and administration of, and
consultation regarding, our proprietary private health care exchange, which allows employees to select from a set of
predefined providers and also provides market-leading health and benefit decision support tools and ongoing health
and wellness management.
Finance and Accounting Services
We serve clients by managing their critical finance, accounting and procurement processes. Our services include
general accounting and reporting, billing and accounts receivable and purchasing, accounts payable and expense
management services. We also offer wholesale and retail lockbox services and process auto and mortgage loans in
the United States. With a global, dedicated team, we manage the core, end-to-end process areas of finance,
accounting and procurement for some of the world’s most recognized brands.
Legal Business Services
We have been providing client support to law firms and corporate legal departments for over 20 years. We work
across the litigation lifecycle, with particular focus on the legal discovery and review process. Our offerings include
litigation support services, compliance and risk review and managed services support.
Workforce Learning Services
We are a provider of end-to-end learning services, designed to accelerate the productivity and development of our
clients’ employees and extended work forces. Our global presence, superior innovation and expertise allow us to
deliver performance-based learning services tailored to our clients’ unique strategic business goals. Our offerings
include learning strategy and assessment, instructor management and learning administration.
Applied Automation and Analytics Solutions
Many of our service offerings described above incorporate our applied automation and analytics solutions to
increase their value and effectiveness to clients across all industries. We deploy these solutions to personalize
millions of interactions, optimize service delivery and simplify complex processes. For example, our customer care
services harness the power of applied analytics and automation to help our customer service agents work more
efficiently across different communication channels. Our applied automation solutions track and learn the most
efficient means to address common customer service needs as they occur in real time so that we can solve the
same problem faster the next time around. The combination of applied automation and analytics allows us to
identify new service demand patterns and opportunities quickly so that we can proactively address them on behalf
of our clients.
Conduent Inc. 2017 Annual Report 5
Our Competitive Strengths
We possess a number of competitive strengths that distinguish us from our competitors, including:
Leadership in attractive growth markets. We are a leader in business process services. Our clients continue to
outsource key business processes to accelerate performance and innovation. Additionally, clients are moving
beyond services for back-office functions in order to drive customer satisfaction and loyalty, as well as productivity
and efficiency. The increase in globalization and cost competition continues to accelerate, forcing companies to
seek ways to stay ahead of the competition. These factors, along with clients and their customers demanding more
personalized, seamless and secure solutions, are collectively driving the ongoing shift to next-generation software
and automation technologies.
• Healthcare. U.S. healthcare spending is estimated to have represented greater than 17.9% of GDP in 2016 and
is continuing to grow. As one of the most regulated industries, healthcare providers must balance increased
utilization with heightened complexity and new financial pressures such as government budget challenges to
significantly reduce reimbursements, reimbursement penalties for hospital readmissions and a shift from fee-for-
service to “value-based” population health management. We are widely recognized by industry analysts as a
leader in healthcare payer operations, serving all 20 of the top 20 U.S. managed healthcare plans and providing
administrative and care management solutions to Medicaid programs and federally funded U.S. government
healthcare programs in 24 states, Puerto Rico and the District of Columbia.
• Transportation. Traffic congestion continues to increase as urbanization and changing demographics take hold
globally. As a result, optimized transportation systems are becoming critical to increase efficiency while
maintaining strict safety requirements. Electronic toll collection, public transit and parking all represent key growth
drivers as governments at all levels increasingly focus on transportation infrastructure. We maintain approximately
54% market share position in electronic toll collection in the United States based on toll revenues collected
through our systems in 2017. We are also one of the largest U.S.-based commercial vehicle operations service
providers in the United States with approximately 51% market share based on 2017 revenues, and we are an
award-winning innovator in parking management.
• Transaction Processing. We provide high volume print and mail services, enrollment processing and
personalized and targeted marketing and communications, to large corporations and we believe we are a leading
provider in this market.
• Prepaid Cards: We are the leading provider of prepaid payment card services in support of the U.S. government
prepaid card services market.
Global delivery expertise. Our scale and global delivery network enables us to deliver our proprietary technology,
differentiated service offerings and service capabilities expertly to clients around the world. We have operations in
India, Philippines, Jamaica, Guatemala, Mexico, Romania, Dominican Republic and several locations within the
United States, giving our customers the option for "onshore" or "offshore" outsourced business process services.
This global delivery model enables us to leverage lower-cost production locations, consistent methodologies and
processes, time zone advantages and business continuity plans. As of December 31, 2017, our employee location
mix was approximately 48% in North America, 20% in Latin America / Caribbean, 22% in Asia Pacific and 10% in
Europe / Middle East / Africa.
Differentiated suite of multi-industry service offerings at scale. We manage transaction-intensive processes
and work directly with end-users to meet their needs often in real-time. We are unique in our ability to offer our
clients these business process services on a large scale and with high quality. Additionally, we are able to leverage
our multi-industry services to bring the same scale and quality to our portfolio of industry-specific service offerings,
such as healthcare claims management, employee benefits management and public transit fare collection.
6
Innovation and development. We innovate by developing and acquiring new technologies and capabilities that
improve business processes. We are constantly creating the next generation of simple, automated and touchless
business processes to drive lower costs, higher quality and increased end-user satisfaction. Analytics allow us to
transform big data into useful information that helps identify operational improvements and constituent insights.
Additionally, we leverage robotic process automation and predictive analytics and combine this with our deep
subject matter expertise to create intelligent services that improve security, increase speed and improve accuracy,
quality and regulatory compliance, and uncover insights that support better decision making and outcomes for our
clients.
Stable recurring revenue model supported by a loyal, diverse client base. We have a broad and diverse base
of clients in 31 countries across geographies and industries, including Fortune 1000 companies, small and midsize
businesses and governmental entities. Our close client relationships and successful client execution support our
stable recurring revenue model and high renewal rates. Excluding our strategic decision not to renew certain
contracts, the renewal rate for the year ended December 31, 2017 was 94% and above our target range of
85%-90%. Including all contracts, renewal rate would have been approximately 87%.
Our Strategies
Our strategy is to drive leadership in attractive markets by leveraging and building on our competitive strengths. We
intend to execute our strategy through increased business portfolio focus and operating discipline, enhanced sales
and delivery capabilities and tightly aligned investments. Our strategy is designed to deliver value by delivering
profitable growth, expanding operating margins and deploying a disciplined capital allocation strategy.
Specific elements of our strategy include the following:
Expand within attractive industries. The industries in which we operate have attractive revenue growth rates,
generally in the mid-single digits. We intend to sharpen our focus and expand our business in industries with strong
growth and profitability characteristics. We will employ a disciplined approach to portfolio management to
complement our competitive strengths and build depth and breadth in our core businesses. Within the Healthcare
industry, we intend to leverage our data analytics, differentiated service offerings and industry know-how to continue
to service payer, provider and core government healthcare clients. Within the Transportation industry, we will
leverage our global, end-to-end platforms to continue to deliver seamless travel experiences while providing back-
end Transaction Processing and Call Center services for government clients globally.
Optimize and strengthen our services capabilities. We plan to optimize our services capabilities and strengthen
several core areas, including Transaction Processing, Finance and Accounting and Prepaid Card services by
building out our services offerings and continuing to improve our competitive strengths. We have begun to divest
non-core assets, refocused our business towards higher margin growing segments and consolidated delivery
operations to enable greater productivity. Within Transaction Processing, we intend to continue to build industry-
specific service offerings and advance inbound and outbound processing capabilities. Within Customer Experience,
we intend to capitalize on our global scale, cost efficiencies and our ability to provide seamless communications
between our clients and their end-users through traditional (e.g., voice) and digital (e.g., web, mobile and Internet of
Things) channels. In Prepaid Cards, we plan to continue to leverage our scalable platform to help our clients
simplify their payment disbursement processes.
Continue to advance next-generation platforms and capabilities. We intend to maintain our focus on innovation
to create next-generation solutions aligned with our clients’ future needs and our growth strategies. We plan to
advance our current platforms, further automate and personalize business processes and enhance data analytics
capabilities to deliver value-added services for our clients.
Engage, develop and support our people. We intend to increasingly develop our employees by investing in
training, processes and systems to equip them with modern tools that enable them to perform their jobs more
efficiently. Furthermore, we plan to strengthen our sales teams throughout improved and optimized coverage and
effective talent management.
Conduent Inc. 2017 Annual Report 7
Competition
Although we encounter competition in all areas of our portfolio, we lead across many areas of our principal
businesses. We compete on the basis of technology, performance, price, quality, reliability and customer service
and support. In the current political environment in the U.S. and other territories, we also consider our "onshore"
delivery capacity to be a competitive advantage. We participate in a highly competitive and rapidly evolving market,
driven by changes in industry standards and demands of customers to become more efficient. Our competitors
range from large international companies to relatively small firms. Our competitors include:
•
Large multinational service providers such as CGI Group, Accenture, Aon Hewitt, Cognizant, Hewlett-Packard
Enterprise, IBM, Teletech and Teleperformance;
• Traditional Business Process Outsourcing companies such as Genpact, ELX Services, Exela Technologies and
WNS Global Services;
• Payroll processing and human capital management providers such as ADP and Paychex;
• Healthcare-focused IT and service solutions providers such as Cerner and Maximus;
• U.S. Federal focused government services such as CACI International and DXC Technology;
• Transportation multi-nationals such as Roper/Transcore, Cubic and Kaptsh; and
• Smaller niche business processing service providers and in-house departments that perform functions that
could be outsourced to us.
Sales and Marketing
We market our business process services to both potential and existing clients through our worldwide sales force
and our business development team. Additionally, we have dedicated “solution architects” who work with clients to
better understand their situation and develop a custom-tailored solution to meet their unique needs.
Our sales and marketing strategy is to go to market by industry to deliver key industry-specific and multi-industry
service offerings to our clients. We focus on developing new prospects through market research and analysis,
renewing expiring contracts and leveraging existing client relationships to offer additional services. We leverage our
broad, multi-industry service offerings to package solutions through enterprise selling, while maintaining a
disciplined approach to pricing and contracting. Our sales efforts typically involve extended selling cycles and our
expertise in specific industries is critical to winning new business.
Our Geographies
We provide services globally and we have a diversified geographic delivery network, including a significant
presence within the U.S. In 2017, approximately 12% of our revenues were generated by clients outside the United
States. In 2017, our revenues by geography were as follows: $5,303 million in the United States (88% of total
revenues), $538 million in Europe (9% of total revenues) and $181 million from the rest of the world (3% of total
revenues). We present geographical information in Note 2 – Segment Reporting to our Consolidated Financial
Statements included in Part II, Item 8 of this Form 10-K, which is incorporated herein by reference.
Innovation and Research and Development
Our innovation and research and development (R&D) capabilities are critical to our client value proposition and
competitive positioning. Our investments in innovation align with our growth strategies and are driven by a view of
future needs and required competencies developed in close partnership with our clients and R&D partners. We are
investing in attractive markets, such as healthcare and transportation, and building on proven platforms to create
services that distinguish us from our competitors.
Our innovation and R&D are focused on three key areas: automation, personalization and analytics.
8
Automation—Create simple, automated and touchless business processes to drive lower cost, higher
quality and increased agility. Businesses require agility to quickly respond to market changes and new customer
requirements. To enable greater business process agility, our R&D goals are to simplify, automate and enable
business processes via flexible platforms that run on robust and scalable infrastructures. Automation of business
processes benefits from our strong image, video and robotic processing, as well as our machine learning
capabilities. Application of these methods to business processes enables technology to perform tasks that today are
performed manually. Examples include providing automation solutions in transportation by aggregating and
automatically applying business rules to simplify toll payments, using our state-of-the-art video and image analytics
to reduce the need for manual review of license plates in tolling and toll adjustment scenarios, analyzing data on
eligibility claims and checking for correctness on applications. The scope of automation is applied across our
portfolio of services and is a key element of our ongoing strategy of modern, efficient services.
Personalization—Augment humans by providing secure, real-time and context-aware personalized
products and services. Whether business correspondence, personal communication, manufactured items or
information service, personalization increases the value to the recipient. Our R&D investments lead to technologies
that improve the efficiency, economics and relevance of business services, such as customer care and health and
welfare services. In our current customer care service offerings, the human touch is seamlessly added as our
software automatically takes telephony data and merges it with customer records pulled from multiple sources to
seamlessly create targeted scripts and flows. This allows the agent to have the caller’s data at their fingertips and
provide a more personal experience to the customer—whether on the phone or online. In toll systems, our systems
automatically pull up a customer’s name, verify their information and prompt them for unpaid tolls. In transit
systems, our mobile app aggregates and calculates the time, cost, carbon footprint and health benefits from
walking, biking, driving, parking and taking public transit. For health and welfare, our systems provide state of the
art personalized delivery to ensure the best utilization of funds for the neediest populations.
Analytics—Transform big data into useful information to support better decision making. Competitive
advantage can be achieved by better utilizing available and real-time information. Today, information resides in an
ever increasing universe of servers, repositories and formats. The vast majority of information is unstructured,
including text, images, voice and videos. We seek to better manage large data systems in order to extract business
insights to provide our clients with actionable recommendations and new services. Tailoring these methods to
various industry applications leads to new customer value propositions. In hospitals, we mine usage and clinical
indicators to improve patient experiences. We also help our healthcare clients identify waste and fraud by identifying
networks of providers and patients with suspicious behavior, such as sudden and dramatic increases in a provider’s
level of business or unusual or illogical patient treatment sequences. In transportation, we enable transport and
parking operators to better understand and predict commuter needs, including adherence to schedules, passenger
loading levels, car park utilization rates and the impact of varying factors such as weather and schedule variations.
In our card payment services business, we perform geo location analytics to predict potential fraud behaviors to
assure monies are being distributed to the intended recipients.
Intellectual Property
Our general policy is to seek patent protection for those inventions likely to be incorporated into our products and
services or where obtaining such proprietary rights will improve our competitive position. We own approximately
1,024 patents and pending applications. Our patent portfolio evolves as new patents are awarded to us and as
older patents expire. These patents expire at various dates, generally 20 years from their original filing dates. While
we believe that our portfolio of patents and applications has value, in general no single patent is essential to our
business or any individual segment. In addition, any of our proprietary rights could be challenged, invalidated or
circumvented, or may not provide significant competitive advantages.
Our business relies on software provided to an approximately equal extent, by both internal development and
external sourcing to deliver our services in our businesses. With respect to internally developed software, we claim
copyright on all such software, registering works which may be accessible to third parties. In addition, we rely on
maintaining source code confidentiality to assure our market competitiveness. With respect to externally sourced
software, we rely on contracts assuring our continued access for our business usage.
In the United States, we own 132 trademarks, which are either registered or applied for, reflecting the many
businesses we participate in. These trademarks may have a perpetual life, subject to renewal every 10 years and
may be subject to cancellation or invalidation based on certain use requirements and third-party challenges, or on
other grounds. We vigorously enforce and protect our trademarks.
Conduent Inc. 2017 Annual Report 9
People and Culture
We draw on the business and technical expertise of our talented and diverse global workforce to provide our clients
with high-quality services. Our business leaders bring a strong diversity of experience in our industry and a track
record of successful performance and execution.
Conduent established its own diversity and inclusion program post-separation, which is overseen by Conduent's
human resources department. Conduent promotes understanding and inclusion through a comprehensive set of
diversity initiatives and strategies, including addressing under-representation by identifying shortfalls and
developing action plans to close those gaps and through work-life programs that assist employees in certain
aspects of their personal lives. Additionally, Conduent informs and educates all employees on diversity programs,
policies and achievements. As an independent company, we intend to continue our commitment to diversity and
inclusion and implement similar policies and programs.
In the United States, Conduent complies with Equal Employment Opportunity guidelines and all applicable federal,
state and local laws that govern the hiring and treatment of its employees.
As of December 31, 2017, we had approximately 90,000 employees globally, with 48% located in the United States
and the remainder located primarily in India, Philippines, Jamaica, Guatemala and Mexico.
Training and Talent Development
We believe our people are our most important asset, which is why we invest in employee growth and development
programs. We are focused on building a workplace where our people can do their best work and have access to the
tools and resources they need to perform their jobs more effectively. We are building a culture of learning and have
shifted from delivering training to incorporating learning into day-to-day work.
We have a strong performance management system in place that requires all employees to engage with their
managers on goal-setting and performance feedback, enabling personal and professional development. There is a
strong emphasis on mentorship and coaching, both formal and informal, to help employees get to the next level in
their careers. We enable this by developing management capability for our front line leaders to ensure they are able
to coach and mentor their teams and engage in constructive and continuous two-way dialogue.
Corporate Ethics
Our commitment to business ethics represents more than a declaration to do the right thing. It has become an
integral part of the way we do business. We operate according to our ethics and compliance program, which is
designed to meet general governance and specific industry and regulatory requirements with a focus on values,
culture and performance with integrity. Conduent has a business ethics program, which is overseen by the business
ethics office, and a code of business conduct (Code), which serves as the foundation of our business ethics
program. The Code makes clear Conduent’s expectations for ethical leadership, performance with integrity and
compliance with company policies and the law. In addition, the Code embodies and reinforces Conduent’s
commitment to integrity and helps employees resolve ethics and compliance concerns consistent with operating
principles and legal and policy controls. In addition, as Conduent employees, our employees are required to
complete business ethics training annually and we periodically solicit their input to gauge the state of Conduent’s
ethical culture and help identify areas for improvement.
Our directors must act in accordance with our Code of Business Conduct and Ethics for Members of the Board; our
principal executive officer, principal financial officer and principal accounting officer, among others, must act in
accordance with our Finance Code of Conduct; and all of our executives and employees must act in accordance
with our Code of Business Conduct. Each of these codes of conduct can be accessed through our website at
www.conduent.com/corporate-governance. They are also available to any shareholder who requests them in writing
addressed to Conduent Incorporated, 100 Campus Drive Suite 200, Florham Park, NJ 07932, Attention: Corporate
Secretary. We will disclose any future amendments to, or waivers from, provisions of our Code of Business Conduct
and Ethics for members of the Board and, our Code of Business Conduct and our Finance Code of Conduct for our
officers on our website as promptly as practicable, and consistent with the requirements of applicable SEC and
NYSE rules.
10
Seasonality
Our revenues can be affected by various factors such as our clients’ demand pattern for our services. These factors
have historically resulted in higher revenues and profits in the fourth quarter.
Other
Conduent Incorporated is a New York corporation, organized in 2016. Our principal executive offices are located at
100 Campus Drive, Florham Park, New Jersey 07932. Our telephone number is (844) 663-2638.
In the Investor Information section of our Internet website, you will find our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. We make these
documents available as soon as we can after we have filed them with, or furnished them to the U.S. Securities and
Exchange Commission (SEC).
Our Internet address is www.conduent.com.
ITEM 1A. RISK FACTORS
Our government contracts are subject to termination rights, audits and investigations, which, if exercised,
could negatively impact our reputation and reduce our ability to compete for new contracts.
A significant portion of our revenues is derived from contracts with U.S. federal, state and local governments and
their agencies, and some of our revenues are derived from contracts with foreign governments and their agencies.
Government entities typically finance projects through appropriated funds. While these projects are often planned
and executed as multi-year projects, government entities usually reserve the right to change the scope of or
terminate these projects for lack of approved funding and/or at their convenience. Changes in government or
political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g.,
Congressional sequestration of funds under the Budget Control Act of 2011) or other debt or funding constraints,
such as those recently experienced in the United States and Europe, could result in lower governmental sales and
in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of
incurred costs, reimbursable expenses and profits on work completed prior to the termination. Additionally, if the
government discovers improper or illegal activities or contractual non-compliance (including improper billing), we
may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of
contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business
with the government. Any resulting penalties or sanctions could materially adversely affect our results of operations
and financial condition. Moreover, government contracts are generally subject to audits and investigations by
government agencies. If the government finds that we inappropriately charged any costs to a contract, the costs are
not reimbursable or, if already reimbursed, the cost must be refunded to the government. Further, the negative
publicity that could arise from any such penalties, sanctions or findings in such audits or investigations could have
an adverse effect on our reputation in the industry and reduce our ability to compete for new contracts and could
materially adversely affect our results of operations and financial condition.
We derive significant revenue and profit from commercial and government contracts awarded through
competitive bidding processes, including renewals, which can impose substantial costs on us, and we will
not achieve revenue and profit objectives if we fail to accurately and effectively bid on such projects.
Many of these contracts are extremely complex and require the investment of significant resources in order to
prepare accurate bids and proposals. Competitive bidding imposes substantial costs and presents a number of
risks, including: (i) the substantial cost and managerial time and effort that we spend to prepare bids and proposals
for contracts that may or may not be awarded to us; (ii) the need to estimate accurately the resources and costs that
will be required to implement and service any contracts we are awarded, sometimes in advance of the final
determination of their full scope and design; (iii) the expense and delay that may arise if our competitors protest or
challenge awards made to us pursuant to competitive bidding and the risk that such protests or challenges could
result in the requirement to resubmit bids and in the termination, reduction or modification of the awarded contracts;
and (iv) the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. If our
competitors protest or challenge an award made to us on a government contract, the costs to defend such an
award may be significant and could involve subsequent litigation that could take years to resolve.
Conduent Inc. 2017 Annual Report 11
Our ability to recover capital and other investments in connection with our contracts is subject to risk.
In order to attract and retain large outsourcing contracts, we sometimes make significant capital and other
investments to enable us to perform our services under those contracts, such as purchases of information
technology equipment, facility costs, labor resources and costs incurred to develop and implement software. The
net book value of certain assets recorded, including a portion of our intangible assets, could be impaired, and our
results of operations and financial condition could be materially adversely affected in the event of the early
termination of all or a part of such a contract or a reduction in volumes and services thereunder for reasons such as
a customer’s or client’s merger or acquisition, divestiture of assets or businesses, business failure or deterioration
or a customer’s or client’s exercise of contract termination rights.
We rely to a significant extent on third-party providers, such as subcontractors, a relatively small number
of primary software vendors, utility providers and network providers; if they cannot deliver or perform as
expected or if our relationships with them are terminated or otherwise change, our results of operations
and financial condition could be materially adversely affected.
Our ability to service our customers and clients and deliver and implement solutions depends to a large extent on
third-party providers such as subcontractors, a relatively small number of primary software vendors, software
application developers, utility providers and network providers meeting their obligations to us and our expectations
in a timely, quality manner. Our results of operations and financial condition could be materially adversely affected
and we might incur significant additional liabilities if any of our third-party providers do not meet these obligations or
our or our clients’ expectations or if they terminate or refuse to renew their relationships with us or were to offer their
products to us with less advantageous prices and other terms than we previously had.
Failure to deliver on our contractual obligations properly and on time could materially adversely affect our
results of operations and financial condition.
Our business model depends in large part on our ability to retain existing and attract new work from our base of
existing clients, as well as on relationships we develop with our clients so that we can understand our clients’ needs
and deliver solutions and services that are tailored to meet those needs. In order for our business to grow, we must
successfully manage the provision of services under our contracts. If a client is not satisfied with the quality of work
performed by us or a subcontractor, or with the type of services or solutions delivered, then we could incur
additional costs to address the situation, the profitability of that work might be impaired and the client’s
dissatisfaction with our services could damage our ability to obtain additional work from that client or obtain new
work from other potential clients. In particular, many of our contracts with non-government clients may be
terminated by the client, without cause, upon specified advance notice, so clients who are not satisfied might seek
to terminate existing contracts prior to their scheduled expiration date, which may result in our inability to fully
recover our up-front investments. In addition, clients could direct future business to our competitors. We could also
trigger contractual credits to clients or a contractual default. Failure to properly transition new clients to our systems,
properly budget transition costs or accurately estimate contract operational costs could result in delays in our
contract performance, trigger service level penalties, impair fixed or intangible assets or result in contract profit
margins that do not meet our expectations or our historical profit margins.
In addition, we incur significant expenditures for the development and construction of system software platforms
needed to support our clients’ needs. Our failure to fully understand client requirements or implement the
appropriate operating systems or databases or solutions which enable the use of other supporting software may
delay the project and result in cost overruns or potential impairment of the related software platforms, which could
materially adversely affect our results of operations and financial condition.
We face significant competition and our failure to compete successfully could materially adversely affect
our results of operations and financial condition.
To remain competitive, we must develop services and applications; periodically enhance our existing offerings;
remain cost efficient; and attract and retain key personnel and management. If we are unable to compete
successfully, we could lose market share and important customers to our competitors and that could materially
adversely affect our results of operations and financial condition.
12
Our significant indebtedness could materially adversely affect our results of operations and financial
condition.
We have and will continue to have a significant amount of debt and other obligations. Our substantial debt and other
obligations could have important consequences. For example, it could (i) increase our vulnerability to general
adverse economic and industry conditions; (ii) limit our ability to obtain additional financing for future working
capital, capital expenditures, acquisitions and other general corporate requirements; (iii) require us to dedicate a
substantial portion of our cash flows from operations to service debt and other obligations thereby reducing the
availability of our cash flows from operations for other purposes; (iv) limit our flexibility in planning for, or reacting to,
changes in our businesses and the industries in which we operate; (v) place us at a competitive disadvantage
compared to our competitors that have less debt; and (vi) become due and payable upon a change in control. If
new debt is added to our current debt levels, these related risks could increase.
Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with
our spin-off, as well as any future debt that we may incur, will depend on our ability to generate cash in the future
from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our control.
The terms of our indebtedness may restrict our current and future operations, particularly our ability to
incur debt that we may need to fund initiatives in response to changes in our business, the industries in
which we operate, the economy and governmental regulations.
The terms of our indebtedness include a number of restrictive covenants that impose significant operating and
financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-
term best interests. These may restrict our and our subsidiaries’ ability to take some or all of the following actions:
incur or guarantee additional indebtedness or sell disqualified or preferred stock;
pay dividends on, make distributions in respect of, repurchase or redeem, capital stock;
•
•
• make investments or acquisitions;
•
•
•
•
•
•
•
•
•
sell, transfer or otherwise dispose of certain assets, including accounts receivable;
create liens;
enter into sale/leaseback transactions;
enter into agreements restricting the ability to pay dividends or make other intercompany transfers;
consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;
enter into transactions with affiliates;
prepay, repurchase or redeem certain kinds of indebtedness;
issue or sell stock of our subsidiaries; and/or
significantly change the nature of our business.
As a result of all of these restrictions, we may be:
•
•
limited in how we conduct our business and pursue our strategy; unable to raise additional debt financing to
operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.
A breach of any of these covenants, if applicable, could result in an event of default under the terms of this
indebtedness. If an event of default occurs, the lenders would have the right to accelerate the repayment of such
debt and the event of default or acceleration may result in the acceleration of the repayment of any other of our debt
to which a cross-default or cross-acceleration provision applies. Furthermore, the lenders of this indebtedness may
require that we pledge our assets as collateral as security for our repayment obligations. If we were unable to repay
any amount of this indebtedness when due and payable, the lenders could proceed against the collateral that
secures this indebtedness. In the event our creditors accelerate the repayment of our borrowings, we may not have
sufficient assets to repay such indebtedness, which could materially adversely affect our results of operations and
financial condition.
Conduent Inc. 2017 Annual Report 13
Our business is dependent on continued interest in outsourcing.
Our business and growth depend in large part on continued interest in outsourced business process services.
Outsourcing means that an entity contracts with a third party, such as us, to provide business process services
rather than perform such services in-house. There can be no assurance that this interest will continue, as
organizations may elect to perform such services themselves and/or the business process outsourcing industry
could move to an as-a-Service model, thereby eliminating traditional business process outsourcing tasks. A
significant change in this interest in outsourcing could materially adversely affect our results of operations and
financial condition. Additionally, there can be no assurance that our cross-selling efforts will cause clients to
purchase additional services from us or adopt a single-source outsourcing approach.
Our profitability is dependent upon our ability to obtain adequate pricing for our services and to improve
our cost structure.
Our success depends on our ability to obtain adequate pricing for our services that will provide a reasonable return
to our shareholders. Depending on competitive market factors, future prices we obtain for our services may decline
from previous levels. If we are unable to obtain adequate pricing for our services, it could materially adversely affect
our results of operations and financial condition. In addition, our contracts are increasingly requiring tighter timelines
for implementation as well as more stringent service level metrics. This makes the bidding process for new
contracts much more difficult and requires us to adequately consider these requirements in the pricing of our
services.
In order to meet the service requirements of our customers, which often includes 24/7 service, and to optimize our
employee cost base, including our back-office support, we often locate our delivery service and back-office support
centers in lower-cost locations, including several developing countries. Concentrating our centers in these locations
presents a number of operational risks, many of which are beyond our control, including the risks of political
instability, natural disasters, safety and security risks, labor disruptions, excessive employee turnover and rising
labor rates. Additionally, a change in the political environment in the United States or the adoption and enforcement
of legislation and regulations curbing the use of such centers outside of the United States could materially adversely
affect our results of operations and financial condition. These risks could impair our ability to effectively provide
services to our customers and keep our costs aligned to our associated revenues and market requirements.
Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to
continue to improve the cost efficiency of our operations through such programs as robotic process automation, to
absorb the level of pricing pressures on our services through cost improvements and to successfully complete
information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and
maintain productivity improvements through restructuring actions or information technology initiatives, our ability to
offset labor cost inflation and competitive price pressures would be impaired, each of which could materially
adversely affect our results of operations and financial condition.
We may be subject to claims of infringement of third-party intellectual property rights which could
adversely affect our results of operation and financial condition.
We rely heavily on the use of intellectual property. We do not own a significant portion of the software that we use to
run our business; instead we license this software from a small number of primary vendors. If these vendors assert
claims that we or our clients are infringing on their software or related intellectual property, we could incur
substantial costs to defend these claims, which could materially adversely affect our results of operations and
financial condition. In addition, if any of our vendors’ infringement claims are ultimately successful, our vendors
could require us to (i) cease selling or using products or services that incorporate the challenged software or
technology, (ii) obtain a license or additional licenses from our vendors or (iii) redesign our services which rely on
the challenged software or technology. In addition, we may be exposed to claims for monetary damages. If we are
unsuccessful in defending an infringement claim and our vendors require us to initiate any of the above actions, or
we are required to pay monetary damages, then such actions could materially adversely affect our results of
operations and financial condition.
14
We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable
information and personal health information, and failure to comply with those laws, whether or not
inadvertent, could subject us to legal actions and negatively impact our operations.
We receive, process, transmit and store information relating to identifiable individuals, both in our role as a service
provider and as an employer. As a result, we are subject to numerous United States (both federal and state) and
foreign jurisdiction laws and regulations designed to protect both individually identifiable information as well as
personal health information, including the Health Insurance Portability and Accountability Act of 1996, as amended
(“HIPAA”) and the HIPAA regulations governing, among other things, the privacy, security and electronic
transmission of individually identifiable health information, and the European Union Directive on Data Protection
(Directive 95/46/EC). The EU General Data Protection Regulation (GDPR) replaces the Data Protection Directive
95/46/EC (with an enforcement date of May 25, 2018) and is designed to harmonize data privacy laws across
Europe, to protect and empower all EU citizens data privacy, to reshape the way organizations across the region
approach data privacy and will have a significant impact on how we process and handle certain data. Other United
States (both federal and state) and foreign jurisdiction laws apply to our processing of individually identifiable
information and these laws have been subject to frequent changes, and new legislation in this area may be enacted
at any time. For example, the invalidation of the U.S.-EU Safe Harbor regime and the emerging GDPR will require
us to implement alternative mechanisms in order for some of our data flows from Europe to the United States to
comply with applicable law. Changes to existing laws, introduction of new laws in this area or failure to comply with
existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our
business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity,
restrictions on our ability to obtain and process information and allegations by our customers and clients that we
have not performed our contractual obligations, any of which could materially adversely affect our results of
operations and financial condition.
We are subject to laws of the United States and foreign jurisdictions relating to processing certain financial
transactions, including payment card transactions and debit or credit card transactions, and failure to
comply with those laws, whether or not inadvertent, could subject us to legal actions and materially
adversely affect our results of operations and financial condition.
We process, support and execute financial transactions, and disburse funds, on behalf of both government and
commercial customers, often in partnership with financial institutions. This activity includes receiving debit and credit
card information, processing payments for and due to our customers and disbursing funds on payment or debit
cards to payees of our customers. As a result, we are subject to numerous United States (both federal and state)
and foreign jurisdiction laws and regulations, including the Electronic Fund Transfer Act, as amended, the Currency
and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended, the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (including the so-called Durbin Amendment),
as amended, the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act of 1999), as amended,
and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA PATRIOT ACT) Act of 2001, as amended. Other United States (both federal and state) and foreign
jurisdiction laws apply to our processing of certain financial transactions and related support services. These laws
are subject to frequent changes, and new statutes and regulations in this area may be enacted at any time.
Changes to existing laws, introduction of new laws in this area or failure to comply with existing laws that are
applicable to us may subject us to, among other things, additional costs or changes to our business practices,
liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to
process and support financial transactions and allegations by our customers, partners and clients that we have not
performed our contractual obligations. Any of these could materially adversely affect our results of operations and
financial condition.
Conduent Inc. 2017 Annual Report 15
Our data systems, information systems and network infrastructure may be subject to hacking or other
cyber security threats and other service interruptions, which could expose us to liability, impair our
reputation or temporarily render us unable to fulfill our service obligations under our contracts.
We are a leading provider of business processing services concentrated in transaction-intensive processing,
analytics and automation. We act as a trusted business partner in both front office and back office platforms,
providing interactions on a substantial scale with our customers and other third parties. Our customers include
global commercial clients and government clients who depend upon our operational efficiency, non-interruption of
service, and accuracy and security of information. We also use third party providers such as subcontractors,
software vendors, utility providers and network providers, upon whom we rely for our business processing services,
to deliver uninterrupted, secure service. As part of our business processing services we also develop system
software platforms necessary to support our customers’ needs, with significant ongoing investment in developing
and operating customer-appropriate operating systems, data bases and system software solutions. We also
receive, process, transmit and store substantial volumes of information relating to identifiable individuals, both in our
role as a service provider and as an employer, and we are subject to numerous laws, rules and regulations in the
United States (both federal and state) and foreign jurisdictions designed to protect both individually identifiable
information as well as personal health information. We also receive, process and implement financial transactions,
and disburse funds, on behalf of both commercial and government customers, which activity includes receiving
debit and credit card information to process payments due to our customers as well as disbursing funds to payees
of our customers. As a result of these and other business processing services, the integrity, security, accuracy and
non-interruption of our systems and information technology and that of our third-party providers and our interfaces
with our customers are extremely important to our business, operating results, growth, prospects and reputation.
We have implemented security systems and controls, both directly and with third-party subcontractors and service
providers, with the intent of maintaining both the physical security of our facilities and the data security of our
customers’, clients’ and suppliers’ confidential information and information related to identifiable individuals
(including payment card and debit and credit card information and health information) against unauthorized access
through our information systems or by other electronic transmission or through the misdirection, theft or loss of
physical media. These include, for example, the appropriate encryption of information. Despite such efforts, we are
subject to breach of security systems which may result in unauthorized access to our facilities and those of our
customers and/or the information we and our customers are trying to protect. Cyber security failure might be caused
by computer hacking, malware, computer viruses, worms and other destructive software, “cyber-attacks” and other
malicious activity, as well as natural disasters, power outages, terrorist attacks and similar events. Operational or
business delays may also result from the disruption of network or information systems and subsequent remediation
activities.
Because the techniques used to obtain unauthorized access are constantly changing and becoming increasingly
more sophisticated and often are not recognized until launched against a target, we or our third-party service
providers may be unable to anticipate these techniques or implement sufficient preventative measures. Hacking,
malware, phishing, viruses and other “cyber-attacks” have become more prevalent, have occurred in our systems in
the past, and may occur in our systems in the future. Although we have implemented and intend to continue to
implement what we believe to be appropriate cyber practices and cyber security systems, these systems may prove
to be inadequate and result in the disruption, failure, misappropriation or corruption of our network and information
systems.
Additionally, with advances in computer capabilities and data protection requirements to address ongoing threats,
we may be required to expend significant capital and other resources to protect against potential security breaches
or to alleviate problems caused by security breaches. Moreover, employee error or malfeasance, faulty password
management or other irregularities may result in a defeat of our or our third-party service providers’ security
measures and a breach of our or our third-party service providers’ information systems (whether digital, cloud-
based or otherwise).
16
If unauthorized parties gain physical access to one of our or one of our third-party service providers’ facilities or
electronic access to our or one of our third-party service providers’ information systems or such sensitive or
confidential information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such
information could result in, among other things, unfavorable publicity and significant damage to our brand,
governmental inquiry, oversight and possible regulatory action, difficulty in marketing our services, loss of existing
and potential customers, allegations by our customers that we have not performed our contractual obligations,
litigation by affected parties and possible financial obligations for substantial damages related to the theft or misuse
of such information, any of which could materially adversely affect our results of operations and financial condition.
Moreover, a security breach could require us to devote significant management resources to address the problems
created by the security breach and to expend significant additional resources to upgrade further the security
measures that we employ to guard such personal information against "cyber attacks" and to maintain various
systems and data centers for our customers. Often these systems and data centers must be maintained worldwide
and on a 24/7 basis. Although we endeavor to ensure that there is adequate backup and maintenance of these
systems and centers, we could experience service interruptions that could result in curtailed operations and loss of
existing and potential customers, which could significantly reduce our revenues and profits in addition to
significantly impairing our reputation. If our information systems and our back-up systems are damaged, breached
or cease to function properly, we may have to make a significant investment to repair or replace them, and we may
suffer interruptions in our operations in the interim, each of which could materially adversely affect our results of
operations and financial condition and diminish the value of our shares.
In addition, our and our customers’ systems and networks are subject to continued threats of terrorism, which could
disrupt our operations as well as disrupt the utilities and telecommunications infrastructure on which our business
depends. To the extent any such disruptions were to occur, our business, operating results and financial condition
could be materially adversely affected.
If we underestimate the scope of work or the costs of performance in our contracts, or we mis-perform our
contracts, our results of operations and financial condition could be materially adversely affected.
In order to stay competitive in our industry, we must also keep pace with changing technologies and customer
preferences. Many of our contracts require us to design, develop and implement new technological and operating
systems for our customers. Many of these systems involve detailed and complex computer source code which must
be created and integrated into a working system that meets contract specifications. The accounting for these
contracts requires judgment relative to assessing risks, estimating contract revenues and costs and making
assumptions for schedule and technical issues. To varying degrees, each contract type involves some risk that we
could underestimate the costs and resources necessary to fulfill the contract. In each case, our failure to accurately
estimate costs or the resources and technology needed to perform our contracts or to effectively manage and
control our costs during the performance of our work could result, and in some instances has resulted, in reduced
profits or in losses. In addition, in many of our contracts, we have complicated performance obligations, including,
without limitation, designing and building new integrated computer systems or doing actuarial work for pension,
medical and other plans with beneficiaries that can rely on future projection of obligations to determine appropriate
levels of funding. These contracts carry potential financial penalties or could result in financial damages or
exposures if we fail to properly perform those obligations and could result in our results of operations and financial
condition being materially adversely affected.
Conduent Inc. 2017 Annual Report 17
If we are unable to collect our receivables for unbilled services, our results of operations and financial
condition could be materially adversely affected.
The profitability of certain of our large contracts depends on our ability to successfully obtain payment from our
clients of the amounts they owe us for work performed. Actual losses on client balances could differ from current
estimates and, as a result, may require adjustment of our receivables for unbilled services. Our receivables include
long-term contracts and over the course of a long-term contract, our customers’ financial condition may change
such that their ability to pay their obligations, and our ability to collect our fees for services rendered, is adversely
affected. Additionally, we may perform work for the federal, state and local governments, with respect to which we
must file requests for equitable adjustment or claims with the proper agency to seek recovery in whole or in part, for
out-of-scope work directed or caused by the government customer in support of its project, and the amounts of such
recoveries may not meet our expectations or cover our costs. Timely collection of client balances also depends on
our ability to complete our contractual commitments (for example, achieve specified milestones in percentage-of-
completion contracts) and bill and collect our contracted revenues. If we are unable to meet our contractual
requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this
occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an
increase in the time to bill and collect for our services, our results of operations and financial condition could be
materially adversely affected.
A decline in revenues from or a loss or failure of significant clients could materially adversely affect our
results of operations and financial condition.
Our results of operations and financial condition could be materially adversely affected by the loss or failure of
significant clients. Some of our clients are in business sectors which have experienced significant financial
difficulties or consolidation, and/or the reduction of volumes or their inability to make payments to us, as a result of,
among other things, their merger or acquisition, divestiture of assets or businesses, contract expiration, nonrenewal
or early termination (including termination for convenience) or business or financial failure or deterioration.
Economic and political conditions could affect our clients’ businesses and the markets they serve.
We have non-recurring revenue, which subjects us to a risk that our revenues and cash flows from
operations may fluctuate from period to period.
Revenue generated from our non-recurring services may fluctuate due to factors both within and outside of our
control. Our mix of non-recurring and recurring revenues is impacted by acquisitions as well as growth in our non-
recurring lines of business. There is less predictability and certainty in the timing and amount of revenues generated
by our non-recurring services and, accordingly, our results of operations and financial condition could be materially
adversely affected by the timing and amount of revenues generated from our non-recurring services.
The failure to obtain or maintain a satisfactory credit rating could adversely affect our liquidity, capital
position, borrowing costs, access to capital markets and ability to post surety or performance bonds to
support clients’ contracts.
Any future downgrades to our credit rating could negatively impact our ability to renew contracts with our existing
clients, limit our ability to compete for new clients, result in increased premiums for surety or performance bonds to
support our clients’ contracts and/or result in a requirement that we provide collateral to secure our surety or
performance bonds. Further, certain of our commercial outsourcing contracts provide that, in the event our credit
ratings are downgraded to specified levels, the client may elect to terminate its contract with us and either pay a
reduced termination fee or, in some limited instances, no termination fee. Such a credit rating downgrade could
adversely affect these client relationships.
There can be no assurance that we will be able to maintain our credit ratings. Any additional actual or anticipated
downgrades of our credit ratings, including any announcement that our ratings are under review for a downgrade,
may have a negative impact on our liquidity, capital position and access to capital markets.
18
A failure to attract and retain necessary technical personnel and qualified subcontractors could materially
adversely affect our results of operations and financial condition.
Because we operate in intensely competitive markets, our success depends to a significant extent upon our ability
to attract, retain and motivate highly skilled and qualified technical personnel and to subcontract with qualified,
competent subcontractors. If we fail to attract, train and retain sufficient numbers of qualified engineers, technical
staff and sales and marketing representatives or are unable to contract with qualified, competent subcontractors,
our results of operations and financial condition could be materially adversely affected. Experienced and capable
personnel in the services industry remain in high demand, and there is continual competition for their talents.
Additionally, we may be required to increase our hiring in geographic areas outside of the United States, which
could subject us to increased geopolitical and exchange rate risk. The loss of any key technical employee or the
loss of a key subcontractor relationship could materially adversely affect our results of operations and financial
condition.
Increases in the cost of telephone and data services or significant interruptions in such services could
materially adversely affect our results of operations and financial condition.
Our business is significantly dependent on telephone and data service provided by various local and long distance
telephone and data service providers around the world. Accordingly, any disruption of these services could
materially adversely affect our results of operations and financial condition. We have taken steps to mitigate our
exposure to service disruptions by investing in redundant circuits, although there is no assurance that the redundant
circuits would not also suffer disruption. Any inability to obtain telephone or data services at favorable rates could
materially adversely affect our results of operations and financial condition. Where possible, we have entered into
long-term contracts with various providers to mitigate short-term rate increases and fluctuations. There is no
obligation, however, for the vendors to renew their contracts with us, or to offer the same or lower rates in the future,
and such contracts are subject to termination or modification for various reasons outside of our control. A significant
increase in the cost of telephone or data services that is not recoverable through an increase in the price of our
services could materially adversely affect our results of operations and financial condition. In addition, a number of
our facilities are located in jurisdictions outside of the United States where the provision of utility services, including
electricity and water, may not be consistently reliable, and while there are backup systems in many of our operating
facilities, an extended outage of utility or network services could materially adversely affect our results of operations
and financial condition.
We are a holding company and, therefore, may not be able to receive dividends or other payments in
needed amounts from our subsidiaries.
Our principal assets are the shares of capital stock and indebtedness of our subsidiaries. We rely on dividends,
interest and other payments from these subsidiaries to meet our obligations for paying principal and interest on
outstanding debt obligations, paying corporate expenses and, if determined by our Board, paying dividends to
shareholders and repurchasing common shares. Certain of our subsidiaries are subject to regulatory requirements
of the jurisdictions in which they operate or other restrictions that may limit the amounts that these subsidiaries can
pay in dividends or other payments to us. No assurance can be given that there will not be further changes in law,
regulatory actions or other circumstances that could restrict the ability of our subsidiaries to pay dividends to us. In
addition, due to differences in tax rates, repatriation of funds from certain countries into the United States could
have unfavorable tax ramifications for us.
Conduent Inc. 2017 Annual Report 19
Our results of operations and financial condition could be materially adversely affected by legal and
regulatory matters.
We are potentially subject to various contingent liabilities that are not reflected on our balance sheet, including
those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings
concerning: securities law; governmental and non-governmental entity contracting, servicing and governmental
entity procurement law; intellectual property law; environmental law; employment law; the Employee Retirement
Income Security Act of 1974 (ERISA); and other laws, regulations and contractual undertakings, as discussed under
Note 13 – Contingencies and Litigation in our Consolidated Financial Statements. Should developments in any of
these matters cause a change in our determination as to an unfavorable outcome and result in the need to
recognize a material accrual or materially increase an existing accrual, or should any of these matters result in an
adverse judgment or be settled for significant amounts above any existing accruals, it could materially adversely
affect our results of operations and financial condition in the period or periods in which such change in
determination, judgment or settlement occurs. There can be no assurances as to the favorable outcome of any
claim, lawsuit, investigation or proceeding. It is possible that a resolution of one or more such proceedings could
require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings,
any of which could materially adversely affect our results of operations and financial condition. These proceedings
could also result in reputational harm, criminal sanctions, consent decrees or orders preventing us from offering
certain services, requiring a change in our business practices in costly ways or requiring development of non-
infringing or otherwise altered products or technologies. In addition, it can be very costly to defend litigation and
these costs could materially adversely affect our results of operations and financial condition. See Note 13 –
Contingencies and Litigation to our Consolidated Financial Statements.
Our results of operations and financial condition may be materially adversely affected by conditions
abroad, including local economics, political environments, fluctuating foreign currencies and shifting
regulatory schemes.
A portion of our revenues is generated from operations outside the United States. In addition, we maintain
significant operations outside the United States. Our results of operations and financial condition could be materially
adversely affected by changes in foreign currency exchange rates, as well as by a number of other factors,
including, without limitation, changes in economic conditions from country to country, changes in a country’s political
conditions, trade controls and protection measures, financial sanctions, licensing requirements, local tax issues,
capitalization and other related legal matters. We generally hedge foreign currency denominated assets, liabilities
and anticipated transactions primarily through the use of currency derivative contracts. The use of derivative
contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does
not completely eliminate volatility. We do not hedge the translation effect of international revenues and expenses,
which are denominated in currencies other than our U.S. parent functional currency, within our Consolidated
Financial Statements. If we are unable to effectively hedge these risks, our results of operations and financial
condition could be materially adversely affected.
20
If we fail to successfully develop new service offerings, including new technology components, and protect
our intellectual property rights, we may be unable to retain current customers and gain new customers and
our revenues would decline.
The process of developing new service offerings, including new technology components, is inherently complex and
uncertain. It requires accurate anticipation of customers’ changing needs and emerging technological trends. We
must make long-term investments and commit significant resources before knowing whether these investments will
eventually result in service offerings that achieve customer acceptance and generate the revenues required to
provide desired returns. For example, establishing internal automation processes to help us develop new service
offerings will require significant up-front costs and resources, which, if not monetized effectively, could materially
adversely affect our revenues. In addition, some of our service offerings rely on technologies developed by and
licensed from third parties. We may not be able to obtain or continue to obtain licenses and technologies from these
third parties at all or on reasonable terms, or such third parties may demand cross-licenses to our intellectual
property. It is also possible that our intellectual property rights could be challenged, invalidated or circumvented,
allowing others to use our intellectual property to our competitive detriment. We also must ensure that all of our
service offerings comply with both existing and newly enacted regulatory requirements in the countries in which they
are sold. If we fail to accurately anticipate and meet our customers’ needs through the development of new service
offerings (including technology components) or if we fail to adequately protect our intellectual property rights or if
our new service offerings are not widely accepted or if our current or future service offerings fail to meet applicable
worldwide regulatory requirements, we could lose market share and customers to our competitors and that could
materially adversely affect our results of operations and financial condition.
Risks related to the spin-off:
We may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off.
We believe that, as an independent, publicly traded company, we will be able to, among other things, design and
implement corporate strategies and policies that are targeted to our business, better focus our financial and
operational resources on our specific business, create effective incentives for our management and employees that
are more closely tied to our business performance, provide investors more flexibility and enable us to achieve
alignment with a more natural shareholder base and implement and maintain a capital structure designed to meet
our specific needs. However, as a result of separating from Xerox, we may be more susceptible to market
fluctuations and other adverse events. As an independent entity, we have an arm’s-length relationship with Xerox
and we may not be able to obtain supplies from Xerox on terms as favorable to us as those we had as a wholly
owned subsidiary of Xerox prior to the spin-off. As a smaller, independent company, Conduent has a narrower
business focus and may be more vulnerable to changing market conditions as well as the risk of takeover by third
parties. In addition, we may be unable to achieve some or all of the benefits that we expected to achieve as an
independent company in the time we expect, if at all. Furthermore, Xerox used to guarantee our and our
subsidiaries’ performance under certain services contracts and real estate leases. Following the spin-off, we expect
that Conduent will provide such performance guarantees, and we may be unable to retain or renew contracts or real
estate leases or a failure to renew such contracts or leases on favorable terms and conditions could materially
adversely affect our results of operations and financial condition. If we fail to achieve some or all of the benefits that
we expected to achieve as an independent company, or do not achieve them in the time we expect, our results of
operations and financial condition could be materially adversely affected.
Conduent Inc. 2017 Annual Report 21
We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an
independent, publicly traded company, and we may experience increased costs after the spin-off.
We had historically operated as part of Xerox’s corporate organization, and Xerox had provided us with various
corporate functions. Following the spin-off, Xerox has no obligation to provide us with assistance other than the
transition services described under “Certain Relationships and Related Party Transactions —Transition Services
Agreement.” These services do not include every service that we have received from Xerox in the past, and Xerox
is only obligated to provide these services for limited periods following completion of the spin-off. Accordingly,
following the spin-off, we have needed to provide internally or obtain from unaffiliated third parties the services we
had received from Xerox. These services include senior management, legal, human resources, finance and
accounting, treasury, information technology, marketing and communications, internal audit and other shared
services, the effective and appropriate performance of which are critical to our operations. We may be unable to
replace these services on terms and conditions as favorable as those we received from Xerox. Because our
business had operated as part of the wider Xerox organization, we may incur additional costs that could adversely
affect our business. If we fail to obtain the quality of services necessary to operate effectively or incur greater costs
in obtaining these services, our results of operations and financial condition could be materially adversely affected.
We have no recent operating history as an independent, publicly traded company, and our historical and
pro forma financial data are not necessarily representative of the results we would have achieved as an
independent, publicly traded company and may not be a reliable indicator of our future results.
We derived certain of the historical financial data included in this Annual Report from Xerox’s consolidated financial
statements, and this data does not necessarily reflect the results of operations and financial condition we would
have achieved as an independent, publicly traded company during the periods presented, or those that we will
achieve in the future. This is primarily because of the following factors:
• Prior to the spin-off, we operated as part of Xerox’s broader corporate organization and Xerox performed
various corporate functions for us, including, but not limited to, senior management, legal, human
resources, finance and accounting, treasury, information technology, marketing and communications,
internal audit and other shared services. Our historical financial data reflect allocations of corporate
expenses from Xerox for these and similar functions. These allocations may not reflect the costs we have
incurred and in the future will incur for similar services as an independent, publicly traded company.
• We entered into transactions with Xerox that did not exist prior to the spin-off, such as Xerox’s provision of
transition services, which will cause us to incur new costs.
• Such historical financial data does not and in the future may not reflect changes that we have experienced
and expect to experience in the future as a result of our separation from Xerox. As part of Xerox, we
enjoyed certain benefits from Xerox’s operating diversity, size, purchasing power, credit rating, borrowing
leverage and available capital for investments. Many of our services contracts, particularly those for our
transportation service offerings in our Public Sector business, require significant capital investments, and
after the spin-off, we may not have access to the capital (from both internal and external sources)
necessary to fund these services contracts. As an independent entity, we may be unable to purchase
goods, services and technologies, such as insurance and health care benefits and computer software
licenses, or access capital markets on terms as favorable to us as those we obtained as part of Xerox prior
to the spin-off.
Following the spin-off, we are now responsible for the additional costs associated with being an independent,
publicly traded company, including costs related to corporate governance, investor and public relations and public
reporting. For additional information about our past financial performance and the basis of presentation of our
financial statements, see “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our historical financial statements and the notes thereto included in this
annual report on Form 10-K.
22
We may have been able to receive better terms from unaffiliated third parties than the terms we receive in
our agreements with Xerox.
We entered into agreements with Xerox related to our separation from Xerox, including the Separation and
Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and
any other agreements, while we were still part of Xerox. Accordingly, these agreements may not reflect terms that
would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of these agreements
relate to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations between
Xerox and us. We may have received better terms from third parties. See “Certain Relationships and Related Party
Transactions—Agreements with Xerox.”
The spin-off could result in significant tax liability to Xerox and its shareholders.
Completion of the spin-off required Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP to the effect
that the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Internal Revenue
Code (the "Code") and the receipt and continuing effectiveness and validity of the IRS Ruling.
The opinion of counsel did not address any U.S. state or local or foreign tax consequences of the spin-off. The
opinion assumed that the spin-off was completed according to the terms of the Separation and Distribution
Agreement and relied on the facts as stated in the Separation and Distribution Agreement, the Tax Matters
Agreement, the other ancillary agreements, the Information Statement included in our registration statement on
Form 10 and a number of other documents. In addition, the opinion was based on certain representations as to
factual matters from, and certain covenants by, Xerox and us. The opinion cannot be relied on if any of the
assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material
respect.
Xerox received an IRS ruling in connection with the spin-off (the "IRS Ruling"). The IRS Ruling relies on certain
facts, assumptions, representations and undertakings from Xerox and us regarding the past and future conduct of
Xerox’s and our businesses and other matters. If any of these facts, assumptions, representations or undertakings
is incorrect or not otherwise satisfied, Xerox may not be able to rely on the IRS Ruling. In addition, the IRS Ruling is
not a comprehensive ruling from the IRS regarding all aspects of the U.S. federal income tax consequences of the
transactions.
Accordingly, notwithstanding the opinion of counsel and the IRS Ruling, there can be no assurance that the IRS will
not assert, or that a court would not sustain, a contrary position.
If the distribution in connection with the spin-off were determined not to qualify for non-recognition of gain and loss
for U.S. federal income tax purposes, U.S. holders who received our common stock could be subject to tax. In this
case, each U.S. holder who received our common stock in the distribution would generally, for U.S. federal income
tax purposes, be treated as having received a distribution in an amount equal to the fair market value of our
common stock received, which would generally result in (i) a taxable dividend to the U.S. holder to the extent of that
U.S. holder’s pro rata share of Xerox’s current and accumulated earnings and profits; (ii) a reduction in the U.S.
holder’s basis (but not below zero) in Xerox common stock to the extent the amount received exceeds the
shareholder’s share of Xerox’s earnings and profits; and (iii) a taxable gain from the exchange of Xerox common
stock to the extent the amount received exceeds the sum of the U.S. holder’s share of Xerox’s earnings and profits
and the U.S. holder’s basis in its Xerox common stock.
We could have an indemnification obligation to Xerox if the Distribution were determined not to qualify for
non-recognition treatment, which could materially adversely affect our results of operations and financial
condition.
If it were determined that the distribution in connection with the spin-off did not qualify for non-recognition of gain
and loss under Section 355 of the Code, we could, under certain circumstances, be required to indemnify Xerox for
the resulting taxes and related expenses. Any such indemnification obligation could materially adversely affect our
results of operations and financial condition.
Conduent Inc. 2017 Annual Report 23
In addition, Section 355(e) of the Code generally creates a presumption that the distribution would be taxable to
Xerox, but not to shareholders, if we or our shareholders were to engage in transactions that result in a 50% or
greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that
begins two years before the date of the distribution, unless it were established that such transactions and the
distribution were not part of a plan or series of related transactions giving effect to such a change in ownership. If
the distribution were taxable to Xerox due to such a 50% or greater change in ownership of our stock, Xerox would
recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders
over Xerox’s tax basis in our common stock and we generally would be required to indemnify Xerox for the tax on
such gain and related expenses. Any such indemnification obligation could materially adversely affect our results of
operations and financial condition.
We agreed to numerous restrictions to preserve the non-recognition treatment of the Distribution, which
may reduce our strategic and operating flexibility.
We agreed in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with
Section 355 of the Code. These covenants and indemnification obligations may limit our ability to pursue strategic
transactions or engage in new businesses or other transactions that may otherwise maximize the value of our
business, and might discourage or delay a strategic transaction that our shareholders may consider favorable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
We lease and own numerous facilities worldwide with larger concentrations of space in Kentucky, New Jersey,
California, Mexico, Guatemala, the Philippines, Jamaica, Romania and India. Our owned and leased facilities house
general offices, sales offices, service locations, call centers and distribution centers. The size of our property
portfolio as of December 31, 2017 was approximately 9.7 million square feet at an annual operating cost (lease
costs and expenses) of approximately $247 million and comprised 330 leased properties and 9 owned properties.
We believe that our current facilities are suitable and adequate for our current businesses. Because of the
interrelation of our business segments, each of the segments uses substantially all of these properties at least in
part.
In addition to the 9.7 million square feet of our real estate property portfolio, we also had 2.7 million square feet of
our leased and owned properties that became surplus in 2017 due to the implementation of our strategic
transformation program as well as various productivity initiatives to consolidate our real estate footprint. We
aggressively managed our surplus properties through early terminations and subleasing of leased properties and
the sale of owned properties. As a result, approximately 1.7 million square feet of the surplus property portfolio were
resolved as of December 31, 2017. Additional leased and owned properties may become surplus over the next
three years as we continue the strategic transformation program. We are obligated to maintain our leased surplus
properties through required contractual lease periods and plan to dispose of or sublease these properties.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under Note 13 – Contingencies and Litigation in the Consolidated Financial Statements in
Part II, Item 8, which is incorporated here by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
24
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Stock Exchange Information
The common stock of Conduent Incorporated is listed on the New York Stock Exchange under the ticker symbol
"CNDT." Our common stock began trading January 3, 2017.
Conduent Common Stock Prices for 2017
New York Stock Exchange composite prices*
High
Low
_____
* Price as of close of business.
Common Shareholders of Record
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
17.44 $
13.10 $
18.15 $
15.50 $
17.20 $
15.38 $
16.39
14.95
Refer to Item 6. Selected Financial Data—Five Years in Review for common shareholders of record at year-
end, which is incorporated here by reference.
Conduent Common Stock Dividends
We did not pay any dividends on our common stock in 2017. We intend to retain future earnings for use in the
operation of our business and to fund future growth. We do not anticipate paying any dividends on our common
stock for the foreseeable future.
Performance Graph
Conduent Inc. 2017 Annual Report 25
Sales of Unregistered Securities During the Quarter Ended December 31, 2017
None
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEARS IN REVIEW(1)
(in millions, except per-share data)
Operations
Revenues
Income (loss) income from continuing operations
Net income (loss)
Per-Share Data
Income (loss) from continuing operations
Basic
Diluted
Net income (loss) attributable to Conduent
Basic
Diluted
Financial Position
Working capital
Total Assets
Consolidated Capitalization
Short-term debt and current portion of long-term debt
Long-term debt
Total Debt(2)
Series A preferred stock
Conduent shareholders' equity/former parent investment
Total Consolidated Capitalization
Selected Data and Ratios(3)
Common shareholders of record at year-end(3)
Book value per common share(3)
Year-end common stock market price(3)
__________
2017
2016
2015
2014
2013
$
6,022
$
6,408
$
6,662
$
6,938
$
6,879
177
181
(983)
(983)
(336)
(414)
34
(81)
$
0.82
$
(4.85) $
(1.65) $
0.17
$
0.81
(4.85)
(1.65)
0.17
0.84
0.83
(4.85)
(4.85)
(2.04)
(2.04)
(0.40)
(0.40)
135
182
0.67
0.67
0.90
0.90
$
$
$
$
$
1,342
$
515
$
(867) $
(887) $
(1,450)
7,548
7,709
9,058
10,954
11,205
82
$
28
$
1,979
2,061
142
3,529
1,913
1,941
142
3,288
24
37
61
n/a
$
268
$
43
311
n/a
5,162
5,411
5,732
$
5,371
$
5,223
$
5,722
$
26,936
16.77
16.16
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
42
310
352
n/a
5,579
5,931
n/a
n/a
n/a
(1) On December 31, 2016, Conduent spun-off from Xerox Corporation. See Note 1 – Basis of Presentation and Summary of Significant
Accounting Policies to the Consolidated Financial Statements included in Item 8 of this 2017 Form 10-K for a discussion concerning the
historical financial statements.
Includes capital lease obligations.
(2)
(3) Common stock of Conduent Incorporated did not begin trading on the NYSE until January 3, 2017; therefore, selected data and ratios are
not available for years prior to 2017.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results
of operations and financial condition of Conduent Incorporated. This MD&A is provided as a supplement to, and
should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes. This
MD&A provides additional information about our operations, current developments, financial condition, cash flows
and results of operations.
Throughout the MD&A, we refer to various notes to our Consolidated Financial Statements which appear in Item 8
of this 2017 Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in
the places where such references are made.
Overview
With revenues of $6.0 billion, we are a leading provider of business process services with expertise in transaction-
intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and
back office, enabling personalized, seamless interactions on a massive scale that improve end-user experience.
Headquartered in Florham Park, New Jersey, we, have a team of approximately 90,000 people as of December 31,
2017, who serves customers in 31 countries. In 2017, 12% of our revenue was generated outside the U.S.
Our reportable segments correspond to how we organize and manage the business and are aligned to the
industries in which our clients operate.
Beginning in 2017, in an effort to better reflect how we manage our business, we changed our reporting segments
to align the Healthcare business based upon customer focus between Commercial Industries and Public Sector.
• Commercial Industries - Our Commercial Industries segment provides business process services and
customized solutions to clients in a variety of industries. Across the Commercial Industries segment, we deliver
end-to-end business-to-business and business-to-customer services that enable our clients to optimize their key
processes. Our multi-industry competencies include transaction processing, customer experience, human
resource management, omni-channel communications and finance and accounting services.
• Public Sector - Our Public Sector segment provides government-centric business process services to U.S.
federal, state and local and foreign governments for transportation, public assistance, program administration,
transaction processing and payment services.
Other includes our Government HE Medicaid Platform business, where we are limiting our focus to maintaining
systems for our current clients; our Education Business inclusive of our Student Loan business, which is in runoff;
and inter-segment eliminations.
Significant 2017 Actions
Dispositions
In 2017, we completed divestitures of: (1) our Firehouse business and suite of emergency records management
products used by fire departments across the country for their incident reporting and Emergency Management
System information and records management; (2) our healthcare provider consulting services business, which
advises healthcare organizations on IT application optimization; (3) the Breakaway Group business, which provides
advisory project services to assist healthcare organizations optimize their health IT applications; (4) the mobile
device management business of Wireless Data Services Limited; and (5) the Global Mobility business. The
aggregate proceeds for these divestitures was $56 million in cash. The businesses sold represent $60 million and
$82 million of 2017 and 2016 revenue, respectively. We recorded a pre-tax gain of $16 million on these divestitures
for the year ended December 31, 2017.
Conduent Inc. 2017 Annual Report 27
In addition, in 2017, we sold a property located in Dallas, Texas, which was formerly the Affiliated Computer
Services (ACS) headquarters, for a pre-tax gain of $24 million. This was part of our effort to consolidate our real
estate footprint.
Health Enterprise Settlement
On November 28, 2017, we entered into a definitive settlement agreement with the State of New York regarding
resolution of the HE platform project. Under the terms of the settlement: (1) our contract with the State of New York
terminated effective December 15, 2017 and we were released from all liabilities and obligations in connection with
the contract at such time; and (2) we will pay, or incur costs on behalf of, the State of New York in the amount of
approximately $20 million. As we have previously reserved this amount, we will incur no additional charges as a
result of the settlement.
Significant 2016 Actions
Separation
On December 31, 2016, Conduent Incorporated spun-off from Xerox Corporation, pursuant to the Separation and
Distribution Agreement. The separation was completed by way of a pro rata distribution of Conduent Incorporated
shares held by Xerox to Xerox's shareholders. As a result of the spin-off we operate as an independent, publicly
traded company on the New York Stock Exchange under the ticker "CNDT".
Goodwill Impairment Charge
Our Commercial Industries reporting units operating results declined in 2016 versus our expectations, including a
weak fourth quarter 2016. In performing our annual impairment test during the fourth quarter of 2016, we
determined that the carrying value of the Commercial Industries reporting unit exceeded its fair value by 53%, which
resulted in a goodwill impairment of $935 million. This has been presented as Goodwill impairment, a separate line
item in the Consolidated Statements of Income (Loss). Refer to Note 6 – Goodwill and Intangible Assets, Net, in the
Consolidated Financial Statements for additional information.
Health Enterprise Charge
In February 2017, we determined that it was not probable that the New York Medicaid Management Information
System (NY MMIS) project would be completed. As a result of this determination, we recorded a pre-tax charge (NY
MMIS charge) of $161 million ($98 million after-tax) in the fourth quarter of 2016. The charge included $83 million
for the write-off of contract receivables which were recorded as a reduction of revenue and $78 million recorded in
Cost of services including $36 million for wind-down costs, $28 million related to the non-cash charge for the
impairment of software and $14 million for the write-off of deferred contract set-up and transition costs and other
related assets and liabilities.
Significant 2015 Actions
Health Enterprise Charge
In 2015, we determined that we would not fully complete the HE platform implementation projects in California and
Montana. However, we would continue to process Medicaid claims using existing legacy systems in those states,
thus providing uninterrupted service for the states' healthcare providers and constituents.
As a result of this determination, we recorded a pre-tax HE charge of $389 million ($237 million after-tax). The
charge included $116 million for the write-off of contract receivables (primarily non-current), $34 million related to
the non-cash impairment of the HE software and deferred contract set-up transition costs and $23 million for other
related assets and liabilities. The remainder of the charge was primarily related to settlement costs including
payments to subcontractors resulting in cash outflows in future periods. Of the $389 million charge, $116 million was
recorded as a reduction to revenue and the remaining $273 million recorded to Cost of services.
This development resulted from the Government Healthcare strategy change announced in July 2015, regarding
our decision to focus our future HE implementations on current Medicaid customers and to discontinue investment
in and sales of our Integrated Eligibility System. This resulted in a pre-tax non-cash software platform impairment
charge of $146 million ($89 million after-tax).
28
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (U.S. GAAP) requires us to make estimates and assumptions in certain circumstances that affect
amounts reported in the accompanying Consolidated Financial Statements and notes thereto. In preparing our
Consolidated Financial Statements, we have made our best estimates and judgments of certain amounts included
in the Consolidated Financial Statements giving due consideration to materiality. However, application of these
accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. Senior management has discussed the development and
selection of the critical accounting policies, estimates and related disclosures included herein with the Audit
Committee of the Board of Directors. We consider these as critical to understanding our Consolidated Financial
Statements, as their application places the most significant demands on management's judgment, since financial
reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different
estimates could have reasonably been used, we disclose the impact of these different estimates on our operations.
In certain instances, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably
use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The
impact of such changes could be material to our results of operations and financial condition in any quarterly or
annual period.
Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such
policies affect our reported and expected financial results. For a detailed discussion of the application of these and
other accounting policies, refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies in
the Consolidated Financial Statements.
Revenue Recognition
Application of the various accounting principles in U.S. GAAP related to the measurement and recognition of
revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and
conditions may require significant contract interpretation to determine the appropriate accounting. Refer to Note 1 –
Basis of Presentation and Summary of Significant Accounting Policies — Revenue Recognition in the Consolidated
Financial Statements for additional information regarding our revenue recognition policies.
A significant portion of our revenue is recognized based on objective criteria that do not require significant estimates
or uncertainties. For example, transaction volumes, time and material and cost reimbursable arrangements are
based on specific, objective criteria under the contracts. Accordingly, revenues recognized under these contracts do
not require the use of significant estimates that are susceptible to change. Revenue recognized using the
percentage-of completion (POC) accounting method does require the use of estimates and judgment as discussed
below.
We recognize revenues when we have persuasive evidence of an arrangement, the services have been provided,
the transaction price is fixed or determinable and collectability is reasonably assured. During 2017, approximately
80% of our revenue was recognized based on transaction volumes, approximately 13% was recognized on a fixed
fee basis (wherein our revenue is earned as we fulfill our performance obligations under the arrangement),
approximately 1% was related to cost reimbursable contracts, approximately 2% recognized using POC accounting
and the remaining 4% was related to time and material contracts. Our revenue mix is subject to change due to the
impact of changing customer requirements, acquisitions, divestitures, new business and lost business.
Percentage-of-Completion: The POC method requires the use of estimates and judgment. Although not significant
to total revenue, the POC methodology is normally applied to certain of our larger and longer term outsourcing
contracts involving system development and implementation, primarily in government healthcare and certain
government transportation contracts. In addition, we had unbilled receivables totaling $187 million and $279 million
at December 31, 2017 and 2016, respectively, representing revenues recognized but not yet billable under the
terms of our POC contracts.
Conduent Inc. 2017 Annual Report 29
The POC accounting methodology involves recognizing probable and reasonably estimable revenue using the
percentage of services completed based on a current cumulative cost incurred to estimated total cost basis and a
reasonably consistent profit margin over the period. Due to the long-term nature of these arrangements, developing
the estimates of cost often requires significant judgment. Factors that must be considered in estimating the progress
of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor
productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If
changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we
revise our cost and revenue estimates, which may result in increases or decreases in revenues. Such revisions are
reflected in income in the period in which the facts that give rise to that revision become known. We perform
ongoing profitability analysis of our POC services contracts in order to determine whether the latest estimates
require updating. Key factors reviewed by the Company to estimate the future costs to complete each contract are
future labor costs, future product costs, expected productivity efficiencies, achievement of contracted milestones
and performance goals, as well as potential penalties for milestone and system implementation delays.
If at any time our estimates indicate the POC contract will be unprofitable, the entire estimated loss for the
remainder of the contract is recorded immediately in cost of services. This results in the contract being recorded at a
zero profit margin going forward with recognition of an equal amount of revenues and costs over the remaining
contract term. A zero profit margin may also be applied when it is impractical to estimate specific amounts or ranges
of contract revenues and costs; however, we can at least determine that we will not incur a loss on a particular
contract.
Capitalization of Outsourcing Contract Costs
In connection with our services arrangements, we incur and capitalize costs to originate these long-term contracts
and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of
the arrangement. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual
service period of the arrangement to cost of services. From time to time, we also provide inducements to customers
in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over
the term of the contract. We regularly review costs to determine appropriateness for deferral in accordance with the
relevant accounting guidance. Key estimates and assumptions that we must make include projecting future cash
flows in order to assess the recoverability of deferred costs. To assess recoverability, undiscounted estimated cash
flows of the contract are projected over its remaining life and compared to the carrying amount of contract related
assets, including the unamortized deferred cost balance. Key factors that are considered in estimating the
undiscounted cash flows include projected labor costs and productivity efficiencies. A significant change in an
estimate or assumption on one or more contracts could have a material effect on our results of operations.
Capitalization of Software Development Costs
We capitalize certain costs incurred to develop commercial software products to be sold, leased or otherwise
marketed after establishing technological feasibility, and we capitalize costs to develop or purchase internal-use
software. Significant estimates and assumptions include: determining the appropriate period over which to amortize
the capitalized costs based on estimated useful lives, estimating the marketability of the commercial software
products and related future revenues and assessing the unamortized cost balances for impairment. For commercial
software products, determining the appropriate amortization period is based on estimates of future revenues from
sales of the products. We consider various factors to project marketability and future revenues, including an
assessment of alternative solutions or products, current and historical demand for the product, and anticipated
changes in technology that may make the product obsolete. For internal-use software, the appropriate amortization
period is based on estimates of our ability to utilize the software on an ongoing basis. To assess the recoverability of
capitalized software costs, we consider estimates of future revenue, costs and cash flows. Such estimates require
assumptions about future cash inflows and outflows, and are primarily based on the historical experience and
expectations regarding future revenues. A significant change in an estimate related to one or more software
products could result in a material change to our results of operations.
Refer to Note 5 – Land, Buildings, Equipment and Software, Net in the Consolidated Financial Statements for
additional information regarding capitalized software costs.
30
Held for Sale
We classify assets as held for sale in the period when the following conditions are met: (i) management, having the
authority to approve the action, commits to a plan to sell the asset (disposal group); (ii) the asset (disposal group) is
available for immediate sale in its present condition subject only to terms that are usual and customary for sales of
such assets (disposal group); (iii) an active program to locate a buyer and other actions required to complete the
plan to sell the asset (disposal group) have been initiated; (iv) the sale of the asset (disposal group) is probable, and
transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year,
except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal
group) beyond one year; (v) the asset (disposal group) is being actively marketed for sale at a price that is
reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A long-lived asset (disposal group) that is classified as held for sale is initially measured at the lower of its carrying
value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in
which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset
(disposal group) until the date of sale.
The fair value of a long-lived asset (disposal group) less any costs to sell is assessed each reporting period it
remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value
of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at
the time it was initially classified as held for sale. Upon determining that a long-lived asset (disposal group) meets
the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group in
the line items Assets held for sale and Liabilities held for sale, respectively, in the Consolidated Balance Sheets.
In the fourth quarter of 2017, management approved the disposal through sale of certain assets and businesses,
which is a mix of both Commercial Industries and Public Sectors. This action was taken as a result of our evaluation
of these businesses as they represent businesses in markets or with services that we did not see as strategic or
core. As of December 31, 2017, these businesses qualified as assets held for sale. During the year ended
December 31, 2017, we reclassified $757 million to assets held for sale and $169 million to liabilities held for sale,
as we have an active program to locate buyers for these businesses and we expect these businesses to be sold
within one year.
Intangible Assets
The fair values of identifiable intangible assets are primarily estimated using an income approach. These estimates
include market participant assumptions and require projected financial information, including assumptions about
future revenue growth and costs necessary to facilitate the projected growth. Other key inputs include assumptions
about technological obsolescence, customer attrition rates, brand recognition, the allocation of projected cash flows
to identifiable intangible assets and discount rates. We regularly review intangible assets with finite lives for
impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Factors we consider important which could trigger an impairment review include the following:
•
•
•
significant underperformance relative to historical or projected future operating results;
significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and
significant negative industry or economic trends.
When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon
the existence of one or more of the above indicators of potential impairment, we assess whether an impairment has
occurred based on whether net book value of the assets exceeds the related projected undiscounted cash flows
from these assets. We consider a number of factors, including past operating results, budgets, economic
projections, market trends and product development cycles in estimating future cash flows. Differing estimates and
assumptions as to any of the factors described above could result in a materially different impairment charge, if any,
and thus materially different results of operations.
Goodwill
Goodwill is not amortized but rather tested for impairment annually, or more frequently, if an event or circumstance
indicates that impairment may have been incurred. Events or circumstances that might indicate an interim
evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting
unit specific economic factors, supply costs, unanticipated competitive activities and acts by governments and
courts.
Conduent Inc. 2017 Annual Report 31
Application of the annual goodwill impairment test requires judgment, including the identification of reporting units,
assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment
of the fair value of each reporting unit. We determined that our reporting units were the same as our operating
segments and, therefore, our business is comprised of two reporting units. Our annual quantitative impairment test
of goodwill was performed in the fourth quarter of 2017.
In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income
approach (discounted cash flow methodology) and market approach. These valuation approaches require
significant judgment and consider a number of factors that include, but are not limited to, expected future cash
flows, growth rates and discount rates and comparable multiples from publicly traded companies in our industry. In
addition, we are required to make certain assumptions and estimates regarding the current economic environment,
industry factors and the future profitability of our businesses.
When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected
financial information and discount rates that are developed using market participant-based assumptions. The cash-
flow projections are based on three-year financial forecasts developed by management that include revenue and
expense projections, restructuring and strategic transformation activities, capital spending trends and investment in
working capital to support anticipated revenue growth or other changes in the business. The selected discount rates
consider the risk and nature of the respective reporting units' cash flows, appropriate capital structure and rates of
return that market participants would require to invest their capital in our reporting units.
We believe these assumptions are appropriate and reflect our forecasted long-term business model and give
appropriate consideration to our historical results as well as the current economic environment and markets that we
serve.
Based on our quantitative assessments, we concluded that the fair value of our Commercial Industries and Public
Sector reporting units exceeded their respective carrying values by 72% and 13%, respectively, at December 31,
2017. The most significant assumptions used in the goodwill analysis relate to a 3% long-term organic growth rate
for both the Commercial Industries and Public Sector segments as well as a 9.25% and a 8.75% discount rate for
the Commercial Industries and Public Sector segments, respectively. The fair values of the Commercial Industries
and Public Sector segments are sensitive to changes in the long-term growth rates and the discount rates. A
decrease of 50 basis points to the long-term growth rate or an increase to the discount rate of 50 basis points would
result in an approximate reduction of fair value of $200 million and $250 million, respectively, in the Public Sector
segment.
Refer to Note 6 – Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional
information regarding goodwill by reportable segment.
Restructuring and Asset Impairments
We have engaged in restructuring actions, which require management to estimate the timing and amount of
severance and other employee separation costs for workforce reduction, the fair value of assets made redundant or
obsolete and the lease cancellation and other exit costs. We accrue for severance and other employee separation
costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The
rates used in determining severance accruals are based on existing plans, historical experiences and negotiated
settlements.
For additional information regarding our restructuring actions, refer to the "Restructuring and Related Costs" section
in the MD&A and Note 7 – Restructuring Programs and Asset Impairment Charges in the Consolidated Financial
Statements.
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. The determination of our
provision for income taxes requires significant judgment, the use of estimates and the interpretation and application
of complex tax laws. Our provision is based on nonrecurring events as well as recurring factors, including the
taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events
such as audit settlements, tax law changes, changes in valuation allowances and other factors, that may not be
predictable. In the event that there is a significant unusual or one-time item recognized in our operating results, the
taxes attributable to that item would be separately calculated and recorded at the same time as an unusual or one-
time item.
32
We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities
and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards.
We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets
recorded in our Consolidated Balance Sheets and provide valuation allowances as required. We regularly review
our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the
expected timing of the reversals of existing temporary differences and tax planning strategies. Gross deferred tax
assets of $250 million and $360 million had valuation allowances of $35 million and $24 million at December 31,
2017 and 2016, respectively. As a result of the 2017 tax law changes in the United States, we recorded provisional
amounts for a one-time non-cash $210 million income tax benefit related to adjusting our deferred tax liabilities from
a 35% Federal tax rate to a 21% Federal tax rate and the transition tax expense of $12 million.
We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur
additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In
addition, when applicable, we adjust previously recorded tax expense to reflect examination results. Our ongoing
assessments of the more-likely-than-not outcomes of examinations and related tax positions require judgment and
can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax
benefits were $15 million, $14 million and $24 million at December 31, 2017, 2016 and 2015, respectively.
Refer to Note 12 – Income Taxes in the Consolidated Financial Statements for additional information regarding
deferred income taxes and unrecognized tax benefits.
Loss Contingencies
We are currently involved in various claims and legal proceedings. At least quarterly, we review the status of each
significant matter and assess its potential financial exposure considering all available information including, but not
limited to, the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information
and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered
probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant
judgment is required in both the determination of probability and the determination as to whether an exposure is
reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available, we reassess the potential liability
related to pending claims and litigation, and may revise estimates. These revisions in the estimates of the potential
liabilities could have a material impact on the results of operations and financial position.
Refer to Note 13 – Contingencies and Litigation in the Consolidated Financial Statements for additional information
regarding loss contingencies.
Conduent Inc. 2017 Annual Report 33
Financial Information
Financial information for the three years ended December 31, 2017 was as follows:
(in millions)
Total Revenues
Total Cost of services
Gross Margin
Operating Costs and Expenses
Research and development
Selling, general and administrative
Restructuring and related costs
Amortization of intangible assets
Goodwill impairment
Separation costs
Interest expense
Related party interest
(Gain) loss on sale of asset and businesses
Other (income) expenses, net
Total Operating Costs and Expenses
Loss Before Income Taxes
Income tax benefit
Income (Loss) From Continuing
Operations
Revenue
$
$
$
$
$
$
Year Ended December 31,
2017 vs. 2016
2016 vs. 2015
2017
2016
2015
$ Change % Change
$ Change % Change
$
$
$
6,022
4,977
1,045
$
$
6,408
5,498
910
13
$
615
101
243
—
12
137
—
(42)
(18)
31
686
101
280
935
44
14
26
2
18
$
$
$
6,662
5,977
685
52
699
159
250
—
—
8
61
—
30
(386)
(521)
135
(18)
(71)
—
(37)
(935)
(32)
123
(26)
(44)
(36)
(6)% $
(9)%
15 % $
(254)
(479)
225
(58)% $
(10)%
— %
(13)%
(100)%
(73)%
879 %
(100)%
(2,200)%
(200)%
(21)
(13)
(58)
30
935
44
6
(35)
2
(12)
878
1,061
$
2,137
$
1,259
$
(1,076)
(50)% $
(16) $
(193)
(1,227) $
(244)
(574) $
(238)
1,211
51
(99)% $
(21)%
(653)
(6)
177
$
(983) $
(336) $
1,160
(118)% $
(647)
193 %
(4)%
(8)%
33 %
(40)%
(2)%
(36)%
12 %
100 %
100 %
75 %
(57)%
100 %
(40)%
70 %
114 %
3 %
Total revenues for 2017 decreased mainly due to the impact from strategic decisions by management as part of our
portfolio rationalization, including exiting certain unprofitable contracts, the run-off of our Student Loan business and
contract losses. Partially offsetting these declines was an increase from the ramping of new business.
Total revenues for 2016 decreased compared to the prior year as a result of the NY MMIS charge of $83 million,
lower volumes, delayed ramping of new business and contract exits, primarily in customer care contracts within our
Commercial Industries segment, the run off of our Student Loan business and overall price declines that were
consistent with prior-period trends. Partially offsetting these declines were new contracts in the Public Sector.
Cost of Services
Cost of services for 2017 decreased compared to the prior year period primarily due to cost transformation, lost
business, wind-down of the NY MMIS contract, run-off of our Student Loan business, strategic contract actions
taken by management as part of portfolio management and lower volumes.
Cost of services for 2016 decreased compared to the prior year period primarily due to lost business, the NY MMIS
contract, run-off of our Student Loan business and lower volumes.
Gross Margin
Increase in gross margin in 2017 compared to the prior year period was driven primarily by the impact of cost and
productivity improvements, including benefits from our strategic transformation program, exiting or remediating
certain underperforming contracts and lower costs associated with our Student Loan business. This was partially
offset by the run-off of our Student Loan business, contract losses and lower volumes with existing clients.
Increase in gross margin in 2016 compared to the prior year period reflected cost benefits from our strategic
transformation initiatives offset by lost business and margin pressures in our customer service offerings and price
declines.
34
Selling, General and Administrative (SG&A)
Lower SG&A compared to the prior years reflected the impact of our strategic transformation initiatives driving lower
wages and benefits, partially offset by the expansion and investment in our sales force.
Restructuring and Related Costs
Restructuring and related costs for the year ended December 31, 2017 include $46 million of lease cancellation
costs as part of our effort to consolidate our real estate footprint, $41 million of severance costs due to headcount
reductions of approximately 3,200 employees worldwide, $9 million of costs primarily related to professional support
services associated with the implementation of the strategic transformation program and $5 million of asset
impairments charges.
Restructuring and related costs for the year ended December 31, 2016 include $54 million of severance costs due
to headcount reductions of approximately 3,600 employees worldwide, $28 million of costs primarily related to
professional support services associated with the implementation of the strategic transformation program, $12
million of asset impairment charges and $7 million of lease cancellation costs.
Refer to Note 7 – Restructuring Programs and Asset Impairment Charges in the Consolidated Financial Statements
for additional information regarding our restructuring programs.
Amortization of Intangible Assets
Amortization of intangible asset decreased in 2017 from the prior year primarily due to the acceleration of
amortization of certain trade-names in 2016.
Amortization of intangible assets was higher in 2016 as compared to 2015, primarily due to the acceleration of
amortization of certain trade-names associated with prior acquisitions.
Refer to Note 6 – Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional
information regarding our intangible assets.
Goodwill Impairment
Our Commercial Industries reporting unit experienced declining operating results in 2016 versus expectations. As a
result, we recorded a goodwill impairment of $935 million. Refer to Note 6 – Goodwill and Intangible Assets, Net in
the Consolidated Financial Statements for additional information regarding the Goodwill impairment charge.
Separation Costs
Separation costs are primarily for 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, such as those related to human resources, brand management, real estate and information
management to the extent not capitalized. Separation costs also include the costs associated with bonuses and
restricted stock grants awarded to employees for retention through the separation.
Interest Expense
Interest expense represents interest on long-term debt and the amortization of debt issuance costs. Interest
expense for the year ended December 31, 2017 increased compared to the prior year, primarily due to the issuance
of debt with the capitalization of the Company during the spin-off in December 2016 and subsequent borrowing
under Term Loan B in January 2017, as well as amounts outstanding at various times throughout the year under the
Company's credit facility.
In 2017, the Company successfully repriced its Term Loan B in April and October (Amendments No.1 and No. 2,
respectively), which overall resulted in lowering the total interest rate on this loan by 250 basis points to LIBOR plus
3.0%.
Refer to Note 8 – Debt in the Consolidated Financial Statements for additional information.
Conduent Inc. 2017 Annual Report 35
Related Party Interest
In January 2017, in connection with the spin-off from Xerox Corporation, we paid Xerox $161 million for the final
settlement per the Separation and Distribution Agreement.
Related-party interest expense for the year ended December 31, 2016 was lower than the prior year primarily due
to the payment of certain related party notes payable in 2015, as a result of the proceeds received from the sale of
the ITO business.
Refer to Note 18 – Related Party Transactions and Former Parent Company Investment in the Consolidated
Financial Statements for additional information.
(Gain) Loss on Sale of Asset
As disclosed under Item 7. MD&A— Divestiture, we completed five divestitures in 2017 with aggregate proceeds of
$56 million. We recorded a pre-tax gain of $16 million on these divestitures. In addition, in 2017 we sold a property
located in Dallas, TX, which was formerly the ACS headquarters, for a pre-tax gain of $24 million.
Other (Income) Expense, Net
Other (income) expense, net primarily includes foreign currency transaction losses (gains), litigation and other
contingent matters and deferred compensation investment results.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform) was enacted. The effects of changes in tax rates
and laws are recognized in the period in which the new legislation is enacted. In the case of US federal income
taxes, the enactment date is the date the bill becomes law. The income tax effects of the Tax Reform have been
initially accounted for on a provisional basis pursuant to the SEC staff guidance on income taxes. Reasonable
estimates for all material tax effects of the Tax Reform have been provided and adjustments to provisional amounts
will be made in subsequent reporting periods as information becomes available to complete provisional
computations.
The 2017 effective tax rate was 1,206.3% as compared with 19.9% for the prior year. The 2017 rate was higher than
the U.S. statutory tax rate of 35% primarily due to the impact of the Tax Reform, which included the reduction of the
U.S. statutory rate from 35% to 21% and a one-time tax on undistributed and previously untaxed post-1986 foreign
earnings and profits. Excluding primarily the tax impact of the Tax Reform, the termination of the COLI, amortization
of intangible assets and gains on U.S divestitures, the adjusted effective tax rate for 2017 was 33.8%. The Tax
Reform is the most significant change to U.S. federal income tax legislation in over 30 years and, as a result, has a
disproportionate effect on our 2017 effective tax rate. See Note 12 – Income Taxes for further information regarding
the impact of the Tax Reform on our Consolidated Financial Statements.
Deferred tax assets and liabilities are measured and recorded using the enacted tax rates for the periods during
which the related temporary differences are expected to reverse or deferred tax attributes are expected to be
realized. As a result of the change in future federal statutory tax rate due to the passing of the Tax Reform, the
deferred tax assets and liabilities should no longer be valued at a federal statutory rate of 35%, but rather at the rate
in which the benefit of the deferred tax liabilities will be realized by the Company. As such, the U.S. federal statutory
rate used to value the Company's deferred tax assets and liabilities was 21%, which resulted in a $210 million tax
benefit.
The 2016 effective tax rate was lower than the U.S. statutory tax rate due primarily to the impact of the non-
deductible Goodwill impairment charge. Excluding primarily the goodwill impairment, NY MMIS, amortization of
intangible assets, and restructuring costs, the 2016 normalized effective rate was 29.0%.
36
Operations Review of Segments
Our reportable segments correspond to how we organize and manage the business and are aligned to the
industries in which our clients operate. Beginning in 2017, in an effort to better reflect how we organize and
manage our business, we changed our reporting segments to align the Healthcare business based on customer
focus between Commercial Industries and Public Sector. All prior years have been adjusted to reflect the new
reporting segments.
The following are our results of financial performance by segment for the three years ended December 31, 2017:
(in millions)
Year Ended December 31, 2017
Total Revenue
Profit (Loss)
EBITDA(1)
Adjusted EBITDA(1)
% of Total Revenue
EBITDA Margin(1)
Adjusted EBITDA Margin(1)
Year Ended December 31, 2016
Total Revenue
Adjusted Revenue(1)
Profit (Loss)
EBITDA(1)
Adjusted EBITDA(1)
% of Total Revenue
EBITDA Margin(1)
Adjusted EBITDA Margin(1)
Year Ended December 31, 2015
Total Revenue
Adjusted Revenue(1)
Profit (Loss)
EBITDA(1)
Adjusted EBITDA(1)
% of Total Revenue
EBITDA Margin(1)
Adjusted EBITDA Margin(1)
_______________
Commercial
Industries
Public Sector
Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,548
182
344
344
58.9%
9.7%
9.7%
3,805
3,805
151
313
313
59.4%
8.2%
8.2%
4,059
4,059
148
308
308
60.9%
7.6%
7.6%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,163
245
330
330
35.9%
15.3%
15.3%
2,308
2,308
293
395
395
36.0%
17.1%
17.1%
2,331
2,331
298
416
416
35.0%
17.8%
17.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
311
(10)
(3)
(2)
5.2 %
(1.0)%
(0.6)%
295
378
(248)
(182)
(73)
4.6 %
(61.7)%
(19.3)%
272
388
(509)
(440)
(85)
4.1 %
(161.8)%
(21.9)%
6,022
417
671
672
100.0%
11.1%
11.2%
6,408
6,491
196
526
635
100.0%
8.2%
9.8%
6,662
6,778
(63)
284
639
100.0%
4.3%
9.4%
(1) Refer to the reconciliations table in the "Non-GAAP Financial Measures" section.
Commercial Industries Segment
Revenue
Commercial Industries revenue 2017 as compared to prior year decreased, primarily driven by strategic contract
actions, lower volumes in our customer care offerings and lost business, partially offset by revenue from new
contracts and price increases with existing clients. Commercial Industries revenue for 2016 decreased from the
prior year, mainly driven by lost business, lower volumes in our customer care offerings and reduced level of
project work as a result of fewer large cases in our litigation services offering, negative impacts from currency and
strategic contract exits. Partially offsetting the decline were new contract signings, primarily in our high-tech
business area.
Conduent Inc. 2017 Annual Report 37
Segment Profit
Increase in the Commercial Industries segment profit for 2017 as compared to the prior year, was primarily driven
by reduced costs as a result of our strategic transformation initiatives, including contract remediation and strategic
contract actions, partially offset by the overall revenue decline. The Commercial Industries segment profit for 2016
as compared to the prior year was largely flat, primarily due to overall benefits from costs and productivity
initiatives, partially offset by margin pressure in our customer care services offering and reduced project work in
our litigation services offering.
Public Sector Segment
Revenue
Public Sector revenue for 2017 as compared to prior year decreased, primarily driven by strategic decisions and
contract losses in State & Local, Government Healthcare and Payment Services. Public Sector revenue for 2016
decreased as compared to the prior year, primarily due to lower volumes and lost business in State Government
Services, partially offset by new business.
Segment Profit
Decrease in the Public Sector segment profit for 2017 as compared to the prior year was mainly due to strategic
decisions, contract losses in Government Healthcare, as well as losses in our Payment Services business, partially
mitigated by our strategic transformation initiative. Decrease in the Public Sector segment profit for 2016 as
compared to prior year was primarily due to the impact of lost business in State Government Services, partially
offset by costs and productivity initiatives and improved performance in our transportation offering.
Other
Revenue
Other revenue for 2017 improved compared to 2016, primarily due to improved pricing and performance from two
large Health Enterprise clients, partially offset by the exit from the NY MMIS contract and the strategic run-off of the
Student Loan business. Other revenue for 2016 increased compared to 2015 as a result of the non-recurring $116
million HE charge in 2015, partially offset by the $83 million write-off of NY MMIS in 2016, the continued run-off of
the Student Loan business, partially offset by our prior-year decision to not complete the HE implementations in
California and Montana.
Segment Loss
Other loss for 2017 improved, primarily due to improved profitability in the student loan business, improved pricing
from a contract extension with a large Health Enterprise client and general operational efficiencies in the HE
business. Other loss for 2016 improved as a result of the non-recurring $389 million HE charge in 2015, partially
offset by the $161 million write-off of the NY MMIS, partially offset by improvements in HE platform implementation
expenses resulting from the decision to not fully complete the HE platform implementation in California and
Montana.
Metrics
Signings
Signings are defined as estimated future revenues from contracts signed during the period, including renewals of
existing contracts. Total Contract Value (TCV) is the estimated total contractual revenue related to signed
contracts. The amounts in the following table do not reflect the impact of our adoption of the new revenue
recognition standard on January 1, 2018. Refer to Note 1 – Basis of Presentation and Summary of Significant
Accounting Policies for further discussion of the estimated impact of the adoption of this standard.
38
(in millions)
New business TCV
Renewals TCV
Total Signings
Annual recurring revenue signings
Non-recurring revenue signings
$
$
$
$
Year Ended December 31,
2017 vs. 2016
2016 vs. 2015
2017
2016
2015
$ Change % Change
$ Change % Change
2,260
$
2,527
$
4,345
$
(267)
(11)% $
(1,818)
2,692
4,325
3,637
(1,633)
(38)%
688
4,952
$
6,852
$
7,982
$
(1,900)
(28)% $
(1,130)
533
383
$
$
589
438
$
$
883
451
$
$
(56)
(55)
(10)% $
(13)% $
(294)
(13)
(42)%
19 %
(14)%
(33)%
(3)%
Signings for 2017 decreased compared to the prior year mainly due to strategic decisions by management to
streamline our portfolio which impacted both new business and renewal volume. Partially offsetting these declines
were new business wins in targeted offerings and expansion with certain existing clients.
Signings for 2016 decreased compared to the prior year, primarily reflecting lower contribution from new business,
due in part to our decision not to pursue opportunities with lower margins and the prior year large NY MMIS new
business signing.
Renewal Rate
Renewal rate is defined as the annual recurring revenue (ARR) on contracts that are renewed during the period as
a percentage of ARR on all contracts for which a renewal decision was made during the period, excluding any
contracts that were not renewed and where a strategic action to improve the risk or profitability had been initiated.
Excluding our strategic decision not to renew certain contracts, renewal rate for 2017 was 94% and above our
target range of 85%-90%. Including all contracts, renewals would have been 87%.
Capital Resources and Liquidity
As of December 31, 2017 and 2016, total cash and cash equivalents were $658 million and $390 million,
respectively. As of December 31, 2017, there were $1,574 million outstanding borrowings under our credit facility
and we utilized $12 million of our revolving credit facility capacity to issue letters of credit. In addition, we will make
payments in 2018 of $99 million to participants of the terminated deferred compensation plans.
Refer to the Capital Market Activity section below for additional information regarding our capital activity.
Cash Flow Analysis
The following summarizes our cash flows for the three years ended December 31, 2017, as reported in our
Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:
(in millions)
Net cash provided by operating activities
Net cash provided by investing activities
Net cash provided by (used in) financing activities
Operating Activities
Year Ended December 31,
Change
2017
2016
2015
2017
2016
$
302
$
108
$
74
(109)
16
132
493
522
(1,023)
$
194
$
58
(241)
(385)
(506)
1,155
The increase in cash generated from operating activities for the year ended December 31, 2017 was primarily
attributable to improvements in working capital and reduced wind-down payments associated with implementations
in California, Montana and New York, partially offset by a higher interest payments on our outstanding debt.
The decrease in cash generated from operating activities for the year ended December 31, 2016 was primarily
attributable to reduced factoring, HE settlement payments and working capital partially offset by lower net income
tax payments due to income tax refunds.
Conduent Inc. 2017 Annual Report 39
Investing Activities
The increase in cash provided by investing activities for the year ended December 31, 2017 compared to the year
ended December 31, 2016 was primarily related to $117 million in proceeds received on the liquidation of
investments related to the termination of the deferred compensation plan, $56 million of proceeds from the sale of
business and assets as compared to payments of $54 million in 2016, $86 million of lower net additions to land,
buildings and equipment, partially offset by non-recurring proceeds of $248 million on related party notes receivable
in 2016.
The decrease in cash provided by investing activities for the year ended December 31, 2016 compared to the year
ended December 31, 2015 was primarily related to $54 million of payments for the sale of business and assets as
compared to proceeds of $742 million in 2015, partially offset by proceeds of $248 million from related party notes
receivable in 2016.
Financing Activities
The change to cash used in financing activities for the year ended December 31, 2017 compared to cash provided
by for the year ended December 31, 2016 was primarily related to a decrease of $1.7 billion in proceeds from long
term debt and an increase in debt payments of $209 million, partially offset by a reduction in payments to former
parent of $1.6 billion.
The change to cash provided by financing activities for the year ended December 31, 2016 compared to cash used
for the year ended December 31, 2015 was primarily related to an increase of $1.9 billion in proceeds from long
term debt and a reduction in payments on debt of $261 million, partially offset by an increase in payments to former
parent of $957 million.
Capital Market Activity
In April 2017, we entered into Amendment No. 1 to the Credit Agreement, which reduced the interest rate on our
Term Loan B by 1.5% from 5.5% over LIBOR to 4.0% over LIBOR. Subsequently in October 2017, we entered into
Amendment No. 2, which reduced the interest rate on our Term Loan B by 1.0% from 4.0% over LIBOR to 3.0%
over LIBOR.
In January 2017, we borrowed an additional $100 million on Term Loan B with proceeds used for general corporate
purposes.
Refer to Note 8 – Debt in the Consolidated Financial Statements for additional information.
Financial Instruments
Refer to Note 9 – Financial Instruments in the Consolidated Financial Statements for additional information.
Contractual Cash Obligations and Other Commercial Commitments and Contingencies
At December 31, 2017, we had the following contractual cash obligations and other commercial commitments and
contingencies:
(in millions)
Total debt, including capital lease obligations(1)
Interest on debt(2)
Minimum operating lease commitments(3)
Defined benefit pension plans
Estimated Purchase Commitments(4)
Total
_______________
2018
2019
2020
2021
2022
Thereafter
$
82
$
72
$
85
$
115
163
8
116
484
$
113
119
—
100
404
$
110
80
—
68
560
107
53
—
38
$
9
$
1,309
91
31
—
21
156
52
—
—
$
343
$
758
$
152
$
1,517
(1) Total debt represents principal debt and capital leases. Refer to Note 8 – Debt in the Consolidated Financial Statements for additional
information regarding debt.
(2) Represents interest on debt. Refer to Note 8 – Debt in the Consolidated Financial Statements for additional information.
(3) Refer to Note 5 – Land, Buildings, Equipment and Software, Net in the Consolidated Financial Statements for additional information.
40
(4) Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with
respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not
have, nor do we anticipate, material loss contracts.
Pension Benefit Plans
We sponsor defined benefit pension plans that require periodic cash contributions. Our 2017 cash contributions for
these plans were $8 million. In 2018, based on current actuarial calculations, we expect to make contributions of
approximately $8 million to our worldwide defined benefit pension plans.
Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors,
including the investment performance of plan assets and discount rates as well as potential legislative and plan
changes. At December 31, 2017, the unfunded and underfunded balances of our U.S. and non-U.S. defined benefit
pension plans were $40 million and $19 million, respectively.
Refer to Note 11 – Employee Benefit Plans in the Consolidated Financial Statements for additional information
regarding contributions to our defined benefit pension and post-retirement plans.
Other Contingencies and Commitments
As more fully discussed in Note 13 – Contingencies and Litigation in the Consolidated Financial Statements, we are
involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental
entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the
Employee Retirement Income Security Act (ERISA); and other laws and regulations. In addition, guarantees,
indemnifications and claims may arise during the ordinary course of business from relationships with suppliers,
customers and non-consolidated affiliates. Nonperformance under a contract including a guarantee, indemnification
or claim could trigger an obligation of the Company.
We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is
deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in
our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should
any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a
material adverse effect on our results of operations, cash flows and financial position in the period or periods in
which such change in determination, judgment or settlement occurs.
Off-Balance Sheet Arrangements
As of December 31, 2017, we do not believe we have any off-balance sheet arrangements that have, or are
reasonably likely to have, a material current or future effect on financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
In addition, refer to the preceding table for the Company's contractual cash obligations and other commercial
commitments and Note 13 – Contingencies and Litigation in the Consolidated Financial Statements for additional
information regarding contingencies, guarantees, indemnifications and warranty liabilities.
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 results using the non-GAAP measures described below.
Conduent Inc. 2017 Annual Report 41
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 the factors
management uses in planning for and forecasting future periods. Compensation of our executives is based in part on
the performance of our business based on these non-GAAP measures.
A reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated
and presented in accordance with U.S. GAAP are provided in the tables below.
These reconciliations also include the income tax effects of 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
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 Revenue, Adjusted Operating Income and Adjusted Operating Margin*
We make adjustments to Revenue and Pre-tax income (Loss) for the following items for the purpose of calculating
Adjusted Revenue, Adjusted Operating Income and Adjusted Operating Margin.
• Goodwill Impairment. Represents Goodwill Impairment charge of $935 million.
• Amortization of intangible assets. The amortization of intangible assets is driven by acquisition activity, which can
vary in size, nature and timing as compared to other companies within our industry and from period to period.
• NY MMIS. Revenue and costs associated with the Company not fully completing the State of New York Health
Enterprise Platform project.
• Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment
charges as well as costs associated with our strategic transformation program.
• HE charge. Revenue and costs associated with not fully completing the Health Enterprise Medical Platform
projects in California and Montana.
• Separation costs. Separation costs are expenses incurred in connection with separation from Xerox Corporation
into a separate, independent, publicly traded company. These costs primarily relate to third-party investment
banking, accounting, legal, consulting and other similar types of services related to the separation transaction as
well as costs associated with the operational separation of the two companies.
•
Interest expense. Interest expense includes interest on long-term debt and amortization of debt issuance costs.
• Related party interest. Related party interest relates interest on related party Notes payable from Xerox prior to
the Separation.
• Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net, litigation
matters and all other (income) expenses, net.
(Gain) loss on sale of asset and businesses.
•
___________
* Applies to both consolidated and segment disclosures.
We provide our investors with adjusted operating income and adjusted operating margin information, as
supplemental information, because we believe it offers added insight, by itself and for comparability between periods,
by adjusting for certain non-cash items as well as certain other identified items which we do not believe are indicative
of our ongoing business and may also provide added insight on trends in our ongoing business.
42
Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate
We made adjustments to Income (Loss) before Income Taxes for the following items for the purpose of calculating
Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate:
• Goodwill Impairment.
• Amortization of intangible assets.
• NY MMIS.
• Restructuring and related costs.
• HE charge.
• Separation costs.
•
(Gain) loss on sale of asset and businesses.
• Other (income) expenses, net.
The Company provides adjusted net income and adjusted EPS financial measures to assist our investors in
evaluating our ongoing operating performance for the current reporting period and, where provided, over different
reporting periods, by adjusting for certain items which may be recurring or non-recurring and which in our view do not
necessarily reflect ongoing performance. We also internally use these measures to assess our operating
performance, both absolutely and in comparison to other companies, and in evaluating or making selected
compensation decisions.
Management believes that adjusted effective tax rate, provided as supplemental information, facilitates a comparison
by investors of our actual effective tax rate with an adjusted effective tax rate which reflects the impact of the items
which are excluded in providing adjusted net income, and may provide added insight into our underlying business
results and how effective tax rates impact our ongoing business.
Segment and Consolidated Adjusted EBITDA and EBITDA Margin
We use Adjusted EBITDA and Adjusted EBITDA Margin as additional way of assessing certain aspects of our
operations that, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP
financial measures, provide a more complete understanding of our on-going business. Adjusted EBITDA represents
income (loss) before interest, income taxes, depreciation and amortization adjusted for the following items:
• Goodwill Impairment.
• Restructuring and related costs.
• Separation costs.
• Other (income) expenses, net.
• NY MMIS.
• NY MMIS depreciation
• HE charge.
• HE charge depreciation.
•
(Gain) loss on sale of asset and businesses.
• Business transformation costs (Segment only).
Adjusted EBITDA and Adjusted EBITDA Margin are not intended to represent cash flows from operations, operating
income (loss) or net income (loss) as defined by U.S. GAAP as indicators of operating performances. Management
cautions that amounts presented in accordance with Conduent's definition of Adjusted EBITDA may not be
comparable to similar measures disclosed by other companies because not all companies calculate Adjusted
EBITDA in the same manner.
Key Financial Ratios
We make adjustments to Gross margin and SG&A as a percentage on Revenue:
• NY MMIS.
• HE charge.
Conduent Inc. 2017 Annual Report 43
The Company provides adjusted gross margin and adjusted SG&A as a percentage of revenue 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.
Non-GAAP Reconciliations
Net Income (Loss) and EPS Reconciliation:
(in millions; except per share amounts)
Net Income
(Loss)
EPS
Net Income
(Loss)
EPS
Net Income
(Loss)
EPS
GAAP as Reported from Continuing Operations
$
177
$
0.81
$
(983) $
(4.85) $
(336) $
(1.65)
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
Adjustments:
Goodwill impairment
Amortization of intangible assets
NY MMIS
Restructuring and related costs
HE charge
Separation costs
(Gain) loss on sale of asset and businesses
Other (income) expenses, net
Less: Income tax adjustments(1)
—
243
9
101
(8)
12
(42)
(18)
(288)
935
280
161
101
—
44
2
18
(335)
—
250
—
159
389
—
—
30
(318)
Adjusted Net Income (Loss) and EPS
$
186
$
0.85
$
223
$
1.06
$
174
$
0.83
(GAAP Shares in thousand)
Weighted average common shares outstanding
Stock options
Restricted stock and performance shares
Adjusted Weighted Average Shares Outstanding(2)
(Non-GAAP Shares in thousand)
Weighted average common shares outstanding
Stock options
Restricted stock and performance shares
8% Convertible preferred stock
Adjusted Weighted Average Shares Outstanding(2)
204,007
195
2,491
206,693
204,007
195
2,491
—
206,693
202,875
—
—
202,875
202,875
374
2,132
5,393
210,774
202,875
—
—
202,875
202,875
374
2,132
5,393
210,774
___________
(1) Reflects the income tax (expense) benefit of the adjustments. Refer to Effective Tax Rate reconciliation below for details.
(2) Average shares for the 2017 calculation of adjusted EPS excludes 5 million shares associated with our Series A convertible preferred stock and includes the
impact of the preferred stock dividend of $10 million for the year ended December 31, 2017. Average shares for the 2016 and 2015 calculation of adjusted EPS
includes 5 million shares associated with our Series A convertible preferred stock and excludes the impact of the preferred stock quarterly dividend. Shares
associated with our stock compensation plan are included in the calculation of adjusted EPS for all years presented.
Effective Tax Reconciliation:
(in millions)
GAAP as Reported from
Continuing Operations
Non-GAAP adjustments
Benefit from tax law changes
Termination of COLI plan
Other non-GAAP adjustments
Total non-GAAP adjustments(1)
Adjusted(2)
__________
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
Pre-Tax
Income
(loss)
Income Tax
(Benefit)
Expense
Effective
Tax Rate
Pre-Tax
Income
(loss)
Income Tax
(Benefit)
Expense
Effective
Tax Rate
Pre-Tax
Income
(loss)
Income Tax
(Benefit)
Expense
Effective
Tax Rate
$
(16) $
(193)
1,206.3% $
(1,227) $
(244)
19.9% $
(574) $
(238)
41.5%
—
—
297
297
281
$
198
(19)
109
288
95
$
—
—
1,541
1,541
33.8% $
314
$
—
—
335
335
91
—
—
828
828
254
$
—
—
318
318
80
31.5%
29.0% $
(1) Refer to Net Income (Loss) reconciliation for details of non-GAAP adjustments.
(2) The tax impact of Adjusted Pre-tax income (Loss) from continuing operations is calculated under the same accounting principles applied to the 'As Reported' pre-
tax income (loss), which employs an annual effective tax rate method to the results.
44
Revenue and Operating Income / Margin Reconciliations:
(in millions)
GAAP as Reported from Continuing
Operations
Adjustments:
Goodwill impairment
Amortization of intangible assets
NY MMIS
Restructuring and related costs
HE charge
Separation costs
Interest expense
Related party interest
(Gain) loss on sale of asset and
businesses
Other (income) expenses, net
Adjusted Revenue / Operating Income /
Margin
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
Pre-Tax
Income
(Loss)
Revenue
Margin
Pre-Tax
Income
(Loss)
Revenue
Margin
Pre-Tax
Income
(Loss)
Revenue
Margin
$
(16) $
6,022
(0.3)% $
(1,227) $
6,408
(19.1)% $
(574) $
6,662
(8.6)%
—
—
—
243
9
101
(8)
12
137
—
(42)
(18)
83
—
935
280
161
101
—
44
14
26
2
18
—
116
—
250
—
159
389
—
8
61
—
30
$
418
$
6,022
6.9 % $
354
$
6,491
5.5 % $
323
$
6,778
4.8 %
(in millions)
Three Months Ended March 31, 2017
Three Months Ended June 30, 2017
Pre-Tax
Income
(Loss)
Revenue
Margin
Pre-Tax
Income
(Loss)
Revenue
Margin
GAAP as Reported from Continuing Operations
$
(22) $
1,553
(1.4)% $
(11) $
1,496
(0.7)%
Adjustments:
Amortization of intangible assets
NY MMIS
Restructuring and related costs
HE charge
Separation costs
Interest expense
(Gain) loss on sale of asset and businesses
Other (income) expenses, net
61
8
18
(5)
5
36
—
(12)
61
1
36
—
1
34
(25)
(9)
Adjusted Operating Income / Margin
$
89
$
1,553
5.7 % $
88
$
1,496
5.9 %
(in millions)
Three Months Ended September 30, 2017
Three Months Ended December 31, 2017
Pre-Tax
Income
(Loss)
Revenue
Margin
Pre-Tax
Income
(Loss)
Revenue
Margin
GAAP as Reported from Continuing Operations
$
13
$
1,480
0.9% $
4
$
1,493
0.3%
Adjustments:
Amortization of intangible assets
NY MMIS
Restructuring and related costs
HE charge
Separation costs
Interest expense
(Gain) loss on sale of asset and businesses
Other (income) expenses, net
60
1
22
(3)
2
35
(16)
(3)
61
(1)
25
—
4
32
(1)
6
Adjusted Operating Income / Margin
$
111
$
1,480
7.5% $
130
$
1,493
8.7%
Conduent Inc. 2017 Annual Report 45
Segment and Consolidated Revenue / Profit / Adjusted EBITDA / Adjusted EBITDA Margin Reconciliations:
$
$
$
$
$
$
$
$
$
Years Ended December 31
2017
2016
2015
3,548
182
162
344
9.7 %
2,163
245
85
330
$
$
$
$
$
$
3,805
151
162
313
8.2 %
2,308
293
102
395
$
$
$
$
$
$
4,059
148
160
308
7.6 %
2,331
298
118
416
15.3 %
17.1 %
17.8 %
311
$
295
$
$
$
—
—
311
(10)
—
7
(3)
(1.0)%
9
(8)
—
—
$
$
83
—
378
(248)
(3)
69
(182)
(61.7)%
161
—
(52)
—
272
—
116
388
(509)
(3)
72
(440)
(161.8)%
—
389
—
(34)
(85)
$
(2)
$
(73)
$
(0.6)%
(19.3)%
(21.9)%
(in millions)
Commercial Industries
Segment revenue
Segment profit
Depreciation & amortization
Adjusted Segment EBITDA
Adjusted EBITDA Margin
Public Sector
Segment revenue
Segment profit
Depreciation & amortization
Adjusted Segment EBITDA
Adjusted EBITDA Margin
Other Segment
Segment revenue
NY MMIS charge
HE charge
Adjusted Segment Revenue
Segment (loss)
Business transformation costs
Depreciation & amortization
Segment EBITDA
Segment EBITDA Margin
NY MMIS charge
HE charge
NY MMIS depreciation
HE depreciation
Adjusted Segment EBITDA
Adjusted EBITDA Margin
46
Segment and Consolidated Revenue / Profit / Adjusted EBITDA / Adjusted EBITDA Margin Reconciliations
(Cont.):
(in millions)
Consolidated
Reconciliation to Adjusted Revenue
Revenue
NY MMIS adjustment
HE charge
Adjusted Revenue
Reconciliation to Adjusted EBITDA
Net Income (Loss) from Continuing Operations
Goodwill impairment
Restructuring and related costs
Separation costs
Interest Expense
Related Party Interest
Income tax benefits
(Gain) Loss on sale of assets and business
Other (income) expenses, net
Depreciation
Amortization
EBITDA
EBITDA Margin
EBITDA
Adjustments:
NY MMIS
NY MMIS depreciation
HE charge
HE charge depreciation
Adjusted EBITDA
Adjusted EBITDA Margin
$
$
$
$
$
Years Ended December 31
2017
2016
2015
6,022
$
6,408
$
6,662
$
$
$
$
—
—
6,022
177
—
101
12
137
—
(193)
(42)
(18)
125
372
671
11.1%
671
9
—
(8)
—
$
$
83
—
6,491
(983)
935
101
44
14
26
—
116
6,778
(336)
—
159
—
8
61
(244)
(238)
$
$
2
18
128
485
526
8.2%
526
161
(52)
—
—
—
30
126
474
284
4.3%
284
—
—
389
(34)
639
$
672
$
635
$
11.2%
9.8%
9.4%
Key Financial Ratios Reconciliation:
(in millions)
GAAP As Reported
Adjustments:
NY MMIS charge
HE charge
Adjusted
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
Gross Margin
SG&A as % of
Revenue
Gross Margin
SG&A as % of
Revenue
Gross Margin
SG&A as % of
Revenue
17.4%
10.2%
14.2%
10.7%
10.3%
10.5%
0.1
(0.1)
17.4%
—
—
2.3
—
(0.1)
—
5.5
10.2%
16.5%
10.6%
15.8%
—
(0.2)
10.3%
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk from foreign currency exchange rates, which could affect operating results, financial
position and cash flows. We manage our exposure to this market risk through our regular operating and financing
activities and, when appropriate, through the use of derivative financial instruments. We utilized derivative financial
instruments to hedge economic exposures, as well as reduce earnings and cash flow volatility resulting from shifts
in market rates. We also hedge the cost to fund material non-dollar entities by buying currencies periodically in
advance of the funding date. This is accounted for using derivative accounting.
Conduent Inc. 2017 Annual Report 47
Recent market events have not caused us to materially modify or change our financial risk management strategies
with respect to our exposures to foreign currency risk. Refer to Note 9 – Financial Instruments in the Consolidated
Financial Statements for additional discussion on our financial risk management.
Foreign Exchange Risk Management
Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency
exchange rates at December 31, 2017, the potential change in the fair value of foreign currency-denominated
assets and liabilities in each entity would not be significant because all material currency asset and liability
exposures were economically hedged as of December 31, 2017. A 10% appreciation or depreciation of the U.S.
Dollar against all currencies from the quoted foreign currency exchange rates at December 31, 2017 would have an
impact on our cumulative translation adjustment portion of equity of approximately $54 million. The net amount
invested in foreign subsidiaries and affiliates, primarily in the U.K. and Europe, and translated into U.S. Dollars
using the year-end exchange rates, was approximately $542 million at December 31, 2017.
Interest Rate Risk Management
The consolidated weighted-average interest rates related to our total debt for 2017 approximated 3.11% for Term A
Loan due 2021, 6.79% for Term B Loan due 2023, 10.91% for Senior Notes due 2024 and 4.39% for capital lease
obligations. As of December 31, 2017, $1,607 million of our total debt of $2,117 million carried variable interest
rates. The fair values of our fixed rate financial instruments are sensitive to changes in interest rates and at
December 31, 2017, a 10% increase in market interest rates would decrease the fair values of such financial
instruments by approximately $19 million. A 10% decrease in market interest rates would increase the fair values of
such financial instruments by approximately $52 million.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Conduent Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Conduent Incorporated and its subsidiaries as
of December 31, 2017 and 2016, and the related consolidated statements of income (loss), comprehensive income
(loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,
including the related notes and schedule of valuation and qualifying accounts for each of the three years in the
period ended December 31, 2017 appearing under Item 15(a)(2) (collectively referred to as the “consolidated
financial statements”). We also have audited the Company's internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement, whether due to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Conduent Inc. 2017 Annual Report 49
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 1, 2018
We have served as the Company’s auditor since 2016.
50
REPORTS OF MANAGEMENT
Management's Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this annual report.
The consolidated financial statements were prepared in conformity with accounting principles generally accepted in
the United States of America and include amounts based on management's best estimates and judgments.
Management believes the consolidated financial statements fairly reflect the form and substance of transactions
and that the financial statements fairly represent the Company's financial position and results of operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly
with the independent registered public accountants, PricewaterhouseCoopers LLP, the internal auditors and
representatives of management to review accounting, financial reporting, internal control and audit matters, as well
as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the
independent registered public accountants. The independent registered public accountants and internal auditors
have free access to the Audit Committee.
/s/ ASHOK VEMURI
/s/ BRIAN WEBB-WALSH
/s/ ALLAN COHEN
Chief Executive Officer
Chief Financial Officer
Chief Accounting Officer
Conduent Inc. 2017 Annual Report 51
CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except per-share data)
Revenue
Revenue
Former parent company revenue
Total Revenues
Cost of Services
Cost of services
Former parent company cost of services
Gross Margin
Operating Costs and Expenses
Research and development
Selling, general and administrative
Restructuring and related costs
Amortization of intangible assets
Goodwill impairment
Separation costs
Interest expense
Related party interest
(Gain) loss on sale of asset and businesses
Other (income) expenses, net
Total Operating Costs and Expenses
Loss Before Income Taxes
Income tax benefit
Income (Loss) From Continuing Operations
Income (loss) from discontinued operations, net of tax
Net Income (Loss)
Basic Earnings (Loss) per Share:
Continuing operations
Discontinued operations
Total Basic Earnings (Loss) per Share
Diluted Earnings (Loss) per Share:
Continuing operations
Discontinued operations
Total Diluted Earnings (Loss) per Share
Year Ended December 31,
2017
2016
2015
$
5,980
$
6,358
$
42
6,022
4,945
32
1,045
13
615
101
243
—
12
137
—
(42)
(18)
1,061
(16)
(193)
177
4
50
6,408
5,462
36
910
31
686
101
280
935
44
14
26
2
18
2,137
(1,227)
(244)
(983)
—
$
$
$
$
$
181
$
(983) $
0.82
0.02
0.84
0.81
0.02
0.83
$
$
$
$
(4.85) $
—
(4.85) $
(4.85) $
—
(4.85) $
6,609
53
6,662
5,937
40
685
52
699
159
250
—
—
8
61
—
30
1,259
(574)
(238)
(336)
(78)
(414)
(1.65)
(0.39)
(2.04)
(1.65)
(0.39)
(2.04)
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Net Income (Loss)
Other Comprehensive Income (Loss), Net(1)
Translation adjustments, net
Unrecognized gains, net
Changes in benefit plans, net
Other Comprehensive Income (Loss), Net
Comprehensive Income (Loss), Net
__________
Year Ended December 31,
2017
2016
2015
181
$
(983) $
(414)
35
2
(5)
32
(135)
—
(20)
(155)
(60)
1
7
(52)
213
$
(1,138) $
(466)
$
$
(1) Refer to Note 16 – Other Comprehensive Income (Loss) for gross components of Other Comprehensive Income (Loss), reclassification
adjustments out of Accumulated other comprehensive loss and related tax effects.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Conduent Inc. 2017 Annual Report 53
CONDUENT INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in millions, except share data in thousands)
Assets
Cash and cash equivalents
Accounts receivable, net
Net receivable from former parent company
Assets held for sale
Other current assets
Total current assets
Land, buildings and equipment, net
Intangible assets, net
Goodwill
Long-term receivable from former parent company
Other long-term assets
Total Assets
Liabilities and Equity
Short-term debt and current portion of long-term debt
Accounts payable
Accrued compensation and benefits costs
Unearned income
Net payable to former parent company
Liabilities held for sale
Other current liabilities
Total current liabilities
Long-term debt
Pension and other benefit liabilities
Deferred taxes
Other long-term liabilities
Total Liabilities
Contingencies (See Note 13)
Series A convertible preferred stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Equity
Total Liabilities and Equity
Shares of common stock issued and outstanding
Shares of series A convertible preferred stock issued and outstanding
December 31,
2017
2016
$
658
$
1,104
11
757
180
2,710
257
891
3,366
11
313
$
$
7,548
$
82
$
138
335
151
—
169
493
1,368
1,979
4
384
142
3,877
390
1,286
—
—
241
1,917
283
1,144
3,889
—
476
7,709
28
164
269
206
124
—
611
1,402
1,913
172
619
173
4,279
142
142
2
3,850
171
(494)
3,529
$
7,548
$
2
3,812
—
(526)
3,288
7,709
210,440
120
202,875
120
The accompanying notes are an integral part of these Consolidated Financial Statements.
54
CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash Flows from Operating Activities:
Net income (loss)
Adjustments required to reconcile net income to cash flows from operating activities:
Year Ended December 31,
2017
2016
2015
$
181
$
(983) $
Depreciation and amortization
Goodwill impairment
Deferred tax benefit
(Gain) loss from investments
Amortization of debt financing costs
Net (gain) loss on sales of businesses and assets
Stock-based compensation
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(Increase) decrease in other current and long-term assets
Increase (decrease) in accounts payable and accrued compensation
Increase (decrease) in restructuring liabilities
Increase (decrease) in other current and long-term liabilities
Net change in income tax assets and liabilities
Other operating, net
Net cash provided by operating activities
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment
Proceeds from sales of land, buildings and equipment
Cost of additions to internal use software
Proceeds (payments) from sale (purchase) of businesses
Proceeds from investments
Net proceeds (payments) on former parent company notes receivable
Other investing, net
Net cash provided by investing activities
Cash Flows from Financing Activities:
Proceeds on long term debt
Debt issuance fee payments
Payments on debt
Net payments to former parent company
Issuance of common stock related to employee stock plans
Dividends paid on preferred stock
Restricted cash - former parent company
Other financing
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of Year
Cash and Cash Equivalents at End of Year
497
—
(230)
(10)
9
(49)
40
31
(30)
(49)
34
(125)
11
(8)
302
(96)
33
(36)
56
117
—
—
74
306
(8)
(241)
(161)
(5)
(10)
15
(5)
(109)
1
268
390
658
$
613
935
(160)
(7)
—
2
23
(23)
(83)
(60)
27
(210)
39
(5)
108
(149)
—
(39)
(54)
11
248
(1)
16
1,969
(67)
(32)
(1,720)
—
—
(18)
—
132
(6)
250
140
390
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
(414)
600
—
(115)
—
—
100
19
243
(86)
22
140
228
(236)
(8)
493
(159)
1
(27)
742
—
(37)
2
522
28
—
(293)
(763)
—
—
—
5
(1,023)
(11)
(19)
159
140
Conduent Inc. 2017 Annual Report 55
CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
AOCL(1)
Former Parent
Company
Investment
Conduent
Shareholders’
Equity
Balance at December 31, 2014 $
— $
— $
— $
(129) $
5,540
$
Comprehensive loss, net
Net transfers to former parent
—
—
—
—
—
—
Balance at December 31, 2015 $
— $
— $
— $
Comprehensive loss, net
Series A Preferred stock
transfer
Capitalization of Company
Net transfers from former parent
Balance at December 31, 2016 $
Comprehensive income, net
Cash dividends declared-
preferred(2)
Stock option and incentive
plans, net
Balance at December 31, 2017 $
__________
—
—
2
—
2
—
—
—
2
—
—
3,812
—
—
—
—
—
$
3,812
$
— $
—
—
38
181
(10)
—
(52)
—
(181) $
(155)
—
—
(190)
(526) $
32
—
—
(414)
217
5,343
$
(983)
(142)
(3,814)
(404)
— $
—
—
—
5,411
(466)
217
5,162
(1,138)
(142)
—
(594)
3,288
213
(10)
38
3,529
$
3,850
$
171
$
(494) $
— $
(1) AOCL - Accumulated other comprehensive loss.
(2) Cash dividend on preferred stock of $20.00 per share for each quarter of 2017.
The accompanying notes are an integral part of these Consolidated Financial Statements.
56
CONDUENT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
References herein to “we,” “us,” “our,” the “Company” and “Conduent” refer to Conduent Incorporated and its
consolidated subsidiaries unless the context suggests otherwise.
Description of Business
We are a global enterprise and leading provider of business process services with expertise in transaction-intensive
processing, analytics and automation. We serve as a trusted business partner in both the front office and back office,
enabling personalized, seamless interactions on a massive scale that improve end user experience. We create value
for our commercial and government clients by applying our expertise, technology and innovation to help them drive
customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing
market dynamics. Our portfolio includes industry-focused service offerings in attractive growth markets such as
healthcare and transportation, as well as multi-industry service offerings such as transaction processing, customer
care and payment services.
Basis of Presentation
Our Consolidated Financial Statements included the historical basis of assets, liabilities, revenues and expenses of
the individual businesses of the Company, including joint ventures and partnerships over which the Company has a
controlling financial interest. We have prepared the Consolidated Financial Statements pursuant to the rules and
regulations of the SEC. Certain reclassifications have been made to prior years to conform to the current year
presentation. All intercompany transactions and balances have been eliminated.
We have also considered the impact of subsequent events on these consolidated financial statements.
Separation from Xerox Corporation
On December 31, 2016, Conduent spun-off from Xerox Corporation (Xerox), pursuant to the Separation and
Distribution Agreement (Separation). The Separation was completed by way of a pro rata distribution of Conduent
shares held by Xerox to Xerox’s shareholders. As a result, we operate as an independent, publicly traded company
on the New York Stock Exchange, under the ticker "CNDT".
Prior to December 31, 2016, the Financial Statements of the Company were derived from the financial statements
and accounting records of Xerox as if the Conduent operated on a standalone basis. Historically, the Company
consisted of the Business Process Outsourcing Operating segment within Xerox’s reportable Services segment and
did not operate as a separate, standalone company. Accordingly, Xerox performed certain corporate overhead
functions for the Company. Therefore, certain corporate costs, including compensation costs for corporate
employees supporting the Company, were allocated from Xerox. It is not practicable to estimate actual costs that
would have been incurred had the Company been a separate standalone company during the periods presented.
Allocations for management costs and corporate support services provided to the Company totaled $165 million and
$170 million for years ended December 31, 2016 and December 31, 2015, respectively. Management of the
Company believes the assumptions regarding the allocated expenses reasonably reflect the utilization of services
provided to or the benefit received by the Company during the periods prior to the Separation. The Consolidated
Financial Statements for the periods prior to the Separation do not necessarily include all the expenses that would
have been incurred or held by the Company had it been a separate, standalone company.
Conduent Inc. 2017 Annual Report 57
Use of Estimates
We prepared the Consolidated Financial Statements using financial information available at the time of preparation,
which requires us to make estimates and assumptions that affect the amounts reported. Our most significant
estimates pertain to the recognition of revenue for contracts based on the percentage of completion method of
accounting, intangible and long-lived assets, valuation of goodwill, contingencies and litigation, income taxes and
corporate allocations (for years ended December 31, 2016 and 2015). Our estimates are based on management's
best knowledge of current events, historical experience, and on various other assumptions that are believed to be
reasonable under the circumstances. As a result, actual results may be different from these estimates.
New Accounting Standards
Revenue Recognition: In May 2014, the Financial Accounting Standards Board (FASB) updated the accounting
guidance related to revenue recognition to clarify the principles for recognizing revenue and replaced all existing
revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an
entity should recognize revenue when promised goods or services are transferred to customers in an amount that
reflects the consideration that is expected to be received for those goods or services. The updated guidance also
requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers largely on a disaggregated basis. We have evaluated
the adoption impact of the updated accounting guidance on our consolidated financial statements and continue to
evaluate the impact on disclosures and internal controls. The new guidance will impact: (1) revenue associated with
postage, which will be recognized on a net basis versus the current gross treatment; (2) the timing of revenue
recognition associated with fixed fees for certain contracts with more than one performance obligation; and (3) the
timing of recognition of certain pricing discounts. We adopted this updated accounting guidance beginning January
1, 2018 using the modified retrospective method under which we will recognize a cumulative-effect adjustment of
approximately $20 million at the date of adoption (the expected impact to 2018 revenues is approximately $15
million), which excludes changes to our revenue associated with the reimbursement of postage. In addition, we
recognized approximately $150 million of postage revenue in 2017 that will be recognized on a net basis (for all
future periods) in Cost of services.
Leases: In February 2016, the FASB updated the accounting guidance related to leases requiring lessees to
recognize a right-of-use asset and a lease liability on the balance sheet for all leases except short term leases (lease
term of 12 months or less). The accounting for lessors is largely unchanged. This updated guidance is effective for
us beginning January 1, 2019. This guidance must be adopted using a modified retrospective approach through a
cumulative-effect adjustment for leases that exist or are entered into after the beginning of the earliest comparative
period in the financial statements. While we are currently evaluating the impact of the updated accounting guidance
on our consolidated financial statements; we do expect a material impact to the Company's Consolidated Balance
Sheets.
Cash Flows: In November 2016 the FASB issued updated accounting guidance regarding the presentation of
restricted cash in the statement of cash flows. Specifically, this update requires that restricted cash and restricted
cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. At December 31, 2017 and 2016, we had $9
million and $22 million of restricted cash, respectively, reported in other current assets. This update is effective for us
beginning January 1, 2018.
Business Combinations: In January 2017, the FASB issued clarifying accounting guidance related to the definition
of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. This update is effective for us beginning January 1, 2018, with early adoption
permitted. The amendment in this update will be applied prospectively. There will be no material impact from the
adoption of this clarifying accounting guidance on our consolidated financial statements.
58
Recently Adopted Accounting Standards
Goodwill: In January 2017, the FASB issued updated accounting guidance for simplifying the goodwill impairment
test. Under the new guidance, an entity does not have to calculate the implied fair value of goodwill at the impairment
testing date of its assets and liabilities as if those assets and liabilities had been acquired in a business combination.
Instead the goodwill impairment test will compare the fair value of a reporting unit with its carrying amount and
recognize as an impairment charge any amount by which the carrying amount exceeds the reporting unit's fair value,
not to exceed the total amount of goodwill allocated to the reporting unit. We have elected to early adopt this new
guidance for our goodwill impairment tests performed after January 1, 2017. Adoption did not have any effect on our
financial condition, results of operations or cash flows.
Summary of Accounting Policies
Revenue Recognition
We primarily generate revenue through services. Revenue is recognized when it is realized or realizable and earned.
We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement,
delivery has occurred, the transaction price is fixed or determinable and collectibility is reasonably assured. Delivery
does not occur until services have been provided to the customer, risk of loss has transferred to the customer, and
either customer acceptance has been obtained, customer acceptance provisions have lapsed or the company has
objective evidence that the criteria specified in the customer acceptance provisions have been satisfied. The
transaction price is not considered to be fixed or determinable until all contingencies related to the sale have been
resolved.
Outsourcing Services: Revenues associated with outsourcing services are generally recognized as services are
rendered, which is generally on the basis of the number of accounts or transactions processed. In service
arrangements where final acceptance of a system or solution by the customer is required, revenue is deferred until
all acceptance criteria have been met. Revenues on cost reimbursable contracts are recognized by applying an
estimated factor to costs as incurred, determined by the contract provisions and prior experience. Revenues on unit-
price contracts are recognized at the contractual selling prices as work is completed and accepted by the customer.
Revenues on time and material contracts are recognized at the contractual rates as the labor hours and direct
expenses are incurred.
Revenues on certain fixed price contracts where we provide system development and implementation services are
recognized over the contract term based on the percentage of development and implementation services that are
provided during the period compared with the total estimated development and implementation services to be
provided over the entire contract using the percentage-of-completion accounting methodology. These services
require that we perform significant, extensive and complex design, development, modification or implementation of
our customers' systems. Performance will often extend over long periods, and our right to receive future payment
depends on our future performance in accordance with the agreement.
The percentage-of-completion methodology involves recognizing probable and reasonably estimable revenue using
the percentage of services completed, on a current cumulative cost to an estimated total cost basis, using a
reasonably consistent profit margin over the period.
Revenues earned in excess of related billings are accrued, whereas billings in excess of revenues earned are
deferred until the related services are provided. We recognize revenues for non-refundable, upfront implementation
fees on a straight-line basis over the period between the initiation of the services through the end of the contract
term.
In connection with our services arrangements, we incur and capitalize costs to originate these long-term contracts
and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of the
arrangement. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual service
period of the arrangement to cost of services. From time to time, we also provide inducements to customers in
various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the
term of the contract.
Spending associated with customer-related deferred set-up/transition and inducement costs were as follows:
(in millions)
Year Ended December 31,
2017
2016
2015
Set-up/transition and inducement expenditures
$
55
$
63
$
65
Conduent Inc. 2017 Annual Report 59
The capitalized amount of customer contract costs were as follows:
(in millions)
Capitalized customer contract costs (1)
__________
Year Ended December 31,
2017
2016
126
137
(1) The balance at December 31, 2017 and 2016 are expected to be amortized over a weighted average period of approximately nine and eight
years, respectively.
Amortization expense for the next five years and thereafter is expected to be as follows (in millions):
2018
2019
2020
2021
2022
Thereafter
$
54
$
22
$
13
$
9
$
6
$
22
Long-lived assets used in the fulfillment of the arrangements are capitalized and depreciated over the shorter of their
useful life or the term of the contract if an asset is contract specific.
Multiple Element Arrangements: As described above, we enter into the following revenue arrangements that may
consist of multiple deliverables including contracts for multiple types of outsourcing services, as well as professional
and value-added services. For instance, we may contract for an implementation or development project and also
provide services to operate the system which we implement or develop over a period of time; or we may contract to
scan, manage and store customer documents.
In substantially all of our multiple element arrangements, we are able to separate the deliverables since we normally
will meet both of the following criteria:
•
•
The delivered item(s) has value to the customer on a stand-alone basis; and
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of
the undelivered item(s) is considered probable and substantially in our control.
Consideration in a multiple-element arrangement is allocated at the inception of the arrangement to all deliverables
on the basis of the relative selling price. When applying the relative selling price method, the selling price for each
deliverable is primarily determined based on vendor-specific objective evidence (VSOE), third-party evidence (TPE),
or our best estimate of the selling price. The above noted revenue policies are then applied to each separated
deliverable, as applicable.
Revenue Reporting: Revenue from sales of third-party vendor products or services is recorded net of costs when
the Company is acting as an agent between the customer and the vendor or supplier, or gross when the Company is
a principal to the transaction. Postage is generally recognized on a gross basis. Several factors are considered to
determine whether the company is an agent or principal, most notably whether the Company is the primary obligor to
the customer, or has inventory risk. Consideration is also given to whether the Company adds meaningful value to
the vendor’s product or service, was involved in the selection of the vendor’s product or service, has latitude in
establishing the sales price or has credit risk.
Revenue-based Taxes: We report revenue net of any revenue-based taxes assessed by governmental authorities
that are imposed on and concurrent with specific revenue-producing transactions. The primary revenue-based taxes
are sales tax and value-added tax (VAT).
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, including money market funds and investments with original
maturities of three months or less.
Receivable Sales
We had transferred certain portions of our receivable portfolios in 2016 and 2015 and accounted for those transfers
as sales based on meeting the criteria for derecognition. Losses on the sale of receivables depend, in part, on both
(a) the cash proceeds and (b) the net non-cash proceeds received or paid. When we have sold receivables, we
normally received beneficial interests in the transferred receivables from the purchasers as part of the proceeds.
Refer to Note 4 – Accounts Receivable, Net for more details on our receivable sales.
60
Assets/Liabilities Held for Sale
We classify assets as held for sale in the period when the following conditions are met: (i) management, having the
authority to approve the action, commits to a plan to sell the asset (disposal group); (ii) the asset (disposal group) is
available for immediate sale in its present condition subject only to terms that are usual and customary for sales of
such assets (disposal group); (iii) an active program to locate a buyer and other actions required to complete the plan
to sell the asset (disposal group) have been initiated; (iv) the sale of the asset (disposal group) is probable, and
transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year,
except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal
group) beyond one year; (v) the asset (disposal group) is being actively marketed for sale at a price that is
reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicate that it is unlikely
that significant changes to the plan will be made or that the plan will be withdrawn.
A long-lived asset (disposal group) that is classified as held for sale is initially measured at the lower of its carrying
value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in
which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset
(disposal group) until the date of sale.
The fair value of a long-lived asset (disposal group) less any costs to sell is assessed each reporting period it
remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value
of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at
the time it was initially classified as held for sale.
In the fourth quarter of 2017, Management approved for disposal through sale of certain assets and businesses. This
action was taken as a result of our strategic evaluation of these businesses. As of December 31, 2017, these
businesses qualified as assets held for sale. During the year ended December 31, 2017, we reclassified $757 million
to assets held for sale and $169 million to liabilities held for sale, as we have an active program to locate buyers for
these businesses and we expect these businesses to be sold within one year.
Refer to Note 3 – Assets/Liabilities Held for Sale for further discussion.
Land, Buildings and Equipment
Land, buildings and equipment are recorded at cost. Buildings and equipment are depreciated over their estimated
useful lives. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life.
Significant improvements are capitalized and maintenance and repairs are expensed when incurred.
Refer to Note 5 – Land, Buildings, Equipment and Software, Net for further discussion.
Software - Internal Use and Product
Internal Use: We capitalize direct costs associated with developing, purchasing or otherwise acquiring software for
internal use and amortize these costs on a straight-line basis over the expected useful life of the software, beginning
when the software is implemented (Internal Use Software). Costs incurred for upgrades and enhancements that will
not result in additional functionality are expensed as incurred. Amounts expended for Internal Use Software are
included in Cash Flows from Investing.
Product: We also capitalize certain costs related to the development of software solutions to be sold to our
customers upon reaching technological feasibility (Product Software). These costs are amortized on a straight-line
basis over the estimated economic life of the software. Amounts expended for Product Software are included in Cash
Flows from Operations. We perform periodic reviews to ensure that unamortized Product Software costs remain
recoverable from estimated future operating profits (net realizable value or NRV). Costs to support or service
licensed software are charged to Costs of outsourcing as incurred.
Refer to Note 5 – Land, Buildings, Equipment and Software, Net for further information.
Goodwill
For acquired businesses, the Company records the acquired assets and assumed liabilities based on their relative
fair values at the date of acquisitions (commonly referred to as the purchase price allocation). Goodwill represents
the excess of the purchase price paid in excess of the fair value of net tangible and intangible assets acquired. For
the Company’s business acquisitions, the purchase price is allocated to identifiable intangible assets separate from
goodwill if they are from contractual or other legal rights, or if they could be separated from the acquired business
and sold, transferred, licensed, rented or exchanged.
Conduent Inc. 2017 Annual Report 61
We test goodwill for impairment annually or more frequent if an event or change in circumstances indicate the asset
may be impaired. Impairment testing for goodwill is done at the reporting unit level. We determined the fair value of
our reporting units utilizing a combination of both an Income Approach and a Market Approach. The Income
Approach utilizes a discounted cash flow analysis based upon the forecasted future business results of our reporting
units. The Market Approach utilizes the guideline public company method. If the fair value of a reporting unit is less
than its carrying amount, an impairment charge would be recognized for amount by which the carrying amount
exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
Refer to Note 6 – Goodwill and Intangible Assets, Net for further information.
Other Intangible Assets
Other intangible assets primarily consist of assets acquired through business combinations, including installed
customer base and distribution network relationships, patents and trademarks. Other intangible assets are amortized
on a straight-line basis over their estimated economic lives unless impairment is identified.
Refer to Note 6 – Goodwill and Intangible Assets, Net for further information.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, including buildings, equipment, internal use software, product
software and other intangible assets, when events or changes in circumstances occur that indicate that the carrying
value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover
the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest
charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment
loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair
value is based on forecasted cash flows.
Pension Obligations
We sponsor various forms of defined benefit pension plans in several countries covering employees who meet
eligibility requirements.
Several statistical and other factors that attempt to anticipate future events are used in calculating the expense,
liability and asset values related to our pension plans. These factors include assumptions we make about the
discount rate, expected return on plan assets, the rate of future compensation increases and mortality rates.
The discount rate is used to present value our future anticipated benefit obligations. The discount rate reflects the
current rate at which benefit liabilities could be effectively settled considering the timing of expected payments for
plan participants. In estimating our discount rate, we consider rates of return on high-quality fixed-income
investments adjusted to eliminate the effects of call provisions, as well as the expected timing of pension and other
benefit payments.
The expected rate of return on plan assets is the long-term rate of return we expect to earn on plan assets. When
estimating the expected rate of return, in addition to assessing recent performance, we consider the historical returns
earned on plan assets, the rates of return expected in the future, and our investment strategy and asset mix with
respect to the plans’ funds. The expected rate of return on plan assets is reviewed annually and revised, as
necessary, to reflect changes in financial markets and our investment strategy.
Each year, the difference between the actual return on plan assets and the expected return on plan assets, as well
as increases or decreases in the benefit obligation as a result of changes in the discount rate and other actuarial
assumptions, are added to or subtracted from any cumulative actuarial gain or loss from prior years. This amount is
the net actuarial gain or loss recognized in Accumulated other comprehensive loss. We amortize net actuarial gains
and losses as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss
(excluding asset gains or losses that have not been recognized in market-related value) exceeds 10% of the greater
of the projected benefit obligation or the market-related value of plan assets (the "corridor" method). This
determination is made on a plan-by-plan basis. If amortization is required for a particular plan, we amortize the
applicable net gain or loss in excess of the 10% threshold on a straight-line basis in net periodic pension cost over
the remaining service period of the employees participating in that pension plan. In plans where substantially all
participants are inactive, the amortization period for the excess is the average remaining life expectancy of the plan
participants.
All changes are ultimately recognized as components of net periodic benefit cost, except to the extent they may be
offset by subsequent changes. At any point, changes that have been identified and quantified but not recognized as
components of net periodic benefit cost, are recognized in Accumulated other comprehensive loss, net of tax.
62
Refer to Note 11 – Employee Benefit Plans for further information regarding our Pension Benefit Obligations.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are based on
differences between U.S. GAAP reporting and tax bases of assets or liabilities and based on current tax laws,
regulations and rates.
The recognition of deferred tax assets requires an assessment to determine the realization of such assets.
Management establishes valuation allowances on deferred tax assets when it is determined “more-likely-than-not”
that some portion or all of the deferred tax assets may not be realized. Management considers positive and negative
evidence in evaluating the ability of the Company to realize its deferred tax assets, including its historical results and
forecasts of future ability to realize its deferred tax assets, including projected future taxable income, the expected
timing of the reversals of existing temporary differences and tax planning strategies.
We are subject to ongoing tax examinations and assessments in various jurisdictions. We have unrecognized tax
benefits for uncertain tax positions. We follow U.S. GAAP which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and
related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as
impact our operating results.
Refer to Note 12 – Income Taxes for further discussion.
Foreign Currency Translation and Re-measurement
The functional currency for most foreign operations is the local currency. Net assets are translated at current rates of
exchange and income, expense and cash flow items are translated at average exchange rates for the applicable
period. The translation adjustments are recorded in Accumulated other comprehensive loss.
The U.S. Dollar is used as the functional currency for certain foreign subsidiaries that conduct their business in U.S.
Dollars. A combination of current and historical exchange rates is used in re-measuring the local currency
transactions of these subsidiaries and the resulting exchange adjustments are recorded in Currency (gains) and
losses within other expenses, net together with other foreign currency re-measurements.
Note 2 – Segment Reporting
Our reportable segments correspond to how we organize and manage the business, as defined by our CEO who is
also our Chief Operating Decision Maker, and are aligned to the industries in which our clients operate. Our
segments involve the delivery of business process services and include service arrangements where we manage a
customer's business activity or process. We report our financial performance based on the two reportable
segments: Commercial Industries and Public Sector.
• Commercial Industries: Our Commercial Industries segment provides business process services and
customized solutions to clients in a variety of industries (other than healthcare). Across the Commercial
Industries segment, we deliver end-to-end business-to-business and business-to-customer services that
enable our clients to optimize their key processes. Our multi-industry competencies include customer care,
human resource management and finance and accounting services. These services are complemented by
innovative industry-specific services such as personalized product information for the automotive industry;
digitized source-to-pay solutions for clients in the manufacturing industry; customer experience and
marketing services for clients in the retail industry; mortgage and consumer loan processing for clients in
the financial services industry; and customized workforce learning solutions for clients in the aerospace
industry.
• Public Sector: Our Public Sector segment provides government-centric business process services to U.S.
federal, state and local and foreign governments for transportation, public assistance, program
administration, transaction processing and payment services.
Other includes our Government Health Enterprise Medicaid Platform business, where we are limiting our focus to
maintaining systems for our current clients; our Education Business inclusive of our Student Loan business, which
is in runoff; and inter-segment eliminations.
Conduent Inc. 2017 Annual Report 63
Selected financial information for our reportable segments was as follows:
(in millions)
2017
Revenue
Former parent company revenue
Inter-segment revenue
Total Segment Revenue
Depreciation and amortization
Segment profit (loss)
2016
Revenue
Former parent company revenue
Inter-segment revenue
Total Segment Revenue
Depreciation and amortization
Segment profit (loss)
2015
Revenue
Former parent company revenue
Inter-segment revenue
Total Segment Revenue
Depreciation and amortization
Segment profit (loss)
Year Ended December 31,
Commercial
Industries
Public Sector
Other
Total
$
$
$
$
$
$
$
$
$
3,486
$
2,160
$
334
$
5,980
42
20
3,548
162
182
$
$
—
3
2,163
85
245
$
$
—
(23)
311
7
(10)
$
$
42
—
6,022
254
417
3,729
$
2,300
$
329
$
6,358
50
26
3,805
162
151
$
$
1
7
$
$
2,308
102
293
(1)
(33)
295
69
(248)
$
$
50
—
6,408
333
196
3,970
$
2,324
$
315
$
6,609
54
35
4,059
160
148
$
$
—
7
2,331
118
298
$
$
(1)
(42)
272
72
(509)
$
$
53
—
6,662
350
(63)
The following is a reconciliation of segment profit (loss) profit to pre-tax (loss) income:
(in millions)
Year Ended December 31,
Segment Profit (Loss) Reconciliation to Pre-tax Loss
2017
2016
2015
Pre-tax Loss
Reconciling items:
Goodwill impairment
Amortization of intangible assets
Restructuring and related costs
Interest expense
Related party interest
Separation costs
(Gain) Loss on sale of asset and businesses
Business transformation costs
Other (income) expenses, net
Total Segment Profit (Loss)
$
(16) $
(1,227) $
(574)
—
243
101
137
—
12
(42)
—
(18)
935
280
101
14
26
44
2
3
18
$
417
$
196
$
—
250
159
8
61
—
—
3
30
(63)
64
Geographic area data is based upon the location of the subsidiary reporting the revenue or long-lived assets and is
as follows for each of the years ended December 31:
(in millions)
United States
Europe
Other areas
Total Revenues and Long-Lived Assets
________________
2017
Revenues
2016
Long-Lived Assets (1)
2015
2017
2016
$
$
5,303
$
5,686
$
5,849
$
289
$
538
181
547
175
616
197
42
54
6,022
$
6,408
$
6,662
$
385
$
325
47
64
436
(1) Long-lived assets are comprised of (i) Land, buildings and equipment, net, (ii) Internal use software, net and (iii) Product software, net.
In 2016, our methodology to disclose revenue on a geographic basis changed to reflect where the work is
contracted. All prior years have been adjusted to reflect this change in methodology.
Note 3 – Assets/Liabilities Held for Sale
As of December 31, 2017, there were certain businesses that qualified as assets/liabilities held for sale due to
plans for disposal through sale. These assets/liabilities held for sale include a mix of both Commercial
Industries and Public Sector that represent businesses in markets or with services that we did not see as
strategic or core. The following is a summary of the major categories of assets and liabilities that have been
reclassified to held for sale.
(in millions)
Accounts Receivable, net
Other current assets
Land, building and equipment, net
Product Software, net
Intangible assets, net
Goodwill
Other long-term assets
Total Assets held for sale
Accounts payable
Accrued compensation
Unearned revenue
Other current liabilities
Pension and other benefit obligations
Other long-term liabilities
Total Liabilities held for sale
Year Ended
December 31,
2017
160
41
6
3
7
537
3
757
9
20
30
53
50
7
169
$
$
$
$
Information Technology Outsourcing (ITO)
In 2015 we completed the sale of our ITO business to Atos, which represented a discontinued operation.
In February 2016, we reached an agreement with Atos on the final adjustments to the closing balance of net
assets sold as well as the settlement of certain indemnifications and recorded an additional pre-tax loss on the
disposal in 2015 of $24 million ($14 million after-tax). The additional loss was recorded in 2015 as the financial
statements had not yet been issued when the agreement was reached with Atos. We made a payment in 2016
to Atos of approximately $52 million, representing a $28 million adjustment to the final sales price as a result of
this agreement and a payment of $24 million due from closing. The payment is reflected in Investing cash
flows as an adjustment of the sales proceeds.
Conduent Inc. 2017 Annual Report 65
Summarized financial information for our Discontinued Operations is as follows:
(in millions)
Revenues
Income (loss) from operations
Loss on disposal
Net income (loss) before income taxes
Income tax expense
Loss from discontinued operations, net of tax
The following is a summary of selected financial information of the ITO business:
(in millions)
Expenses:
Operating lease rent expense
Defined contribution plans
Interest expense
Expenditures:
Cost of additions to land, buildings and equipment
Cost of additions to internal use software
Customer-related deferred set-up/transition and inducement costs
Note 4 – Accounts Receivable, Net
Accounts receivable, net was as follows:
(in millions)
Amounts billed or billable
Unbilled amounts
Allowance for doubtful accounts
Accounts Receivable, Net
Year Ended
December 31, 2015
$
$
$
$
619
104
(101)
3
(81)
(78)
Year Ended
December 31, 2015
$
$
130
4
2
41
1
10
December 31,
2017
2016
$
$
$
919
187
(2)
1,104
$
1,014
279
(7)
1,286
Unbilled amounts include amounts associated with percentage-of-completion accounting and other earned
revenues not currently billable due to contractual provisions. Amounts to be invoiced in subsequent months for
current services provided are included in amounts billable, and at December 31, 2017 and 2016 were approximately
$364 million and $429 million, respectively.
Accounts Receivable Sales Arrangements
Prior to 2017, we sold accounts receivables with payment due dates of less than 60 days.
Under most of the agreements, we continue to service the sold accounts receivable. When applicable, a servicing
liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability
were not material.
Accounts receivable sales were as follows:
(in millions)
Year Ended December 31,
2017
2016
2015
Accounts receivable sales
Estimated increase (decrease) to operating cash flows(1)
$
— $
—
250
$
(136)
325
58
__________
(1) Represents the difference between current and prior year fourth quarter receivable sales adjusted for the effects of: (i) deferred proceeds,
(ii) collections prior to the end of the year and (iii) currency.
66
Note 5 - Land, Buildings, Equipment and Software, Net
Land, buildings and equipment, net were as follows:
(in millions except as noted)
Land
Building and building equipment
Leasehold improvements
Office furniture and equipment
Other
Construction in progress
Subtotal
Accumulated depreciation
Estimated Useful
Lives
December 31,
(Years)
2017
2016
$
3
$
25 to 50
Varies
3 to 15
4 to 20
17
247
784
1
24
1,076
(819)
Land, Buildings and Equipment, Net
$
257
$
Depreciation expense and operating lease rent expense were as follows:
10
20
236
719
1
54
1,040
(757)
283
(in millions)
Depreciation expense
Operating lease rent expense
Year Ended December 31,
2017
2016
2015
$
$
125
375
$
$
130
378
$
$
126
389
We lease buildings and equipment, substantially all of which are accounted for as operating leases. Certain leases
were accounted for as capital leases and the remaining net book value of those assets, included in Land, Buildings
and Equipment, net were approximately $32 million and $42 million at December 31, 2017 and 2016, respectively.
Future minimum operating lease commitments that have initial or remaining non-cancelable lease terms in excess
of one year at December 31, 2017 were as follows (in millions):
2018
2019
2020
2021
2022
Thereafter
$
163
$
119
$
80
$
53
$
31
$
52
Internal Use and Product Software
Additions to Internal Use and Product Software as well as year-end balances for these assets were as follows:
(in millions)
Additions to:
Internal use software
Product software
(in millions)
Capitalized Costs, Net
Internal use software
Product software
Year Ended December 31,
2017
2016
2015
$
$
36
10
$
39
10
December 31,
2017
2016
$
106
$
22
27
19
115
38
Useful lives of our internal use and product software generally vary from one to seven years.
Conduent Inc. 2017 Annual Report 67
Included within product software at December 31, 2017 and 2016 were $2 million and $3 million, respectively, of
capitalized costs associated with software system platforms developed for use in certain of our government services
businesses.
During 2016 we determined that it was probable that we would not fully complete our NY MMIS project in its current
form. As a result of this decision an impairment charge of approximately $28 million was recorded in Cost of
services. We also recorded an additional impairment charge in 2016 related to the 2015 HE charge of
approximately $9 million in Restructuring and asset impairment. In 2015 we decided to discontinue certain future
implementations of these software system platforms, and recorded an impairment charge of $160 million ($14
million in Cost of services and $146 million in Restructuring and asset impairments).
Note 6 - Goodwill and Intangible Assets, Net
Goodwill
The following table presents the changes in the carrying amount of goodwill, by reportable segment:
(in millions)
Balance at December 31, 2015
Foreign currency translation
Acquisitions
Disposition
Impairment
Balance at December 31, 2016
Foreign currency translation
Dispositions
Assets held for sale
Balance at December 31, 2017
Impairment Charge
Commercial
Industries
Public Sector
Total
2,467
$
2,405
$
(24)
(2)
(2)
(935)
(20)
—
—
—
1,504
$
2,385
$
19
(19)
(105)
28
(14)
(432)
1,399
$
1,967
$
4,872
(44)
(2)
(2)
(935)
3,889
47
(33)
(537)
3,366
$
$
$
There was no impairment identified for the years ended December 31, 2017 and 2015. In 2016, due to the declining
trends and projections in the Commercial Industries reporting unit, we concluded that the fair value of our
Commercial Industries reporting unit was less than its carrying value. Accordingly, we recorded a pre-tax goodwill
impairment charge of $935 million during the fourth quarter of 2016, which is separately presented in the
Consolidated Statements of Income (Loss). There was no impairment identified for the Public Sector in 2016.
Based on our quantitative assessments, we concluded that the fair value of our Commercial Industries and Public
Sector reporting units exceeded their respective carrying values by 72% and 13%, respectively, at December 31,
2017. The most significant assumptions used in the goodwill analysis relate to a 3% long-term organic growth rate
for both the Commercial Industries and Public Sector segments as well as a 9.25% and a 8.75% discount rate for
the Commercial Industries and Public Sector segments, respectively.
Intangible Assets, Net
Net intangible assets were $891 million at December 31, 2017 of which $492 million and $399 million relate to our
Commercial Industries and Public Sector segments, respectively. Intangible assets were comprised of the following:
December 31, 2017
December 31, 2016
(in millions except years)
Weighted
Average
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Customer relationships
12 years
Technology, patents and
non-compete
Total Intangible Assets
4 years
$
$
2,907
$
2,022
$
885
$
2,924
$
1,788
$
1,136
11
5
6
11
3
8
2,918
$
2,027
$
891
$
2,935
$
1,791
$
1,144
68
Amortization expense related to intangible assets was $243 million, $280 million and $250 million for the years
ended December 31, 2017, 2016 and 2015, respectively. Amortization expense is expected to approximate $241
million in 2018, $241 million in 2019, $238 million in 2020, $134 million in 2021 and $12 million in 2022.
Note 7 – Restructuring Programs and Asset Impairment Charges
We engage in a series of restructuring programs related to downsizing our employee base, exiting certain activities,
outsourcing certain internal functions and engaging in other actions designed to reduce our cost structure and
improve productivity. Prior to 2017, these initiatives primarily consist of severance actions that impacted all major
geographies and segments. In 2017, the implementation of our strategic transformation program as well as various
productivity initiatives reduced our real estate footprint across all geographies and segments resulting in increased
lease cancellation and other related costs. Management continues to evaluate our business, therefore, in future
years, there may be additional provisions for new plan initiatives as well as changes in previously recorded
estimates as payments are made or actions are completed. Asset impairment charges were also incurred in
connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these
programs.
Costs associated with restructuring, including employee severance and lease termination costs are generally
recognized when it has been determined that a liability has been incurred, which is generally upon communication
to the affected employees or exit from the leased facility. In those geographies where we have either a formal
severance plan or a history of consistently providing severance benefits representing a substantive plan, we
recognize employee severance costs when they are both probable and reasonably estimable.
A summary of our restructuring program activity during the two years ended December 31, 2017 is as follows:
(in millions)
Balance at December 31, 2015
Restructuring provision
Reversals of prior accruals
Total Net Current Period Charges
Charges against reserve and currency
Balance at December 31, 2016
Restructuring provision
Reversals of prior accruals
Total Net Current Period Charges
Charges against reserve and currency
Liabilities held for sale
Balance at December 31, 2017
$
Severance and
Related Costs
Lease Cancellation
and Other Costs
Asset Impairments
Total
4
67
(13)
54
(43)
15
49
(8)
41
(42)
—
14
—
7
—
7
(2)
5
49
(3)
46
(17)
(4)
—
12
—
12
(11)
1
5
—
5
(6)
—
$
30
$
— $
4
86
(13)
73
(56)
21
103
(11)
92
(65)
(4)
44
We also recorded costs related to professional support services associated with the implementation of the strategic
transformation program of $9 million and $28 million during the years ended December 31, 2017 and 2016,
respectively.
The following table summarizes the total amount of costs incurred in connection with these restructuring programs
by segment:
(in millions)
Commercial Industries
Public Sector
Other(1)
Total Net Restructuring Charges
________________
Year Ended December 31,
2017
2016
2015
$
$
$
60
28
4
$
57
12
4
92
$
73
$
11
2
146
159
(1) Refer to Note 5 – Land, Buildings, Equipment and Software, Net for additional information regarding the asset impairment in 2016 and
2015.
Conduent Inc. 2017 Annual Report 69
Note 8 – Debt
We classify our debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest
put date available to the debt holders. We defer costs associated with debt issuance over the applicable term.
These costs are amortized as interest expense in our Consolidated Statements of Income (Loss).
Long-term debt was as follows:
(in millions)
Term loan A due 2021
Term loan B due 2023
Senior notes due 2024
Capital lease obligations
Principal Debt Balance
Debt issuance costs and unamortized discounts
Less: current maturities
Weighted Average
Interest Rates at
December 31, 2017(1)
2017
2016
December 31,
3.11% $
6.79%
10.91%
4.39%
$
732
842
510
33
$
2,117
$
(56)
(82)
Total Long-term Debt
____________
(1) Represents weighted average effective interest rate which includes the effect of discounts and premiums on issued debt.
1,979
$
$
694
750
510
43
1,997
(56)
(28)
1,913
Scheduled principal payments due on our long-term debt for the next five years and thereafter are as follows:
2018(1)
$
82
$
_____________
2019
72
$
2020
85
$
2021
560
$
2022
Thereafter
9
$
1,309
$
Total
2,117
(1) Quarterly long-term debt maturities for 2018 are $21 million, $21 million, $21 million and $19 million for the first, second, third and fourth
quarters, respectively.
Credit Facility
On December 7, 2016, we entered into a senior secured credit agreement (Credit Agreement) among the Company,
its subsidiaries: Conduent Business Services, LLC (CBS), Affiliated Computer Services International B.V. and
Conduent Finance, Inc. (CFI), the lenders party and JP Morgan Chase Bank, N.A., as the administrative agent. The
Credit Agreement contains senior secured credit facilities (Senior Credit Facilities) consisting of:
(i)
Senior Secured Term Loan A (Term Loan A) due 2021 with an aggregate principal amount of $700 million;
(ii) Senior Secured Term Loan B (Term Loan B) due 2023 with an aggregate principal amount of $850 million;
(iii) Senior Revolving Credit Facility (Revolving Credit Facility) due 2021 with an aggregate available amount of
$750 million including a sub-limit for up to $300 million available for the issuance of letters of credit.
Borrowings under the Term Loan A Facility and the Revolving Credit Facility bears interest at a rate equal to either
the sum of a base rate plus a margin ranging from 1.00% and 1.50% or the sum of a Eurocurrency rate plus an
applicable rate ranging from 2.00% to 2.50%, with either such margin varying according to the total net leverage
ratio of CBS. Borrowing under Term Loan B Facility bears interest at a rate equal to the sum of a base rate plus
2.0%, or the sum of a Eurocurrency rate plus 3.0%. CBS is required to pay a quarterly commitment fee under the
Revolving Credit Facility at a rate ranging from 0.35% to 0.40% per annum, with such rate varying according to the
total net leverage ratio of CBS and the actual daily unused portion of the commitments during the applicable
quarter. CBS is also required to pay a fee equal to the adjusted LIBOR on the aggregate face amount of
outstanding letters of credit under the Revolving Credit Facility.
The Credit Agreement permits us to incur incremental term loan borrowings and /or increase commitments under
the Revolving Credit Facility, subject to certain limitations and satisfaction of certain conditions, in an aggregate
amount not to exceed (i) $200 million plus, (ii) if the senior secured net leverage ratio of CBS and its subsidiaries
does not exceed 2.25 to 1.00 on a pro forma basis (without giving effect to any incurrence under clause (i) that is
incurred substantially simultaneously with amounts incurred under clause (ii)), an unlimited amount.
70
All obligations under the Senior Credit Facilities are unconditionally guaranteed by the Company, CBS, CFI and the
existing and future direct and indirect wholly owned domestic subsidiaries of CBS (subject to certain exceptions). All
obligations under the Senior Credit Facilities, and the guarantees of those obligations, are secured, subject to
certain exceptions, by substantially all of the assets of CBS and the guarantors under the Senior Credit Facilities
(other than the Company and CFI), including a first-priority pledge of all the capital stock of CBS and the
subsidiaries of CBS directly held by CBS or the guarantors (other than the Company and CFI) under the Senior
Credit Facilities (which pledge, in the case of any foreign subsidiary, will be limited to 65% of the capital stock of any
first-tier foreign subsidiary).
The Credit Facility contains certain customary affirmative and negative covenants, restrictions and events of default.
CBS is required to maintain a total net leverage ratio not to exceed 4.25 to 1.00 (a quarterly test) for each quarter
through September 30, 2018 and 3.75 to 1.00 for each quarter thereafter.
The net proceeds of the borrowings under the Term Loan A of $700 million (approximately $278 million borrowed in
Euros) and Term Loan B of $850 million, were used to purchase our international subsidiaries from Xerox
Corporation, to pay a distribution to Xerox Corporation and for working capital and other general corporate
purposes. At December 31, 2017 we had $1,574 million in outstanding borrowings under our Credit Agreement and
had utilized $12 million of our Revolving Credit Facility capacity to issue letters of credit. Discounts and debt
issuance costs of $47 million were deferred.
Senior Notes
On December 7, 2016, CBS and CFI, each a wholly owned subsidiary of the Company, issued $510 million Senior
Unsecured Notes due 2024 bearing interest at 10.5% (the "Senior Notes"). Interest is payable semi-annually,
beginning on June 15, 2017. Discounts and debt issuance costs of $17 million were deferred.
At the option of the Issuers, the Senior Notes are redeemable in whole or in part, at any time prior to December 15,
2020, at a price equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid
interest, if any, to, but excluding, the redemption date plus a “make-whole” premium. The Issuers may also redeem
the Senior Notes, in whole or in part, at any time on or after December 15, 2020, at the redemption prices specified
in the Indenture, plus accrued and unpaid interest, if any, to but excluding the redemption date. Additionally, at any
time prior to December 15, 2019, the Issuers may redeem up to 35% of the aggregate principal amount of the
Senior Notes with the net cash proceeds from certain equity offerings at a price equal to 110.50% of the principal
amount of the Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by the Company and each of
the existing and future domestic subsidiaries of CFI or CBS that guarantee the obligations under the Senior Credit
Facilities.
Proceeds from the issuance were used to fund a portion of the transfer of cash to Xerox Corporation in connection
with the spin-off.
Interest
Interest paid on our short-term and long-term debt amounted to $129 million, $5 million and $9 million for the years
ended December 31, 2017, 2016 and 2015, respectively.
Interest expense and interest income was as follows:
(in millions)
Interest expense
Interest income
Year Ended December 31,
2017
2016
2015
$
137
$
3
14
$
3
8
3
Conduent Inc. 2017 Annual Report 71
Note 9 – Financial Instruments
We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could
affect operating results, financial position and cash flows. We manage our exposure to these market risks through
our regular operating and financing activities and, when appropriate, through the use of derivative financial
instruments. These derivative financial instruments are utilized to hedge economic exposures, as well as to reduce
earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative
contracts to manage foreign currency exposures that we hedge. Our primary foreign currency market exposures
include the Philippine Peso, Indian Rupee and Mexican Peso. The fair market values of all our derivative contracts
change with fluctuations in interest rates or currency exchange rates and are designed so that any changes in their
values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held
solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of
our derivative activities are reflected as cash flows from operating activities.
We do not believe there is significant risk of loss in the event of non-performance by the counterparty associated with
our derivative instruments because these transactions are executed with a major financial institution. Further, our
policy is to deal only with counterparties having a minimum investment grade or better credit rating. Credit risk is
managed through the continuous monitoring of exposures to such counterparties.
Summary of Foreign Exchange Hedging Positions
At December 31, 2017, we had outstanding forward exchange with gross notional values of $160 million, which is
typical of the amounts that are normally outstanding at any point during the year. The impact of our hedging program
is not material to our balance sheet or income statement.
Approximately 68% of these contracts mature within three months, 12% in three to six months, 15% in six to twelve
months and 5% in greater than 12 months.
The following is a summary of the primary hedging positions and corresponding fair values as of December 31, 2017:
(in millions)
Currencies Hedged (Buy/Sell)
Philippine Peso/U.S. Dollar
Indian Rupee/U.S. Dollar
Mexican Peso/U.S. Dollar
All Other
Total Foreign Exchange Hedging
____________
Gross
Notional
Value
Fair Value
Asset
(Liability)(1)
$
$
$
62
68
9
21
160
$
—
1
—
—
1
(1) Represents the net receivable (payable) amount included in the Consolidated Balance Sheet at December 31, 2017.
Note 10 – Fair Value of Financial Assets and Liabilities
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. US. GAAP establishes a framework for
measuring that includes a hierarchy used to classify the inputs used in measuring fair value. The levels of the fair
value hierarchy are as follows:
Level 1: Fair value is determined using an unadjusted quoted price in an active market for identical assets or
liabilities. As at December 31, 2017 and 2016, the Company did not have any asset or liability that was measured
using Level 1 inputs.
Level 2: Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable,
either directly or indirectly. All the Company's assets and liabilities that were measured at fair value on a recurring
basis as at December 31, 2017 and 2016, were valued using Level 2 inputs.
Level 3: Fair value is estimated using unobservable inputs that are significant to the fair value of the assets. As at
December 31, 2017 and 2016, the Company did not have any asset or liability that was measured using Level 3
inputs.
72
The following table represents assets and liabilities fair value measured on a recurring basis. The basis for the
measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs.
(in millions)
Assets:
Foreign exchange contracts - forwards
Deferred compensation investments in cash surrender life insurance(1)
Deferred compensation investments in mutual funds(1)
Total
Liabilities:
Foreign exchange contracts - forwards
Deferred compensation plan liabilities(1)
Total
As of December 31,
2017
2016
$
$
$
$
2
—
—
2
$
$
1
$
99
100
$
1
99
10
110
3
113
116
(1)
In September 2017, the Company terminated the legacy deferred compensation plans (Plans) and the Company Owned Life Insurance
(COLI), which held the Plans’ investments. The Company will make payments to Plan participants of approximately $100 million in the
fourth quarter 2018.
Fair value for our deferred compensation plan investments in company-owned life insurance is reflected at cash
surrender value. Fair value for our deferred compensation plan investments in mutual funds is based on quoted
market prices for actively traded investments similar to those held by the plan. Fair value for deferred compensation
plan liabilities is based on the fair value of investments corresponding to employees’ investment selections, based
on quoted prices for similar assets in actively traded markets.
Summary of Other Financial Assets and Liabilities Fair Value Measured on a Nonrecurring Basis
The estimated fair values of our other financial assets and liabilities fair value measured on a nonrecurring basis
were as follows:
(in millions)
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Short-term debt
Long-term debt
December 31, 2017
December 31, 2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
658
$
658
$
390
$
9
1,104
82
1,979
9
1,104
82
2,070
22
1,286
28
1,913
390
22
1,286
28
1,933
The fair value amounts for Cash and cash equivalents, Restricted cash and Accounts receivable, net, approximate
carrying amounts due to the short maturities of these instruments. The fair value of Short and Long-term debt was
estimated based on the current rates offered to us for debt of similar maturities (Level 2). The difference between
the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to
retire all debt at such date.
The fair value of the Goodwill impairment charge of $935 million recorded in 2016, was estimated based on a
determination of the implied fair value of goodwill, leveraging discounted cash flows (level 3). Refer to Note 6 –
Goodwill and Intangible Assets, Net for additional information regarding this impairment.
Conduent Inc. 2017 Annual Report 73
Note 11 – Employee Benefit Plans
Our defined benefit pension plans are primarily associated with certain employees in our Human Resources and
Consulting business located in the U.S., Canada and the United Kingdom (U.K.). Prior to an amendment to freeze
future service benefits, these defined benefit pension plans had provided benefits for participating employees based
on years of service and average compensation for a specified period before retirement (see Plan Amendment below
for further information).
Certain of our employees participate in post-employment medical plans. These plans are not material to our results
of operations or financial position and are not included in the disclosures below.
December 31 is the measurement date for all of our defined benefit pension plans.
(in millions)
Change in Benefit Obligation:
Benefit obligation, January 1
Service cost
Interest cost
Actuarial loss
Currency exchange rate changes
Benefits paid/settlements
Benefit Obligation, December 31
Change in Plan Assets:
Fair value of plan assets, January 1
Actual return on plan assets
Employer contribution
Currency exchange rate changes
Benefits paid/settlements
Fair Value of Plan Assets, December 31
Net Funded Status at December 31(1)
Amounts Recognized in the Consolidated Balance
Sheets:
Asset held for sale
Accrued compensation and benefit costs
Liabilities held for sale
Pension and other benefit liabilities
Net Amounts Recognized
_______________
(1)
Includes under-funded and un-funded plans.
$
$
$
$
$
$
$
Pension Benefits
U.S. Plans
Non-U.S. Plans
2017
2016
2017
2016
$
89
—
4
10
—
(1)
102
$
74
—
3
13
—
(1)
89
$
$
164
$
2
5
5
14
(12)
178
$
52
$
47
$
140
$
8
3
—
(1)
62
$
(40) $
2
4
—
(1)
52
$
(37) $
— $
— $
—
(40)
—
—
—
(37)
13
5
14
(12)
160
$
(18) $
$
1
—
(11)
(8)
(40) $
(37) $
(18) $
157
2
5
27
(19)
(8)
164
150
15
2
(19)
(8)
140
(24)
—
(2)
—
(22)
(24)
Benefit plans pre-tax amounts recognized in Accumulated other comprehensive loss (AOCL) at December 31:
Pension Benefits
U.S. Plans
Non-U.S. Plans
2017
2016
2017
2016
$
38
$
31
$
42
$
42
(in millions)
Net actuarial loss
74
Aggregate information for pension plans with an Accumulated benefit obligation in excess of plan assets is
presented below:
(in millions)
Underfunded Plans:
U.S.
Non U.S.
Unfunded Plans:
Non U.S.
December 31, 2017
December 31, 2016
Projected
benefit
obligation
Accumulated
benefit
obligation
Fair value of
plan assets
Projected
benefit
obligation
Accumulated
benefit
obligation
Fair value of
plan assets
$
102
$
60
5
102
$
55
$
62
46
89
$
162
89
$
156
52
140
3
—
2
1
—
Total Underfunded and Unfunded Plans:
U.S.
Non U.S.
Total
$
$
102
$
65
167
$
102
$
58
$
62
46
160
$
108
$
89
$
164
253
$
89
$
157
246
$
52
140
192
Our pension plan assets and benefit obligations at December 31, 2017 were as follows:
(in millions)
U.S.
U.K.
Canada
Other
Total
Fair Value of
Pension Plan
Assets
Pension Benefit
Obligations
Net Funded
Status
Accumulated
Benefit Obligation
$
$
62
$
114
44
2
102
113
55
10
$
(40) $
1
(11)
(8)
222
$
280
$
(58) $
102
114
53
5
274
The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:
(in millions)
Components of Net Periodic
Benefit Costs:
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Net Periodic Benefit Cost
Other changes in plan assets and
benefit obligations recognized in
Other Comprehensive Income:
Net actuarial loss (gain)
Amortization of net actuarial loss
Total Recognized in Other
Comprehensive Income
Total Recognized in Net Periodic
Benefit Cost and Other
Comprehensive Income
2017
U.S. Plans
2016
2015
2017
2016
2015
Non-U.S. Plans
Year Ended December 31,
$
— $
— $
— $
4
(5)
1
—
7
(1)
6
3
(4)
—
(1)
13
—
13
3
(4)
—
(1)
4
—
4
$
2
5
(8)
1
—
(2)
(1)
(3)
$
2
5
(8)
1
—
18
(1)
17
3
6
(9)
2
2
(9)
(2)
(11)
$
6
$
12
$
3
$
(3) $
17
$
(9)
The net actuarial loss for the defined benefit pension plans that will be amortized from AOCL into net periodic
benefit cost over the next fiscal year is $2 million.
Conduent Inc. 2017 Annual Report 75
Plan Amendments
Pension Plan Freezes
In 2015, we amended several of our major defined benefit pension plans to freeze current benefits and eliminate
benefits accruals for future service, including our plans in the U.S., Canada and the U.K. The freeze of current
benefits is the primary driver of the reduction in pension service costs since 2015. In certain non-U.S. plans, we are
required to continue to consider salary increases and inflation in determining the benefit obligation related to prior
service.
Plan Assets
Current Allocation
As of the 2017 and 2016 measurement dates, the global pension plan assets were $222 million and $192 million,
respectively. These assets were invested among several asset classes.
The following tables presents the defined benefit plans assets measured at fair value and the basis for that
measurement:
(in millions)
Asset Class
U.S. Plans
Non-U.S. Plans
December 31, 2017
Level 1
Level 2
Level 3
Total
%
Level 1
Level 2
Level 3
Total
%
Cash and cash equivalents
$
1
$
— $
— $
Equity Securities
Fixed Income Securities
Other
Total Fair Value of Plan Assets
$
12
18
—
31
$
31
—
—
31
—
—
—
$
— $
1
43
18
—
62
2% $
69%
29%
—%
100% $
3
—
—
—
3
$
— $
— $
47
46
55
$
148
$
—
—
9
9
3
47
46
64
2%
29%
29%
40%
$
160
100%
U.S. Plans
Non-U.S. Plans
December 31, 2016
Level 1
Level 2
Level 3
Total
%
Level 1
Level 2
Level 3
Total
%
3
9
10
—
$
— $
— $
24
6
—
—
—
—
3
33
16
—
52
6% $
— $
— $
— $
63%
31%
—%
—
—
—
61
60
11
100% $
— $
132
$
—
—
8
8
—
61
60
19
—%
44%
43%
13%
$
22
$
30
$
— $
$
140
100%
(in millions)
Asset Class
Cash and cash equivalents
$
Equity Securities
Fixed Income Securities
Other
Total Fair Value of Plan
Assets
Valuation Method
Our primary Level 3 assets are Real Estate and Guaranteed Investment Contract investments which are individually
immaterial. The fair value of our real estate investment funds are based on the Net Asset Value (NAV) of our
ownership interest in the funds. NAV information is received from the investment advisers and is primarily derived
from third-party real estate appraisals for the properties owned. The fair value for our Guaranteed Investment
Contract investments have been determined based on the higher of the surrender value of the contract or the
present value of the cash flow of the related pension obligations. The valuation techniques and inputs for our Level
3 assets have been consistently applied for all periods presented.
Investment Strategy
The target asset allocations for our worldwide defined benefit pension plans were:
Equity investments
Fixed income investments
Real estate
Other
Total Investment Strategy
76
2017
Non-U.S.
28%
43%
4%
25%
100%
U.S.
55%
23%
—%
22%
100%
2016
Non-U.S.
41%
45%
4%
10%
100%
U.S.
55%
25%
—%
20%
100%
We employ a total return investment approach whereby a mix of equities and fixed income investments are used to
maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan
expenses by exceeding the interest growth in long-term plan liabilities. Risk tolerance is established through careful
consideration of plan liabilities, plan funded status and corporate financial condition. This consideration involves the
use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of
equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S.
stocks, as well as growth, value and small and large capitalizations. Other assets such as real estate, are used to
improve portfolio diversification. Derivatives may be used to hedge market exposure in an efficient and timely
manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying
investments. Investment risks and returns are measured and monitored on an ongoing basis through annual liability
measurements and quarterly investment portfolio reviews.
Contributions
In 2017, we made cash contributions of $8 million ($3 million U.S. and $5 million non-U.S.) to our defined benefit
pension plans.
In 2018, based on current actuarial calculations, we expect to make contributions of approximately $8 million ($8
million non-U.S. and none for U.S.) to our defined benefit pension plans.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid
during the following years:
(in millions)
2018
2019
2020
2021
2022
Years 2023-2026
Assumptions
$
Pension Benefits
U.S.
Non-U.S.
Total
$
2
2
2
3
3
19
$
4
5
5
5
5
30
6
7
7
8
8
49
Weighted-average assumptions used to determine benefit obligations at the plan measurement dates:
Discount rate
Rate of compensation increase
2017
Pension Benefits
2016
2015
U.S.
Non-U.S.
U.S.
Non-U.S.
U.S.
Non-U.S.
3.8%
n/a
2.9%
0.8%
4.2%
n/a
3.2%
1.0%
4.3%
n/a
3.9%
1.0%
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31:
2018
2017
2016
2015
U.S.
Non-U.S.
U.S.
Non-U.S.
U.S.
Non-U.S.
U.S.
Non-U.S.
Pension Benefits
Discount rate
Expected return on plan assets
Rate of compensation increase
3.8%
7.8%
n/a
3.1%
4.8%
0.8%
4.2%
7.8%
n/a
3.1%
4.8%
0.8%
4.3%
7.8%
n/a
3.9%
5.7%
1.0%
4.0%
7.8%
n/a
3.4%
5.8%
1.1%
Conduent Inc. 2017 Annual Report 77
Defined Contribution Plans
We have post-retirement savings and investment plans in several countries, including the U.S., U.K. and Canada. In
many instances, employees from those defined benefit pension plans that have been amended to freeze future service
accruals (see "Plan Amendments" for additional information) were transitioned to an enhanced defined contribution
plan. In these plans employees are allowed to contribute a portion of their salaries and bonuses to the plans, and we
match a portion of the employee contributions. We recorded charges related to our defined contribution plans of $35
million in 2017, $35 million in 2016 and $34 million in 2015.
Note 12 - Income Taxes
Prior to the spin-off from Xerox Corporation, Conduent’s operating results were included in various Xerox
consolidated U.S. federal and state income tax returns, as well as non-U.S. tax filings. For the purposes of the
Company’s Consolidated and Combined Financial Statements for periods prior to the spin-off, income tax expense
and deferred tax balances have been recorded as if the Company filed tax returns on a standalone basis, separate
from Xerox. The Separate Return Method applies the accounting guidance for income taxes to the standalone
financial statements as if the Company was a separate taxpayer and a standalone enterprise for fiscal 2016 and
prior.
On December 22, 2017, the Tax Reform was enacted. The effects of changes in tax rates and laws are recognized
in the period in which the new legislation is enacted. In the case of US federal income taxes, the enactment date is
the date the bill becomes law. The income tax effects of the Tax Reform have been initially accounted for on a
provisional basis pursuant to the SEC staff guidance on income taxes. Reasonable estimates for all material tax
effects of the Tax Reform (other than amounts related to accounting policy elections) have been provided and
adjustments to provisional amounts will be made in subsequent reporting periods as information becomes available
to complete provisional computations. With respect to this legislation, we recorded a provisional tax benefit of $198
million, which included a $210 million tax benefit due to the re-measurement of deferred tax assets and liabilities
resulting from the decrease in the corporate U.S. federal income tax rate from 35% to 21%, and $12 million as a
one-time-charge on the transition tax for Post-1986 undistributed and not previously taxed foreign earnings and
profits. The impacts of Tax Reform on our 2017 Consolidated Financial Statements are provisional, and could
change during 2018 as we further evaluate the impacts of the Tax Reform. The Company has provisionally adopted
the policy of treating the Global Intangible Low Taxed Income (GILTI) regime as a period cost. The GILTI regime
enacted as part of Tax Reform subjects certain post 2017 foreign earnings (i.e. amounts in excess of deemed return
on net tangible assets of non-US subsidiaries) to US tax. In January 2018, the FASB released guidance on the
accounting for tax on GILTI. The guidance indicates that either accounting for deferred taxes on GILTI or treating
GILTI as a period cost are both acceptable accounting elections.
(Loss) income before income taxes (pre-tax (loss) income) was as follows:
(in millions)
Domestic loss
Foreign income
Loss Before Income Taxes
Year Ended December 31,
2017
2016
2015
$
$
(91) $
(1,329) $
75
102
(16) $
(1,227) $
(654)
80
(574)
78
(Benefit) provision for income taxes were as follows:
(in millions)
Federal Income Taxes
Current
Deferred
Foreign Income Taxes
Current
Deferred
State Income Taxes
Current
Deferred
Total Benefit
Year Ended December 31,
2017
2016
2015
$
4
$
(233)
(116) $
(132)
25
(3)
8
6
31
(3)
1
(25)
$
(193) $
(244) $
(130)
(99)
24
6
(17)
(22)
(238)
A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate is as
follows:
U.S. federal statutory income tax rate
Nondeductible expenses(1)
Effect of tax law changes
Change in valuation allowance for deferred tax assets
State taxes, net of federal benefit
Audit and other tax return adjustments
Tax-exempt income, credits and incentives
Foreign rate differential adjusted for U.S. taxation of foreign profits(2)
Other
Effective Income Tax Rate
____________
Year Ended December 31,
2017
2016
2015
35.0 %
(155.9)%
1,282.4 %
(39.5)%
1.2 %
— %
38.9 %
47.7 %
(3.5)%
1,206.3 %
35.0 %
(19.0)%
— %
0.1 %
1.8 %
1.4 %
0.7 %
0.7 %
(0.8)%
19.9 %
35.0 %
(1.3)%
0.9 %
(1.0)%
4.2 %
0.1 %
0.7 %
2.4 %
0.5 %
41.5 %
In 2017, nondeductible expenses primarily related to the nondeductible portion of the goodwill and officers life insurance.
(1)
(2) The “U.S. taxation of foreign profits” represents the U.S. tax, net of foreign tax credits, associated with actual and deemed repatriations of
earnings from our non-U.S. subsidiaries, except for transition tax, which is reported on the line Effect of tax law changes.
On a consolidated basis, we paid/(received) a total of $29 million, $(123) million and $194 million in income taxes to
federal, foreign and state jurisdictions during the three years ended December 31, 2017, 2016 and 2015,
respectively.
Total income tax expense (benefit) was allocated as follows:
(in millions)
Pre-tax income
Discontinued operations(1)
Common shareholders' equity:
Changes in defined benefit plans
Stock option and incentive plans, net
Total Income Tax Benefit
_____________
Year Ended December 31,
2017
2016
2015
(193) $
(244) $
3
—
—
—
8
—
(190) $
(236) $
(238)
81
2
(6)
(161)
$
$
(1) Refer to Note 3 – Assets/Liabilities Held for Sale for additional information regarding discontinued operations.
Conduent Inc. 2017 Annual Report 79
Unrecognized Tax Benefits and Audit Resolutions
We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that
certain positions may not be fully sustained upon review by tax authorities. Each period we assess uncertain tax
positions for recognition, measurement and effective settlement. Benefits from uncertain tax positions are measured
at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Where we
have determined that our tax return filing position does not satisfy the more-likely-than-not recognition threshold, we
have recorded no tax benefits.
We are also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope
of our operations. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related
tax positions require judgment and can increase or decrease our effective tax rate, as well as impact our operating
results. The specific timing of when the resolution of each tax position will be reached is uncertain. As of
December 31, 2017, we do not believe that there are any positions for which it is reasonably possible that the total
amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)
Balance at January 1
Additions related to current year
Additions related to prior years positions
Reductions related to prior years positions
Settlements with taxing authorities(1)
Currency
Balance at December 31
_______________
(1) 2016 settlement results in $5 million cash paid.
2017
2016
2015
14
$
—
—
—
—
1
$
24
1
—
(5)
(5)
(1)
15
$
14
$
32
3
—
(10)
—
(1)
24
$
$
Included in the balances at December 31, 2017, 2016 and 2015 are $0, $0 and $8 million, respectively, of tax
positions that are highly certain of realization but for which there is uncertainty about the timing. Because of the
impact of deferred tax accounting, other than for the possible incurrence of interest and penalties, the disallowance
of these positions would not affect the annual effective tax rate. In addition, for other uncertain tax positions, we
maintain offsetting benefits from other jurisdictions of $16 million, $16 million and $14 million, at December 31,
2017, 2016 and 2015, respectively.
We recognized interest and penalties accrued on unrecognized tax benefits, as well as interest received from
favorable settlements within income tax expense. We had $6 million, $4 million and $14 million accrued for the
payment of interest and penalties associated with unrecognized tax benefits at December 31, 2017, 2016 and 2015,
respectively.
In the U.S., we are no longer subject to U.S. federal income tax examinations for years before 2005. With respect to
our major foreign jurisdictions, the years generally remain open back to 2006.
Deferred Income Taxes
The Company is in the position of having tax basis in excess of book basis in its U.S. investment in foreign
subsidiaries. Nonetheless, the Company is indefinitely reinvesting its foreign subsidiaries' undistributed earnings of
$253 million. For years after 2017, the Tax Reform does allow for certain earnings to be repatriated free from US
Federal taxes. However, the repatriation of earnings could give rise to additional tax liabilities.
80
The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows:
(in millions)
Deferred Tax Assets
Net operating losses
Operating reserves, accruals and deferrals
Deferred compensation
Pension
Other
Subtotal
Valuation allowance
Total
Unearned income
Intangibles and goodwill
Depreciation
Other
Total
Total Deferred Taxes, Net
Deferred Tax Liabilities
December 31,
2017
2016
$
41
90
59
15
45
250
(35)
215
$
$
134
413
10
25
582
$
42
155
101
18
44
360
(24)
336
217
680
15
29
941
(367) $
(605)
$
$
$
$
$
The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a
valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not,
be realized in the future. The net change in the total valuation allowance for the years ended December 31, 2017
and 2016 was an increase of $11 million and a decrease of $14 million, respectively. The valuation allowance
relates primarily to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary
differences for which we have concluded it is more-likely-than-not that these items will not be realized in the
ordinary course of operations.
Although realization is not assured, we have concluded that it is more-likely-than-not that the deferred tax assets,
for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of
operations based on the available positive and negative evidence, including scheduling of deferred tax liabilities and
projected income from operating activities. The amount of the net deferred tax assets considered realizable,
however, could be reduced in the near term if actual future income or income tax rates are lower than estimated, or
if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary
differences.
At December 31, 2017, we had tax credit carryforwards of $27 million available to offset future income taxes which
will expire between 2018 and 2037 if not utilized. We also had net operating loss carryforwards for income tax
purposes of $422 million that will expire between 2018 and 2037, if not utilized; and $43 million available to offset
future taxable income indefinitely.
Conduent Inc. 2017 Annual Report 81
Note 13 – Contingencies and Litigation
As more fully discussed below, we are involved in a variety of claims, lawsuits, investigations and proceedings
concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property
law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws
and regulations. We determine whether an estimated loss from a contingency should be accrued by assessing
whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing
our litigation and regulatory matters using available information. We develop our views on estimated losses in
consultation with outside counsel handling our defense in these matters, which involves an analysis of potential
results, assuming a combination of litigation and settlement strategies. Should developments in any of these
matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a
material accrual, or should any of these matters result in a final adverse judgment or be settled for significant
amounts, this could have a material adverse effect on our results of operations, cash flows and financial position in
the period or periods in which such change in determination, judgment or settlement occurs. We believe that we
have recorded adequate provisions for any such matters as of December 31, 2017. Litigation is inherently
unpredictable, and it is not possible to predict the ultimate outcome of these matters and such outcome in any such
matter could be in excess of any amounts accrued and could be material to our results of operations, cash flows or
financial position in any reporting period.
Additionally, guarantees, indemnifications and claims arise during the ordinary course of business from relationships
with suppliers, customers and nonconsolidated affiliates when we undertake an obligation to guarantee the
performance of others if specified triggering events occur. Nonperformance under a contract could trigger an
obligation of the Company. These potential claims include actions based upon alleged exposures to products, real
estate, intellectual property such as patents, environmental matters and other indemnifications. The ultimate effect
on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the
final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to
results of operations in the period recognized, management does not anticipate they will have a material adverse
effect on the consolidated financial position or liquidity. As of December 31, 2017, we have accrued our estimate of
liability incurred under our indemnification arrangements and guarantees.
Litigation Against the Company
State of Texas v. Xerox Corporation, Xerox State Healthcare, LLC, and ACS State Healthcare, LLC: On May
9, 2014, the State of Texas, via the Texas Office of Attorney General (the “State”), filed a lawsuit in the 53rd Judicial
District Court of Travis County, Texas. The lawsuit alleges that Xerox Corporation, Xerox State Healthcare, LLC and
ACS State Healthcare (collectively, the "Xerox Defendants") violated the Texas Medicaid Fraud Prevention Act in
the administration of its contract with the Texas Department of Health and Human Services (“HHSC”). The State
alleges that the Xerox Defendants made false representations of material facts regarding the processes,
procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks
recovery of amounts paid for orthodontic treatment under the Texas Medicaid program for the period from
approximately 2004 to 2012, three times the amount of the payments made as a result of the alleged unlawful acts,
civil penalties, pre- and post-judgment interest and all costs and attorneys’ fees. The Xerox Defendants filed their
Answer in June, 2014 denying all allegations. A trial date is scheduled for November, 2018. During the first quarter
of 2018, the State notified the Xerox Defendants in the litigation discovery process that its claim is in excess of two
billion dollars based primarily on the assertion of treble damages and civil penalties per illegal act for almost two
hundred thousand purported illegal acts. The Xerox Defendants will forcefully contest this assertion and continue to
vigorously defend themselves in this matter. We are not able to determine or predict the ultimate outcome of this
proceeding or to estimate any reasonably possible loss or range of losses, if any, in excess of the thirty-eight million
dollars we have already accrued. In the course of litigation, we periodically engage in discussions with the State's
counsel for possible resolution of the matter. Should developments cause a change in our determination as to an
unfavorable outcome, or result in a final adverse judgment or settlement for a significant amount, there could be a
material adverse effect on our results of operations, cash flows and financial position in the period in which such
change in determination, judgment or settlement occurs.
82
Dennis Nasrawi v. Buck Consultants et al.: On October 8, 2009, plaintiffs filed a lawsuit in the Superior Court of
California, Stanislaus County, and on November 24, 2009, the case was removed to the U.S. Court for the Eastern
District of California, Fresno Division. Plaintiffs allege actuarial negligence against Buck Consultants, LLC (“Buck”),
a wholly-owned subsidiary of Conduent, for the use of faulty actuarial assumptions in connection with the 2007
actuarial valuation for the Stanislaus County Employees Retirement Association (“StanCERA”). Plaintiffs allege that
the employer contribution rate adopted by StanCERA based on Buck’s valuation was insufficient to fund the benefits
promised by the County. On July 13, 2012, the Court entered its ruling that the plaintiffs lacked standing to sue in a
representative capacity on behalf of all plan participants. The Court also ruled that plaintiffs had adequately pleaded
their claim that Buck allegedly aided and abetted StanCERA in breaching its fiduciary duty. Plaintiffs then filed their
Fifth Amended Complaint and added StanCERA to the litigation. Buck and StanCERA filed demurrers to the
amended complaint. On September 13, 2012, the Court sustained both demurrers with prejudice, completely
dismissing the matter and barring plaintiffs from refiling their claims. Plaintiffs appealed, and ultimately the California
Court of Appeals (Sixth District) reversed the trial court’s ruling and remanded the case back to the trial court. Buck
will continue to aggressively defend these lawsuits. We are not able to determine or predict the ultimate outcome of
this proceeding or reasonably provide an estimate or range of estimate of the possible outcome or loss, if any.
Conduent Business Services, LLC v. Cognizant Business Services, LLC: On April 12, 2017, Conduent Business
Services LLC (“Conduent”) filed a lawsuit against Cognizant Business Services Corporation (“Cognizant”) in the
Supreme Court of New York County, New York. The lawsuit relates to the Amended and Restated Master Outsourcing
Services Agreement effective as of October 24, 2012, and the service delivery contracts and work orders thereunder,
between Conduent and Cognizant, as amended and supplemented (the “Contract”). The Contract contains certain
minimum purchase obligations by Conduent through the date of expiration. The lawsuit alleges that Cognizant
committed multiple breaches of the Contract, including Cognizant’s failure to properly perform its obligations as
subcontractor to Conduent under Conduent’s contract with the New York Department of Health to provide a Medicaid
Management Information Systems (the “NY MMIS Contract”). In the lawsuit, Conduent seeks damages in excess of
one hundred fifty million dollars. During the first quarter of 2018, Conduent provided notice to Cognizant that it was
terminating the Contract for cause and will be recording in that period certain charges associated with the termination.
Cognizant has asserted counterclaims against Conduent in the lawsuit seeking damages in excess of twenty-two
million dollars. Conduent has responded to Cognizant’s counterclaims by denying the allegations. Conduent will
continue to vigorously defend itself against the counterclaims but we are not able to determine or predict the ultimate
outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome.
Other Matters:
On January 5, 2016, the Consumer Financial Protection Bureau (the "CFPB") notified Xerox Education Services,
Inc. (XES) that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise
(NORA) process, the CFPB’s Office of Enforcement is considering recommending that the CFPB take legal action
against XES, alleging that XES violated the Consumer Financial Protection Act’s prohibition of unfair
practices. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief
or other corrective action. The purpose of a NORA letter is to provide a party being investigated an opportunity to
present its position to the CFPB before an enforcement action is recommended or commenced. This notice stems
from an inquiry that commenced in 2014 when XES received and responded to a Civil Investigative Demand
containing a broad request for information. During this process, XES self-disclosed to the Department of Education
and the CFPB certain adjustments of which it had become aware that had not been timely made relating to its
servicing of a small percentage of third-party student loans under outsourcing arrangements for various financial
institutions. The CFPB and the Department of Education, as well as certain states' attorney general offices and
other regulatory agencies, began similar reviews. XES has cooperated and continues to fully cooperate with all
regulatory agencies, and XES has submitted its NORA response. We cannot provide assurance that the CFPB or
another party will not ultimately commence a legal action against XES in this matter nor are we able to predict the
likely outcome of the investigations into this matter or reasonably provide an estimate or range of estimate of
possible outcome or loss, if any. We could in future periods incur judgments or enter into settlements in connection
with this matter and there could be a material adverse effect on our results of operations, cash flows and financial
position in the period in which such change in judgment or settlement occurs.
Conduent Inc. 2017 Annual Report 83
Guarantees, Indemnifications and Warranty Liabilities
Indemnifications Provided as Part of Contracts and Agreements
Acquisitions/Divestitures:
We have indemnified, subject to certain deductibles and limits, the purchasers of businesses or divested assets for
the occurrence of specified events under certain of our divestiture agreements. In addition, we customarily agree to
hold the other party harmless against losses arising from a breach of representations and covenants, including such
matters as adequate title to assets sold, intellectual property rights, specified environmental matters and certain
income taxes arising prior to the date of acquisition. Where appropriate, an obligation for such indemnifications is
recorded as a liability at the time of the acquisition or divestiture. Since the obligated amounts of these types of
indemnifications are often not explicitly stated or are contingent on the occurrence of future events, the overall
maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than
obligations recorded as liabilities at the time of divestiture, we have not historically made significant payments for
these indemnifications. Additionally, under certain of our acquisition agreements, we have provided for additional
consideration to be paid to the sellers if established financial targets are achieved post-closing. We have recognized
liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of
acquisition. Contingent obligations related to indemnifications arising from our divestitures and contingent
consideration provided for by our acquisitions are not expected to be material to our financial position, results of
operations or cash flows.
Other Agreements:
We are also party to the following types of agreements pursuant to which we may be obligated to indemnify the
other party with respect to certain matters:
• Guarantees on behalf of our subsidiaries with respect to real estate leases. These lease guarantees may
remain in effect subsequent to the sale of the subsidiary.
• Agreements to indemnify various service providers, trustees and bank agents from any third-party claims
related to their performance on our behalf, with the exception of claims that result from the third-party's own
willful misconduct or gross negligence.
• Guarantees of our performance in certain services contracts to our customers and indirectly the performance of
third parties with whom we have subcontracted for their services. This includes indemnifications to customers
for losses that may be sustained as a result of our performance of services at a customer's location.
In each of these circumstances, our payment is conditioned on the other party making a claim pursuant to the
procedures specified in the particular contract and such procedures also typically allow us to challenge the other
party's claims. In the case of lease guarantees, we may contest the liabilities asserted under the lease. Further, our
obligations under these agreements and guarantees may be limited in terms of time and/or amount, and in some
instances, we may have recourse against third parties for certain payments we made.
Also in December 2017, a customer released our former parent company from a performance guarantee for a
service contract resulting in a release of escrow funds of $15 million to the Company.
Intellectual Property Indemnifications
We do not own most of the software that we use to run our business. Instead, we license this software from a small
number of primary vendors. We indemnify certain software providers against claims that may arise as a result of our
use or our subsidiaries', customers' or resellers' use of their software in our services and solutions. These
indemnities usually do not include limits on the claims, provided the claim is made pursuant to the procedures
required in the services contract.
84
Indemnification of Officers and Directors
Our corporate by-laws require that, except to the extent expressly prohibited by law, we must indemnify our officers
and directors against judgments, fines, penalties and amounts paid in settlement and reasonable expenses,
including attorneys' fees, incurred in connection with civil or criminal action or proceedings or any appeal, as it
relates to their services to our Company and our subsidiaries. Although the by-laws provide no limit on the amount
of indemnification, we may have recourse against our insurance carriers for certain payments made by us.
However, certain indemnification payments (such as those related to "clawback" provisions in certain compensation
arrangements) may not be covered under our directors' and officers' insurance coverage. We also indemnify certain
fiduciaries of our employee benefit plans for liabilities incurred in their service as fiduciary whether or not they are
officers of the Company. Finally, in connection with our acquisition of businesses, we may become contractually
obligated to indemnify certain former and current directors, officers and employees of those businesses in
accordance with pre-acquisition by-laws or indemnification agreements or applicable state law.
Other Contingencies
Certain contracts, primarily in our Public Sector segment, require us to provide a surety bond or a letter of credit as
a guarantee of performance. As of December 31, 2017, we had $576 million for outstanding surety and bid bonds
used to secure our performance of contractual obligations with our clients, and we had $256 million of outstanding
letters of credit issued to secure our performance of contractual obligations to our clients as well as other corporate
obligations.
In general, we would only be liable for the amount of these guarantees in the event of default in our performance of
our obligations under each contract. We believe we have sufficient capacity in the surety markets and liquidity from
our cash flow and our various credit arrangements (including our Credit Facility) to allow us to respond to future
requests for proposals that require such credit support.
We have service arrangements where we service third-party student loans in the Federal Family Education Loan
program (FFEL) on behalf of various financial institutions. We service these loans for investors under outsourcing
arrangements and do not acquire any servicing rights that are transferable by us to a third-party. At December 31,
2017, we serviced a FFEL portfolio of loans with an outstanding principal balance of approximately $5.2 billion.
Some servicing agreements contain provisions that, under certain circumstances, require us to purchase the loans
from the investor if the loan guaranty has been permanently terminated as a result of a loan default caused by our
servicing error. If defaults caused by us are cured during an initial period, any obligation we may have to purchase
these loans expires. Loans that we purchase may be subsequently cured, the guaranty reinstated and the loans
repackaged for sale to third parties. We evaluate our exposure under our purchase obligations on defaulted loans
and establish a reserve for potential losses. The reserve is evaluated periodically and adjusted based upon
management’s analysis of the historical performance of the defaulted loans. As of December 31, 2017, other current
liabilities include reserves of approximately $1 million, which we believe to be adequate. In addition to potential
purchase obligations arising from servicing errors, various laws and regulations applicable to student loan
borrowers could give rise to fines, penalties and other liabilities associated with loan servicing errors.
Note 14 - Preferred Stock
Series A Preferred Stock
In connection with the December 31, 2016 spin-off from Xerox Corporation, we issued 120 thousand shares of
Series A convertible perpetual preferred stock with an aggregate liquidation preference of $120 million and an initial
fair value of $142 million. The convertible preferred stock pays quarterly cash dividends at a rate of 8% per year
($9.6 million per year). Each share of convertible preferred stock is convertible at any time, at the option of the
holder, into 44.9438 shares of common stock for a total of 5,393 thousand shares (reflecting an initial conversion
price of approximately $22.250 per share of common stock), subject to customary anti-dilution adjustments.
Conduent Inc. 2017 Annual Report 85
If the closing price of our common stock exceeds 137% of the initial conversion price for 20 out of 30 trading days,
we have the right to cause any or all of the convertible preferred stock to be converted into shares of common stock
at the then applicable conversion rate. The convertible preferred stock is also convertible, at the option of the holder,
upon a change in control, at the applicable conversion rate plus an additional number of shares determined by
reference to the price paid for our common stock upon such change in control. In addition, upon the occurrence of
certain fundamental change events, including a change in control or the delisting of Conduent's common stock, the
holder of convertible preferred stock has the right to require us to redeem any or all of the convertible preferred
stock in cash at a redemption price per share equal to the liquidation preference and any accrued and unpaid
dividends to, but not including, the redemption date. As a result of the contingent redemption feature, the convertible
preferred stock is classified as temporary equity and reflected separately from permanent equity in the Consolidated
Balance Sheets.
Note 15 – Shareholders’ Equity
Preferred Stock
As of December 31, 2017, we had one class of preferred stock outstanding. See Note 14 – Preferred Stock for
further information. We are authorized to issue approximately 100 million shares of cumulative preferred stock
at $0.01 par value per share.
Common Stock
We have 1 billion authorized shares of common stock at $0.01 par value per share. At December 31, 2017, 15
million shares were reserved for issuance under our incentive compensation plans and 5.4 million shares were
reserved for conversion of the Series A convertible preferred stock.
Stock Compensation Plans
Certain of our employees participate in a long-term incentive plan. Our long-term incentive plan authorizes the
issuance of restricted stock units / shares (RSU), performance stock units / share (PSU) and non-qualified stock
options to employees. All awards for these plans prior to 2017, were made in Xerox stock and therefore converted
into Conduent stock effective upon the Separation. Using a formula designed to preserve the value of the award
immediately prior to the Separation, all of these awards will be settled and are reflected in Conduent's Consolidated
Statements of Stockholders' Equity. Stock-based compensation expense includes expense based on the awards
and terms previously granted to the employees.
Stock-based compensation expense was as follows:
(in millions)
Stock-based compensation expense, pre-tax
$
Income tax benefit recognized in earnings
2017
Year Ended December 31,
2016
2015
$
42
17
23
$
9
19
7
Restricted Stock Units / Shares Compensation expense is based upon the grant date market price. The
compensation expense is recorded over the vesting period, which is normally three years from the date of grant,
based on management's estimate of the number of shares expected to vest.
Performance Stock Units / Shares: The Company granted PSUs that vest contingent upon its achievement of
certain specified financial performance criteria over a three-year period. If the three-year actual results exceed the
stated targets, then the plan participants have the potential to earn additional shares of common stock, which
cannot exceed 100% of the original grant.
The fair value of PSUs is based upon the market price of Conduent's common stock on the date of the grant and
then converted to Conduent's common stock upon the Separation. Compensation expense is recognized over the
vesting period, which is normally three years from the date of grant, based on management's estimate of the
number of shares expected to vest. If the stated targets are not met, any recognized compensation cost would be
reversed.
Employee Stock Options: Stock options were issued by a former parent company and were converted to
Conduent's common stock upon the Separation. These options generally expire within the next two years. Other
than these options, Conduent has not issued any new stock options.
86
Summary of Stock-based Compensation Activity
(shares in thousands)
Shares
Restricted Stock Units / Shares
2017
2016
2015
Weighted
Average Grant
Date Fair
Value
Shares
Weighted
Average Grant
Date Fair
Value
Shares
Weighted
Average Grant
Date Fair
Value
Outstanding at January 1
1,961
$
Granted
Vested
Canceled
Impact of spin-off(1)
Outstanding at December 31
Performance Stock Units /
Shares
Outstanding at January 1
Granted
Vested
Canceled
Impact of spin-off(1)
Outstanding at December 31
_____________________________
1,988
(215)
(609)
—
3,125
4,926
$
3,933
(1,696)
(1,734)
—
5,429
13.99
16.75
19.98
15.88
n/a
16.29
13.99
16.76
19.67
17.46
n/a
16.55
782
$
2,602
(119)
(121)
(1,183)
1,961
7,522
$
1,850
—
(1,478)
(2,968)
4,926
11.70
9.61
9.43
10.55
n/a
13.99
11.57
9.35
—
11.96
n/a
13.99
3,422
$
260
(2,768)
(132)
—
782
5,771
$
3,583
(610)
(1,222)
—
7,522
8.47
11.86
7.83
9.52
n/a
11.70
11.68
10.68
7.88
11.36
n/a
11.57
(1) Stock-based compensation was converted from former parent stock into Conduent common stock at spin-off.
The Company issued 77 thousand Deferred Stock Units (DSU) to non-employee members of the Board of
Directors. These DSUs are fully vested and will be issued when the directors leave the Board.
The Company has 348 thousand stock options outstanding as of December 31, 2017 at strike prices ranging from
$10.15 to $11.38. These stock options are fully vested and exercisable.
The total unrecognized compensation cost related to non-vested stock-based awards at December 31, 2017 was as
follows (in millions):
Awards
Restricted Stock Units / Shares
Performance Stock Units / Shares
Total
Unrecognized
Compensation
Remaining Weighted-
Average Vesting Period
(Years)
$
$
27
30
57
The aggregate intrinsic value of outstanding RSUs and PSs awards was as follows (in millions):
Awards
Restricted Stock Units / Shares
Performance Stock Units / Shares
December 31, 2017
$
Information related to stock options outstanding and exercisable at December 31, 2017 was as follows:
(in millions)
Options
Outstanding
Exercisable
Aggregate intrinsic value
Weighted-average remaining contractual life (years)
$
6
$
1.3
1.9
1.6
50
88
6
1.3
Conduent Inc. 2017 Annual Report 87
The total intrinsic value and actual tax benefit realized for vested and exercised stock-based awards were as
follows:
(in millions)
December 31, 2017
December 31, 2016
December 31, 2015
Awards
Restricted Stock
Units / Shares
Performance Stock
Units / Shares
Stock Options
Total
Intrinsic
Value
Cash
Received
Tax
Benefit
Total
Intrinsic
Value
Cash
Received
Tax
Benefit
Total
Intrinsic
Value
Cash
Received
Tax
Benefit
$
3
$
— $
1
$
1
$
— $
— $
30
$
— $
11
25
3
—
6
10
1
—
3
—
9
—
1
7
14
—
19
2
5
Note 16 – Other Comprehensive Income (Loss)
Other Comprehensive Loss is comprised of the following:
(in millions)
Pre-tax
Net of Tax
Pre-tax
Net of Tax
Pre-tax
Net of Tax
Translation Adjustments Gains (Losses)
$
35
$
35
$
(135) $
(135) $
(60) $
(60)
Year Ended December 31,
2017
2016
2015
Unrealized Gains (Losses):
Changes in fair value of cash flow hedges
gains (losses)
Changes in cash flow hedges reclassed to
earnings(1)
Net Unrealized Gains (Losses)
Defined Benefit Plans Gains (Losses)
Net actuarial/prior service gains (losses)
Actuarial loss amortization/settlement(2)
Other gains (losses)(3)
Changes in Defined Benefit Plans Gains
(Losses)
Other Comprehensive Income (Loss)
_____________________________
1
2
3
(5)
2
(4)
(7)
1
1
2
(4)
2
(3)
(5)
(2)
2
—
(31)
1
3
(27)
(1)
1
—
(23)
1
2
(20)
(4)
(2)
5
1
5
2
2
9
3
1
4
2
1
7
$
31
$
32
$
(162) $
(155) $
(50) $
(52)
(1) Reclassified to Cost of sales - refer to Note 9 – Financial Instruments for additional information regarding our cash flow hedges.
(2) Reclassified to Total Net Periodic Benefit Cost - refer to Note 11 – Employee Benefit Plans for additional information.
(3) Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL.
Accumulated Other Comprehensive Loss (AOCL)
AOCL is comprised of the following:
(in millions)
Cumulative translation adjustments(1)
Other unrealized losses, net
Benefit plans net actuarial losses and prior service credits
Total Accumulated Other Comprehensive Loss
_____________________________
December 31,
2017
2016
2015
$
$
(437) $
(472) $
1
(58)
(1)
(53)
(494) $
(526) $
(147)
(1)
(33)
(181)
(1) 2016 includes $190 million of AOCL transferred from former parent as part of the spin-off.
88
Note 17 – Earnings per Share
We did not declare any common stock dividends in the periods presented.
The following table sets forth the computation of basic and diluted earnings per share of common stock:
(in millions, shares in thousands)
Basic Earnings (Loss) per Share:
Net income (loss) from continuing operations attributable to Conduent
Accrued dividends on preferred stock
Adjusted Net Income (Loss) From Continuing Operations Available to
Common Shareholders
Net income (loss) from discontinued operations attributable to Conduent
Adjusted Net Income (Loss) Available to Common Shareholders
Weighted-average common shares outstanding
Basic Earnings (Loss) per Share:
Continuing operations
Discontinued operations
Basic Earnings (Loss) per Share
Diluted Earnings (Loss) per Share:
Net income (loss) from continuing operations attributable to Conduent
Accrued dividends on preferred stock
Adjusted Net Income (Loss) From Continuing Operations Available to
Common Shareholders
Net income (loss) from discontinued operations attributable to Conduent
Adjusted Net Income (Loss) Available to Common Shareholders
Weighted-average common shares outstanding
Common shares issuable with respect to:
Stock options
Restricted stock and performance units / shares
Convertible preferred stock
Adjusted Weighted Average Common Shares Outstanding
Diluted Earnings (Loss) per Share:
Continuing operations
Discontinued operations
Diluted Earnings (Loss) per Share
Year Ended December 31,
2017
2016
2015
177
$
(10)
167
4
(983) $
—
(983)
—
171
$
(983) $
(336)
—
(336)
(78)
(414)
204,007
202,875
202,875
0.82
0.02
0.84
$
$
177
$
(10)
167
4
(4.85) $
—
(4.85) $
(983) $
—
(983)
—
171
$
(983) $
(1.65)
(0.39)
(2.04)
(336)
—
(336)
(78)
(414)
204,007
202,875
202,875
195
2,491
—
—
—
—
—
—
—
206,693
202,875
202,875
0.81
0.02
0.83
$
$
(4.85) $
—
(4.85) $
(1.65)
(0.39)
(2.04)
$
$
$
$
$
$
$
$
The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable
shares or shares that if included would have been anti-dilutive (shares in thousands):
Stock Options
Restricted stock and performance shares
Convertible preferred stock
Total Securities
—
2,568
5,393
7,961
857
5,719
5,393
11,969
—
—
—
—
Conduent Inc. 2017 Annual Report 89
Note 18 – Related Party Transactions and Former Parent Company Investment
Allocation of Corporate Expenses
The Consolidated Statements of Income (Loss), Consolidated Statements of Comprehensive Income (Loss) and
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 include an allocation of
general corporate expenses from Xerox, the Company's former parent. The financial information in these
Consolidated Financial Statements does not necessarily include all the expenses that would have been incurred or
held had we been a separate, standalone company and it is not practicable to estimate actual costs that would have
been incurred had we been a separate, standalone company during the periods presented. Management considers
these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided. Allocations
for management costs and corporate support services provided totaled $165 million and $170 million for the years
ended December 31, 2016 and 2015, respectively. These amounts include costs for corporate functions including,
but not limited to, senior management, legal, human resources, finance and accounting, treasury, information
technology and other shared services. Where possible, these costs were allocated based on direct usage, with the
remainder allocated on a basis of costs, headcount and/or other measures we have determined as reasonable.
(in millions)
Research and development
Selling, general and administrative
Total Allocated Corporate Expenses
Final Cash Allocation To Former Parent
Year Ended December 31,
2016
2015
$
$
25
$
140
165
$
43
127
170
In January 2017, in connection with the Separation, we paid Xerox $161 million for settlement of the management
and support services received.
The components of Net transfers to former parent and the reconciliation to the corresponding amount presented on
the Consolidated Statements of Cash Flows are as follows:
(in millions)
Year Ended December 31,
2016
2015
Cash pooling and general financing activities
$
(466) $
Corporate cost allocations
Income taxes
Divestitures and acquisitions, net
Capitalization of related party notes payable
Total net transfers (to) from former parent
Stock-based compensation
Capitalization of related party notes payable
Net payments on notes payable with former parent company
Other, net
165
(157)
54
—
(404)
(23)
—
(1,132)
(161)
Total Net payments to former parent company per Consolidated Statements of Cash Flows
$
(1,720) $
(396)
170
168
(742)
1,017
217
(19)
(1,017)
(91)
147
(763)
Related Party Notes Receivable/Payable
Certain operating units of the Company had various interest bearing notes under contractual agreements to and
from Xerox Corporation and other related parties. The purpose of these notes was to provide funds for certain
working capital or other capital and operating requirements of the business. Net interest expense on these notes
with related party companies was recorded net in Related Party Interest in the Consolidated Statements of Income
(Loss) and was $26 million and $61 million for the years ended December 31, 2016 and 2015, respectively. These
notes had fixed interest rates that ranged from 1% to 8%. The balances were settled as part of the Separation
transaction.
90
Related Party Revenue and Purchases
We provide various services to Xerox Corporation, including those related to human resources, accounting and
finance and customer care, which are reported as Related party revenue in the Consolidated Statements of Income
(Loss). The costs related to these services are reported as Related party cost of services in the Consolidated
Statements of Income (Loss).
We also leased equipment and received related services, supplies and parts, from Xerox and Xerox subsidiaries in
the amount of $21 million and $24 million, for the years ended December 31, 2016 and 2015, respectively. The
costs related to these services, supplies and parts are reported in Cost of services and Selling, administrative and
general expenses in the Consolidated Statements of Income (Loss).
Note 19 – Subsequent Events
In the first quarter of 2018, the Company will be moving the Health Enterprise business from the Other segment into
the Public Sector segment. In addition, the Company plans to move the divested businesses' historical results to
Other segment from both the Commercial Industries and the Public Sector segments.
See Note 13 – Contingencies and Litigation as it relates to the termination of the Cognizant agreement.
Conduent Inc. 2017 Annual Report 91
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(in millions, except per-share data)
2017
Revenues
Costs and Expenses
(Loss) Income before Income Taxes
Income tax (benefit) expense
(Loss) Income from Continuing Operations
Income from discontinued operations, net of tax
Net (Loss) Income
Basic Earnings (Loss) per Share(1):
Continuing operations
Discontinued operations
Total Basic (Loss) Earnings per Share:
Diluted Earnings (Loss) per Share(1):
Continuing operations
Discontinued operations
Total Diluted (Loss) Earnings per Share
2016
Revenues
Costs and Expenses
(Loss) Income before Income Taxes
Income tax (benefit) expense
(Loss) Income from Continuing Operations
Income (loss) from discontinued operations, net of tax
Net (Loss) Income
Basic Earnings (Loss) per Share(1):
Continuing operations
Total Basic (Loss) Earnings per Share:
Diluted Earnings (Loss) per Share(1):
Continuing operations
Total Diluted (Loss) Earnings per Share
_________________
$
$
$
$
$
$
$
$
$
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
$
1,553
$
1,496
$
1,480
$
1,493
$
6,022
1,575
1,507
1,467
1,489
6,038
(16)
(193)
177
4
181
0.82
0.02
0.84
0.81
0.02
0.83
6,408
7,635
(1,227)
(244)
(983)
—
(22)
(12)
(10)
4
(11)
(7)
(4)
—
13
30
(17)
—
4
(204)
208
—
(6) $
(4) $
(17) $
208
$
(0.06) $
(0.03) $
(0.09) $
1.00
$
0.02
—
—
—
(0.04) $
(0.03) $
(0.09) $
1.00
$
(0.06) $
(0.03) $
(0.09) $
0.98
$
0.02
—
—
—
(0.04) $
(0.03) $
(0.09) $
0.98
$
1,685
$
1,613
$
1,596
$
1,514
$
1,739
1,647
1,594
(54)
(31)
(23)
—
(34)
(24)
(10)
—
(23) $
(10) $
2
1
1
—
1
(0.12) $
(0.05) $
(0.12) $
(0.05) $
0.01
0.01
(0.12) $
(0.05) $
(0.12) $
(0.05) $
0.01
0.01
2,655
(1,141)
(190)
(951)
—
$
$
$
$
$
(951) $
(983)
(4.69) $
(4.69) $
(4.85)
(4.85)
(4.69) $
(4.69) $
(4.85)
(4.85)
(1) The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per
share, because securities that are anti-dilutive in certain quarters may not be anti-dilutive on a full-year basis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
92
ITEM 9A. CONTROLS AND PROCEDURES
Management's Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this annual report.
The consolidated financial statements were prepared in conformity with accounting principles generally accepted in
the United States of America and include amounts based on management's best estimates and judgments.
Management believes the consolidated financial statements fairly reflect the form and substance of transactions
and that the financial statements fairly represent the Company's financial position and results of operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly
with the independent registered public accountants, PricewaterhouseCoopers LLP, the internal auditors and
representatives of management to review accounting, financial reporting, internal control and audit matters, as well
as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the
independent registered public accountants. The independent registered public accountants and internal auditors
have access to the Audit Committee.
Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of our principal executive officer and principal
financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of December 31, 2017, the end of the period covered by this report. Based on this evaluation, our principal
executive officer and principal financial officer have concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective to ensure that information we are required to disclose
in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms relating to Conduent Incorporated, including our consolidated subsidiaries, and was
accumulated and communicated to the Company’s management, including the principal executive officer and
principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934,
as amended. Under the supervision and with the participation of our management, including our principal executive
officer, principal financial and accounting officers, we have conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in "Internal Control - Integrated Framework" (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the above evaluation, management concluded that our internal control over financial reporting was
effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which
appears in Part II, Item 8 of this Form 10-K.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no
change identified in our internal control over financial reporting that occurred during the last fiscal quarter ended
December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None
Conduent Inc. 2017 Annual Report 93
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding directors is incorporated herein by reference to the section entitled “Proposal 1 - Election
of Directors” in our definitive Proxy Statement (2018 Proxy Statement) to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, for our 2018 Annual Meeting of Stockholders. The Proxy Statement
will be filed within 120 days after the end of our fiscal year ended December 31, 2017.
The information regarding compliance with Section 16(a) of the Securities and Exchange Act of 1934 is
incorporated herein by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance”
of our 2018 Proxy Statement.
The information regarding the Audit Committee, its members and the Audit Committee financial experts is
incorporated by reference herein from the subsection entitled “Committee Functions, Membership and Meetings” in
the section entitled “Proposal 1 - Election of Directors” in our 2018 Proxy Statement.
We have adopted a code of ethics applicable to our principal executive officer, principal financial officer and
principal accounting officer. The Finance Code of Conduct can be found on our website at: http://
www.conduent.com/investor and then clicking on Corporate Governance. Information concerning our Finance Code
of Conduct can be found under "Corporate Governance" in our 2018 Proxy Statement and is incorporated here by
reference.
Executive Officers of Conduent
The following is a list of the executive officers of Conduent, their current ages, their present positions and the year
appointed to their present positions.
Each officer is elected to hold office until the meeting of the Board of Directors held on the day of the next annual
meeting of shareholders, subject to the provisions of the By-Laws.
Name
Ashok Vemuri*
David Amoriell
Allan Cohen
Jeffrey Friedel
James Michael Peffer
Brian J. Webb-Walsh
Age
49
61
48
56
56
42
Present Position
Chief Executive Officer
Executive Vice President & President, Public Sector
Vice President & Chief Accounting Officer
Executive Vice President & Chief People Officer
Executive Vice President, General Counsel &
Secretary
Executive Vice President & Chief Financial Officer
* Member of Conduent Board of Directors
Year Appointed
to Present
Position
2017
Conduent
Officer
Since
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
Each of the officers named above has been an officer or an executive of Conduent or its subsidiaries for less than
five years.
Mr. Vemuri served as Chief Executive Officer of Xerox Business Services, LLC and an Executive Vice President of
Xerox Corporation since July 2016. Mr. Vemuri previously was President, Chief Executive Officer and a member of
the Board of Directors of IGATE Corporation. Prior to IGATE, Mr. Vemuri spent 14 years at Infosys Limited, a
multinational consulting and IT services company, in a variety of leadership and business development roles.
Mr. Amoriell served as the chief operating officer of the Public Sector Business Group for Xerox Services. He was
named to that position in June 2014 and appointed a corporate vice president of Xerox in February 2012. Prior to
that, Mr. Amoriell was the chief operating officer for the Government & Transportation Sector of Xerox Services.
Prior to joining Conduent, Mr. Cohen served as Senior Vice President and Controller of NBC Universal since 2011.
Mr Cohen also previously served as Vice President, Assistant Controller at Time Warner, Professional Accounting
Fellow in the Division of Corporate Finance at the Securities and Exchange Commission and Senior Manager at
PriceWaterhouseCoopers.
94
Prior to joining Conduent, Mr. Friedel served as Vice President and Head of the Office of Integrity and Compliance
at Infosys Limited from January 2016 to September 2016, a global leader in technology services and consulting,
where he oversaw SEC compliance, internal investigations, code of conduct, whistleblower, and anti-bribery and
export regulations. Mr. Friedel has also previously served as Senior Vice President and General Counsel at IGATE
Corporation from June 2014 to December 2015, an IT services and business process outsourcing company which
was acquired by CapGemini. Prior to June 2014, Mr. Friedel held a variety of leadership roles at Infosys Limited.
Mr. Peffer served as Vice President, General Counsel and Secretary for Xerox Corporation from August 2016 to
December 2016. Prior to this, Mr. Peffer served as Associate General Counsel of Xerox Corporation and Executive
Vice President of Xerox Business Services, LLC. since 2010. Prior to 2010, Mr. Peffer was Senior Vice President
and Deputy General Counsel of ACS from May 2009.
Mr. Webb-Walsh served as the Chief Financial Officer of Xerox Services since January 2016. Prior to this, Mr.
Webb-Walsh was Senior Vice President of Finance for the Government Healthcare Group and the Platform
Development and Systems Integration Group of Xerox Services. Mr. Webb-Walsh joined Xerox Corporation in 1997
and has held a variety of leadership positions.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the following captions under “Proposal 1 - Election of Directors” in our 2018 Proxy
Statement is incorporated herein by reference: “Compensation Discussion and Analysis”, “Summary Compensation
Table”, “Grants of Plan-Based Awards in 2017”, “Outstanding Equity Awards at 2017 Fiscal Year-End”, “Option
Exercises and Stock Vested in 2017”, “Pension Benefits for the 2017 Fiscal Year”, “Nonqualified Deferred
Compensation for the 2017 Fiscal Year”, “Potential Payments upon Termination or Change in Control”, “Summary of
Director Annual Compensation, "Compensation Committee Interlocks and Insider Participation” and “Compensation
Committee”. The information included under the heading “Compensation Committee Report” in our 2018 Proxy
Statement is incorporated herein by reference; however, this information shall not be deemed to be “soliciting
material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18
of the Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management and securities authorized
for issuance under equity compensation plans is incorporated herein by reference to the subsections entitled
“Ownership of Company Securities,” and “Equity Compensation Plan Information” under “Proposal 1 - Election of
Directors” in our 2018 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions is incorporated herein by reference to the
subsection entitled “Certain Relationships and Related Person Transactions” under “Proposal 1 - Election of
Directors” in our 2018 Proxy Statement. The information regarding director independence is incorporated herein by
reference to the subsections entitled “Corporate Governance” and “Director Independence” in the section entitled
“Proposal 1 - Election of Directors” in our 2018 Proxy Statement.
ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES
The information regarding principal auditor fees and services is incorporated herein by reference to the section
entitled “Proposal 2 - Ratification of Election of Independent Registered Public Accounting Firm” in our 2018 Proxy
Statement.
Conduent Inc. 2017 Annual Report 95
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) Index to Financial Statements and Financial Statement Schedule, incorporated by reference or filed as part
of this report:
Report of Independent Registered Public Accounting Firm including Report on Financial Statement
Schedule;
Consolidated Statements of Income (Loss) for each of the years in the three-year period ended
December 31, 2017;
Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year
period ended December 31, 2017;
Consolidated Balance Sheets as of December 31, 2017 and 2016;
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2017;
Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended
December 31, 2017;
Notes to the Consolidated Financial Statements;
Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 2017; and
All other schedules are omitted as they are not applicable, or the information required is included in the
financial statements or notes thereto.
(2) Supplementary Data:
Quarterly Results of Operations (unaudited).
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended December 31, 2017
(in millions)
Allowance for Losses:
2017 Accounts Receivable
2016 Accounts Receivable
2015 Accounts Receivable
Tax Valuation Allowance:
2017 Tax Valuation
2016 Tax Valuation
Balance
at beginning
of period
Additions
charged to
expense(1)
Amounts
(credited)
charged to
other income
statement
accounts (2)
Deductions
and other, net
of recoveries (3)(4)
Balance
at end
of period
$
7
6
6
24
38
$
(1) $
— $
(4) $
4
4
11
—
—
—
—
—
(3)
(4)
—
(14)
2
7
6
35
24
2015 Tax Valuation
__________
(1) Account Receivables: additions charged to expense represent bad debt provisions relate to estimated losses due to credit and
(2)
35
—
5
38
similar collectibility issues.
(2) Account Receivables: Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such
as customer accommodations and contract terminations.
(3) Account Receivables: Deductions and other, net of recoveries primarily relates to receivable write-offs, but also includes the
impact of foreign currency translation adjustments and recoveries of previously written off receivables.
(4) Tax Valuation: Reductions to tax valuation allowance are primarily related to certain net operating loss carryforwards, tax credit
carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will
not be realized in the ordinary course of operations.
96
(3) The exhibits listed below are filed or incorporated by reference are part of this Form 10-K.
Management contracts or compensatory plans or arrangements listed that are applicable to the executive
officers named in the Summary Compensation Table which appears in Registrant's 2018 Proxy Statement
or to our directors are preceded by an asterisk (*).
Exhibit No.
2.1
3.1
3.2
4.1
10.1(a)
10.1(b)
10.1(c)
10.1(d)
Separation and Distribution Agreement, dated as of December 30, 2016, by and between Xerox
Corporation and Conduent Incorporated.
Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated
January 3, 2017. (See SEC File Number 001-37817).
Restated Certificate of Incorporation of Registrant as of December 23, 2016.
Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated
December 23, 2016. (See SEC File Number 001-37817).
Amended and Restated By-Laws of Registrant as amended through December 31, 2016.
Incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K dated
December 23, 2016. (See SEC File Number 001-37817).
Indenture, dated as of December 7, 2016, among Conduent Finance, Inc., Xerox Business
Services, LLC, the Guarantors named therein and U.S. Bank National Association, as trustee.
Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated
December 9, 2016. (See SEC File Number 001-37817).
Credit Agreement, dated as of December 7, 2016, among Conduent Incorporated, Xerox
Business Services, LLC, Affiliated Computer Services International B.V., Conduent Finance,
Inc., the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as
Administrative Agent.
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
December 9, 2016. (See SEC File Number 001-37817).
Amendment No. 1 to Credit Agreement, dated as of April 1, 2017, among Conduent
Incorporated, Conduent Business Services, LLC (f/k/a Xerox Business Services, LLC), Affiliated
Computer Services International B.V., Conduent Finance, Inc., the Lenders from time to time
party thereto and JPMorgan Chase Bank, N.A. as Administrative Agent.
Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated
April 11, 2017. (See SEC File Number 001-37817).
Amendment No. 2 to Credit Agreement, dated as of October 10, 2017, among Conduent
Incorporated, Conduent Business Services, LLC (f/k/a Xerox Business Services, LLC), Affiliated
Computer Services International B.V., Conduent Finance, Inc., the Lenders from time to time
party thereto and JPMorgan Chase Bank, N.A. as Administrative Agent.
Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated
October 10, 2017. (See SEC File Number 001-37817).
First Incremental Agreement, dated as of January 3, 2017, among JPMorgan Chase Bank,
N.A., as Administrative Agent and Xerox Business Services, LLC.
Incorporated by reference to Exhibit 10.1(b) to the Registrant's Annual Report on Form 10-K
dated March 10, 2017, (See SEC File Number 001-37817).
10.3(a)
Transition Services Agreement, dated as of December 30, 2016, by and between Xerox
Corporation and Conduent Incorporated.
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
January 3, 2017. (See SEC File Number 001-37817).
10.3(b)
Tax Matters Agreement, dated as of December 30, 2016, by and between Xerox Corporation
and Conduent Incorporated.
Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated
January 3, 2017. (See SEC File Number 001-37817).
10.3(c)
Employee Matters Agreement, dated as of December 30, 2016, by and between Xerox
Corporation and Conduent Incorporated.
Incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated
January 3, 2017. (See SEC File Number 001-37817).
10.3(d)
Intellectual Property Agreement, dated as of December 30, 2016, by and between Xerox
Corporation and Conduent Incorporated.
Conduent Inc. 2017 Annual Report 97
Incorporated by reference to Exhibit 10.4 to Registrant’s Current Report on Form 8-K dated
January 3, 2017. (See SEC File Number 001-37817).
10.3(e)
Trademark License Agreement, dated as of December 30, 2016, by and between Xerox
Corporation and Conduent Incorporated.
10.4(a)
10.4(b)
Incorporated by reference to Exhibit 10.5 to Registrant’s Current Report on Form 8-K dated
January 3, 2017. (See SEC File Number 001-37817).
Joinder Agreement to Agreement, dated December 31, 2016, among Conduent Incorporated,
Xerox Corporation, Icahn Partners Master Fund LP, Icahn Partners LP, Icahn Onshore LP,
Icahn Offshore LP, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P., Icahn
Enterprises G.P. Inc., Beckton Corp., High River Limited Partnership, Hopper Investments LLC,
Barberry Corp., Jonathan Christodoro and Carl C. Icahn.
Incorporated by reference to Exhibit 10.6 to Registrant’s Current Report on Form 8-K dated
January 3, 2017. (See SEC File Number 001-37817).
Agreement, dated January 28, 2016, among Xerox Corporation, Icahn Partners Master Fund
LP, Icahn Partners LP, Icahn Onshore LP, Icahn Offshore LP, Icahn Capital LP, IPH GP LLC,
Icahn Enterprises Holdings L.P., Icahn Enterprises G.P. Inc., Beckton Corp., High River Limited
Partnership, Hopper Investments LLC, Barberry Corp., Jonathan Christodoro and Carl C. Icahn.
Incorporated by reference to Exhibit 10.6 to Registrant’s Amendment No. 1 to Form 10 dated
August 15, 2016. (See SEC File Number 001-37817).
10.5
Exchange Agreement dated October 27, 2016 by and among Darwin A. Deason, Conduent
Incorporated and Xerox Corporation.
Incorporated by reference to Exhibit 10.14 to Registrant’s Amendment No. 5 to Form 10 dated
October 28, 2016. (See SEC File Number 001-37817).
The management contracts or compensatory plans or arrangements listed below that are applicable to the
executive officers named in the Summary Compensation Table which will appear in the Registrant’s 2018
Proxy Statement or to our directors are preceded by an asterisk (*).
*10.6(a)(i)
Registrant’s Performance Incentive Plan dated as of December 15, 2016 (“PIP”).
Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-215361
dated December 29, 2016. (See SEC File Number 001-37817).
*10.6(a)(ii)
Form of Restricted Stock Award Agreement under the PIP.
Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
March 29, 2017. (See SEC File Number 001-37817).
*10.6(a)(iii)
Form of Performance Share Award Agreement (ELTIP) under the PIP.
Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated
March 29, 2017. (See SEC File Number 001-37817).
*10.6(a)(iv)
Form of Performance Share Award Agreement (SIG) under the PIP.
*10.6(a)(v)
Forms of Restricted Stock Unit Award Agreement 2017 under the PIP.
*10.6(a)(vi)
Forms of Performance Stock Unit Award Agreement 2017 under the PIP
Incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated
March 29, 2017. (See SEC File Number 001-37817).
*10.6(b)(i)
Registrant’s Equity Compensation Plan for Non-Employee Directors dated as of December 15,
2016 (“ECPNED”).
Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-215361
dated December 29, 2016. (See SEC File Number 001-37817).
*10.6(b)(ii)
Form of Agreement under the ECPNED.
Incorporated by reference to Exhibit 10.6(b)(ii) to the Registrant's Annual Report on From 10-K
dated March 10, 2017. (See SEC File Number 001-37817).
*10.6.(c)
Registrant's Executive Change in Control Severance Plan dated as of April 25, 2017.
Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
August 28, 2017. (See SEC File Number 001-37817).
98
*10.6(d)
Letter Agreement dated June 10, 2016 between Xerox Corporation and Ashok Vemuri
regarding compensation arrangements.
Incorporated by reference to Exhibit 99.2 to Xerox Corporation’s Current Report on Form 8-K
dated June 14, 2016. (See SEC File Number 001-04471).
*10.6(e)
Letter Agreement dated July 22, 2016 between Xerox Corporation and J. Michael Peffer
regarding compensation arrangements.
Incorporated by reference to Exhibit 10.12 to Registrant’s Amendment No. 4 to Form 10 dated
October 21, 2016. (See SEC File Number 001-37817).
*10.6(f)
Letter Agreement dated September 6, 2016 between Xerox Corporation and Brian Webb-Walsh
regarding compensation arrangements.
Incorporated by reference to Exhibit 10.13 to Registrant’s Amendment No. 4 to Form 10 dated
October 21, 2016. (See SEC File Number 001-37817).
*10.6(g)
Letter Agreement dated September 28, 2017 between Conduent Incorporated and Allan Cohen
regarding compensation arrangements.
21.1
23
31(a)
31(b)
32
101.CAL
101.DEF
101.INS
101.LAB
101.PRE
101.SCH
List of subsidiaries of Registrant.
Consent of PricewaterhouseCoopers LLP.
Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
Certification of CEO and CFO pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002.
XBRL Taxonomy Extension Calculation Linkbase.
XBRL Taxonomy Extension Definition Linkbase.
XBRL Instance Document.
XBRL Taxonomy Extension Label Linkbase.
XBRL Taxonomy Extension Presentation Linkbase.
XBRL Taxonomy Extension Schema Linkbase.
Conduent Inc. 2017 Annual Report 99
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONDUENT INCORPORATED
/s/ ASHOK VEMURI
Ashok Vemuri
Chief Executive Officer
March 1, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the date indicated.
Title
Chief Executive Officer and Director
Executive Vice President and Chief Financial Officer
Vice President and Chief Accounting Officer
Director
Director
Director
Director
Director
Director
Director and Chairman of the Board
Director
March 1, 2018
Signature
Principal Executive Officer:
/S/ ASHOK VEMURI
Ashok Vemuri
Principal Financial Officer:
/S/ BRIAN WEBB-WALSH
Brian Webb-Walsh
Principal Accounting Officer:
/S/ ALLAN COHEN
Allan Cohen
/S/ PAUL S. GALANT
Paul S. Galant
/S/ JOIE A. GREGOR
Joie A. Gregor
/s/ VINCENT J. INTRIERI
Vincent J. Intrieri
/S/ COURTNEY MATHER
Courtney Mather
/S/ MICHAEL NEVIN
Michael Nevin
/S/ MICHAEL A. NUTTER
Michael A. Nutter
/s/ WILLIAM G. PARRETT
William G. Parrett
/S/ VIRGINIA M. WILSON
Virginia M. Wilson
100
2
Letter to Shareholders
6 Our Value Chain
7 Our Transformation Roadmap
Overview of Services and Results
8
9
12
Non-GAAP Measures
Board of Directors
13 Officers and Investor Information
Form 10-K
Financial Highlights
GAAP revenue
Adjusted revenue1
Gross margin
Adjusted gross margin1
SG&A
Adjusted operating income1
Pre-tax loss
GAAP EPS
Adjusted net income1
Adjusted EPS1
EBITDA1
EBITDA margin1
Adjusted EBITDA1
(dollar values in millions, except EPS)
2017
2016
2015
Adjusted operating margin1
6.9%
5.5%
4.8%
$ 6,022
$ 6,408
$ 6,662
$ 6,022
$ 6,491
$ 6,778
17.4%
17.4%
14.2%
16.5%
10.3%
15.8%
$
$
615
418
$ 686
$ 699
$
354
$
323
$
(16)
$ (1,227)
$ 0.81
$ (4.85)
$
186
$ 0.85
$
671
223
1.06
$
$
$
$
$
$
(574)
(1.65)
174
$ 0.83
526
$
284
11.1%
8.2%
4.3%
$
672
$
635
$
639
Adjusted EBITDA margin1
11.2%
9.8%
9.4%
1 Please refer to the Non-GAAP Measures table beginning on page 9 for the reconciliation
of this financial measure that is not in compliance with Generally Accepted Accounting
Principles (GAAP).
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2017 Annual Report
Creating
Intelligent
Interactions
Conduent Incorporated
100 Campus Drive, Suite 200
Florham Park, NJ 07932
Conduent.com
© 2018 Conduent Inc. All rights reserved.
Conduent and Conduent Agile Star are
trademarks of Conduent Inc. in the United
States and/or other countries.
Paper from responsible sources.