Conduent Incorporated — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Unless noted, amounts are in U.S. dollars and millions. Conduent provides business-process services and technology solutions to commercial clients and governments. Its three reportable segments are Commercial Industries, Government Services and Transportation.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $4,467 | $5,393 |
| Net loss | $(1,934) | $(416) |
| Net loss per diluted share | $(9.29) | $(2.06) |
| Adjusted EBITDA | $494 | $640 |
| Adjusted EBITDA margin | 11.1% | 11.9% |
| Cash from operating activities | $132 | $283 |
| Cash and cash equivalents at year-end | $496 | $756 |
| Working capital at year-end | $409 | $767 |
| Total debt carrying value at year-end | $1,514 | $1,567 |
FY2019 goodwill impairment charges totaled approximately $1,952, a substantial non-cash contributor to the reported loss. The company reported $1,539 of principal debt, including finance leases; $50 was due within one year. Its $750 revolving credit facility had $83 utilized for letters of credit. Operating cash flow declined by $151 year over year; investing activities used $310 and financing activities used $85. Cash at year-end excludes $9 of restricted cash.
Segment results
| Segment | Revenue | Adjusted EBITDA | Margin |
|---|---|---|---|
| Commercial Industries | $2,385 | $542 | 22.7% |
| Government Services | $1,263 | $423 | 33.5% |
| Transportation | $781 | $157 | 20.1% |
Revenue by segment was lower in Commercial Industries and Government Services than in 2018, while Transportation revenue increased. Segment adjusted EBITDA declined in Commercial Industries and Government Services and improved in Transportation. Shared IT, infrastructure and corporate costs were $629 on an adjusted EBITDA basis.
Material changes versus FY2018
- Revenue fell $926, or 17%, reflecting divestitures, lost business, pricing and volume pressure, and currency effects; new-business ramps partly offset the declines.
- Adjusted EBITDA decreased $146, and its margin fell 0.8 percentage points to 11.1%.
- Renewal and new-business signings weakened: total contract value of signings was $3,226, down 41%. Renewal rates, excluding strategic decisions not to renew selected contracts, were 81% versus 95%; the filing attributes much of the decline to the California Medicaid contract loss.
- Cash from operations fell $151. Cash balances declined $260, while working capital decreased $358.
- Goodwill declined from $3,408 to $1,502 following impairment charges. Total assets fell from $6,680 to $4,514 and equity from $3,222 to $1,300.
- Conduent acquired Health Solution Plus for $90 in January 2019 and sold a portfolio of customer-care contracts in February 2019. The company also continued divesting non-core operations.
Outlook, management commentary, risks and unusual items
- Management described a strategic and operational review begun in Q3 2019 and a transformation focused on growth, service quality and efficiency. Actions included centralizing sales under a Chief Revenue Officer, modernizing IT and consolidating data centers, and reducing real estate and operating costs. The filing provides no specific numeric revenue or earnings guidance.
- The company recorded approximately $2.0 billion in goodwill impairment for 2019, including a $284 charge in Q1, approximately $1.1 billion in Q2 and a $512 charge for Government Services following further contract losses at year-end. The quarterly results table reports approximately $601 of impairment in Q4, reflecting the quarter’s total impairment charges and adjustments.
- In February 2019, Conduent agreed to pay Texas $236 to settle litigation; $118 was paid in 2019 and the remaining $118 in January 2020. The case was dismissed with prejudice. Other litigation and regulatory matters remain, with some outcomes not estimable from the filing.
- Operating cash flow was affected by $131 in payments for Texas and other litigation and lower adjusted EBITDA. Investing outflows included $90 for the acquisition and higher spending on IT modernization; capital additions to property and equipment and internal-use software totaled $215.
- Key risks include government funding and termination rights, contract losses and renewals, competitive pricing, execution and cost estimation, technology and data-center migration disruptions, cybersecurity and data-protection compliance, collection of receivables, indebtedness and potential goodwill or other asset impairment. The filing notes a significant October 2018 outage related to a data-center migration and continuing legacy vendor delivery challenges.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end; the independent auditor also opined that internal control was effective. The auditor identified goodwill impairment valuation as a critical audit matter.
- Conduent paid no common-stock dividends in 2019 and said it did not anticipate common dividends for the foreseeable future. Series A preferred stock carries an 8% annual cash dividend.
Important facts for investors to verify
- Whether contract retention, signings and revenue stabilize after the sharp FY2019 declines, particularly in Government Services and Commercial Industries.
- Whether the 2019 goodwill write-downs adequately reflect future contract performance, margins and reporting-unit assumptions.
- Progress, cost and service impact of IT modernization and data-center consolidation, including avoidance of further outages or client penalties.
- Near-term liquidity and debt service capacity, including the $118 Texas settlement payment made in January 2020 and scheduled debt maturities.
- Resolution and potential financial exposure from remaining litigation, including the Skyview dispute over approximately $23 of notes and the Cognizant proceedings.