Conduent Inc. — Q2 2019 Form 10-Q
Business context and period. Conduent provides business process services, analytics and automation to commercial and government clients. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2019 | Comparable period / context |
|---|---|---|
| Revenue | $1.112 billion | Down 20% from $1.387 billion |
| Net income (loss) | $(1.029) billion; $(4.94) per diluted share | Compared with $11 million income; $0.04 diluted EPS |
| Goodwill impairment | $1.067 billion | No charge in Q2 2018; six-month 2019 charge was $1.351 billion |
| Adjusted EBITDA | $114 million; 10.3% of revenue | Compared with $166 million; 12.0% margin |
| Operating cash flow | Not separately stated for Q2 | Six-month use of $234 million, versus $60 million provided |
| Cash and cash equivalents | $276 million at June 30 | $756 million at December 31, 2018 |
| Debt | $1.540 billion on the balance sheet | $52 million current and $1.488 billion long-term; principal debt balance was $1.568 billion |
For the six months, revenue was $2.270 billion, down 19%, and net loss was $1.337 billion versus a $39 million loss in 2018. Six-month adjusted EBITDA was $237 million (10.4% margin), down from $327 million (11.6%). The filing does not provide a clear consolidated gross-margin figure.
At June 30, current assets were $1.607 billion and current liabilities $1.217 billion. The company had a $750 million revolving credit line, with $81 million used for letters of credit. Management said cash, operating cash flows and financing activities should fund expected operating and capital needs for at least the next 12 months.
Material changes versus prior period
- Revenue declined mainly from divestitures, portfolio rationalization and exits from certain unprofitable contracts, pricing pressure, contract losses and currency effects. New-business ramps partly offset the decline.
- Revenue by segment in Q2: Commercial Industries $592 million, Government Services $326 million and Transportation $194 million. Transportation grew; Commercial Industries and Government Services declined.
- Q2 signings fell 57% to $813 million, including renewals down 69% to $485 million. Six-month signings declined 44% to $1.765 billion. Management cited a focus on acceptable-margin wins, longer sales cycles and delayed signings.
- Renewal rates, excluding contracts strategically not renewed, were 60% for Q2 and 78% for the first half, versus 99% and 97%. The loss of the California MMIS contract was a major factor.
- Cash declined by $480 million in the first half. Operating cash use reflected $131 million of Texas and other litigation payments and negative working capital; investing cash use included the HSP acquisition and higher technology-related capital spending.
Outlook, risks and unusual items
- Management lowered sales outlook and future average-margin expectations and increased the weighted average cost of capital in its goodwill assessment, citing contract losses, lower potential volumes, weaker-than-expected new business and a strategy pivot following management changes. No specific quantitative revenue or earnings guidance is provided in the filing.
- The revised outlook contributed to $1.351 billion of first-half goodwill impairment: $284 million in Q1 and approximately $1.1 billion in Q2. Impairments affected all reporting units; Transportation goodwill fell to $81 million from $641 million at year-end.
- Conduent agreed to pay $236 million to settle Texas Medicaid litigation. It had paid $118 million by June 30; the remaining $118 million was due by January 15, 2020 and secured by letters of credit. The filing describes dismissal and release as subject to the settlement terms.
- Other material legal matters include the Cognizant contract dispute, where Conduent seeks damages exceeding $150 million and faces counterclaims, and unresolved potential matters relating to its former student-loan servicing business. Outcomes and possible losses are not clearly estimable in the filing.
- Other risks include significant indebtedness, contract renewal and delivery performance, cybersecurity and data protection, and potential disruption from IT modernization and data-center consolidation. The company was also undertaking restructuring; first-half restructuring charges were $42 million, including $18 million of data-center migration costs.
- The company acquired Health Solutions Plus for $90 million cash, with up to $8 million of contingent consideration. It also adopted new lease accounting, recognizing $317 million of operating lease right-of-use assets and $370 million of operating lease liabilities at June 30.
Important facts for investors to verify
- How the reduced sales and margin outlook, management transition and contract pipeline affect future results and whether additional goodwill impairment is possible.
- Progress and timing of the remaining $118 million Texas settlement payment, and the resolution of the Cognizant and student-loan-related matters.
- Whether operating cash flow improves after the first-half cash use, considering working capital, litigation payments and planned technology investment.
- Renewal and signing trends, particularly after the California MMIS loss, and whether new-business ramps can offset portfolio exits and pricing pressure.
- Debt, revolving-credit availability and the effect of outstanding letters of credit on liquidity and capacity to bid for contracts.