Conduent Incorporated — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, with results compared primarily against FY2020; it does not provide a standalone fourth-quarter income statement. Conduent provides business-process services to commercial clients and governments through Commercial Industries, Government Services and Transportation.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $4.140 billion | $4.163 billion |
| Operating costs and expenses | $4.165 billion | $4.302 billion |
| Loss before income taxes | $25 million | $139 million |
| Net loss | $28 million | $118 million |
| Diluted loss per share | $0.18 | $0.61 |
| Adjusted EBITDA | $487 million | $480 million |
| Adjusted EBITDA margin | 11.8% | 11.5% |
| Operating cash flow | $243 million | $161 million |
| Cash and cash equivalents at year-end | $415 million | $450 million |
| Debt principal outstanding at year-end | $1.440 billion | $1.528 billion |
FY2021 investing cash outflow was $142 million and financing cash outflow was $132 million. The company reported $1.413 billion of debt on the balance sheet, including debt issuance costs and discounts; $30 million of principal was scheduled within 12 months. Its $550 million revolving facility had $100 million drawn and $20 million used for letters of credit at year-end, leaving $430 million available. The $100 million borrowing was repaid on February 11, 2022. Management stated cash, operating cash generation and available credit should cover requirements over the next 12 months and beyond.
Revenue by segment was $2.076 billion for Commercial Industries, $1.318 billion for Government Services and $746 million for Transportation. Segment adjusted EBITDA margins were 11.6%, 33.4% and 14.6%, respectively. Conduent paid no common-stock dividends in 2021 and does not anticipate common dividends for the foreseeable future; it paid $10 million in preferred-stock dividends.
Changes versus FY2020
- Revenue declined $23 million, or about 1%. Management attributed the decrease to prior-year business losses, partly offset by new-business ramps, increased Government Services volumes and reduced pandemic impacts in Commercial Industries and Transportation.
- Net loss narrowed by $90 million. Lower depreciation and amortization, restructuring, litigation and divestiture costs contributed to lower total expenses. SG&A rose $76 million, including $32 million related to abandoning an internal project, as well as higher compensation, sales and recruiting costs.
- Adjusted EBITDA increased $7 million and its margin improved 0.3 percentage points. Government Services improved on pandemic-related volumes and efficiencies; Commercial Industries and Transportation adjusted EBITDA declined.
- Operating cash flow increased $82 million, mainly because FY2020 included a payment under the Texas settlement agreement, partly offset by higher tax payments and working-capital movements.
- New-business annual recurring revenue signings rose 16% to $408 million, while total signings fell 3% to $4.620 billion. Net ARR activity reached $128 million in Q4 2021, up from $60 million in Q4 2020; management cautions this indicative metric is not a forecast for a specific 12-month period.
Outlook, notable items and risks
- Outlook: The supplied filing text provides no specific numerical FY2022 revenue, earnings or cash-flow guidance. Management emphasized growth, efficiency and service quality, and noted persistent uncertainty from COVID-19 and labor-market conditions.
- Debt refinancing: In October 2021, Conduent refinanced its facilities, extending maturities: Term Loan A due 2026, Term Loan B due 2028, $520 million of senior notes due 2029 and a revolving facility maturing 2026. The credit agreement includes a first-lien net leverage covenant capped at 3.50:1, with its first test scheduled for March 31, 2022.
- Midas sale: The company agreed to sell its Midas patient-safety and analytics business for $321 million cash, subject to customary adjustments. The sale closed February 8, 2022; the business generated $70 million of 2021 revenue. Conduent expected to record a gain in Q1 2022.
- Unusual charge: Conduent wrote off $28 million of capitalized costs and accrued $4 million of remaining hosting fees after abandoning an internal project. It also recorded a $15 million loss on extinguishment of debt.
- Contingencies: The filing describes securities, commercial, government-contracting and other litigation. The company says it has recorded adequate provisions but cannot predict outcomes or estimate possible losses in excess of reserves for certain matters. It reports $64 million of litigation-related accruals in other current liabilities.
- Key risks: Government funding and termination provisions; contract renewals, performance and pricing; labor availability and cost; dependence on third-party providers; IT modernization and data-center migration disruptions; cybersecurity, privacy and payment-processing compliance; customer concentration and receivable collection; foreign exchange; goodwill impairment; and substantial debt and restrictive covenants. Goodwill was $1.339 billion, 33.2% of total assets; the 2021 impairment test found no impairment.
- Audit and controls: The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end. Goodwill valuation for Commercial Industries was identified as a critical audit matter.
Investor facts to verify
- Whether revenue retention, new-business ramps and recurring-revenue signings can offset prior contract losses and the post-pandemic decline in stimulus-driven volumes.
- Whether adjusted EBITDA translates into sustainable operating cash flow after capital spending, working-capital needs, debt service and preferred dividends.
- The impact of the Midas sale proceeds and any recognized gain on liquidity, debt reduction and continuing-business performance.
- Compliance with the leverage covenant and the cost and rate exposure of floating-rate debt; $880 million of year-end debt carried variable rates.
- Developments in litigation, government-contract audits, cybersecurity and service continuity, and goodwill valuation assumptions.