Conduent Incorporated — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Conduent provides business process services to commercial, government and transportation clients.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.038 billion | $1.041 billion | $3.092 billion | $3.108 billion |
| Income (loss) before taxes | $19 million | $(13) million | $29 million | $(128) million |
| Net income (loss) | $11 million | $(7) million | $12 million | $(107) million |
| Diluted EPS | $0.04 | $(0.04) | $0.02 | $(0.54) |
| Adjusted EBITDA and margin | $130 million; 12.5% | $141 million; 13.5% | $373 million; 12.1% | $347 million; 11.2% |
Q3 revenue was essentially flat year over year; nine-month revenue declined 1%. Q3 adjusted EBITDA and margin fell, while nine-month adjusted EBITDA and margin improved. The filing does not provide a clear consolidated GAAP operating-margin figure.
For the nine months, operating cash flow was $158 million, versus cash used of $11 million in 2020. Investing activities used $97 million, including $52 million for property and equipment and $49 million for internal-use software. Financing activities used $112 million. Cash and cash equivalents were $394 million at September 30, compared with $450 million at year-end 2020.
Total debt was approximately $1.4 billion, including $21 million classified as current at quarter-end. The company had $740 million available under its then-existing revolver, net of letters of credit. Current assets were $1.511 billion and current liabilities were $987 million.
Business and segment trends
- Commercial Industries: Q3 revenue was $509 million, down from $518 million; segment profit was $29 million versus $32 million. Management cited prior-period business losses and labor-market pressures.
- Government Services: Q3 revenue was $349 million, approximately flat; segment profit rose to $125 million from $122 million. COVID-related SNAP and unemployment activity supported volumes. Two federal stimulus programs ended in September; some residual revenue was expected in Q4 2021.
- Transportation: Q3 revenue increased to $180 million from $175 million, but segment profit declined to $16 million from $26 million. Looser pandemic restrictions and new-business ramp-up supported revenue, while legacy lost business weighed on profit.
New-business total contract value signings were $344 million in Q3, down 26%; nine-month signings were $1.475 billion, up 4%. Net ARR activity was $132 million, its fourth consecutive positive quarter and 25% above Q2. The total new-business pipeline was $21.0 billion, versus $22.0 billion a year earlier.
Material changes, outlook and risks
- Profitability improved from prior-year losses, with lower depreciation and amortization, restructuring costs, interest expense and litigation costs contributing to the nine-month comparison. SG&A increased, reflecting compensation, sales-force and recruiting costs.
- On October 15, 2021, after quarter-end, Conduent refinanced debt and extended maturities. The refinancing included $265 million of Term Loan A due 2026, $515 million of Term Loan B due 2028, $520 million of secured notes due 2029, and a $550 million revolver due 2026. It borrowed $100 million under the new revolver at closing and used proceeds to repay the prior facilities. The company said the refinancing extended its maturity profile; financial covenants were waived until March 31, 2022.
- Management described a continued focus on growth, quality and efficiency, with a goal of profitable growth, margin expansion and disciplined capital allocation. The filing provides no specific full-year revenue or earnings guidance.
- COVID-19 impacts remained uncertain; management noted continued judgment and variability in estimates. Risks include contract renewals and performance, government contract termination or appropriations, client losses, labor and cost pressures, cybersecurity and data privacy, debt restrictions and LIBOR transition. Modernization and data-center consolidation could disrupt operations.
- Contingencies include securities, commercial, actuarial and student-loan-related matters. The company said it believed recorded provisions were adequate, but outcomes and potential losses beyond reserves could not be estimated clearly. It had $553 million of surety bonds and $94 million of letters of credit outstanding.
- No interim goodwill impairment test was considered necessary, but further pandemic-related deterioration or loss of significant contracts could lead to impairment. Restructuring and related costs were $10 million in Q3 and $31 million for nine months.
Investor facts to verify
- Whether the Q3 decline in adjusted EBITDA and the weakness in Commercial Industries and Transportation persist.
- How much Government Services revenue remains after the federal stimulus programs ended, and whether it is replaced by recurring business.
- Execution and costs of the October refinancing, including interest expense, covenant terms and liquidity under the new facilities.
- Conversion of the $132 million Net ARR activity metric and $1.3 billion of remaining performance obligations into recognized revenue; timing is not guaranteed.
- Developments in material litigation and regulatory matters, and any effect on reserves, cash flow or results.