Conduent Incorporated — 2018 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. Conduent provides business process services, including commercial transaction and employee services, government administration and payments, and transportation systems. It reported about 82,000 employees and operated in 26 countries. Segment presentation changed in 2018; prior periods were recast.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $5.393 billion | $6.022 billion |
| Operating costs and expenses | $5.788 billion | $6.038 billion |
| Loss from continuing operations / net loss | $416 million | Income from continuing operations $177 million; net income $181 million |
| Diluted loss / earnings per share | $(2.06) | $0.83 |
| Adjusted EBITDA | $640 million; 11.9% margin | $672 million; 11.2% margin |
| Cash provided by operating activities | $283 million | $300 million |
| Cash and cash equivalents at year-end | $756 million | $658 million |
| Working capital | $767 million | $1.342 billion |
| Debt | $1.598 billion principal, including capital leases; $1.567 billion net carrying amount | $2.117 billion principal; $2.061 billion net carrying amount |
Revenue declined 10% year over year. Management attributed the decrease to the new revenue standard, divestitures, portfolio rationalization, contract losses and lower volumes, partly offset by new-business ramps. Excluding the revenue-standard effect and divestitures, revenue declined 3.8%. The new standard reduced reported 2018 revenue by approximately $150 million, principally because postage revenue was reported net rather than gross.
Cash from investing was $460 million, including $675 million of net proceeds from divestitures and asset sales; capital spending included $179 million for property and equipment and $45 million for internal-use software. Cash used in financing was $637 million, primarily reflecting debt repayments and a $95 million premium on debt redemption. The company had a $750 million revolving facility, with $12 million used for letters of credit.
Segment revenue and adjusted EBITDA were: Commercial Industries $2.547 billion and $597 million; Government Services $1.351 billion and $451 million; Transportation $729 million and $149 million. Segment adjusted EBITDA margins were 23.4%, 33.4% and 20.4%, respectively. Other revenue was $766 million, largely related to divestitures and the Student Loan business.
Material changes versus the prior comparable period
- Revenue fell $629 million, or 10%, and adjusted EBITDA decreased from $672 million to $640 million. Conduent nevertheless reported a net loss versus net income in 2017.
- Litigation costs, net, rose to $227 million from a $11 million recovery in 2017. The 2018 total operating costs also included a $108 million loss on extinguishment of debt and a $42 million net loss on divestitures and transaction costs.
- Conduent sold four businesses during 2018 for aggregate cash proceeds of $703 million and recorded a $78 million pretax net gain on those divestitures. Separately, it recorded a $66 million impairment charge on customer-care contracts held for sale.
- Debt principal declined by about $519 million. In July, the company redeemed $476 million of 10.5% senior notes, paying a $95 million premium; it also repriced term loans and extended the Term A and revolving-facility maturities.
- SG&A declined to $560 million from $611 million. Restructuring costs were $81 million, including severance associated with reductions of approximately 3,000 employees and real-estate and transformation costs.
Outlook, commentary, risks and unusual items
- Management described a continuing transformation focused on automation, infrastructure and real-estate optimization, productivity, contract remediation and a more focused portfolio. It provided no specific revenue, earnings or cash-flow guidance in the supplied filing text.
- Signings rose 26% to $5.445 billion, driven by renewals; new-business total contract value fell 21% to $1.598 billion. Annual recurring revenue signings declined 23% to $365 million. Renewal rates, excluding contracts strategically not renewed, were 95% versus 94%.
- Remaining performance obligations were approximately $2 billion at year-end; the company expected to recognize about 67% over the next two years. This is a disclosed contracted-revenue estimate, not earnings guidance.
- In February 2019, Conduent agreed to pay $236 million to settle Texas claims, in installments through 2021. It recorded an additional $113 million reserve in the fourth quarter of 2018, net of a $13 million discount; the filing says the State’s release becomes effective after full payment. The State had previously asserted claims exceeding $2 billion. The agreement followed year-end and is a significant contingency to monitor.
- Conduent disclosed a significant October 2018 service outage related to a data-center migration and warned future migrations could disrupt service, incur penalties or harm customer relationships. It also cited legacy technology-provider performance issues and ongoing IT modernization as operational risks.
- Other key risks include contract execution and renewals, government funding and termination rights, pricing and volume pressure, significant debt and covenant restrictions, cybersecurity and data privacy, and litigation. Most debt carried variable rates at year-end, increasing exposure to interest-rate changes.
- Subsequent events included a January 2019 acquisition of Health Solutions Plus for approximately $90 million, with up to $7.8 million contingent consideration, and completion in February 2019 of the customer-care contract sale for $25 million. The company anticipated a net working-capital cash use in the first quarter of 2019.
- The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end. The auditor noted the 2018 change in revenue accounting.
Most important facts for investors to verify
- Whether the Texas settlement installments are paid as scheduled, and the final cash-flow and liability impact.
- Whether revenue stabilizes after divestitures and strategic contract exits, and whether new-business signings recover from their decline.
- Whether transformation savings and margin improvements offset ongoing revenue pressure and technology investment needs.
- Debt maturity, variable-rate exposure, covenant headroom and liquidity after the settlement, acquisition and anticipated working-capital use.
- Operational progress on IT modernization and data-center migrations, including service levels, customer penalties and retention.
- Potential additional costs or claims from the student-loan investigations, other litigation and customer or government contract disputes.