Conduent Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Conduent became an independent, publicly traded company following its December 31, 2016 spin-off from Xerox. The prior-year comparison reflects pre-separation operations, including allocated Xerox corporate costs, and may not be fully comparable with standalone results.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $1.553 billion | $1.685 billion |
| Loss from continuing operations | $10 million | $23 million |
| Net loss | $6 million | $23 million |
| Diluted loss per share | $0.04 | $0.12 |
| Operating margin (company-defined, non-GAAP) | 5.5%; adjusted 5.7% | 4.2%; adjusted 4.2% |
| Gross margin | 16.7%; adjusted 16.9% | 15.7% |
| Operating cash flow | $(106) million | $(117) million |
| Cash and cash equivalents at period-end | $255 million | $390 million at Dec. 31, 2016 |
| Principal debt balance | $2.175 billion | $1.997 billion at Dec. 31, 2016 |
Investing cash outflow was $25 million and financing cash outflow was $6 million. Cash declined $135 million during the quarter. Reported pre-tax loss was $22 million; the income tax benefit was $12 million. The reported effective tax rate was 54.5%, versus 34.0% on an adjusted basis. Adjusted continuing-operations net income was $35 million, or $0.16 per diluted share; these are non-GAAP measures and should be considered alongside GAAP results.
At March 31, current assets were $1.974 billion and current liabilities were $1.248 billion. Debt included $70 million outstanding on the revolving facility, term loans and $510 million of senior notes. On April 7, 2017, the company repriced its Term Loan B, reducing its spread over LIBOR by 1.5 percentage points, from 5.5% to 4.0%, and paid an approximately $8 million prepayment fee.
Segments and changes versus prior year
- Revenue fell 8% year over year, or 7% at constant currency. Management cited lost business, lower volumes, price declines, the exit of the New York Medicaid Management Information System (NY MMIS) contract and student-loan runoff; new contract ramp-ups partly offset the decline.
- Commercial Industries revenue was $923 million, down 8%; segment profit was $29 million and margin was 3.1%, up 0.5 percentage points.
- Public Sector revenue was $549 million, down 4%; segment profit was $61 million and margin was 11.1%, up 0.4 percentage points.
- Other revenue was $81 million, down 24%; segment loss was $4 million versus $16 million a year earlier. The segment includes the Medicaid platform business, student-loan runoff and certain corporate costs.
- Company-reported gross and operating margins improved, reflecting transformation initiatives, lower costs and improved Other-segment performance, partly offset by lost business, pricing pressure and customer-care margins. Selling, administrative and general expense decreased $14 million to $169 million.
- Interest expense increased to $36 million from $1 million, primarily because of debt issued in December 2016. The prior-year period also included $10 million of related-party interest expense.
- Signings were $931 million of total contract value, down 37% from $1.488 billion. Renewal rate was 92% under a revised methodology, above the 85%–90% target range; excluding strategic actions, management said renewals would have been approximately 80%.
Outlook, commentary and notable matters
The filing provides no specific full-year revenue or earnings guidance. Management emphasized strategic transformation, cost improvements and new-contract ramp-ups, while noting persistent revenue and margin pressures. It expected approximately $21 million of the $24 million restructuring reserve to be spent over the following 12 months. The company anticipated full-year pension contributions of approximately $10 million.
- NY MMIS and Health Enterprise: The company had recorded a $161 million pre-tax charge in Q4 2016 after determining completion of the NY MMIS project was not probable. Q1 2017 included an $8 million adjustment to estimated wind-down costs and a separate $(5) million adjustment for California and Montana Health Enterprise estimates. Discussions with New York continued; a negotiated resolution might not succeed, and a contractual dispute or claim could follow.
- Legal and regulatory exposure: Disclosed matters include the Texas Medicaid contract lawsuit, which alleges damages exceeding hundreds of millions of dollars, and CFPB and other agency reviews concerning student-loan servicing. The company said it could not predict the outcome of the regulatory reviews and that material adverse outcomes could affect results and cash flows.
- Contract support and loan servicing: Outstanding surety bonds were $642 million and letters of credit were $133 million. The company serviced approximately 1.2 million FFEL loans with $19.8 billion of principal; certain servicing agreements can require loan purchases if servicing errors cause permanent loss of a guaranty. A $2 million reserve was recorded for potential defaulted-loan losses.
- Other items: A customer dispute settlement generated $14 million of gains, split between continuing and discontinued operations. A roughly $4 million out-of-period compensation-accrual adjustment reduced Q1 costs and expenses; the company said it was not material. The quarter included restructuring charges associated with approximately 700 employee reductions.
Important facts for investors to verify
- Whether revenue declines, lower signings and renewal trends persist, and whether new contract ramps offset customer losses.
- Progress, additional costs and potential claims related to NY MMIS and the California and Montana Health Enterprise implementations.
- Cash conversion and working-capital movements, particularly receivables and collections, alongside the level and cost of debt.
- Whether the Term Loan B repricing delivers the anticipated interest savings and how ongoing transformation and restructuring affect reported versus adjusted results.
- Developments in the Texas litigation, CFPB and other student-loan servicing reviews, and potential exposure from guarantees and loan-servicing obligations.