Conduent Incorporated — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Conduent provides business process services through Commercial, Government Services and Transportation segments. Unless stated otherwise, amounts are in millions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $928 | $1,026 | $1,895 | $2,054 |
| Income before taxes | $5 | $19 | $215 | $10 |
| Net income (loss) | $0 | $12 | $136 | $1 |
| Adjusted EBITDA | $87 | $128 | $196 | $243 |
| Adjusted EBITDA margin | 9.4% | 12.5% | 10.3% | 11.8% |
| Operating cash flow | Not separately provided for the quarter | $(5) | $103 |
Q2 diluted EPS was $(0.01), versus $0.04; six-month diluted EPS was $0.60, versus $(0.02). Q2 revenue fell 10% year over year and six-month revenue fell 8%. Management attributed the decline mainly to reduced federal stimulus revenue, lost prior-year business and unfavorable foreign exchange, partly offset by new-business ramp. Lower revenue and federal stimulus also pressured Government Services profitability. Commercial profitability improved on efficiency and expense reductions, while Transportation’s six-month results were affected by lost business, project timing and a prior-year one-time benefit.
Reported six-month earnings included a $166 pretax gain on the Midas divestiture and $38 of insurance recoveries related to the previously disclosed Texas matter. The divestiture generated $325 of cash proceeds during the six months; the company recorded approximately $62 of related income taxes. Consequently, net income and cash generation should be assessed in light of these unusual items. Q2 net income was effectively breakeven, although reported as $0 million rounded; loss per share reflects preferred dividends.
Balance sheet, debt and liquidity
- At June 30, 2022, cash and cash equivalents were $519, versus $415 at December 31, 2021; total assets were $3,900 and total liabilities were $2,533.
- Total debt principal was approximately $1,327, with $30 due within one year; balance-sheet debt, net of issuance costs and discounts, was $1,302. The company had no revolving-credit borrowings and reported $546 available under its $550 revolver, net of letters of credit.
- Six-month operating cash flow was $(5), compared with $103 a year earlier. Investing cash flow was $242, largely reflecting Midas sale proceeds; financing cash flow was $(121), including repayment of $100 drawn on the revolver.
- Capital expenditures and internal-use software additions totaled $83 in the first half. Management said cash, expected operating cash flow and revolver availability should cover obligations for at least the next 12 months. The company reported compliance with debt covenants.
Outlook, commentary and risks
No specific earnings or revenue guidance is provided in the supplied filing text. Management described its strategy as focused on profitable growth, margin expansion, operating efficiency and disciplined capital allocation. New-business ACV was $180 for Q2 and $347 for the first half; first-half renewal TCV rose 13% to $1,238. The new-business pipeline was $22.0 billion at quarter-end. Net ARR activity was $104, a directional metric that management cautions is not a forecast for a specific 12-month period.
Management noted ongoing uncertainty from COVID-19 and foreign exchange, challenging labor markets, reliance on major customers and government contracts, contract performance and renewal risks, cybersecurity and data-protection exposures, and risks from IT modernization and data-center consolidation. Restructuring and transformation activities continue. The company stated there were no material changes to previously disclosed risk factors.
Significant proceedings include a securities class action that was certified in February 2022, disputes involving Skyview and Cognizant, and a remaining state attorney general inquiry concerning legacy student-loan servicing matters. The company says it has recorded provisions it considers adequate, but outcomes may exceed reserves and cannot be reliably estimated for certain matters. It also had $547 of surety bonds and $101 of letters of credit supporting contractual and other obligations.
Most important facts for investors to verify
- How much of first-half earnings and cash availability is attributable to the Midas gain and related tax effects, and whether recurring operations can improve after the divestiture.
- Drivers of the year-over-year revenue decline, particularly federal stimulus exposure, client losses, foreign exchange and new-business ramp.
- Operating cash conversion and working-capital trends, given negative first-half operating cash flow despite reported net income.
- Debt-service capacity, refinancing costs and liquidity headroom, including covenant compliance and access to the revolver.
- Developments in material litigation, regulatory inquiries, surety and letter-of-credit obligations, and the potential for losses above recorded reserves.