Conduent Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Conduent provides business-process services to commercial clients and government entities. The unaudited interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1.051 billion | $1.158 billion | Down $107 million (9%) |
| Net loss | $49 million | $308 million | Improved $259 million |
| Diluted loss per share | $0.24 | $1.49 | Improved |
| Adjusted EBITDA | $96 million | $123 million | Down $27 million |
| Adjusted EBITDA margin | 9.1% | 10.6% | Down 1.5 percentage points |
| Operating cash flow | $(192) million | $(49) million | Cash use increased $143 million |
| Investing cash flow | $(23) million | $(168) million | Cash use decreased $145 million |
| Financing cash flow | $130 million | $(22) million | Improved $152 million |
Revenue fell primarily due to 2019 divestitures, contract losses, volume and pricing pressure, and COVID-19; new-business ramps partly offset the declines. Management attributed approximately $14 million of the revenue decline directly to COVID-19. Cost of services and SG&A declined 8% and 9%, respectively, reflecting divestitures and cost-reduction efforts, partly offset by work-from-home technology and sanitation costs.
Q1 2020 included no goodwill impairment, compared with a $284 million impairment in Q1 2019. This difference was a major reason the reported net loss narrowed; adjusted EBITDA nevertheless declined. Interest expense was $17 million, versus $20 million. The effective tax rate was 3.9%, versus 8.9%.
Segments and commercial indicators
| Segment | Revenue, Q1 2020 | Adjusted EBITDA, Q1 2020 | Adjusted EBITDA margin |
|---|---|---|---|
| Commercial Industries | $572 million | $115 million | 20.1% |
| Government Services | $290 million | $99 million | 34.1% |
| Transportation | $189 million | $32 million | 16.9% |
Commercial Industries revenue and adjusted EBITDA declined year over year. Government Services revenue declined, but adjusted EBITDA and margin increased. Transportation revenue and adjusted EBITDA increased, although COVID-19 reduced some higher-margin activity. Total signings were $839 million, down 12%; new-logo/new-capability signings rose 127% to $282 million, while renewals fell 29% to $515 million. Renewal rate, excluding specified strategic non-renewals and divestitures, was 93%, versus 92%.
Financial position, liquidity and debt
At March 31, 2020, cash and cash equivalents were $395 million, down from $496 million at year-end 2019. Total debt principal was $1.678 billion, including $60 million due within one year; the balance sheet reported $1.596 billion of long-term debt after debt costs and current maturities. The company drew $150 million on its $750 million revolver as a precaution related to COVID-19. After $82 million of letters of credit, $518 million remained available at quarter-end; availability was reported as $589 million on April 16 after $71 million of letters of credit matured. Conduent said it was in compliance with debt covenants.
Total assets were $4.394 billion and total liabilities were $3.032 billion at quarter-end. Cash, cash equivalents and restricted cash totaled $413 million, including $18 million of restricted cash. Q1 operating cash use included the final $118 million payment under the Texas settlement. Management noted that cash generation is typically weighted toward the latter part of the year and expected operating cash flow to remain negative in Q2 2020. It stated that cash, projected operating cash flow and available credit should fund expected obligations for at least the next 12 months.
Outlook, risks and unusual items
The filing provides no formal numerical earnings or revenue guidance. Management described the pandemic’s ultimate effects as highly uncertain and said it expected continued challenges and possible volume declines, with cost mitigation, automation and work-from-home capabilities as potential offsets. COVID-19 disrupted demand and operations, increased delivery and technology costs, delayed strategic and technology investments, and could affect contract performance, collections, asset values and access to financing. Management warned that further disruption could materially adversely affect results and capital resources.
The company reported no interim goodwill impairment test was necessary as of March 31, 2020, but cautioned that prolonged disruption, weaker reporting-unit performance or significant contract losses could lead to impairment. The Texas Medicaid case was dismissed with prejudice after the company paid its final $118 million settlement installment in January 2020. Other disclosed matters include litigation over notes from a business sale, the Cognizant contract dispute, and unresolved student-loan-related regulatory matters; outcomes or potential losses were not clearly estimable for several of these proceedings. Outstanding performance-related surety bonds were $591 million and letters of credit were $210 million.
COVID-19 response measures included shifting most employees to remote work, additional safety measures for on-site employees, and drawing on the revolver. The CARES Act defers employer payroll taxes for the remainder of 2020 to 2021 and 2022, providing a temporary operating-cash-flow benefit. The company said the Act was not expected to materially affect its income tax provision.
Investor verification priorities
- Track COVID-19 effects on transaction volumes, contract performance, customer demand, collections and costs, and whether management’s mitigation measures offset them.
- Monitor operating cash flow, cash balances, revolver usage and availability, debt levels, covenant compliance, and the expected negative Q2 operating cash flow.
- Assess whether revenue declines and lower adjusted EBITDA persist, and compare new-business wins with renewals and contract losses.
- Follow goodwill and other asset valuations, particularly if the pandemic or significant contract losses weaken reporting-unit performance.
- Review developments in the Cognizant, Skyview, and student-loan-related matters, along with other contingencies and contractual guarantees.