Conduent Incorporated — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Conduent provides business-process services and technology solutions to commercial and government customers. Figures are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,041 | $1,098 | $3,108 | $3,368 |
| Net income (loss) | $(7) | $(16) | $(107) | $(1,353) |
| Diluted EPS | $(0.04) | $(0.09) | $(0.54) | $(6.52) |
| Adjusted EBITDA | $141 | $127 | $347 | $364 |
| Adjusted EBITDA margin | 13.5% | 11.6% | 11.2% | 10.8% |
Q3 revenue fell 5% year over year; nine-month revenue fell 8%. Nine-month results improved substantially from 2019 primarily because 2019 included a $1,351 goodwill impairment charge. Excluding that comparison, the company remained loss-making. Q3 pre-tax loss was $13 versus $14 in the prior-year quarter; nine-month pre-tax loss was $128 versus $1,471.
Revenue weakness reflected lost business and COVID-related declines, particularly in Commercial Industries and Transportation, partly offset by higher government-program volumes and new-business ramps. In Q3, Commercial Industries revenue was $518 (down from $578), Government Services $348 (up from $319), and Transportation $175 (down from $201). Q3 segment adjusted EBITDA margins were 10.8%, 36.8%, and 20.0%, respectively.
Cash, debt and liquidity
- Nine-month operating cash flow was $(11), versus $(216) in 2019. Investing cash use was $(92), and financing cash provided was $99. Cash and cash equivalents were $488 at September 30, compared with $496 at year-end 2019.
- Principal debt was $1,673, including $150 drawn on the revolving facility; $78 was current. The company had $592 available under its $750 revolving facility after borrowings and letters of credit, and reported compliance with debt covenants.
- Management said cash, projected operating cash flow and available credit should provide sufficient resources for expected obligations for at least 12 months. This outlook depends on uncertain business and pandemic conditions.
- Capital expenditures and internal-use software additions totaled $95 over the first nine months. Preferred stock carries an 8% annual dividend; the Q3 dividend was accrued but unpaid at quarter-end.
Material changes, outlook and risks
- Management estimated COVID-19 reduced revenue by $3 in Q3 (with a favorable net revenue effect) and $46 over nine months, and reduced pre-tax income by approximately $0 and $52, respectively. Temporary cost savings were $14 in Q3 and $48 year to date, largely from furloughs and lower travel, vendor and facilities spending.
- Restructuring and related costs were $20 in Q3 and $56 year to date. The expanded cost program included eliminating approximately 300 positions and closing approximately five facilities. Management cautioned that further restructuring charges or estimate changes may occur.
- New-business total contract value signings were $468 in Q3, up 100%, and $1,415 year to date, up 80%. These are contract-value measures, not current-period revenue. Remaining performance obligations were approximately $1.5 billion; about 70% was expected to be recognized over the next two years. The filing gives no specific earnings or revenue guidance.
- Management described continuing pandemic-related demand, delivery and operational uncertainty, including work-from-home costs and security concerns, customer transaction-volume declines, possible government contract reductions, delayed technology investments, and potential collection or impairment risks. Approximately 75% of the workforce was working remotely at quarter-end.
- Goodwill was $1,506; no 2020 impairment test was considered necessary, but prolonged disruption or significant contract losses could trigger impairment. The Texas Medicaid matter was settled and dismissed after $236 was paid. Other matters include a securities class action, Skyview sale-related litigation, Cognizant contract litigation and unresolved student-loan-related inquiries; outcomes or potential losses are not estimable from the filing.
Important facts for investors to verify
- Whether revenue declines and COVID-related volume pressures stabilize, particularly in Commercial Industries and Transportation, and whether government-related strength persists.
- Whether cost savings and restructuring translate into durable margin improvement after temporary measures end.
- Operating cash generation, working-capital movements, revolver usage, debt covenant headroom and the ability to meet debt and preferred-dividend obligations.
- Conversion of signings and the $1.5 billion remaining performance obligations into recognized revenue, and any contract losses or delays.
- Developments in material litigation and regulatory matters, and whether COVID-19 or customer losses lead to goodwill or other asset impairments.