Conduent Inc. — Q1 2021 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2021. Conduent provides business process services to commercial, government and transportation clients. Results are unaudited and in U.S. dollars; financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $1,028 | $1,051; down 2.2% |
| Operating costs and expenses | $1,037 | $1,102 |
| Loss before income taxes | $(9) | $(51) |
| Net loss | $(11), or $(0.06) per diluted share | $(49), or $(0.24) per diluted share |
| Adjusted EBITDA | $115; 11.2% of revenue | $96; 9.1% of revenue |
| Cash from operating activities | $(2) | $(192) |
| Cash and cash equivalents at quarter-end | $389 | $450 at December 31, 2020 |
| Total debt | Approximately $1.5 billion | $89 current maturities |
At March 31, the company had $1.551 billion of current assets and $1.045 billion of current liabilities. Its $750 million revolving facility had no outstanding borrowings; $7 million was used for letters of credit, leaving $743 million available. The company reported compliance with debt covenants.
Segment revenue and adjusted EBITDA were: Commercial Industries, $526 million and $62 million; Government Services, $318 million and $92 million; Transportation, $184 million and $30 million. Segment adjusted EBITDA margins were 11.8%, 28.9% and 16.3%, respectively. These segment measures are not the same as consolidated net income.
Material changes and management commentary
- Revenue declined by $23 million year over year. Commercial Industries and Transportation were pressured by prior-year lost business and COVID-related volume declines; Government Services grew on higher public assistance and unemployment-benefit activity, including federal stimulus-related payments and new-business ramp-up.
- Net loss narrowed by $38 million. Lower cost of services, depreciation and amortization, interest and litigation costs contributed to the improvement; restructuring costs increased to $13 million from $7 million.
- Operating cash use improved by $190 million, primarily because Q1 2020 included a $118 million Texas litigation payment, alongside better receivable collections and working-capital timing. Management noted that cash generation is historically weighted to later in the year.
- New-business total contract value signings rose 10% to $356 million, while renewals fell 47% to $273 million; total signings declined 25% to $629 million. Annual recurring-revenue signings increased 67% to $95 million. The new-business pipeline was $21.0 billion.
- Management described an ongoing transformation focused on growth, service quality, operating efficiency and margin expansion. It reported operational improvements but noted that COVID response diverted management time and delayed some strategic and technology investments.
Outlook, risks and unusual items
- The filing provides no specific quantified revenue, earnings or cash-flow guidance. Management said cash, projected operating cash flow and available credit were expected to provide sufficient resources for at least the next 12 months.
- COVID-19 effects remained uncertain, including possible impacts on customer volumes, operations and estimates. Management warned that disruption, weaker reporting-unit performance or significant contract losses could lead to goodwill impairment; no interim goodwill impairment test was deemed necessary in Q1.
- Key risks include contract renewals and performance, reliance on major clients and third parties, data security and privacy, technology modernization and data-center consolidation, indebtedness, receivables collection, and litigation and regulatory matters.
- Significant unresolved matters include securities litigation, disputes relating to a divested call-center business and the Cognizant outsourcing contract, and potential student-loan servicing claims. The company said it could not predict outcomes or estimate potential losses beyond recorded reserves in several matters.
- Restructuring and related costs were $13 million, including $7 million for data-center consolidation. The company had $610 million of surety bonds and $95 million of letters of credit outstanding to support contractual and other obligations.
- Subsequent event: on May 1, 2021, the company redeemed all $34 million of its 10.50% senior notes due 2024.
Important facts for investors to verify
- Whether Government Services stimulus-related volumes and elevated benefit-payment activity persist, and how Commercial Industries and Transportation recover from pandemic and lost-business pressures.
- Whether signings convert into revenue and cash, particularly given lower renewal signings and the sales-pipeline outlook.
- Operating cash conversion and liquidity through the remainder of 2021, including debt maturities, capital spending and working-capital needs.
- Progress and costs of transformation, restructuring and technology modernization, including any service disruptions or further delays.
- Developments in litigation, regulatory inquiries, contingent liabilities and the potential for goodwill impairment.