Conduent Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Conduent provides business process services across Commercial Industries, Government Services and Transportation.
Financial performance
- Revenue: $1.158 billion, down $262 million (18%) from $1.420 billion in Q1 2018. Management attributed the decline mainly to divestitures, portfolio rationalization and contract losses, with currency also a factor; new-business ramps partly offset the decrease.
- Profit and margins: Net loss was $308 million, or $1.49 per diluted share, versus a $50 million loss, or $0.26 per share, a year earlier. Results included a $284 million goodwill impairment. Segment adjusted EBITDA was $123 million versus $161 million; adjusted EBITDA margin fell to 10.6% from 11.3%. Reported operating costs were $1.496 billion, compared with $1.474 billion.
- Segments: Commercial Industries revenue was $612 million and adjusted EBITDA $135 million (22.1% margin); Government Services was $325 million and $95 million (29.2%); Transportation was $184 million and $29 million (15.8%). Transportation revenue increased, but its profit and margin declined. Segment adjusted EBITDA excludes shared costs and other reconciling items.
- Cash flow: Operating cash use was $49 million, versus $38 million used in Q1 2018. Investing cash use was $168 million, including $90 million for the HSP acquisition and higher infrastructure-related capital spending; financing cash use was $22 million. Cash, cash equivalents and restricted cash ended the quarter at $528 million, including $8 million restricted.
- Liquidity and debt: Cash and cash equivalents were $520 million at March 31, down from $756 million at year-end. Debt principal was $1.579 billion, including $53 million due within one year; reported long-term debt was $1.496 billion. The company had a $750 million revolving credit line, with $12 million used for letters of credit.
- Balance sheet: Current assets were $1.831 billion and current liabilities $1.434 billion. Total liabilities were $3.594 billion and equity $2.927 billion. Adoption of lease accounting added $338 million of operating lease right-of-use assets and $394 million of operating lease liabilities at quarter-end.
Changes, unusual items and management commentary
- The $284 million Transportation goodwill impairment followed customer contract losses, lower-than-expected new contracts and higher delivery costs. The reporting unit had no remaining goodwill valuation headroom; other reporting units’ fair values had also declined, though they were not impaired.
- Revenue included $36 million from divestitures, compared with $248 million in Q1 2018. Conduent completed the sale of selected customer care contracts to Skyview Capital in February and recorded an additional $12 million loss, including transaction costs. It also acquired healthcare software provider Health Solutions Plus for $90 million cash, with up to $8 million of contingent consideration.
- Conduent agreed to settle the Texas Medicaid litigation for $236 million. A May 2019 amendment set payments of $40 million (reported as already paid), $78 million by May 15, 2019, and $118 million by January 15, 2020, secured by letters of credit. The amended payment terms resulted in an additional $13 million expense recognized in Q1.
- Signings fell 26% to $952 million: new-business total contract value declined 39% to $225 million and renewals declined 21% to $727 million. Management cited a focus on acceptable-margin wins, longer lead times and delays. Renewal rate, excluding contracts strategically not renewed, was 92%, versus 94%.
- Management expects operating cash flow, cash on hand and financing activities to fund operating and anticipated capital needs for at least 12 months. It expects Q2 operating cash flow to be negative, noting that cash generation historically is weighted to the second half of the year. No full-year revenue or earnings guidance is stated in the provided filing text.
- Transformation actions reduced costs, but the company continues IT modernization, data-center consolidation and cybersecurity investment; management cautioned that modernization and consolidation could disrupt operations. Q1 restructuring costs were $16 million, including $9 million for data-center migration.
Risks and contingencies
Key exposures include contract renewals and performance, client losses, pricing and cost pressures, government contract termination and appropriations, significant debt, cybersecurity and data privacy, IT modernization execution, and the ability to collect receivables. The company reported $636 million of outstanding surety bonds and $266 million of letters of credit. It said litigation outcomes are inherently uncertain and could exceed recorded reserves; the Texas settlement and unresolved matters, including the Cognizant dispute, merit attention. The CFPB investigation relating to former student-loan servicing was resolved in Q1, but the company could not assure that other parties or regulators would not pursue claims. Management reported disclosure controls were effective and no material change in risk factors from the 2018 Form 10-K.
Investor verification points
- Verify the timing and funding of the remaining Texas settlement payments, related letters of credit and cash-flow effects.
- Track Transportation contract performance, further losses or penalties, and any additional goodwill impairment; review valuation assumptions and headroom in other reporting units.
- Assess whether signings, renewals and revenue stabilize, and whether new-business ramps offset contract losses and divestitures.
- Monitor operating cash flow, working capital, liquidity after settlement payments, debt service and revolver availability.
- Check the resolution and potential financial exposure of remaining litigation and regulatory matters, and the execution risks of IT modernization and data-center consolidation.