Conduent Incorporated — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Conduent provides business-process services to commercial, government and transportation clients.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $977 million | $1,038 million | $2,872 million | $3,092 million |
| Net income | $15 million | $11 million | $151 million | $12 million |
| Diluted EPS | $0.06 | $0.04 | $0.66 | $0.02 |
| Adjusted EBITDA | $105 million | $130 million | $301 million | $373 million |
| Adjusted EBITDA margin | 10.7% | 12.5% | 10.5% | 12.1% |
Q3 revenue declined 6% year over year; nine-month revenue declined 7%. Management attributed declines primarily to lower federal stimulus revenue, prior-year client losses and unfavorable foreign-exchange translation. Cost reductions and operating efficiencies partly offset revenue pressure. Q3 pretax income was $23 million versus $19 million; nine-month pretax income was $238 million versus $29 million.
- Q3 segments: Commercial revenue was $504 million, up from $493 million; Government Services was $291 million, down from $346 million; Transportation was $182 million, up from $180 million. Segment adjusted EBITDA was $68 million, $88 million and $25 million, respectively.
- Nine-month segments: Commercial revenue was $1,486 million versus $1,493 million; Government Services was $856 million versus $996 million; Transportation was $523 million versus $549 million.
- Cash flow, nine months: Operating cash flow was $93 million versus $158 million. Investing cash flow was $216 million, including Midas sale proceeds, versus cash used of $97 million. Financing cash used was $132 million versus $112 million.
- Cash and liquidity: Cash and equivalents were $577 million at September 30, 2022, up from $415 million at year-end 2021. Current assets were $1,641 million and current liabilities $933 million. The $550 million revolver had no borrowings; $548 million was available after letters of credit.
- Debt: Balance-sheet debt was $33 million current and $1,272 million long-term. Principal debt balance was $1,329 million before debt issuance costs and discounts. The company reported compliance with debt covenants.
Material changes and unusual items
- The February 2022 sale of the Midas business generated $321 million cash consideration and a $166 million pretax gain; the company recorded approximately $62 million of related income taxes. This gain materially contributed to nine-month net income and investing cash flow.
- Nine-month results included $31 million of net litigation recoveries, primarily a $24 million insurance recovery, and $14 million of defense-cost recovery recorded in SG&A. The recoveries relate to the previously disclosed Texas matter.
- Interest expense rose to $22 million in Q3 from $12 million and to $59 million for nine months from $38 million, primarily reflecting higher rates on refinanced facilities.
- Foreign-currency translation reduced nine-month comprehensive income by $82 million; total other comprehensive loss was $84 million.
Outlook, management commentary and risks
Management stated its strategy is focused on profitable growth, margin expansion, operating efficiency and disciplined capital allocation. It reported Q3 new-business annual contract value (ACV) of $191 million, up 27% year over year and increasing for a fifth consecutive quarter. Nine-month new-business ACV was $538 million, down 13%; renewal contract value was $1.896 billion, up 38%. Annual recurring-revenue signings were $296 million, substantially unchanged from the prior year. Management expects cash, operating cash flow and available revolver capacity to meet obligations for at least the next 12 months. No specific earnings or revenue guidance was provided in the supplied filing text.
Risks include macroeconomic uncertainty, inflation and higher interest rates, COVID-19 and geopolitical disruption, contract renewals and client concentration, labor-market pressures, foreign-exchange movements, cybersecurity and data-protection exposure, and possible disruption from IT modernization and data-center consolidation. A recession, weaker reporting-unit performance or loss of significant contracts, or further rate increases, could lead to goodwill impairment; no interim impairment test was deemed necessary in Q3. The company said it had adequate provisions for litigation, but outcomes may exceed reserves. Notable matters include a securities class-action settlement pending court approval, the Skyview dispute, the Cognizant litigation, and a remaining state inquiry related to student-loan servicing. The company reported $565 million of surety bonds and $91 million of letters of credit outstanding.
Important facts for investors to verify
- How much of nine-month earnings reflects the Midas gain and insurance recoveries versus recurring operating performance.
- Whether revenue and adjusted EBITDA stabilize, particularly in Government Services, and whether signings convert to recognized revenue and cash.
- Debt and interest costs, including the difference between balance-sheet carrying debt and principal debt balance.
- Final costs and court approval of the securities settlement, and developments in other litigation and regulatory matters.
- Potential effects of foreign exchange, labor costs, macroeconomic conditions and IT/data-center transformation on margins, cash flow and goodwill.