Conduent Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Conduent provides business process services to commercial, government and transportation clients.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,026 million | $1,016 million | $2,054 million | $2,067 million |
| Net income (loss) | $12 million | ($51) million | $1 million | ($100) million |
| Diluted EPS | $0.04 | ($0.25) | ($0.02) | ($0.50) |
| Adjusted EBITDA | $128 million | $110 million | $243 million | $206 million |
| Adjusted EBITDA margin | 12.5% | 10.8% | 11.8% | 10.0% |
Q2 revenue rose 1%; six-month revenue declined less than 1%. Q2 cost of services fell 3% while SG&A rose 13%. For the six months, cost of services fell 4% and SG&A increased 11%. Lower depreciation and amortization, restructuring and litigation costs also supported the improved earnings comparison. The six-month effective tax rate was 94.3%, reflecting the small pretax-income base and tax items described in the filing.
Q2 segment revenue was $503 million for Commercial Industries, $338 million for Government Services and $185 million for Transportation. Government Services benefited from COVID-related public assistance and unemployment payment volumes; Transportation revenue improved with easing restrictions and new-business ramp. Commercial Industries remained pressured by lost business and pandemic-related declines.
Cash flow, liquidity and debt
- Six-month operating cash flow was $103 million, versus cash used of $118 million in 2020. Investing cash outflow was $69 million; financing cash outflow was $87 million.
- Cash and cash equivalents were $397 million at June 30, down from $450 million at year-end 2020. The $750 million revolver had no borrowings; $7 million supported letters of credit, leaving $743 million available.
- Total debt outstanding was approximately $1.4 billion, with $89 million due within one year. The company redeemed its remaining $34 million of 10.50% senior notes in May, recording a $2 million extinguishment loss. It reported compliance with debt covenants.
- Capital spending included $39 million for property and equipment and $32 million for internal-use software during the first half.
Changes, outlook and risks
- Compared with 2020, the company returned to quarterly and year-to-date net income, with improved adjusted EBITDA and margins. Management attributed operating progress to efficiency initiatives, lower costs and stronger Government Services volumes; the prior-year comparison also included a $118 million Texas litigation payment in operating cash flow.
- Q2 new-business TCV signings were $775 million, up 24%; renewal TCV was $825 million, down 10%. Six-month new-business TCV rose 19% to $1.131 billion, while renewal TCV fell 23% to $1.098 billion. The new-business pipeline was $21.0 billion, compared with $22.0 billion a year earlier.
- Management described a continuing focus on profitable growth, margin expansion, operational quality and disciplined capital allocation. The filing provides no specific full-year revenue or earnings guidance. Management said cash, projected operating cash flow and available credit should fund expected obligations for at least the next 12 months.
- COVID-19 effects remained uncertain, including changing demand and operating conditions. Management noted that modernization and data-center consolidation could disrupt operations, and that pandemic response had diverted management time and delayed some strategic and technology investments. Goodwill was $1.519 billion; no interim impairment test was deemed necessary, but a sustained downturn or loss of significant contracts could trigger impairment.
- Material unresolved matters include securities litigation, a dispute with Skyview over a business sale and notes, the Cognizant contract litigation (Conduent seeks more than $150 million; Cognizant asserts counterclaims), and legacy student-loan-related regulatory matters. The company said it could not estimate possible losses beyond recorded reserves for several proceedings and cautioned that outcomes could materially affect results, cash flow or financial position.
Important facts for investors to verify
- Whether Government Services’ pandemic-related payment volumes persist or decline, and whether new-business signings convert into recognized revenue.
- Renewal trends, lost-business offsets and the pace of revenue recovery in Commercial Industries and Transportation.
- Cash conversion, working-capital needs, capital investment and debt repayment capacity, including the upcoming $89 million debt maturity.
- Progress and costs of efficiency, technology modernization and data-center initiatives, including any operational disruption or goodwill impairment indicators.
- Developments in significant litigation and regulatory matters, potential liabilities above reserves, and any effect on liquidity or earnings.