Conduent Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Conduent provides business-process services and technology solutions to commercial clients and governments. Amounts are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $1,016 | $1,112 | $2,067 | $2,270 |
| Net income (loss) | $(51) | $(1,029) | $(100) | $(1,337) |
| Diluted loss per share | $(0.25) | $(4.94) | $(0.50) | $(6.44) |
| Adjusted EBITDA | $110 | $114 | $206 | $237 |
| Adjusted EBITDA margin | 10.8% | 10.3% | 10.0% | 10.4% |
Q2 revenue declined 9% year over year. The much smaller reported net loss primarily reflects the absence of the prior-year goodwill impairment charge: $1,067 in Q2 2019 and $1,351 in the first half of 2019; no impairment was recorded in 2020. Excluding that comparison, adjusted EBITDA was lower by $4 in Q2 and $31 for the first half.
- Segment trends, Q2: Commercial Industries revenue was $520 (down from $592), Government Services $331 (up from $326), and Transportation $165 (down from $194). Adjusted EBITDA was $96, $120, and $39, respectively; corresponding segment margins were 18.5%, 36.3%, and 23.6%.
- Cash flow, first half: Operating cash use was $118, versus $234 in 2019; investing cash use was $58, versus $209; financing provided $114, versus $39 used. Cash and cash equivalents were $428 at June 30, down from $496 at year-end 2019.
- Debt and liquidity: Long-term debt was $1,649 in total, including $68 current and $1,581 non-current, compared with $1,514 at year-end. The company had drawn $150 on its $750 revolving facility and had $592 available after $8 of letters of credit. It reported compliance with debt covenants.
- Balance sheet: Total assets were $4,326 and total liabilities $3,009 at June 30; shareholders’ equity was $1,175. Accounts receivable were $693, compared with $652 at year-end.
Changes, outlook, and management commentary
- Management attributed approximately $35 of Q2 revenue decline and $49 for the first half to COVID-19 effects. Q2 COVID-19 impacts included lower transportation and commercial volumes, partly offset by higher government-program volumes. The estimated pre-tax impact, including revenue, incremental costs, and temporary cost actions, was a loss of $8 for Q2 and $18 for the first half.
- Management reported temporary COVID-related cost savings of approximately $27 in Q2 and $31 in the first half. Its expanded cost-reduction program included about 1,500 position eliminations and closure of about 20 facilities. Approximately 75% of the workforce was working from home at quarter-end; about 2,000 associates were furloughed.
- New-business TCV signings were $623 in Q2, up 90%, and $947 in the first half, up 71%. Annual recurring revenue signings were $105 in Q2, up 25%, and $162 in the first half, up 19%. These are contract-signing measures, not recognized revenue.
- The company gave no specific financial guidance. Management expected continuing pandemic-related challenges and potential volume declines, while citing automation, cost actions, and work-from-home capabilities as potential offsets. It stated that cash, projected operating cash flow, and credit availability were expected to meet obligations for at least the next 12 months. Historically, it generates most operating cash in the latter part of the year.
- Key risks include the uncertain duration and effects of COVID-19, contract losses or government contract changes, customer payment delays, work-from-home and cybersecurity disruptions, technology modernization risks, and possible impairment of goodwill or other assets. Management found no impairment test necessary at June 30, but warned further deterioration could lead to impairment.
Contingencies and unusual items
- The Texas Medicaid case was dismissed with prejudice after the company paid the remaining $118 of a $236 settlement in January 2020.
- A securities class action survived the company’s motion to dismiss in June 2020; the company said it could not estimate a possible loss beyond recorded reserves. Other disclosed disputes include litigation over notes from a 2019 business sale and a contract dispute with Cognizant; outcomes and potential losses were not estimable in the filing.
- The company reported $578 of outstanding surety bonds and $90 of letters of credit supporting contracts and other obligations. It stated that recorded provisions for litigation were adequate, while noting outcomes could exceed accruals.
- The company suspended its 401(k) match for U.S. hourly employees in Q2, extending the suspension previously applied to U.S. salaried employees.
Important facts for investors to verify
- Whether COVID-19-related volume weakness, especially in Commercial Industries and Transportation, persists and how much government-program activity offsets it.
- Whether new-business signings convert into revenue and cash flow, and whether contract renewals and customer retention improve.
- Operating cash generation in the second half, receivables collection, and the effect of temporary savings and deferred payroll taxes.
- Debt levels, revolver availability, covenant compliance, and the company’s capacity to service debt and preferred-stock dividends.
- Developments in litigation and regulatory matters, including whether any outcomes require material additional reserves or payments.
- Potential goodwill or other asset impairments if business performance or significant contracts deteriorate.