Conduent Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Conduent provides business-process and technology-enabled services to commercial clients and governments, across Commercial Industries, Government Services and Transportation.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.098B | $1.304B | $3.368B | $4.111B |
| Net income (loss) | $(16)M | $(237)M | $(1.353)B | $(276)M |
| Adjusted EBITDA | $127M | $157M | $364M | $484M |
| Adjusted EBITDA margin | 11.6% | 12.0% | 10.8% | 11.8% |
| Operating cash flow | Not stated separately | Not stated separately | $(216)M | $30M |
- Q3 revenue fell 16%; nine-month revenue fell 18%. Management cited divestitures, pricing pressure, contract losses and currency effects, partly offset by new-business ramps. Prior-year comparisons include divested businesses.
- Q3 net loss improved versus 2018, when results included a $108M debt-extinguishment loss and substantial litigation costs. Nine-month 2019 results include a $1.351B goodwill impairment charge; excluding that charge, reported net loss was still negative.
- Q3 segment adjusted EBITDA was $133M in Commercial Industries, $106M in Government Services and $47M in Transportation, offset by $159M of shared IT, infrastructure and corporate costs. Transportation revenue and profit improved; Commercial Industries and Government Services faced revenue pressure.
- Nine-month capital spending included $109M for property and equipment and $49M for internal-use software. Investing cash use was $253M, compared with $534M provided in 2018, which included $672M of divestiture and asset-sale proceeds.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $228M, down from $756M at December 31, 2018. Current assets were $1.546B and current liabilities $1.123B.
- Debt principal was $1.545B, with $50M of current maturities; balance-sheet debt carrying value was $1.518B. Interest expense for the first nine months was $60M, down from $92M.
- The company had a $750M revolving credit line, with $79M used for letters of credit. It reported $229M of total outstanding letters of credit, including $118M securing the remaining Texas settlement payment.
- Management expected operating cash flow, cash on hand and financing activities to cover operating and anticipated capital and other requirements for at least the next 12 months.
Material developments, outlook and risks
- Goodwill impairment: The company recorded $1.351B of impairment in the first half of 2019 across reporting units after weaker contract performance, lower expected new business and volumes, reduced sales and margin forecasts, and a higher discount rate. No additional impairment was identified in Q3; goodwill stood at $2.090B versus $3.408B at year-end 2018.
- Commercial momentum: Nine-month signings were $2.511B, down 36% year over year, reflecting sales staffing challenges, longer lead times and delayed signings. Q3 signings were $746M, up 1%. Renewal rates, excluding contracts strategically not renewed, were 83% for nine months versus 96% in 2018.
- Management described a strategic transformation involving cost reduction, real-estate consolidation and IT modernization, including data-center consolidation and added cybersecurity investment. It cautioned that modernization and consolidation could disrupt operations. Further restructuring charges may arise.
- Texas Medicaid settlement: The company agreed to pay $236M; $118M had been paid and the remaining $118M was due in January 2020 and fully reserved. The case was dismissed with prejudice following the settlement.
- Other notable contingencies include the Cognizant dispute, in which Conduent seeks damages exceeding $150M and Cognizant asserts counterclaims totaling $90M, and unresolved student-loan-related inquiries. Management said litigation outcomes are uncertain and could exceed reserves.
- The filing provides no specific numerical full-year revenue or earnings guidance. It identifies leadership transition and strategic review, contract renewals and performance, indebtedness, cybersecurity, and customer and government-contract risks as factors that could affect results.
Important facts for investors to verify
- Whether revenue declines and lower signings stabilize, and whether new-business ramps offset contract losses and pricing pressure.
- Cash conversion and liquidity after the $118M Texas payment due in January 2020, alongside capital spending and litigation cash requirements.
- Progress and disruption risk from IT modernization, data-center consolidation and restructuring, and whether segment margins recover.
- Potential further impairment or adverse changes to forecasts, and developments in the Cognizant and student-loan matters.