Conduent(CNDT) - 2022 Q4 - Annual Report

Part I Business Conduent is a global technology-led business process solutions company providing services to commercial, government, and transportation sectors, focusing on Growth, Efficiency, and Quality to drive shareholder value - Conduent delivers mission-critical services for businesses and governments, serving 80% of Fortune 100 companies and over 600 government and transportation agencies[19] - As of December 31, 2022, the company employed approximately 62,000 associates globally, with 41% in North America and the remainder in delivery centers across Asia Pacific, Latin America, the Caribbean, and Europe[24][25] - The company's strategy is centered on three pillars: Growth (measured by revenue retention and new business), Efficiency (measured by associate retention and Adjusted EBITDA margin), and Quality (measured by SLA performance and client satisfaction)[26][27] 2022 Revenue by Segment | Segment | Revenue (in millions) | Percentage of Total Revenue | | :--- | :--- | :--- | | Commercial | $1,992 | 52% | | Government | $1,150 | 30% | | Transportation | $709 | 18% | Our Business and Strategic Focus Conduent provides technology-led business process solutions, managing 1.3 billion customer interactions in 2022, with a strategic focus on Growth, Efficiency, and Quality - In 2022, Conduent managed approximately 1.3 billion customer service interactions and processed nearly 12 million daily tolling transactions[21][22] - The company's systems process 43% of all Supplemental Nutrition Assistance Program (SNAP) payments in the U.S[23] - Strategic growth efforts in 2022 led to a 10% increase in add-on sales compared to 2021, and the number of top 100 clients with multiple service lines grew from 73 to 90[30] - Efficiency efforts have improved the Net Promoter Score (NPS) by 30 points over the past three years[29] Segments and Service Offerings The company operates through three segments: Commercial (CXM, BOS, Healthcare, HCS), Government (healthcare, digital payments), and Transportation (road usage, transit, public safety) - The Commercial segment is the largest, representing 52% of total 2022 revenues, providing solutions like CXM, BOS, Healthcare, and HCS[40][44] - The Government segment, 30% of 2022 revenues, provides solutions for government healthcare programs in 46 states and disburses $106 billion annually for federally sponsored programs[41][51][53] - The Transportation segment, 18% of 2022 revenues, manages 48% of transactions for the top 10 U.S. tolling agencies and processed over 8.7 million citation payments in 2022[42][55][58] Competition and Intellectual Property Conduent competes with large multinational providers and specialized firms based on technology, performance, price, and service, protecting its portfolio of 607 U.S. patents and 57 registered trademarks - Key competitors include large service providers (Accenture, Cognizant), traditional BPO companies (Genpact), HR providers (Alight), healthcare specialists (Gainwell, Optum), and transportation firms (TransCore, Verra Mobility)[66][69] - As of December 31, 2022, the company holds approximately 607 U.S. patents and has 31 pending applications, also owning 57 registered trademarks in the United States[69][71] People and Culture As of year-end 2022, Conduent had approximately 62,000 associates globally, emphasizing diversity, equity, and inclusion, and investing in employee development - The global workforce of approximately 62,000 is distributed with 41% in North America and the rest primarily in Asia Pacific, Latin America, the Caribbean, and Europe[72] - The company has received multiple diversity and inclusion awards, including being recognized as a Best Place to Work for Disability Inclusion and named to Forbes' America's Best 500 Employers for Diversity 2022[74][78] - In 2022, employees completed about 2.7 million learning assets on the company's digital platforms[75] Risk Factors The company faces operational, legal/compliance, and financial risks, including government contract dependence, cybersecurity threats, and significant indebtedness Business, Economic, Market and Operational Risks Significant operational risks include government contract termination, competitive bidding, reliance on third-party providers, and disruptions from geopolitical events or the COVID-19 pandemic - A significant portion of revenue comes from government contracts, which are subject to appropriation, termination rights, and audits, posing risks of revenue loss and penalties[96] - The business is exposed to risks from geopolitical events, macroeconomic conditions, and natural disasters, particularly in regions with a significant workforce like the U.S., India, and the Philippines[99] - The COVID-19 pandemic continues to negatively impact the business through disruptions to service delivery, challenges with work-from-home models, and adverse effects on customer demand[114] Legal, Compliance and Data Security Risks The company is subject to stringent data privacy laws (HIPAA, GDPR) and cybersecurity threats, with non-compliance or breaches leading to legal action and reputational damage - The company handles sensitive personal and health data, making it subject to stringent regulations like HIPAA and GDPR, where failure to comply can result in significant penalties[118] - Cybersecurity threats such as hacking, malware, and phishing are prevalent and could lead to service interruptions, data misappropriation, litigation, and significant financial damages[122][124][126] - The company is subject to various legal proceedings concerning securities, contracting, intellectual property, and employment laws, which could result in substantial payments and reputational harm[130] Financial Risks Financial stability is challenged by a $358 million goodwill impairment in 2022, substantial indebtedness with restrictive covenants, and pressures on pricing and cost management - A goodwill impairment charge of $358 million was recorded for the Commercial reporting unit as of December 31, 2022, triggered by lower-than-expected contract signings and a softening business pipeline[133] - The company has significant indebtedness with restrictive covenants that could limit its ability to obtain additional financing, dedicate cash flow to operations, and compete effectively[136][139] - Profitability is dependent on the ability to secure adequate pricing for services and improve cost structures, which is challenged by competitive pressures and rising labor costs[145][147] Properties As of December 31, 2022, Conduent's property portfolio comprised approximately 5.6 million square feet across 193 leased and 4 owned facilities, actively managing its real estate footprint - The company's property portfolio totals approximately 5.6 million square feet with an annual operating cost of about $138 million[155] - In 2022, 0.5 million square feet of leased property became surplus due to efficiency initiatives, and the company successfully resolved this surplus space during the year[156] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 16 – Contingencies and Litigation to the Consolidated Financial Statements - Details on legal proceedings are available in Note 16 of the financial statements[157] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Conduent's common stock trades on Nasdaq under "CNDT", with no dividends paid in 2022, and future earnings intended for business operations and growth - The company's common stock trades on the Nasdaq under the symbol "CNDT"[160] - No dividends were paid on common stock in 2022, and the company intends to retain future earnings for business growth[162] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenue decreased by 7% to $3.9 billion, resulting in a net loss of $182 million due to a goodwill impairment, despite progress in new business ACV and operational service levels Financial Information and Analysis of Results of Operations For 2022, revenue decreased by 7% to $3,858 million, leading to a net loss of $182 million, primarily due to a $358 million goodwill impairment, offset by lower SG&A and a divestiture gain Consolidated Results of Operations (2022 vs. 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $3,858 | $4,140 | (7)% | | Cost of services | $3,018 | $3,138 | (4)% | | SG&A | $440 | $544 | (19)% | | Goodwill impairment | $358 | $0 | n/m | | (Gain) on divestitures, net | ($158) | $3 | (5,367)% | | Net Income (Loss) | ($182) | ($28) | (550)% | - The 7% revenue decrease was primarily due to lower federal stimulus revenue, lost business, the Midas business divestiture, and negative foreign exchange impacts[180] - A goodwill impairment charge of $358 million was recorded in 2022 related to the Commercial reporting unit[188] - The divestiture of the Midas business resulted in a pre-tax gain of $166 million[189] Operations Review of Segments In 2022, Commercial segment profit increased despite slight revenue decline, while Government and Transportation segments saw revenue and profit decreases due to stimulus reduction and exchange rates Segment Performance (2022 vs. 2021) | Segment (in millions) | 2022 Revenue | 2021 Revenue | 2022 Adjusted EBITDA | 2021 Adjusted EBITDA | | :--- | :--- | :--- | :--- | :--- | | Commercial | $1,992 | $2,017 | $226 | $193 | | Government | $1,150 | $1,307 | $331 | $437 | | Transportation | $709 | $746 | $84 | $106 | - Commercial segment profit increased, driven by the BenefitWallet business and operational efficiencies, despite a slight revenue decline[201][203] - Government segment revenue and profit decreased primarily due to significantly lower federal stimulus revenue compared to the prior year[204][205] Metrics New business ACV increased by 1% to $732 million, and TCV rose by 11% to $1,887 million, while renewal TCV decreased by 13% due to timing, with Net ARR Activity at $114 million Signings (2022 vs. 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | New business ACV | $732 | $726 | 1% | | New business TCV | $1,887 | $1,705 | 11% | | Renewals TCV | $2,477 | $2,835 | (13)% | | Total Signings | $4,364 | $4,540 | (4)% | - The total new business pipeline increased to $22.6 billion at the end of 2022, up from $21.4 billion at the end of 2021[215] - The Net ARR Activity metric for the trailing twelve months ending December 31, 2022 was $114 million[217] Capital Resources and Liquidity As of December 31, 2022, Conduent had $582 million in cash, with operating cash flow at $144 million, and believes its liquidity is sufficient to meet obligations for the next twelve months Cash Flow Summary (2022 vs. 2021) | Cash Flow (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $144 | $243 | | Net cash from investing activities | $173 | ($142) | | Net cash from financing activities | ($131) | ($132) | - Total cash and cash equivalents increased to $582 million at year-end 2022 from $415 million at year-end 2021[218] - Material cash requirements include $1,335 million in total debt, $271 million in lease payables, and $112 million in purchase commitments as of year-end 2022[229][230][231] Critical Accounting Estimates and Policies Critical accounting estimates include revenue recognition, income taxes, loss contingencies, and goodwill valuation, with a $358 million impairment charge recorded for the Commercial unit in Q4 2022 - Key critical accounting estimates include revenue recognition, goodwill valuation, income taxes, and loss contingencies[236][237] - The annual goodwill impairment test as of October 1, 2022, did not result in an impairment, however, a subsequent review in Q4 for the Commercial reporting unit was triggered by lower-than-expected contract signings and a softening business pipeline[251][252] - The Q4 2022 goodwill impairment assessment for the Commercial reporting unit resulted in a pre-tax impairment charge of $358 million[252] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, managing them with derivatives, with $762 million of its $1,335 million debt carrying variable interest rates - The company manages foreign currency and interest rate risk through operating activities and derivative instruments[262] - A 10% appreciation or depreciation of the U.S. Dollar against all currencies would impact the cumulative translation adjustment portion of equity by approximately $75 million[264] - As of year-end 2022, $762 million of the company's total debt carried variable interest rates, exposing it to interest rate fluctuations, out of $1,335 million total debt[265] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2022, including the independent auditor's report highlighting the goodwill impairment assessment as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[269] - The auditor identified the goodwill impairment assessment for the Commercial reporting unit as a critical audit matter due to the significant judgments and assumptions made by management regarding revenue growth, discount rates, and long-term growth rates[278][279] Key Financial Statement Data (as of Dec 31, 2022) | Metric (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Income Statement | | | | Revenue | $3,858 | $4,140 | | Net Loss | ($182) | ($28) | | Balance Sheet | | | | Total Assets | $3,571 | $4,036 | | Total Liabilities | $2,512 | $2,762 | | Total Equity | $917 | $1,132 | Controls and Procedures Management concluded that disclosure controls and procedures, as well as internal control over financial reporting, were effective as of December 31, 2022, with no material changes in Q4 - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2022[485] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, a conclusion audited and confirmed by PricewaterhouseCoopers LLP[487] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees This section incorporates by reference information from the 2023 Proxy Statement regarding directors, executive compensation, security ownership, related party transactions, and accountant fees - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and accountant fees is incorporated by reference from the forthcoming 2023 Proxy Statement[490][494][495][496] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and all exhibits filed with the Form 10-K report, including CEO and CFO certifications - This part contains the index to financial statements, financial statement schedules, and a list of all exhibits filed with the Form 10-K[497][498]