Conduent(CNDT) - 2020 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2020 ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED) This section presents the unaudited condensed consolidated financial statements for Conduent Incorporated for the three months ended March 31, 2020, including statements of income (loss), comprehensive income (loss), balance sheets, cash flows, and shareholders' equity, along with detailed notes explaining the basis of presentation, accounting policies, revenue disaggregation, segment reporting, debt, contingencies, and other financial information Condensed Consolidated Statements of Income (Loss) The company reported a significant reduction in net loss for the three months ended March 31, 2020, compared to the prior year, primarily due to the absence of goodwill impairment charges and lower operating costs, despite a decrease in revenue Condensed Consolidated Statements of Income (Loss) (in millions, except per share data) | (in millions, except per share data) | March 31, 2020 | March 31, 2019 | | :----------------------------------- | :------------- | :------------- | | Revenue | $1,051 | $1,158 | | Total Operating Costs and Expenses | $1,102 | $1,496 | | Income (Loss) Before Income Taxes | $(51) | $(338) | | Income tax expense (benefit) | $(2) | $(30) | | Net Income (Loss) | $(49) | $(308) | | Basic Net Income (Loss) per Share | $(0.24) | $(1.49) | | Diluted Net Income (Loss) per Share | $(0.24) | $(1.49) | Condensed Consolidated Statements of Comprehensive Income (Loss) The company's comprehensive loss decreased significantly year-over-year, driven by the improved net income (loss) and a shift from other comprehensive income to loss, primarily due to currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (Loss) (in millions) | (in millions) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income (Loss) | $(49) | $(308) | | Other Comprehensive Income (Loss), Net | $(30) | $22 | | Comprehensive Income (Loss), Net | $(79) | $(286) | - Currency translation adjustments contributed a loss of $28 million in Q1 2020, compared to a gain of $7 million in Q1 2019[11] Condensed Consolidated Balance Sheets As of March 31, 2020, the company's total assets and liabilities slightly decreased compared to December 31, 2019, with a notable decrease in cash and cash equivalents and an increase in long-term debt Condensed Consolidated Balance Sheets (in millions) | Asset/Liability Category | March 31, 2020 | December 31, 2019 | | :------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $395 | $496 | | Total current assets | $1,572 | $1,586 | | Goodwill | $1,486 | $1,502 | | Total Assets | $4,394 | $4,514 | | Total current liabilities | $1,023 | $1,177 | | Long-term debt | $1,596 | $1,464 | | Total Liabilities | $3,032 | $3,072 | | Total Equity | $1,220 | $1,300 | Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2020, the company experienced increased cash usage in operating activities, significantly reduced cash usage in investing activities, and a substantial increase in cash from financing activities, primarily due to drawing on its revolving credit facility Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $(192) | $(49) | | Net cash provided by (used in) investing activities | $(23) | $(168) | | Net cash provided by (used in) financing activities | $130 | $(22) | | Increase (decrease) in cash, cash equivalents and restricted cash | $(92) | $(237) | | Cash, Cash Equivalents and Restricted Cash at End of period | $413 | $528 | - The company drew $150 million from its revolving credit facility in Q1 2020, contributing to the positive financing cash flow[18] Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity decreased from $1,300 million at December 31, 2019, to $1,220 million at March 31, 2020, primarily due to the net loss and other comprehensive losses during the period Condensed Consolidated Statements of Shareholders' Equity (in millions) | Item | Balance at Dec 31, 2019 | Net Income (Loss) | Other comprehensive income (loss), net | Balance at Mar 31, 2020 | | :------------------------------------- | :---------------------- | :---------------- | :------------------------------------- | :---------------------- | | Common Stock | $2 | — | — | $2 | | Additional Paid-in Capital | $3,890 | — | — | $3,891 | | Retained Earnings (Deficit) | $(2,185) | $(49) | — | $(2,236) | | Accumulated Other Comprehensive Loss (AOCL) | $(407) | — | $(30) | $(437) | | Total Shareholders' Equity | $1,300 | $(49) | $(30) | $1,220 | Notes to the Condensed Consolidated Financial Statements These notes provide essential context and detail for the condensed consolidated financial statements, covering accounting policies, revenue recognition, segment performance, debt, financial instruments, contingencies, and the impact of the COVID-19 pandemic on estimates and operations Note 1 – Basis of Presentation Conduent is a global provider of mission-critical services and solutions for businesses and governments. The unaudited interim financial statements are prepared in accordance with U.S. GAAP, and the COVID-19 pandemic has introduced increased judgment and variability into financial estimates - Conduent provides mission-critical services and solutions to a majority of Fortune 100 companies and over 500 government entities, leveraging transaction-intensive processing, analytics, and automation[25] - The COVID-19 pandemic has required increased judgment and introduced higher variability and volatility in the company's financial estimates and assumptions as of March 31, 2020[28] Note 2 – Recent Accounting Pronouncements The company adopted new credit loss guidance (CECL) as of January 1, 2020, with no material impact. It is currently evaluating the impact of new guidance on income taxes (effective January 1, 2021) and reference rate reform (applicable through December 31, 2022) - The adoption of the new credit loss guidance (CECL) on January 1, 2020, did not have a material impact on the company's consolidated financial statements[31] - The company is evaluating the impact of new accounting guidance for income taxes (effective January 1, 2021) and reference rate reform (applicable through December 31, 2022)[32][33] Note 3 – Revenue The company changed its disaggregated revenue presentation in Q1 2020, showing total consolidated revenue of $1,051 million for the three months ended March 31, 2020, a decrease from $1,158 million in the prior year. The majority of revenue is recognized over time Disaggregated Revenue by Major Service Offering (in millions) | Service Offering | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Commercial Industries | $572 | $612 | | Government Services | $290 | $325 | | Transportation | $189 | $184 | | Other (Divestitures, Education) | $0 | $37 | | Total Consolidated Revenue | $1,051 | $1,158 | | Timing of Revenue Recognition: | | | | Point in time | $30 | $39 | | Over time | $1,021 | $1,119 | - Estimated future revenue from remaining performance obligations at March 31, 2020, was approximately $1.8 billion, with 66% expected to be recognized over the next two years[41] Note 4 – Segment Reporting The company operates through three reportable segments: Commercial Industries, Government Services, and Transportation, along with 'Other' operations and 'Shared IT / Infrastructure & Corporate Costs'. Segment financial performance is based on Segment Profit / (Loss) and Segment Adjusted EBITDA - The company realigned its sales organization and certain shared IT and allocated functions in Q1 2020, revising prior periods for consistency[42] Segment Financial Performance (in millions) | Segment | 2020 Revenue | 2019 Revenue | 2020 Segment Profit (Loss) | 2019 Segment Profit (Loss) | 2020 Adjusted EBITDA | 2019 Adjusted EBITDA | | :------------------------------- | :----------- | :----------- | :------------------------- | :------------------------- | :------------------- | :------------------- | | Commercial Industries | $572 | $612 | $90 | $117 | $115 | $139 | | Government Services | $290 | $325 | $93 | $80 | $99 | $89 | | Transportation | $189 | $184 | $23 | $19 | $32 | $28 | | Other | $0 | $37 | $4 | $1 | $(3) | $1 | | Shared IT / Infrastructure & Corporate Costs | $0 | $0 | $(165) | $(148) | $(147) | $(134) | | Total | $1,051 | $1,158 | $45 | $69 | $96 | $123 | Note 5 – Restructuring Programs and Related Costs The company continues restructuring programs to optimize its employee base, reduce real estate, and consolidate data centers, incurring $7 million in restructuring and related costs for Q1 2020, down from $16 million in Q1 2019 - Restructuring programs aim to reduce cost structure and improve productivity through employee downsizing, real estate footprint reduction, and data center consolidation[53] Restructuring Program Activity (in millions) | Category | Accrued Balance at Dec 31, 2019 | Provision | Changes in estimates | Total Net Current Period Charges | Charges against reserve and currency | Accrued Balance at Mar 31, 2020 | | :----------------------------- | :------------------------------ | :-------- | :------------------- | :------------------------------- | :----------------------------------- | :------------------------------ | | Severance Related Costs | $15 | — | — | — | $(8) | $7 | | Termination and Other Costs | $6 | $3 | $1 | $4 | $(5) | $5 | | Asset Impairments | — | $1 | — | $1 | $(1) | — | | Total | $21 | $4 | $1 | $5 | $(14) | $12 | Total Net Restructuring Charges by Segment (in millions) | Segment | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Commercial Industries | $2 | $2 | | Shared IT / Infrastructure & Corporate Costs | $3 | $14 | | Total Net Restructuring Charges | $5 | $16 | Note 6 – Debt As of March 31, 2020, the company's total long-term debt was $1,596 million, with $60 million due within one year. It had drawn $150 million from its $750 million revolving credit facility and was in compliance with all debt covenants Long-term Debt (in millions) | Debt Type | March 31, 2020 | December 31, 2019 | | :------------------------------ | :------------- | :---------------- | | Term loan A due 2022 | $652 | $664 | | Term loan B due 2023 | $822 | $824 | | Revolving credit facility due 2022 | $150 | — | | Senior notes due 2024 | — | $34 | | Finance lease obligations | — | $17 | | Principal debt balance | $1,678 | $1,539 | | Less: current maturities | $(60) | $(50) | | Total Long-term Debt | $1,596 | $1,464 | - As of March 31, 2020, the company had $518 million available to be drawn from its $750 million Senior Revolving Credit Facility, after utilizing $150 million and $82 million for letters of credit[59] - The company was in compliance with all debt covenants as of March 31, 2020, and December 31, 2019[60] Note 7 – Financial Instruments The company uses derivative instruments, primarily forward contracts, to hedge foreign currency exchange rate fluctuations, with gross notional values of $176 million at March 31, 2020, mostly maturing within three months - The company is exposed to market risk from changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to hedge economic exposures and reduce volatility[61] - Outstanding forward exchange contracts had gross notional values of $176 million at March 31, 2020, with approximately 72% maturing within three months[61] Note 8 – Fair Value of Financial Assets and Liabilities The company measures financial assets and liabilities at fair value using a hierarchy (Level 1, 2, 3). Foreign exchange forward contracts are measured at Level 2, while long-term debt and contingent consideration payable are also valued, with the latter using a Level 3 Monte Carlo simulation Financial Assets and Liabilities Accounted for at Fair Value (in millions) | Item | March 31, 2020 | December 31, 2019 | | :---------------------------------- | :------------- | :---------------- | | Assets: Foreign exchange contract - forward | $1 | $2 | | Liabilities: Foreign exchange contracts - forwards | $3 | — | Other Financial Assets and Liabilities (in millions) | Item | March 31, 2020 Carrying Amount | March 31, 2020 Fair Value | December 31, 2019 Carrying Amount | December 31, 2019 Fair Value | | :---------------------------------- | :----------------------------- | :------------------------ | :-------------------------------- | :--------------------------- | | Long-term debt | $1,596 | $1,373 | $1,464 | $1,449 | | Contingent consideration payable | $4 | $4 | $4 | $4 | - The fair value of long-term debt is estimated based on current rates for similar maturities (Level 2), while contingent consideration payable uses a Monte Carlo simulation model (Level 3)[70][71] Note 9 – Employee Benefit Plans The company recognized $1 million in expense for its defined contribution plans in Q1 2020, a decrease from $3 million in Q1 2019, following the suspension of its 401(k) plan match for U.S. salaried employees in 2019 - The company suspended its 401(k) plan match for all U.S. salaried employees beginning in 2019[73] Defined Contribution Plan Expense (in millions) | Period | Expense | | :------------------------------------ | :------ | | Three months ended March 31, 2020 | $1 | | Three months ended March 31, 2019 | $3 | Note 10 – Accumulated Other Comprehensive Loss (AOCL) The Accumulated Other Comprehensive Loss (AOCL) increased from $(407) million at December 31, 2019, to $(437) million at March 31, 2020, primarily due to negative currency translation adjustments Changes in Accumulated Other Comprehensive Loss (AOCL) (in millions) | Item | Balance at Dec 31, 2019 | Other comprehensive income (loss) before reclassifications | Net current period other comprehensive income (loss) | Balance at Mar 31, 2020 | | :------------------------------------- | :---------------------- | :--------------------------------------------------------- | :--------------------------------------------------- | :---------------------- | | Currency Translation Adjustments | $(408) | $(28) | $(28) | $(436) | | Gains on (Losses) Cash Flow Hedges | $3 | $(3) | $(3) | — | | Defined Pension Benefit Items | $(2) | $1 | $1 | $(1) | | Total | $(407) | $(30) | $(30) | $(437) | Note 11 – Contingencies and Litigation The company is involved in various claims and lawsuits, including a settled Texas Medicaid fraud case (final payment made in January 2020), an ongoing dispute related to a customer care call center business sale, and a lawsuit against Cognizant Business Services. The company also has outstanding surety bonds and letters of credit totaling $801 million - The Texas Medicaid Fraud Prevention Act lawsuit was settled, with the final $118 million payment made in January 2020, resulting in dismissal with prejudice[81] - A lawsuit filed by Skyview Capital LLC and Continuum Global Solutions, LLC alleges breach of representation and warranty, breach of contract, and fraud related to the sale of a customer care call center business, with plaintiffs seeking to withhold payments on $23 million in notes[82] - Conduent Business Services LLC filed a lawsuit against Cognizant Business Services Corporation for breach of contract, seeking damages over $150 million, while Cognizant counterclaimed for approximately $90 million[85] - As of March 31, 2020, the company had $591 million in outstanding surety bonds and $210 million in outstanding letters of credit to secure contractual and corporate obligations[88] Note 12 – Preferred Stock The company has Series A convertible perpetual preferred stock with a $120 million liquidation preference, paying 8% quarterly cash dividends, and convertible into 44.9438 shares of common stock per preferred share - In December 2016, the company issued 120,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $120 million and an initial fair value of $142 million[89] - The preferred stock pays quarterly cash dividends at an 8% annual rate ($9.6 million per year) and is convertible into 44.9438 shares of common stock per preferred share[89] Note 13 – Earnings per Share Basic and diluted net loss per share for common stock was $(0.24) for the three months ended March 31, 2020, a significant improvement from $(1.49) in the prior year, after accounting for preferred stock dividends Earnings per Share Computation (in millions, except per share data) | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $(49) | $(308) | | Cash dividend paid - preferred stock | $(2) | $(2) | | Adjusted Net Income (Loss) Available to Common Shareholders | $(51) | $(310) | | Weighted average common shares outstanding (thousands) | 211,093 | 207,944 | | Basic Net Income (Loss) per Share | $(0.24) | $(1.49) | | Diluted Net Income (Loss) per Share | $(0.24) | $(1.49) | Note 14 – Supplementary Financial Information This note provides a detailed breakdown of the components within 'Other Current Assets,' 'Other Current Liabilities,' 'Other Long-term Assets,' and 'Other Long-term Liabilities' as of March 31, 2020, and December 31, 2019 Components of Other Assets and Liabilities (in millions) | Category | March 31, 2020 | December 31, 2019 | | :---------------------------- | :------------- | :---------------- | | Other Current Assets | | | | Prepaid expenses | $86 | $70 | | Income taxes receivable | $43 | $38 | | Restricted cash | $18 | $9 | | Total Other Current Assets | $318 | $283 | | Other Current Liabilities | | | | Accrued liabilities | $285 | $309 | | Litigation related accruals | $67 | $178 | | Restructure reserves | $7 | $15 | | Total Other Current Liabilities | $535 | $647 | | Other Long-term Assets | | | | Internal use software, net | $147 | $150 | | Deferred contract costs, net | $76 | $84 | | Total Other Long-term Assets | $384 | $387 | | Other Long-term Liabilities | | | | Income tax liabilities | $20 | $20 | | Unearned income | $19 | $21 | | Total Other Long-term Liabilities | $81 | $91 | Note 15 – Related Party Transactions The company engages in transactions with related parties sharing common shareholders, reporting $6 million in revenue from and $6 million in purchases from these entities for Q1 2020, with immaterial receivable and payable balances Related Party Transactions (in millions) | Transaction Type | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Revenue from related parties | $6 | $9 | | Purchases from related parties | $6 | $12 | - Receivable and payable balances with related party entities were not material as of March 31, 2020, and December 31, 2019[97] Note 16 – Goodwill Goodwill decreased slightly to $1,486 million at March 31, 2020, primarily due to foreign currency translation. The company concluded no goodwill impairment test was necessary for Q1 2020 but acknowledges potential future impacts from the COVID-19 pandemic Changes in Carrying Amount of Goodwill by Segment (in millions) | Segment | Balance at Dec 31, 2019 | Foreign currency translation | Balance at Mar 31, 2020 | | :---------------------- | :---------------------- | :--------------------------- | :---------------------- | | Commercial Industries | $821 | $(9) | $812 | | Government Services | $621 | $(6) | $615 | | Transportation | $60 | $(1) | $59 | | Total | $1,502 | $(16) | $1,486 | - No interim goodwill impairment test was deemed necessary for any reporting units as of March 31, 2020[98] - The ongoing COVID-19 pandemic could potentially lead to future goodwill impairment charges if reporting unit fair values fall below carrying values[99] ITEM 2 — MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2020, including an overview of the business, the impact of the COVID-19 pandemic, detailed financial and segment performance reviews, key business metrics, critical accounting policies, and analysis of capital resources and cash flows Overview Conduent is a global leader in business process services, providing mission-critical solutions to businesses and governments. Its strategy focuses on portfolio focus, operational discipline, sales excellence, and innovation, supported by a workforce of approximately 65,000 people across 25 countries - Conduent is one of the largest business process services companies globally, delivering mission-critical services and solutions to businesses and governments[103] - The company's strategy emphasizes portfolio focus, operational discipline, sales and delivery excellence, and innovation, complemented by aligned investments[104] - As of March 31, 2020, Conduent had approximately 65,000 employees servicing customers from service centers in 25 countries[105] COVID-19 Outbreak In response to the COVID-19 pandemic, Conduent implemented a proactive plan including employee support, transitioning the majority of its workforce to work-from-home, increasing on-site sanitation, and drawing on its revolving credit facility as a precautionary measure, which has also delayed strategic initiatives - The company established a proactive plan to address COVID-19, including extending short-term disability, providing extra sick leave, and introducing a hardship leave policy for associates[106] - A majority of the workforce was shifted to work-from-home, requiring coordinated effort and stringent safety/security precautions[107] - The company drew on its revolving credit facility as a precautionary measure and experienced diversion of management time and delayed investments from strategic initiatives due to the COVID-19 response[109] Financial Review of Operations For Q1 2020, revenue decreased by 9% year-over-year to $1,051 million, primarily due to divestitures, contract losses, and COVID-19 impacts. However, net loss significantly improved from $(308) million to $(49) million, largely due to the absence of a goodwill impairment charge and reductions in operating costs Financial Review of Operations (in millions) | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change ($) | Change (%) | | :---------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Revenue | $1,051 | $1,158 | $(107) | (9)% | | Cost of services (excluding depreciation and amortization) | $832 | $906 | $(74) | (8)% | | Selling, general and administrative (excluding depreciation and amortization) | $116 | $127 | $(11) | (9)% | | Research and development (excluding depreciation and amortization) | $1 | $3 | $(2) | (67)% | | Depreciation and amortization | $117 | $115 | $2 | 2% | | Restructuring and related costs | $7 | $16 | $(9) | (56)% | | Interest expense | $17 | $20 | $(3) | (15)% | | Goodwill impairment | — | $284 | $(284) | (100)% | | (Gain) loss on divestitures and transaction costs | $4 | $14 | $(10) | (71)% | | Litigation costs (recoveries), net | $6 | $12 | $(6) | (50)% | | Other (income) expenses, net | $2 | $(1) | $3 | | | Total Operating Costs and Expenses | $1,102 | $1,496 | $(394) | | | Income (Loss) Before Income Taxes | $(51) | $(338) | $287 | | | Income tax expense (benefit) | $(2) | $(30) | $28 | | | Net Income (Loss) | $(49) | $(308) | $259 | | - Approximately $14 million of the Q1 2020 revenue decline was directly attributable to the COVID-19 impact, primarily from lower volume demand in Transportation and Commercial Industries[114] - The effective tax rate for Q1 2020 was 3.9%, lower than the U.S. statutory rate, primarily due to geographic mix of income, valuation allowances, and tax credits[128] Operations Review of Segment Revenue and Profit Segment performance varied, with Commercial Industries revenue and profit declining due to contract losses and COVID-19. Government Services saw revenue decrease but profit increase from cost reductions. Transportation revenue and profit increased due to new business and reduced IT spend, despite COVID-19 impacts. Shared IT/Infrastructure & Corporate Costs increased due to IT and COVID-19 related expenses Segment Financial Performance (in millions) | Segment | 2020 Revenue | 2019 Revenue | 2020 Segment Profit (Loss) | 2019 Segment Profit (Loss) | 2020 Adjusted EBITDA | 2019 Adjusted EBITDA | | :------------------------------- | :----------- | :----------- | :------------------------- | :------------------------- | :------------------- | :------------------- | | Commercial Industries | $572 | $612 | $90 | $117 | $115 | $139 | | Government Services | $290 | $325 | $93 | $80 | $99 | $89 | | Transportation | $189 | $184 | $23 | $19 | $32 | $28 | | Other | $0 | $37 | $4 | $1 | $(3) | $1 | | Shared IT / Infrastructure & Corporate Costs | $0 | $0 | $(165) | $(148) | $(147) | $(134) | | Total | $1,051 | $1,158 | $45 | $69 | $96 | $123 | - Commercial Industries revenue decreased due to contract losses and COVID-19, particularly in Customer Experience Management and Human Resource Services (BenefitWallet interest rates)[138] - Government Services segment profit and Adjusted EBITDA margin increased due to reductions in IT and delivery spend, despite revenue declines from contract losses and volume pressure[142] - Transportation revenue and profit increased, driven by new business and reduced IT platform spend, partially offset by COVID-19 related volume pressure and project delays[143][144] Metrics The company redefined its new business classification, reporting a 127% increase in New Logo/New Capability TCV to $282 million in Q1 2020. However, Add-on Expansion TCV decreased by 58% and Renewals TCV decreased by 29%, leading to an overall 12% decrease in Total Signings to $839 million. The renewal rate, excluding strategic non-renewals, was 93% - New Logo/New Capability sales increased by 127% to $282 million in Q1 2020, driven by large wins in Commercial Industries, Government Services, and Transportation segments[148] Signings (Total Contract Value - TCV) (in millions) | Category | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change ($) | Change (%) | | :---------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | New logo & New capability TCV | $282 | $124 | $158 | 127% | | Add-on expansion TCV | $42 | $101 | $(59) | (58)% | | Renewals TCV | $515 | $727 | $(212) | (29)% | | Total Signings | $839 | $952 | $(113) | (12)% | - The renewal rate for Q1 2020 was 93%, up from 92% in Q1 2019, excluding strategic decisions not to renew certain contracts and divestiture impacts[155] Critical Accounting Policies The COVID-19 pandemic has significantly impacted the company's business, operations, and customer demand, requiring substantial management judgment in financial reporting. While some government subsidy programs saw increases, these were offset by declines in retail call volumes, banking transaction processing, and other areas, leading to high uncertainty regarding future financial impacts - The COVID-19 pandemic has caused disruptions to the company's business, costs, operations, supply chain, and customer demand, requiring significant management judgment in determining financial impacts[156][157] - Benefits from increased government subsidy programs were offset by declines in retail call volumes, banking client transaction processing, interest rate exposure in BenefitWallet, and reduced child support/Medicaid volumes[156] Capital Resources and Liquidity As of March 31, 2020, the company had $395 million in cash and cash equivalents and $518 million available from its revolving credit facility. Total long-term debt was $1.7 billion, with $60 million due within one year. Management believes current resources are sufficient to meet obligations for at least the next twelve months Capital Resources (in millions) | Item | March 31, 2020 | December 31, 2019 | | :---------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $395 | $496 | | Revolving Credit Facility (drawn) | $150 | — | | Net Revolver available to be drawn | $518 | | | Total long-term debt outstanding | $1,700 | | | Current portion of long-term debt | $60 | | - The company drew $150 million from its $750 million revolving credit facility in March 2020 as a precautionary measure due to COVID-19[159] - Management believes that cash on hand, projected cash flow from operations, a sound balance sheet, and the revolving line of credit will provide sufficient financial resources for at least the next twelve months[162] Cash Flow Analysis Net cash used in operating activities increased by $143 million year-over-year to $(192) million, primarily due to the final Texas litigation payment and lower adjusted EBITDA. Investing activities used less cash, while financing activities provided $130 million, mainly from the revolving credit facility draw-down Cash Flow Summary (in millions) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Better (Worse) | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :------------- | | Net cash provided by (used in) operating activities | $(192) | $(49) | $(143) | | Net cash provided by (used in) investing activities | $(23) | $(168) | $145 | | Net cash provided by (used in) financing activities | $130 | $(22) | $152 | - The increase in cash used in operating activities was primarily due to the $118 million final payment for the Texas litigation, lower adjusted EBITDA, and other working capital decreases[165] - The decrease in cash used in investing activities was mainly due to reduced capital expenditures and the absence of acquisition/divestiture payments[166] - Cash from financing activities increased primarily due to the $150 million draw-down from the revolving credit facility[167] Market Risk Management The company is exposed to market risk from foreign currency exchange rate fluctuations and manages this through operating and financing activities, and derivative financial instruments like forward contracts, without material changes to its risk management strategies - The company is exposed to market risk from changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to hedge economic exposures and reduce volatility[169] - Recent market and economic events have not caused the company to materially modify its financial risk management strategies for foreign currency risk[170] ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section incorporates by reference the market risk management discussion from Item 2, detailing the company's exposure to foreign currency exchange rates and its strategies for managing these risks through derivative financial instruments - The information regarding quantitative and qualitative disclosures about market risk is incorporated by reference from the 'Market Risk Management' section in Item 2 of this Form 10-Q[171] ITEM 4 — CONTROLS AND PROCEDURES Management, including the principal executive and financial officers, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2020, concluding they were effective. No material changes in internal control over financial reporting occurred during the quarter - The company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2020[172] - No material change in internal control over financial reporting occurred during the quarter ended March 31, 2020[173] PART II — OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and exhibits, providing additional context to the financial information ITEM 1 — LEGAL PROCEEDINGS This section incorporates by reference Note 11 – Contingencies and Litigation from the financial statements, which details various claims, lawsuits, and other legal matters the company is involved in - Information regarding legal proceedings is incorporated by reference from Note 11 – Contingencies and Litigation in the Condensed Consolidated Financial Statements[174] ITEM 1A — RISK FACTORS This section supplements previously reported risk factors with a new, significant risk related to the ongoing COVID-19 pandemic. It highlights disruptions to business operations, challenges with work-from-home solutions, adverse impacts on customer demand, diversion of management attention, potential government contract reductions, and increased financial risks including goodwill impairment and debt implications - The company's business has been and will continue to be negatively impacted by the ongoing COVID-19 pandemic, supplementing previously disclosed risk factors[177] - COVID-19 has caused disruptions including challenges with work-from-home transitions (e.g., security, compliance, delays), adverse impacts on customer demand and sales pipeline, and diversion of management resources from strategic initiatives[179][180][182] - Additional risks include potential government contract reductions or terminations, adverse impacts on customer payment cycles, reliance on third parties, risk of goodwill or other asset impairment, increased debt levels, and volatility in common share trading prices[183][185][186][187][188] ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the quarter ended March 31, 2020, the company did not engage in any unregistered sales of equity securities or issuer purchases of equity securities - The company did not issue any securities in transactions that were not registered under the Securities Act of 1933 during the quarter ended March 31, 2020[192] - There were no issuer purchases of equity securities during the quarter ended March 31, 2020[193] ITEM 6 — EXHIBITS This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, various restricted stock unit and performance restricted stock unit award agreements, CEO and CFO certifications, and Inline XBRL documents - Exhibits include the Restated Certificate of Incorporation, Amended and Restated By-Laws, forms of Restricted Stock Unit Award Agreement and Performance Restricted Stock Unit Award Agreement for 2020[196][197][198][199] - Certifications from the CEO and CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. Section 1350 are included[200] - Inline XBRL documents (Instance, Calculation, Definition, Label, Presentation, Schema Linkbases) and the Cover Page Interactive Data File are also listed as exhibits[201] SIGNATURES The report is duly signed on behalf of Conduent Incorporated by Mario A. Pompeo, Vice President and Chief Accounting Officer (Principal Accounting Officer), on May 7, 2020 - The report was signed by Mario A. Pompeo, Vice President and Chief Accounting Officer (Principal Accounting Officer) of Conduent Incorporated[204] - The signing date for the report was May 7, 2020[204]