Conduent(CNDT) - 2020 Q2 - Quarterly Report

Part I — Financial Information Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements and related accounting notes Condensed Consolidated Statements of Income (Loss) Condensed Consolidated Statements of Income (Loss) (Unaudited) (in millions, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $1,016 | $1,112 | $2,067 | $2,270 | | Cost of services (excluding D&A) | 795 | 879 | 1,627 | 1,785 | | SG&A (excluding D&A) | 111 | 121 | 227 | 248 | | R&D (excluding D&A) | — | 2 | 1 | 5 | | Depreciation and amortization | 115 | 112 | 232 | 227 | | Restructuring and related costs | 29 | 26 | 36 | 42 | | Interest expense | 15 | 20 | 32 | 40 | | Goodwill impairment | — | 1,067 | — | 1,351 | | (Gain) loss on divestitures and transaction costs | 2 | 2 | 6 | 16 | | Litigation costs (recoveries), net | 14 | 1 | 20 | 13 | | Other (income) expenses, net | (1) | 1 | 1 | — | | Total Operating Costs and Expenses | 1,080 | 2,231 | 2,182 | 3,727 | | Income (Loss) Before Income Taxes | (64) | (1,119) | (115) | (1,457) | | Income tax expense (benefit) | (13) | (90) | (15) | (120) | | Net Income (Loss) | $(51) | $(1,029) | $(100) | $(1,337) | | Net Income (Loss) per Share: | | | | | | Basic | $(0.25) | $(4.94) | $(0.50) | $(6.44) | | Diluted | $(0.25) | $(4.94) | $(0.50) | $(6.44) | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) | $(51) | $(1,029) | $(100) | $(1,337) | | Other Comprehensive Income (Loss), Net: | | | | | | Currency translation adjustments, net | 2 | (1) | (26) | 6 | | Reclassification of currency translation adjustments on divestitures | — | — | — | 15 | | Reclassification of divested benefit plans and other | — | — | — | (1) | | Unrecognized gains (losses), net | 2 | — | (1) | 1 | | Changes in benefit plans, net | — | — | 1 | — | | Other Comprehensive Income (Loss), Net | 4 | (1) | (26) | 21 | | Comprehensive Income (Loss), Net | $(47) | $(1,030) | $(126) | $(1,316) | Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (Unaudited) (in millions, except share data in thousands) | Asset/Liability/Equity | June 30, 2020 | December 31, 2019 | | :------------------------------------------ | :------------ | :---------------- | | Assets: | | | | Cash and cash equivalents | $428 | $496 | | Accounts receivable, net | 693 | 652 | | Contract assets | 160 | 155 | | Other current assets | 287 | 283 | | Total current assets | 1,568 | 1,586 | | Land, buildings and equipment, net | 309 | 342 | | Operating lease right-of-use assets | 255 | 271 | | Intangible assets, net | 306 | 426 | | Goodwill | 1,491 | 1,502 | | Other long-term assets | 397 | 387 | | Total Assets | $4,326 | $4,514 | | Liabilities and Equity: | | | | Current portion of long-term debt | $68 | $50 | | Accounts payable | 170 | 198 | | Accrued compensation and benefits costs | 182 | 174 | | Unearned income | 106 | 108 | | Other current liabilities | 496 | 647 | | Total current liabilities | 1,022 | 1,177 | | Long-term debt | 1,581 | 1,464 | | Deferred taxes | 93 | 111 | | Operating lease liabilities | 218 | 229 | | Other long-term liabilities | 95 | 91 | | Total Liabilities | 3,009 | 3,072 | | Series A convertible preferred stock | 142 | 142 | | Common stock | 2 | 2 | | Additional paid-in capital | 3,896 | 3,890 | | Retained earnings (deficit) | (2,290) | (2,185) | | Accumulated other comprehensive loss | (433) | (407) | | Total Equity | 1,175 | 1,300 | | Total Liabilities and Equity | $4,326 | $4,514 | | Shares of common stock issued and outstanding | 209,225 | 211,511 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Unaudited) (in millions) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------------------------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(100) | $(1,337) | | Depreciation and amortization | 232 | 227 | | Deferred income taxes | (29) | (140) | | Goodwill impairment | — | 1,351 | | Net cash provided by (used in) operating activities | $(118) | $(234) | | Net cash provided by (used in) investing activities | $(58) | $(209) | | Net cash provided by (used in) financing activities | $114 | $(39) | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | (6) | 2 | | Increase (decrease) in cash, cash equivalents and restricted cash | (68) | (480) | | Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 505 | 765 | | Cash, Cash Equivalents and Restricted Cash at End of period | $437 | $285 | Condensed Consolidated Statements of Shareholders' Equity Condensed Consolidated Statements of Shareholders' Equity (Unaudited) (in millions) | Metric | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | AOCL (1) | Shareholders' Equity | | :------------------------------------------------- | :----------- | :------------------------- | :-------------------------- | :------- | :------------------- | | Balance at March 31, 2020 | $2 | $3,891 | $(2,236) | $(437) | $1,220 | | Cash dividends paid - preferred stock, $20/share | — | — | (3) | — | (3) | | Stock option and incentive plans, net | — | 5 | — | — | 5 | | Net Income (Loss) | — | — | (51) | — | (51) | | Other comprehensive income (loss), net | — | — | — | 4 | 4 | | Balance at June 30, 2020 | $2 | $3,896 | $(2,290) | $(433) | $1,175 | Condensed Consolidated Statements of Shareholders' Equity (Unaudited) (in millions) - Six Months Ended June 30, 2020 | Metric | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | AOCL (1) | Shareholders' Equity | | :------------------------------------------------- | :----------- | :------------------------- | :-------------------------- | :------- | :------------------- | | Balance at December 31, 2019 | $2 | $3,890 | $(2,185) | $(407) | $1,300 | | Cash dividends paid - preferred stock, $40/share | — | — | (5) | — | (5) | | Stock option and incentive plans, net | — | 6 | — | — | 6 | | Net Income (Loss) | — | — | (100) | — | (100) | | Other comprehensive income (loss), net | — | — | — | (26) | (26) | | Balance at June 30, 2020 | $2 | $3,896 | $(2,290) | $(433) | $1,175 | Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1 – Basis of Presentation - Conduent is a global provider of mission-critical services and solutions for businesses and governments, leveraging transaction-intensive processing, analytics, and automation to improve efficiencies, reduce costs, and enable revenue growth. It serves a majority of Fortune 100 companies and over 500 government entities[27] - The unaudited interim financial statements are prepared in accordance with U.S. GAAP and SEC regulations, with management's estimates and assumptions requiring increased judgment due to the ongoing COVID-19 pandemic[28][29][30] Note 2 – Recent Accounting Pronouncements - The Company adopted the new credit loss guidance (CECL model) as of January 1, 2020, which did not have a material impact on its consolidated financial statements[33] - The Company is currently evaluating the impact of new accounting guidance for income taxes (effective January 1, 2021) and reference rate reform (LIBOR discontinuation, applicable through December 31, 2022) on its financial statements[34][35] Note 3 – Revenue - During Q1 2020, the Company changed its disaggregated revenue presentation by major service offering, with prior periods revised for consistency. Revenue is recognized over time for the majority of services[37][40] Disaggregated Revenue by Major Service Offering (in millions) | Service Offering | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Commercial Industries | $520 | $592 | $1,092 | $1,204 | | Government Services | 331 | 326 | 621 | 651 | | Transportation | 165 | 194 | 354 | 378 | | Other (Divestitures, Education) | — | — | — | 37 | | Total Consolidated Revenue | $1,016 | $1,112 | $2,067 | $2,270 | | Timing of Revenue Recognition: | | | | | | Point in time | $32 | $34 | $62 | $73 | | Over time | 984 | 1,078 | 2,005 | 2,197 | - Estimated future revenue from unsatisfied or partially satisfied performance obligations at June 30, 2020, was approximately $1.6 billion, with about 67% expected to be recognized over the next two years[43] Note 4 – Segment Reporting - The Company's three reportable segments are Commercial Industries, Government Services, and Transportation, aligned with client industries and managed based on Segment Profit / (Loss) and Segment Adjusted EBITDA[44][45] Selected Financial Information for Reportable Segments (Three Months Ended June 30, 2020 vs. 2019, in millions) | Metric | Commercial Industries (2020/2019) | Government Services (2020/2019) | Transportation (2020/2019) | Shared IT / Infrastructure & Corporate Costs (2020/2019) | Total (2020/2019) | | :-------------------------- | :------------------------------ | :------------------------------ | :------------------------- | :------------------------------------------------------- | :---------------- | | Revenue | $520 / $592 | $331 / $326 | $165 / $194 | $0 / $0 | $1,016 / $1,112 | | Segment profit (loss) | $72 / $111 | $115 / $95 | $31 / $29 | $(162) / $(176) | $55 / $59 | | Adjusted EBITDA | $96 / $132 | $120 / $102 | $39 / $41 | $(144) / $(161) | $110 / $114 | Selected Financial Information for Reportable Segments (Six Months Ended June 30, 2020 vs. 2019, in millions) | Metric | Commercial Industries (2020/2019) | Government Services (2020/2019) | Transportation (2020/2019) | Shared IT / Infrastructure & Corporate Costs (2020/2019) | Total (2020/2019) | | :-------------------------- | :------------------------------ | :------------------------------ | :------------------------- | :------------------------------------------------------- | :---------------- | | Revenue | $1,092 / $1,204 | $621 / $651 | $354 / $378 | $0 / $0 | $2,067 / $2,270 | | Segment profit (loss) | $162 / $228 | $208 / $175 | $54 / $48 | $(327) / $(324) | $100 / $128 | | Adjusted EBITDA | $211 / $271 | $219 / $191 | $71 / $69 | $(291) / $(295) | $206 / $237 | Note 5 – Restructuring Programs and Related Costs - Conduent is undertaking restructuring programs to optimize its employee base, reduce real estate footprint, and consolidate data centers, aiming to reduce costs and improve productivity. These initiatives include employee severance, lease terminations, and asset impairments[54][55] Restructuring Program Activity (Six Months Ended June 30, 2020, in millions) | Category | Severance and Related Costs | Termination and Other Costs | Asset Impairments | Total | | :----------------------------------- | :-------------------------- | :-------------------------- | :---------------- | :---- | | Accrued Balance at December 31, 2019 | $15 | $6 | $0 | $21 | | Provision | 10 | 10 | 11 | 31 | | Changes in estimates | — | 1 | — | 1 | | Total Net Current Period Charges | 10 | 11 | 11 | 32 | | Charges against reserve and currency | (13) | (13) | (11) | (37) | | Accrued Balance at June 30, 2020 | $12 | $4 | $0 | $16 | Total Net Restructuring Charges by Segment (in millions) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Commercial Industries | $5 | $9 | $7 | $11 | | Government Services | 1 | 1 | 1 | 1 | | Transportation | 3 | — | 3 | 1 | | Shared IT / Infrastructure & Corporate Costs | 18 | 14 | 21 | 26 | | Total Net Restructuring Charges | $27 | $24 | $32 | $40 | Note 6 – Debt Long-term Debt (in millions) | Debt Type | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Term loan A due 2022 | $648 | $664 | | Term loan B due 2023 | 820 | 824 | | Revolving credit facility due 2022 | 150 | — | | Senior notes due 2024 | — | 34 | | Finance lease obligations | — | 17 | | Principal debt balance | 1,671 | 1,539 | | Debt issuance costs and unamortized discounts | (22) | (25) | | Less: current maturities | (68) | (50) | | Total Long-term Debt | $1,581 | $1,464 | - As of June 30, 2020, the Company had borrowed $150 million from its $750 million Senior Revolving Credit Facility, with $592 million remaining available. The Company was in compliance with all debt covenants[60][61] Note 7 – Financial Instruments - Conduent uses derivative instruments, primarily forward contracts, to hedge foreign currency exchange rate fluctuations, reducing earnings volatility and protecting asset/liability fair values. As of June 30, 2020, outstanding forward exchange contracts had gross notional values of $162 million, with most maturing within three months[63] Note 8 – Fair Value of Financial Assets and Liabilities - The Company classifies fair value measurements into a three-level hierarchy based on input observability. All recurring fair value measurements for foreign exchange contracts were classified as Level 2[65][66][67][68] Financial Assets and Liabilities Accounted for at Fair Value on a Recurring Basis (in millions) | Asset/Liability | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Assets: Foreign exchange contract - forward | $1 | $2 | | Liabilities: Foreign exchange contracts - forward | $1 | $0 | - The fair value of long-term debt was estimated using current rates for similar maturities (Level 2), while contingent consideration payable was measured using a Monte Carlo simulation model (Level 3)[72][73] Note 9 – Employee Benefit Plans - Conduent has post-retirement savings and investment plans, including defined contribution plans. The Company suspended its 401(k) match for all U.S. salaried employees in 2019 and extended this suspension to all U.S. hourly employees in Q2 2020[74] Defined Contribution Plan Expense (in millions) | Period | Expense | | :------------------------------- | :------ | | Three Months Ended June 30, 2020 | $0 | | Three Months Ended June 30, 2019 | $2 | | Six Months Ended June 30, 2020 | $1 | | Six Months Ended June 30, 2019 | $5 | Note 10 – Accumulated Other Comprehensive Loss (AOCL) Balances and Changes in AOCL (in millions) | Metric | Currency Translation Adjustments | Gains (Losses) on Cash Flow Hedges | Defined Pension Benefit Items | Total | | :------------------------------------------------- | :------------------------------- | :--------------------------------- | :---------------------------- | :---- | | Balance at December 31, 2019 | $(408) | $3 | $(2) | $(407) | | Other comprehensive income (loss) before reclassifications | (26) | (1) | 1 | (26) | | Amounts reclassified from accumulated other comprehensive loss | — | — | — | — | | Net current period other comprehensive income (loss) | (26) | (1) | 1 | (26) | | Balance at June 30, 2020 | $(434) | $2 | $(1) | $(433) | Note 11 – Contingencies and Litigation - Conduent is involved in various claims and lawsuits, including governmental contracting, intellectual property, employment, and commercial law. The Company accrues estimated losses when probable and estimable, believing adequate provisions have been recorded, though ultimate outcomes are unpredictable and could be material[79][80] - Key litigation includes a resolved Texas Medicaid fraud lawsuit (paid $118M in Jan 2020), an ongoing securities class action (motion to dismiss denied), a dispute with Skyview Capital LLC regarding a business sale, and a long-standing actuarial negligence case (Dennis Nasrawi v. Buck Consultants) which remains stayed[81][83][84][85] - The Company also has a lawsuit against Cognizant Business Services for breach of contract, seeking over $150 million, with Cognizant counterclaiming for approximately $90 million[87] - As of June 30, 2020, Conduent had $578 million in outstanding surety bonds and $90 million in outstanding letters of credit to guarantee contractual performance, primarily in Government Services and Transportation segments[89] Note 12 – Preferred Stock - In December 2016, Conduent issued 120,000 shares of Series A convertible perpetual preferred stock with a $120 million liquidation preference and an initial fair value of $142 million. It pays quarterly cash dividends at 8% per year ($9.6 million annually) and is convertible into 44.9438 shares of common stock per preferred share[91] Note 13 – Earnings per Share Computation of Basic and Diluted Earnings per Share of Common Stock (in millions, except per share data in whole dollars and shares in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(51) | $(1,029) | $(100) | $(1,337) | | Cash dividend paid - preferred stock | (3) | (3) | (5) | (5) | | Adjusted Net Income (Loss) Available to Common Shareholders | $(54) | $(1,032) | $(105) | $(1,342) | | Weighted average common shares outstanding | 209,129 | 208,496 | 210,261 | 208,207 | | Adjusted Weighted Average Common Shares Outstanding | 209,129 | 208,496 | 210,261 | 208,207 | | Net Income (Loss) per Share: | | | | | | Basic | $(0.25) | $(4.94) | $(0.50) | $(6.44) | | Diluted | $(0.25) | $(4.94) | $(0.50) | $(6.44) | Note 14 – Supplementary Financial Information Components of Other Assets and Liabilities (in millions) | Category | June 30, 2020 | December 31, 2019 | | :------------------------------------------ | :------------ | :---------------- | | Other Current Assets: | | | | Prepaid expenses | $87 | $70 | | Income taxes receivable | 25 | 38 | | Restricted cash | 9 | 9 | | Net receivable from buyers of divested businesses | 52 | 52 | | Total Other Current Assets | $287 | $283 | | Other Current Liabilities: | | | | Accrued liabilities | $266 | $309 | | Litigation related accruals | 74 | 178 | | Current operating lease liabilities | 82 | 91 | | Restructure reserves | 11 | 15 | | Total Other Current Liabilities | $496 | $647 | | Other Long-term Assets: | | | | Internal use software, net | $152 | $150 | | Deferred contract costs, net | 73 | 84 | | Product software, net | 55 | 40 | | Capitalized cloud computing implementation costs, net | 41 | 40 | | Total Other Long-term Assets | $397 | $387 | | Other Long-term Liabilities: | | | | Income tax liabilities | $16 | $20 | | Unearned income | 22 | 21 | | Restructuring reserves | 5 | 6 | | Total Other Long-term Liabilities | $95 | $91 | Note 15 – Related Party Transactions - Carl C. Icahn and his affiliates increased their ownership in Q3 2019. Conduent engages in normal course transactions with related parties sharing the same shareholders, including providing HR and support services and purchasing office equipment[97] Transactions with Related Parties (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue from related parties | $7 | $8 | $13 | $17 | | Purchases from related parties | $2 | $6 | $8 | $18 | Note 16 – Goodwill Changes in the Carrying Amount of Goodwill by Reportable Segment (in millions) | Segment | Commercial Industries | Government Services | Transportation | Total | | :----------------------------------- | :-------------------- | :------------------ | :------------- | :---- | | Balance at December 31, 2019 | $821 | $621 | $60 | $1,502 | | Foreign currency translation | (7) | (5) | 1 | (11) | | Balance at June 30, 2020 | $814 | $616 | $61 | $1,491 | - The Company assessed goodwill for impairment in Q1 and Q2 2020 and concluded that no interim impairment test was necessary, as the fair values of reporting units were not more likely than not below their carrying values. However, the COVID-19 pandemic could lead to future impairment charges[99][100][101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Conduent's financial condition, operations, transformation, COVID-19 impact, segment performance, and liquidity Overview - Conduent is a global business process services company providing mission-critical solutions to businesses and governments, focusing on improving efficiencies, reducing costs, and enabling revenue growth through expertise in transaction-intensive processing, analytics, and automation[104][105] - Headquartered in Florham Park, New Jersey, the Company has approximately 63,000 associates, including 2,000 furloughed, servicing customers from 24 countries as of June 30, 2020[106] Executive Summary - Conduent is transforming its business with a focus on growth, quality, and efficiency, expanding its cost reduction initiative in Q1 and Q2 2020 to offset COVID-19 impacts[107] - The strategy aims for profitable growth, expanded operating margins, and disciplined capital allocation. Key results for the three and six months ended June 30, 2020, include strong new business signings and operational progress[108][111] Key Business Signings (in millions) | Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :----------------------------- | | New business TCV signings | $623 (up 90% YoY) | $947 (up 71% YoY) | | Annual recurring revenue signings | $105 (up 25% YoY) | $162 (up 19% YoY) | COVID-19 Outbreak - Conduent continued critical services during COVID-19, implementing a proactive plan including associate support (extended disability, sick leave), shifting 75% of the workforce to work-from-home by Q2 2020, increasing sanitation, and drawing on its revolving credit facility as a precautionary measure[112][113][114][115] - The pandemic has diverted management's time and delayed strategic, transformational, and technology initiatives[115] Financial Review of Operations Financial Review of Operations (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (2020 vs 2019) | % Change (2020 vs 2019) | | :----------------------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :-------------------- | :---------------------- | | Revenue | $1,016 | $1,112 | $(96) | (9)% | | Cost of services (excluding D&A) | 795 | 879 | (84) | (10)% | | Selling, general and administrative (excluding D&A) | 111 | 121 | (10) | (8)% | | Research and development (excluding D&A) | — | 2 | (2) | (100)% | | Depreciation and amortization | 115 | 112 | 3 | 3% | | Restructuring and related costs | 29 | 26 | 3 | 12% | | Interest expense | 15 | 20 | (5) | (25)% | | Goodwill impairment | — | 1,067 | (1,067) | (100)% | | (Gain) loss on divestitures and transaction costs | 2 | 2 | — | 0% | | Litigation costs (recoveries), net | 14 | 1 | 13 | 1300% | | Other (income) expenses, net | (1) | 1 | (2) | (200)% | | Total Operating Costs and Expenses | 1,080 | 2,231 | (1,151) | (51)% | | Income (Loss) Before Income Taxes | (64) | (1,119) | 1,055 | 94% | | Income tax expense (benefit) | (13) | (90) | 77 | 86% | | Net Income (Loss) | $(51) | $(1,029) | $978 | 95% | - Revenue decreased by 9% for both the three and six months ended June 30, 2020, primarily due to lost business and COVID-19 impacts in Transportation and Commercial Industries, partially offset by COVID-19 related volume increases in Government Services. Approximately $35 million and $49 million of the revenue decline for the three and six months, respectively, were attributable to COVID-19[121][122] - Cost of services and SG&A decreased due to lost business, lower volumes, and cost reduction initiatives (real estate, IT, labor costs), including $27 million and $31 million in temporary COVID-19 mitigation cost savings for the three and six months, respectively. The net COVID-19 impact on pre-tax income was a loss of $8 million and $18 million for the three and six months, respectively[123][124][125][126][127][128] - Depreciation and amortization increased due to capitalized software amortization. Interest expense decreased due to a lower average debt balance. There was no goodwill impairment in 2020, compared to significant charges in 2019[129][133][134] - Litigation costs increased significantly in 2020, primarily due to reserves for various matters and reimbursement costs with Xerox Corporation, compared to the Texas litigation expense in 2019[136] Income Taxes - The CARES Act, signed in March 2020, provides tax relief, including deferral of employer payroll taxes to 2021 and 2022, offering a temporary operating cash flow benefit[140] Effective Tax Rates | Period | Effective Tax Rate | Normalized Effective Tax Rate | | :------------------------------- | :----------------- | :---------------------------- | | Three Months Ended June 30, 2020 | 20.3% | 32.5% | | Three Months Ended June 30, 2019 | 8.0% | 30.2% | | Six Months Ended June 30, 2020 | 13.0% | 32.8% | | Six Months Ended June 30, 2019 | 8.2% | 32.6% | - The effective tax rate for Q2 2020 was 20.3% (vs. 8.0% in Q2 2019), influenced by geographic income mix. The six-month rate was 13.0% (vs. 8.2% in 2019), impacted by geographic mix, valuation allowances, and tax credits. Normalized rates exclude specific non-recurring items[141][143][144] - The Company believes it is reasonably possible that approximately $13 million in unrecognized tax benefits will reverse within 12 months due to an anticipated audit settlement[145] Operations Review of Segment Revenue and Profit Commercial Industries Segment - Commercial Industries revenue decreased for both three and six months ended June 30, 2020, primarily due to lost business in Customer Experience Management (CXM) and Human Resource Services (HRS), as well as COVID-19 related volume declines and interest rate impacts in BenefitWallet[155][156] - COVID-19 accounted for approximately $44 million and $51 million of the revenue decline for the three and six months, respectively, driven by reduced transaction processing, workers' compensation/healthcare claims, and BenefitWallet revenue[155][156] - Segment profit and Adjusted EBITDA margin decreased due to overall revenue declines, adverse COVID-19 effects, and exit costs from prior year contract losses, partially offset by IT, real estate, and labor cost reductions[157] Government Services Segment - Government Services revenue increased for the three months ended June 30, 2020, driven by new business ramp-up and COVID-19 related volume increases, particularly in SNAP and unemployment insurance benefits, partially offset by contract losses[159] - COVID-19 contributed approximately $45 million and $46 million to revenue increases for the three and six months, respectively, primarily from increased SNAP and Pandemic SNAP volumes and unemployment insurance benefit distributions[159][160] - Segment profit and Adjusted EBITDA margin increased due to higher revenue and reductions in IT and delivery spend[161] Transportation Segment - Transportation revenue decreased for both three and six months ended June 30, 2020, due to lost business and COVID-19 impacts, partially offset by new business ramp-up[162] - COVID-19 caused approximately $36 million and $44 million of revenue declines for the three and six months, respectively, mainly from reduced tolling and curbside management volumes and project delays in transit solutions[162] - Segment profit and Adjusted EBITDA margin increased due to reduced IT and labor costs from the cost reduction initiative[163] Other - Other revenue was flat for the three months ended June 30, 2020, but decreased for the six months due to divestitures completed in Q1 2019[164] - Other segment profit increased for the six months ended June 30, 2020, primarily due to a $7 million adjustment to the California MMIS settlement liability, partially offset by ongoing costs from divested customer care contracts[166] Shared IT / Infrastructure & Corporate Costs - Shared IT/Infrastructure and Corporate costs decreased for both three and six months ended June 30, 2020, driven by cost reduction initiatives and lower facilities costs due to COVID-19 stay-at-home orders, partially offset by increased shared infrastructure IT costs and COVID-19 related expenses[167] Metrics Signings - Total signings for the three and six months ended June 30, 2020, increased significantly, driven by new business and renewal Total Contract Value (TCV) signings[169] Signings (in millions, excluding divestitures) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change | % Change | | :----------------------------------- | :------------------------------- | :------------------------------- | :----- | :------- | | New business TCV | $623 | $328 | $295 | 90% | | Renewals TCV | 912 | 485 | 427 | 88% | | Total Signings | $1,535 | $813 | $722 | 89% | | Annual recurring revenue signings | $105 | $84 | $21 | 25% | | Non-recurring revenue signings | $76 | $49 | $27 | 55% | Signings (in millions, excluding divestitures) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change | % Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :----- | :------- | | New Business TCV | $947 | $553 | $394 | 71% | | Renewals TCV | 1,427 | 1,212 | 215 | 18% | | Total Signings | $2,374 | $1,765 | $609 | 35% | | Annual recurring revenue signings | $162 | $136 | $26 | 19% | | Non-recurring revenue signings | $120 | $81 | $39 | 48% | - The total new business pipeline grew from $18.0 billion at June 30, 2019, to $22.0 billion at June 30, 2020[178] Critical Accounting Policies - The COVID-19 pandemic has caused disruptions, leading to increased volumes in some government subsidy programs (SNAP, Unemployment Insurance) but declines in retail call volumes, banking, healthcare, automotive, transaction processing, and tolling businesses[179] - Management uses significant judgment in assessing the pandemic's impact on financial results, and changes in these assumptions could materially affect reported amounts. The ultimate effect remains highly uncertain[180] Capital Resources and Liquidity - As of June 30, 2020, cash and cash equivalents were $428 million (down from $496 million at Dec 31, 2019). The Company has a $750 million revolving credit facility, with $150 million drawn in March 2020 as a COVID-19 precautionary measure, leaving $592 million available[182] - Total long-term debt was $1.6 billion, with $68 million due within one year. The Company believes its cash, projected cash flow, balance sheet, and revolving credit facility provide sufficient resources for the next twelve months[184][185] - The Company completed a $118 million payment in January 2020 as part of a $236 million settlement with the State of Texas, resolving the Medicaid fraud lawsuit[183] Cash Flow Analysis Cash Flow Summary (Six Months Ended June 30, in millions) | Cash Flow Activity | 2020 | 2019 | Better (Worse) | | :-------------------------------------------------------------------- | :--- | :--- | :------------- | | Net cash provided by (used in) operating activities | $(118) | $(234) | $116 | | Net cash provided by (used in) investing activities | $(58) | $(209) | $151 | | Net cash provided by (used in) financing activities | $114 | $(39) | $153 | - Operating cash flow improved by $116 million, driven by timing of accounts payable, deferral of payroll taxes under the CARES Act, lower net cash income tax payments, and other working capital changes[187] - Investing cash flow improved by $151 million due to decreased capital expenditures, absence of the HSP acquisition, and lower divestiture payments. Financing cash flow increased by $153 million, primarily from the $150 million draw on the revolving credit facility[188][189] Market Risk Management - Conduent is exposed to foreign currency exchange rate fluctuations and manages this risk through operating and financing activities, including derivative financial instruments like forward contracts, to hedge economic exposures and reduce earnings/cash flow volatility[191] - Recent market and economic events, including COVID-19, have not materially altered the Company's financial risk management strategies[192] Item 3. Quantitative and Qualitative Disclosures About Market Risk Incorporates market risk management information from Item 2, noting no material changes since the 2019 Annual Report on Form 10-K - The disclosures about market risk are incorporated by reference from the "Market Risk Management" section in Item 2 of this Form 10-Q[193] - There have been no material changes to the quantitative and qualitative disclosures regarding market risk as set forth in the 2019 Annual Report on Form 10-K[193] Item 4. Controls and Procedures Evaluation of disclosure controls and procedures, confirming effectiveness and no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - The Company's management, including the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, and concluded they were effective[195] Changes in Internal Control Over Financial Reporting - There were no changes in internal control over financial reporting during the quarter ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[196] Part II — Other Information Item 1. Legal Proceedings Refers to Note 11 of the Condensed Consolidated Financial Statements for legal proceedings and contingencies - Information regarding legal proceedings is incorporated by reference from Note 11 – Contingencies and Litigation in the Condensed Consolidated Financial Statements[197] Item 1A. Risk Factors Details new risks from the COVID-19 pandemic, impacting business, operations, service delivery, and financial stability Supplemental Risk Factor - The COVID-19 pandemic has negatively impacted and will continue to impact Conduent's business, operations, service delivery, and customer demand[199][201][203] - Key risks include added burdens and costs from shifting to work-from-home (e.g., cybersecurity, data security, logistical issues), adverse impacts on revenues and sales due to decreased transaction volumes and customer uncertainty, and diversion of management time from strategic initiatives[201][203][204] - Additional risks include potential government contract reductions or terminations, challenges in meeting customer contractual requirements, impacts on customer payment cycles, reliance on third parties, potential goodwill or asset impairment, increased debt levels, and stock price volatility[205][206][207][208][210][211] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Confirms no unregistered sales or issuer purchases of equity securities during the quarter Sales of Unregistered Securities during the Quarter ended June 30, 2020 - The Company did not issue any securities in transactions that were not registered under the Securities Act of 1933 during the quarter ended June 30, 2020[214] Issuer Purchases of Equity Securities during the Quarter ended June 30, 2020 - The Company did not make any issuer purchases of equity securities during the quarter ended June 30, 2020[215] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL - The exhibits include the Restated Certificate of Incorporation, Amended and Restated By-Laws, CEO and CFO certifications (pursuant to Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. Section 1350), and various Inline XBRL taxonomy documents[218][219][220][221] Signatures Contains the required signatures for the Form 10-Q, submitted by the Chief Financial Officer - The report was duly signed on behalf of Conduent Incorporated by Brian J. Webb-Walsh, Chief Financial Officer, on August 6, 2020[223]