What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 179 added, 85 removed, 138 unchanged (66% of the section changed)

9 unchanged sentences

Our differentiated services and solutions improve experiences for millions of people every day.

Headquartered in Florham Park, New Jersey, we have a team of approximately 65,000 people as of March 31, 2020, servicing customers from service centers in 25 countries.

Headquartered in Florham Park, New Jersey, we have a team of approximately 63,000 associates, including approximately 2,000 furloughed associates as of June 30, 2020, servicing customers from service centers in 24 countries.

Executive Summary

We continue to transform our business through an intense focus on growth, quality, and efficiency – utilizing a programmatic, project management approach.

Beginning in the first quarter of 2020 and through the second quarter of 2020, we have expanded the focus of our transformation initiative to include both permanent and temporary cost efficiencies, which we also refer to as a cost reduction initiative, aimed to offset as much of the COVID-19 related negative impacts as possible.

We intend to drive portfolio focus, operating discipline, sales and delivery excellence and innovation, complemented by tightly aligned investments to achieve this mission and purpose.

Our strategy is designed to deliver value by delivering profitable growth, expanding operating margins and deploying a disciplined capital allocation strategy.

During the three and six months ended June 30, 2020, our strategy contributed to the following results:

• Revenue of $1,016 million and $2,067 million for the three and six months ended June 30, 2020, respectively.

Revenue performance in our Government Services segment was positively affected by the COVID-19 pandemic from increased volumes, partially offset by a negative COVID-19 effect on our Transportation and Commercial Industries segments,

• Strong new business signings results:

◦ The strongest quarter of new business total contract value (TCV) signings since our separation as a stand-alone public company, of $623 million for the three months ended June 30, 2020, normalizing for any divestiture impact.

New business TCV signings were up 90% compared to that of the prior year period and $947 million for the six months ended June 30, 2020, up 71% compared to that of the prior year period.

◦ Annual recurring revenue signings of $105 million for the three months ended June 30, 2020, up 25% compared to that of the prior year period and $162 million for the six months ended June 30, 2020, up 19% compared to that of the prior year period.

CNDT Q2 2020 Form 10-Q

• The Company has shown year-over-year operational progress, including a reduction of the number and duration of technology related incidents and outages.

COVID-19 Outbreak

Throughout the COVID-19 pandemic, we have continued to provide critical and best-in-class services to our customers and their end-users, while ensuring the health and safety of our greatest assets - our associates.

To address the potential impact to our business, over the near-term, our Business Continuity team has established a proactive plan, which includes:

To address the potential impact to our business, over the near-term, our Business Continuity team has established a proactive plan, in the first quarter of 2020 and continuing into the second quarter, which includes:

• Supporting our associates with a number of specific initiatives, including making improvements to our policies to extend short term disability, providing extra supplemental sick leave coverage and introducing a hardship leave policy.

• Shifting majority of our workforce to work-from-home.

This took a coordinated effort from our technology team and our site location representatives, while focusing on stringent safety and security precautions.

• At the end of the second quarter of 2020, approximately 75% of our workforce had been shifted to work-from-home.

We are starting a slow and measured approach to bringing associates back to Conduent offices, as appropriate.

This will be a phased process and based on the specific COVID-19 conditions in certain geographies, as well as, business requirements.

• Increased sanitation and social distancing for required on-site essential associates.

• Draw down on our revolving credit facility (Revolver) as a precautionary measure.

In addition, the Company’s COVID-19 response has also resulted in diversion of management's time and delayed investments from strategic, transformational and technology initiatives which had been planned.

In addition, the Company’s response to the COVID-19 pandemic has also resulted in diversion of management's time and delayed investments from strategic, transformational and technology initiatives which had been planned.

As the crisis continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and their end-users and the Company and to continue to provide our mission-critical services and solutions.

Refer to the discussion of results of operations below for a quantification and discussion of COVID-19 pandemic related effects.

CNDT Q2 2020 Form 10-Q

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Three Months Ended

March 31, 2020 vs.

June 30, 2020 vs.

($ in millions) 2020 2019 $ Change % Change

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Net Income (Loss) $ (51) $ (1,029) $ 978

Revenue for the three months ended March 31, 2020 decreased, compared to the prior year period, primarily due to the impact from divestitures completed in 2019, contract losses, volume and price pressure and the impact of the COVID-19 pandemic.

Partially offsetting these declines were increases from the ramp of new business.

The Company identified approximately $14 million of the revenue decline for the three months ended March 31, 2020 was directly attributable to the COVID-19 impact.

The impact was primarily driven by lower volume demand in the Transportation and the Commercial Industries segments.

Six Months Ended

June 30, 2020 vs.

($ in millions) 2020 2019 $ Change % Change

Revenue $ 2,067 $ 2,270 $ (203) (9) %

Operating Costs and Expenses

Cost of services (excluding depreciation and amortization) 1,627 1,785 (158) (9) %

Cost of services for the three months ended March 31, 2020 decreased, compared to the prior year period, mainly driven by divestitures completed in 2019, reductions in real estate, information technology and labor costs from our strategic transformation initiatives, lost business, lower volumes and lower costs to support volume lost resulting from COVID-19.

These savings were partially offset by increases in technology costs to support work from home and increased cleaning and sanitation expenses.

The Company is implementing certain cost mitigation activities to offset these increased costs.

Selling, General and Administrative (SG&A) (excluding depreciation and amortization)

Lower SG&A for the three months ended March 31, 2020, compared to the prior year period, was reflective of divested SG&A expenses, reductions in real estate costs, lower corporate overhead costs and reductions in labor costs.

These savings were partially offset by increases in technology costs to support work from home.

The Company is implementing certain cost mitigation activities to offset these increased costs.

Selling, general and administrative (excluding depreciation and amortization) 227 248 (21) (8) %

Research and development (excluding depreciation and amortization) 1 5 (4) (80) %

Depreciation and amortization 232 227 5 2 %

Restructuring and related costs 36 42 (6) (14) %

Interest expense 32 40 (8) (20) %

Goodwill impairment — 1,351 (1,351) (100) %

(Gain) loss on divestitures and transaction costs 6 16 (10) (63) %

Litigation costs (recoveries), net 20 13 7 54 %

Other (income) expenses, net 1 — 1

Total Operating Costs and Expenses 2,182 3,727 (1,545)

Income (Loss) Before Income Taxes (115) (1,457) 1,342

Income tax expense (benefit) (15) (120) 105

Net Income (Loss) $ (100) $ (1,337) $ 1,237

CNDT Q2 2020 Form 10-Q

Revenue for the three and six months ended June 30, 2020 decreased, compared to the prior year periods, primarily due to lost business and the effect of the COVID-19 pandemic within our Transportation segment due to lower tolling volumes and within our Commercial Industries segment due to lower revenue in our Human Resource Service (HRS) service offering and lower volumes in our Commercial Healthcare Solutions (CHS) and Business Operations Solutions (BOS) service offerings.

These were partially offset by higher revenue due to COVID-19 related increased volumes in the government payments business, which is part of our Government Services Solutions service offering in our Government Services segment.

Additionally, the decrease for the six months ended June 30, 2020 was also due to the impact from divestitures completed during the first quarter of 2019.

Approximately $35 million and $49 million of the revenue decline for the three and six months ended June 30, 2020, respectively, were attributable to the COVID-19 pandemic or COVID-19 related effects.

Cost of Services (excluding depreciation and amortization)

Cost of services for the three months ended June 30, 2020 decreased, compared to the prior year period, driven by lost business and lower volumes as well as the cost reduction initiative, which led to reductions in real estate, information technology and labor costs.

Also contributing to the decline were lower costs to support volume loss resulting from the effect of the COVID-19 pandemic.

Cost of services for the six months ended June 30, 2020 decreased, compared to the prior year period, mainly driven by lost business and lower volumes, the cost reduction initiative, which led to reductions in real estate, information technology and labor costs, as well as divestitures completed in the first quarter of 2019.

Also contributing to the decline were lower costs to support volume loss resulting from the effect of the COVID-19 pandemic.

Our net impact of temporary cost actions to mitigate the effect of the COVID-19 pandemic on revenue and contribution margin on the business resulted in approximately $27 million and $31 million of cost savings for the three and six months ended June 30, 2020, respectively.

These temporary cost actions were primarily driven by furloughs, reduced travel and vendor spend, reduced facilities spend and a suspension of 401(k) match for all U.S.

These cost reductions are split between Costs of services and Selling, general, and administrative.

These cost savings are net of incremental costs such as the costs to support work-from home and the costs of increased facilities sanitation.

The approximate effect of the COVID-19 pandemic on our pre-tax income, which includes the net revenue impact, the incremental costs, and the temporary cost mitigation actions, was a loss of $8 million and $18 million for the three and six months ended June 30, 2020, respectively.

Selling, General and Administrative (SG&A) (excluding depreciation and amortization)

Lower SG&A for the three months ended June 30, 2020, compared to the prior year period, was driven by the cost reduction initiative, which led to reductions in real estate costs, lower corporate overhead costs and reductions in labor costs as well as temporary savings from lower travel expenses.

Lower SG&A for the six months ended June 30, 2020, compared to the prior year period, was driven by divested SG&A expenses as well as the cost reduction initiative, which led to the reductions in real estate costs, lower corporate overhead costs and reductions in labor costs.

Depreciation and Amortization

Depreciation and amortization for the three months ended March 31, 2020 increased, compared to the prior year period, primarily due to increased capitalized software amortization for new projects placed in service.

Depreciation and amortization for the three and six months ended June 30, 2020 increased, compared to the prior year periods, primarily due to increased capitalized software amortization for new projects placed in service.

CNDT Q2 2020 Form 10-Q

Restructuring and Related Costs

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footprint, exiting certain activities, outsourcing certain internal functions, consolidating our data centers and engaging in other actions designed to reduce our cost structure and improve productivity.

Additionally, during the latter part of the first quarter of 2020, the Company began an expanded cost transformation program to partially offset the negative effects of the COVID-19 pandemic, also referred to as a cost reduction initiative.

This resulted in increased Restructuring and related costs for the three months ended June 30, 2020.

This included the elimination of approximately 1,500 positions and closure of approximately 20 facilities across all geographies.

The following are the components of our Restructuring and related costs:

Three Months Ended

June 30, Six Months Ended

(in millions, except headcount in whole numbers) 2020 2019 2020 2019

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Data center consolidation 6 9 8 18

Termination and other costs 3 4

Termination, asset impairment and other costs 11 2 14 6

Total net current period charges 27 24 32 40

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Interest expense represents interest on long-term debt and the amortization of debt issuance costs.

The decrease in Interest expense for the three months ended March 31, 2020, compared to the prior year period, was driven primarily by a lower average debt balance.

The decrease in Interest expense for the three and six months ended June 30, 2020, compared to the prior year periods, was driven primarily by a lower average debt balance.

Refer to Note 6 – Debt in the Condensed Consolidated Financial Statements for additional information.

Goodwill Impairment

There was no goodwill impairment for the three months ended March 31, 2020.

The goodwill impairment for the three months ended March 31, 2019 related to the write-down of the carrying values of the Transportation segment.

There were no goodwill impairment charges for the three and six months ended June 30, 2020.

The goodwill impairment for the three and six months ended June 30, 2019 related to the write-down of the carrying values of all the Company's reporting units.

(Gain) Loss on Divestitures and Transaction Costs

The costs included in the three months ended March 31, 2020 consist of professional fees related to the strategic review by the Company's Board of Directors.

The costs included in the three months ended March 31, 2019 consist of $5 million of changes in estimates related to losses on divestitures and $9 million of transaction and related costs, $4 million of which relates to costs to remediate Payment Card Industry Data Security Standards compliance issues related to the sale of select standalone customer care contracts to Skyview Capital LLC.

The costs included in the three and six months ended June 30, 2020 consist of professional fees related to the strategic review by the Company's Board of Directors.

The costs included in the six months ended June 30, 2019 consist of $5 million of changes in estimates related to losses on divestitures and $9 million of transaction and related costs, $4 million of which relates to costs to remediate Payment Card Industry Data Security Standards compliance issues related to the sale of select standalone customer care contracts to Skyview Capital LLC.

Litigation Costs (Recoveries), Net

Net litigation costs for the three months ended March 31, 2020 primarily consist of costs related to certain reimbursement matters with our former parent company, Xerox Corporation.

Net litigation costs for the three months ended March 31, 2019 primarily consist of the $13 million expense related to the Texas litigation.

Net litigation costs for the three and six months ended June 30, 2020 primarily consist of reserves for various matters that are subject to litigation and costs related to certain reimbursement matters with our former parent company, Xerox Corporation.

Net litigation costs for the six months ended June 30, 2019 primarily consist of the $13 million expense related to the Texas litigation.

Refer to Note 11 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.

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The CARES Act provides for various tax relief and tax incentive measures, which are not expected to have a material impact on the Company's income tax provision.

The payment of the employer share of payroll taxes for the remainder of 2020 will be deferred to 2021 & 2022 under the CARES Act, which will provide a temporary operating cash flow benefit.

The effective tax rate for the three months ended March 31, 2020 was 3.9%, compared to 8.9% for the three months ended March 31, 2019.

The March 31, 2020 rate was lower than the U.S.

The payment of the employer share of payroll taxes for the remainder of 2020 will be deferred to 2021 and 2022 under the CARES Act, which will provide a temporary operating cash flow benefit.

The effective tax rate for the three months ended June 30, 2020 was 20.3%, compared to 8.0% for the three months ended June 30, 2019.

The June 30, 2020 rate was slightly lower than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income.

The effective tax rate for the three months ended June 30, 2019 was lower than the U.S.

statutory tax rate of 21%, primarily due to the goodwill impairment charge being partially non-deductible for tax, the geographic mix of income and the inclusion of Global Intangible Low Tax Income (GILTI).

Excluding the impact of amortization of intangible assets and restructuring costs, the normalized effective tax rate for the three months ended June 30, 2020 was 32.5%.

The normalized effective tax rate of 30.2% for the three months ended June 30, 2019, was predominantly impacted by the exclusion of a goodwill impairment, divestitures, charges for amortization of intangible assets and restructuring costs.

The effective tax rate for the six months ended June 30, 2020 was 13.0%, compared to 8.2% for the six months ended June 30, 2019.

The June 30, 2020 rate was lower than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income, valuation allowances and tax charges recognized on the vesting of employee equity awards, partially offset by tax credits.

The effective tax rate for the three months ended March 31, 2019 was lower than the U.S.

statutory tax rate of 21%, primarily due to the goodwill impairment charge being partially non-deductible for tax and the geographic mix of income, partially offset by the tax benefit recognized on the sale of a portfolio of select standalone customer care contracts to Skyview Capital LLC.

Excluding the impact of valuation allowances, vesting of equity awards, amortization of intangible assets and restructuring costs, the normalized effective tax rate for the three months ended March 31, 2020 was 33.3%.

The normalized effective tax rate of 34.7% for the three months ended March 31, 2019, was predominantly impacted by the goodwill impairment, divestitures, the Texas litigation reserve, charges for amortization of intangible assets, restructuring and divestiture related costs.

The effective tax rate for the six months ended June 30, 2019 was lower than the U.S.

statutory tax rate of 21%, primarily due to the goodwill impairment charge being partially non-deductible for tax and the geographic mix of income, partially offset by U.S.

federal tax credits and tax benefits recognized on the sale of a portfolio of select standalone customer care contracts to Skyview Capital LLC.

Excluding the impact of valuation allowances, vesting of equity awards, amortization of intangible assets and restructuring costs, the normalized effective tax rate for the six months ended June 30, 2020 was 32.8%.

The normalized effective tax rate of 32.6% for the six months ended June 30, 2019, was predominantly impacted by the goodwill impairment, divestitures, the Texas litigation reserve, charges for amortization of intangible assets and restructuring costs.

The Company believes it is reasonably possible that unrecognized tax benefits of approximately $13 million will reverse within 12 months due to an anticipated audit settlement.

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• Transportation.

Other operations include our divestitures and our Student Loan business, which the Company exited in the third quarter of 2018.

Shared IT / Infrastructure & Corporate Costs includes both normal ongoing IT infrastructure and enterprise application costs and costs related to modernization of a significant portion of our infrastructure with new systems and processes and consolidation of our data centers as part of our transformation initiatives.

Other includes our divestitures and our Student Loan business, which the Company exited in the third quarter of 2018.

Shared IT / Infrastructure & Corporate Costs includes both normal ongoing IT infrastructure and enterprise application costs and costs related to the modernization of a significant portion of our infrastructure with new systems and processes.

It also includes costs related to corporate overhead functions and shared real estate costs.

These costs are not allocated to the reportable segments.

CNDT Q2 2020 Form 10-Q

There is a risk, however, that our modernization efforts and data center consolidations could materially and adversely disrupt our operations.

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See Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2019 and see Part II, Item 1A – Risk Factors of this Form 10-Q for additional information.

CNDT Q1 2020 Form 10-Q

Results of financial performance by segment were:

14 unchanged sentences

Adjusted EBITDA Margin 22.3 % 31.3 % 21.1 % — % — % — % 10.3 %

CNDT Q2 2020 Form 10-Q

Six Months Ended

(in millions) Commercial Industries Government Services Transportation Other Shared IT / Infrastructure & Corporate Costs Total

2020 Divestitures Other

Revenue $ 1,092 $ 621 $ 354 $ — $ — $ — $ 2,067

Segment profit (loss) $ 162 $ 208 $ 54 $ — $ 3 $ (327) $ 100

Segment depreciation and amortization $ 49 $ 11 $ 17 $ — $ — $ 36 $ 113

Adjusted EBITDA $ 211 $ 219 $ 71 $ — $ (4) $ (291) $ 206

% of Total Revenue 52.8 % 30.1 % 17.1 % — % — % — % 100.0 %

Adjusted EBITDA Margin 19.3 % 35.3 % 20.1 % — % — % — % 10.0 %

Revenue $ 1,204 $ 651 $ 378 $ 36 $ 1 $ — $ 2,270

Segment profit (loss) $ 228 $ 175 $ 48 $ 1 $ — $ (324) $ 128

Segment depreciation and amortization $ 43 $ 16 $ 17 $ — $ — $ 29 $ 105

Adjusted EBITDA $ 271 $ 191 $ 69 $ 1 $ — $ (295) $ 237

% of Total Revenue 53.0 % 28.7 % 16.7 % 1.6 % — % — % 100.0 %

Adjusted EBITDA Margin 22.5 % 29.3 % 18.3 % 2.8 % — % — % 10.4 %

Commercial Industries Segment

Commercial Industries revenue for the three months ended March 31, 2020 decreased, compared to the prior year period, primarily driven by contract losses and the adverse effects of COVID-19, partially offset by revenue from new contracts.

The COVID-19 related impact was primarily driven by reduced volumes in our Customer Experience Management service offering and reduced interest rates impacting revenue generated from account balances in the Health Savings Account (BenefitWallet), which is part of our Human Resource Services offering.

Commercial Industries revenue for the three months ended June 30, 2020 decreased, compared to the prior year period, primarily driven by lost business within our Customer Experience Management (CXM) and our HRS service offerings, as well as COVID-19 related volume declines and interest rate impact in our BenefitWallet business.

For the three months ended June 30, 2020, approximately $44 million of the revenue decline in the Commercial Industries segment was attributable to the COVID-19 pandemic or COVID-19 related effects.

This was primarily due to:

1) lower transaction processing activity for client in the auto, dental, financial services and travel industries within of our BOS service offering, 2) reduced workers compensation claims and commercial healthcare claims processing in our Commercial Healthcare Solutions (CHS) service offering, and 3) reduced revenue from BenefitWallet in our HRS service offering, as a result of interest rate reductions.

Commercial Industries revenue for the six months ended June 30, 2020 decreased, compared to the prior year period, primarily driven by loss of business within our CXM and HRS service offerings, as well as COVID-19 and COVID 19 related volume declines and interest rate impact.

For the six months ended June 30, 2020, approximately $51 million of the revenue decline in the Commercial Industries segment was directly attributable to the effects of the COVID-19 pandemic.

Segment Profit and Adjusted EBITDA

Decreases in the Commercial Industries segment profit and adjusted EBITDA margin for the three months ended March 31, 2020, compared to the prior year period, were mainly driven by overall revenue declines and the adverse effects of COVID-19, partially offset by reductions in IT, real estate and labor costs from our transformation initiatives.

Government Services Segment

Government Services revenue for the three months ended March 31, 2020, decreased compared to the prior year period, primarily driven by contract losses and volume pressure.

These declines were partially offset by ramp of new business and volume increases and COVID-19 related volume increases.

Decreases in the Commercial Industries segment profit and adjusted EBITDA margin for the three and six months ended June 30, 2020, compared to the prior year periods, were mainly driven by overall revenue declines, the adverse effects of the COVID-19 pandemic and current period exit costs from prior year contract losses, partially offset by reductions in IT, real estate and labor costs.

CNDT Q2 2020 Form 10-Q

Government Services Segment

Government Services revenue for the three months ended June 30, 2020 increased compared to the prior year period, primarily driven by ramp of new business and volume increases and COVID-19 related volume increases.

These increases were partially offset by contract losses and volume pressure.

For the three months ended June 30, 2020, approximately $45 million of the revenue increase in the Government Services segment was attributable to the COVID-19 pandemic or COVID-19 related effects.

This was largely driven by:

1) increases in the Supplemental Nutrition Assistance Program (SNAP) volumes and Pandemic SNAP volumes, 2) an increase in the number of citizens to which we distribute unemployment insurance benefits, and 3) the additional unemployment insurance benefit distributions under the CARES Act.

Within the unemployment benefit business, we generate revenue based on the amount of spending by card holders.

Government Services revenue for the six months ended June 30, 2020 decreased compared to the prior year period, primarily driven by contract losses, partially offset by ramp up of new business, volume increases and COVID-19 related volume increases, particularly in the second quarter of 2020.

For the six months ended June 30, 2020, approximately $46 million of revenue in the Government Services segment was attributable to the COVID-19 pandemic or COVID-19 related effects.

Segment Profit and Adjusted EBITDA

Increases in the Government Services segment profit and adjusted EBITDA margin for the three months ended March 31, 2020, compared to the prior year period, were mainly driven by reductions in IT and delivery spend, partially offset by reduced revenue.

Increases in the Government Services segment profit and adjusted EBITDA margin for the three and six months ended June 30, 2020, compared to the prior year periods, were mainly driven by increased revenue and reductions in IT and delivery spend.

Transportation Segment

Transportation revenue for the three months ended March 31, 2020 increased, compared to the prior year period, primarily driven by ramp of new business and volume increases, partially offset by lost business and COVID-19 related impact.

Transportation revenue for the three and six months ended June 30, 2020 decreased, compared to the prior year periods, primarily driven by lost business and COVID-19 related impact, partially offset by ramp of new business.

For the three and six months ended June 30, 2020, approximately $36 million and $44 million, respectively, of the revenue declines in the Transportation segment were attributable to the COVID-19 pandemic or COVID-19 related effects.

The COVID-19 related impacts were primarily driven by volume pressure in the Roadway Charging & Management Services and Curbside Management Solutions service offerings and project delays in the Transit Solutions service offering.

Segment Profit and Adjusted EBITDA

Transportation segment profit and adjusted EBITDA margin for the three months ended March 31, 2020 increased, compared to the prior year period, mainly driven by increased revenue and reduced IT platform spend, partially offset by the loss of higher margin business primarily related to COVID-19.

Other revenue for the three months ended March 31, 2020 decreased, compared to the prior year period, driven mainly by the divestitures completed in 2019.

Transportation segment profit and adjusted EBITDA margin for the three and six months ended June 30, 2020 increased, compared to the prior year periods, mainly driven by reduced IT and labor costs as a result of the cost reduction initiative.

Other revenue for the three months ended June 30, 2020 remained flat, compared to the prior year period.

Other revenue for the six months ended June 30, 2020 decreased, compared to the prior year period, driven mainly by the divestitures completed in the first quarter of 2019.

CNDT Q2 2020 Form 10-Q

Segment Profit (Loss) and Adjusted EBITDA

Increase in Other segment profit for the three months ended March 31, 2020, compared to the prior year period, was primarily due to the adjustment to the remaining California MMIS settlement liability of $7 million as a result of the contract expiration on March 31, 2020.

Increase in Other segment profit for the six months ended June 30, 2020, compared to the prior year period, was primarily due to the adjustment to the remaining California MMIS settlement liability of $7 million as a result of the contract expiration on March 31, 2020, partially offset by ongoing costs related to the portfolio of select standalone customer care contracts that were sold to Skyview Capital LLC in 2019.

The $7 million benefit was removed from adjusted EBITDA for segment reporting purposes due to its non-recurring nature.

Shared IT / Infrastructure & Corporate Costs

Shared IT/Infrastructure and Corporate costs for the three months ended March 31, 2020 increased, compared to the prior year period.

This was primarily driven by an increase in shared infrastructure related IT due to some discrete non-recurring credits benefiting the prior year, as well as increased costs incurred due to COVID-19, partially offset by reduced corporate overhead.

The Company has re-defined the way it classifies new business to align with the new organizational structure in order to properly align incentives with measurement metrics.

The Global Sales Organization, consisting of Sales Executives, is now responsible for securing sales to new clients or sales of new capabilities to existing clients.

The Company defines these as New Logo/New Capability sales.

During the first quarter of 2020, the Company sold $282 million of New Logo/New Capability, representing a 127% increase when compared to prior period.

New business wins for the quarter were driven by large wins in the Customer Experience Management service offering, which is part of our Commercial Industries segment, Government Services segment and the Transportation segment.

CNDT Q1 2020 Form 10-Q

The account managers within the business units are responsible for existing add-on sales.

The Company signed $42 million of existing add-on sales in the first quarter of 2020, representing a 58% decrease compared to the prior period.

In total, the Company signed $324 million of new business in the first quarter of 2020, representing a 44.0% increase compared to the prior period.

Shared IT/Infrastructure and Corporate costs for the three and six months ended June 30, 2020 decreased, compared to the prior year period.

This was primarily driven by the efficiencies created by the cost reduction initiative and lower facilities costs as a result of the COVID-19 related stay-at-home orders, partially offset by an increase in shared infrastructure related IT due to some discrete non-recurring credits benefiting the prior year, as well as increased costs incurred due to the effects of the COVID-19 pandemic.

Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts.

Total Contract Value (TCV) is the estimated total contractual revenue related to signed contracts.

TCV is the estimated total contractual revenue related to signed contracts.

Total signings for the three and six months ended June 30, 2020 increased, compared to the prior year periods, driven by increases in new business and renewal TCV signings.

TCV signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts.

TCV is the estimated total contractual revenue related to signed contracts, excluding the impact of divested business as required.

For the three months ended June 30, 2020, the Company signed $623 million of new business, representing a 90% increase compared to the prior year period, which is the strongest quarter of new business TCV signings since our separation as a stand-alone public company.

Renewal TCV for the three months ended June 30, 2020 was $912 million, an increase of 88% compared to the prior year period.

The Company continues to build the size and strength of the newly centralized sales team.

For the six months ended June 30, 2020, the Company signed $947 million of new business, representing 71% increase compared to the prior year period.

Renewal TCV for the six months ended June 30, 2020 was $1,427 million, an increase of 18% compared to the prior year period.

The amounts in the following table exclude divestitures.

Three Months Ended

March 31, 2020 vs.

June 30, 2020 vs.

($ in millions) 2020 2019 $ Change % Change

New logo & New capability TCV $ 282 $ 124 $ 158 127 %

Add-on expansion TCV 42 101 $ (59) (58) %

New business TCV $ 623 $ 328 $ 295 90 %

Renewals TCV 912 485 427 88 %

Total Signings $ 1,535 $ 813 $ 722 89 %

Total signings for the three months ended March 31, 2020 decreased, compared to the prior year period, driven by declines in renewal signings, partially offset by increases in new business signings.

Renewal rate is defined as the annual recurring revenue (ARR) on contracts that are renewed during the period as a percentage of ARR on all contracts for which a renewal decision was made during the period, excluding any contracts that were not renewed and where a strategic action to improve the risk or profitability had been initiated.

Excluding our strategic decision not to renew certain contracts and impact of divestitures, renewal rates for the three months ended March 31, 2020 and 2019 were 93% and 92%, respectively.

Annual recurring revenue signings (1)

$ 105 $ 84 $ 21 25 %

Non-recurring revenue signings (2)

$ 76 $ 49 $ 27 55 %

CNDT Q2 2020 Form 10-Q

Six Months Ended

June 30, 2020 vs.

($ in millions) 2020 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 (1)

$ 162 $ 136 $ 26 19 %

Non-recurring revenue signings (2)

$ 120 $ 81 $ 39 48 %

(1) Recurring revenue signings are for new business contracts longer than one year.

(2) Non-recurring revenue signings are for contracts shorter than one year.

The total new business pipeline at the end of June 30, 2020 and 2019 was $22.0 billion and $18.0 billion, respectively.

Total new business pipeline is defined as total new business TCV pipeline of deals in all sell stages.

This extends past the next twelve-month period to include total pipeline, excluding the impact of divested business as required.

Critical Accounting Policies

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The Company is experiencing disruptions to its business, costs, operations, supply chain, and customer demand for its services and solutions due to the rapid and widening spread of the COVID-19 pandemic.

While we experienced some benefits, mainly increases in certain government subsidy programs such as Supplemental Nutrition Assistance Program and Unemployment Insurance, these were more than offset with declines in retail call volumes, large banking client volume declines in transaction processing, interest rate exposure in our BenefitWallet business, declines in child support and Medicaid volumes, transit solutions and curbside management solutions volume, among other challenges.

We expect similar challenges and potential declines in volume ahead of us, but we also have some offsetting factors such as leveraging automation, focusing on temporary and long-term cost solutions through re-engineering our operating model and leveraging our work-from-home infrastructure.

The Company also continues to monitor the potential impact on the carrying values of certain assets.

These foregoing factors and other factors, which may worsen, can be expected to have a material adverse impact on our business, operations, financial results and capital resources.

The ultimate impact of the COVID-19 pandemic on us is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19 and the actions taken to contain COVID-19 or address its impact in the short and long term, among others.

While we experienced expansion of volumes and revenues in some of our service offerings, mainly increases in certain government subsidy programs such as SNAP and Unemployment Insurance, these were more than offset with declines in retail call volumes, large banking, healthcare, automotive and other client volume declines in transaction processing, interest rate exposure in our BenefitWallet business, declines in our tolling business, which is part of our Transit solutions service offering, and our Curbside management solutions volume, among other challenges.

We expect similar challenges and potential declines in volume ahead of us, but we also anticipate other factors to offset these declines such as leveraging automation, focusing on temporary and long-term cost solutions through re-engineering our operating model and leveraging our work-from-home infrastructure.

The Company also continues to monitor the potential effect on the carrying values of certain assets.

These foregoing factors and other factors, which may worsen, can be expected to have a material adverse effect on our business, operations, financial results and capital resources.

The ultimate effect of the COVID-19 pandemic on us is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, new information that will emerge concerning the severity and effects of COVID-19 and the actions taken to contain the pandemic or address its impact in the short and long term, among others.

We do not yet know and cannot predict the full extent of potential impacts on our business, our services and business offerings or our operating results, financial condition and cash flow.

Management uses significant judgment in determining the impact of the COVID-19 pandemic on its financial results for the current period and for any future periods.

Changes in management's assumptions and judgment relating to the impact of COVID-19 could significantly affect the amounts disclosed in the MD&A – Financial Review of Operations and the MD&A – Operations Review of Segment Revenue and Profit, as the effect of the COVID-19 pandemic.

For additional information on various COVID-19 impacts, uncertainties and risks, see Part II, Item 1A – Risk Factors included in this Form 10-Q

For additional information on various COVID-19 impacts, uncertainties and risks, see Part II, Item 1A – Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Annual Report on Form 10-K), as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

CNDT Q2 2020 Form 10-Q

Capital Resources and Liquidity

As of March 31, 2020, and December 31, 2019, total cash and cash equivalents were $395 million and $496 million, respectively.

The Company also has a $750 million Revolver for its various cash needs, of which $150 million has been drawn, as a precautionary measure in March 2020 in response to the COVID-19 pandemic, and $82 million issued for letters of credit.

The net Revolver available to be drawn upon as of March 31, 2020, was $518 million.

$71 million of the $82 million letters of credit utilized matured on April 16, 2020, thereby increasing the net Revolver available to be drawn upon to $589 million as of April 16, 2020.

As of June 30, 2020, and December 31, 2019, total cash and cash equivalents were $428 million and $496 million, respectively.

The Company also has a $750 million Revolver for its various cash needs, of which $150 million was drawn in March 2020 as a precautionary measure in response to the COVID-19 pandemic, and $8 million issued for letters of credit.

The net amount available to be drawn upon under our Revolver as of June 30, 2020, was $592 million.

Pursuant to the terms of the State of Texas Agreement, the Company was required to pay the State of Texas $236 million, of which $118 million was paid in 2019 and $118 million paid in January 2020.

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Refer to Note 11 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.

As of March 31, 2020, our total long-term debt outstanding was $1.7 billion of which $60 million was due within one year.

As of June 30, 2020, our total long-term debt outstanding was $1.6 billion of which $68 million was due within one year.

Refer to Note 6 – Debt in the Condensed Consolidated Financial Statements for additional debt information.

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The following table summarizes our cash flows, as reported in our Condensed Consolidated Statement of Cash Flows in the accompanying Condensed Consolidated Financial Statements:

Three Months Ended

Six Months Ended

(in millions) 2020 2019 Better (Worse)

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Historically the Company generates the majority of its cash from operating activities in the latter part of the year.

As such, the Company expects the second quarter 2020 cash flow from operations to also be negative.

Operating activities

The net increase in cash used in operating activities of $143 million, compared to the prior year period, was primarily related to the $118 million final payment for the Texas litigation, lower adjusted EBITDA of $27 million and other working capital decreases of $18 million, partially offset by lower net cash income tax payments of $20 million.

The net improvement in cash used in operating activities of $116 million, compared to the prior year period, was primarily related to timing of payments of Accounts payable and other current liabilities of $30 million, the deferral of payroll taxes allowed by the CARES Act of $18 million, lower net cash income tax payments of $36 million and other working capital changes of $30 million.

Investing activities

The decrease in cash used in investing activities of $145 million was primarily due to decreased spending for capital expenditures and the absence of acquisition and divestiture payments.

The decrease in cash used in investing activities of $151 million was primarily due to decreased spending for capital expenditures and the absence of the HSP acquisition in the first quarter of 2019 and lower divestiture payments.

Financing activities

The increase in cash from financing activities was primarily related to the $150 million draw down from our $750 million revolving credit facility.

The increase in cash from financing activities was primarily related to the $150 million draw down from our $750 million Revolver in the first quarter of 2020.

CNDT Q2 2020 Form 10-Q

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This is accounted for using derivative accounting.

Recent market and economic events have not caused us to materially modify nor change our financial risk management strategies with respect to our exposures to foreign currency risk.

Recent market and economic events, including the effects of the COVID-19 pandemic, have not caused us to materially modify nor change our financial risk management strategies with respect to our exposures to foreign currency risk.

Refer to Note 7 – Financial Instruments in the Condensed Consolidated Financial Statements for additional discussion on our financial risk management.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the “Market Risk Management” section in Item 2 of this Form 10-Q is hereby incorporated by reference in answer to this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis