What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 123 added, 116 removed, 201 unchanged (54% of the section changed)

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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 63,000 associates, including approximately 2,000 furloughed associates as of June 30, 2020, servicing customers from service centers in 24 countries.

Headquartered in Florham Park, New Jersey, we have a team of approximately 65,000 associates, including approximately 2,100 furloughed associates as of September 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 continue to transform our business through an intense focus on growth, quality, and efficiency – utilizing a programmatic and project management approach.

Beginning in the first quarter of 2020 and through the third 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 program, 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.

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

• Revenue of $1,041 million and $3,108 million for the three and nine months ended September 30, 2020, respectively.

An approximate $3 million favorable impact and $46 million unfavorable impact on revenue for the three and nine months ended September 30, 2020, respectively, was attributable to the COVID-19 pandemic or COVID-19 related effects.

• The approximate effect of the COVID-19 pandemic on our pre-tax income, which includes the net revenue impact and incremental costs, was a loss of $0 million and $52 million for the three and nine months ended September 30, 2020, respectively.

In addition to reductions in certain direct costs, the Company also achieved certain temporary cost savings associated with our cost reduction program of $14 million and $48 million for the three and nine months ended September 30, 2020, respectively.

These temporary cost actions were primarily driven by furloughs, reduced travel, vendor and facilities spend.

CNDT Q3 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.

• Strong new business signings results:

◦ Another strong quarter of new business total contract value (TCV) signings of $468 million for the three months ended September 30, 2020, representing an increase of 100% compared to that of the prior year period and $1,415 million for the nine months ended September 30, 2020, representing an increase of 80% compared to that of the prior year period.

◦ Annual recurring revenue signings of $96 million for the three months ended September 30, 2020, up 35% compared to that of the prior year period and $258 million for the nine months ended September 30, 2020, up 25% compared to that of the prior year period.

• The Company has shown year-over-year operational progress, including a reduction of the number of technology related incidents and outages, improvements in associate satisfaction survey results and increases in bonus payments from customers.

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, in the first quarter of 2020 and continuing into the second quarter, which includes:

To address the potential impact to our business over the near-term, our Business Continuity team established a proactive plan in the first quarter of 2020 that has continued into the second and third quarters, 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.

• 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.

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

We will start 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.

• Draw down on our Senior Revolving Credit Facility (Revolver) as a precautionary measure.

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.

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 to continue to provide our mission-critical services and solutions.

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

CNDT Q3 2020 Form 10-Q

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Three Months Ended

June 30, 2020 vs.

September 30, 2020 vs.

($ in millions) 2020 2019 $ Change % Change

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Net Income (Loss) $ (7) $ (16) $ 9

Six Months Ended

June 30, 2020 vs.

Nine Months Ended

September 30, 2020 vs.

($ in millions) 2020 2019 $ Change % Change

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CNDT Q3 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.

Revenue for the three and nine months ended September 30, 2020 decreased, compared to the prior year periods, primarily due to lost business and the effect of the COVID-19 pandemic across our Commercial Industries and our Transportation segments.

These were partially offset by higher revenue due to COVID-19 related to increased volumes in our Government Services Solutions service offering within our Government Services segment and the ramp of new business.

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.

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

Cost of services for the nine months ended September 30, 2020 decreased, compared to the prior year period, mainly driven by loss of business, lower volumes, our cost reduction program, which led to reductions in information technology, labor and real estate 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.

The net impact to costs on our business due to the COVID-19 pandemic was an approximate $11 million and $42 million decrease for the three and nine months ended September 30, 2020, respectively.

Included in this net impact were $14 million and $48 million of temporary cost savings associated with our cost reduction program.

These temporary cost actions were primarily driven by furloughs, reduced travel, vendor and facilities spend.

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 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

SG&A for the three months ended September 30, 2020 increased, compared to the prior year period, driven by increase in management incentive compensation due to certain business results meeting or exceeding internal targets, partially offset by our cost reduction program, which led to reductions in real estate, corporate overhead and labor costs, as well as temporary savings from lower travel expenses.

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

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.

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

This included the elimination of approximately 300 positions and closure of approximately 5 facilities.

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

CNDT Q3 2020 Form 10-Q

Three Months Ended

June 30, Six Months Ended

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

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

Severance and related costs $ 4 $ 1 $ 14 $ 17

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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 and six months ended June 30, 2020, compared to the prior year periods, was driven primarily by a lower average debt balance.

The decrease in Interest expense for the three and nine months ended September 30, 2020, compared to the prior year periods, was driven primarily by lower interest rates, partially offset by a higher average debt balance that resulted from the $150 million withdrawn from our Senior Revolving Credit Facility (Revolver) in March 2020.

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

Goodwill Impairment

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.

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

The goodwill impairment for the three and nine months ended September 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 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.

The costs included in the three and nine months ended September 30, 2020 consist of professional fees related to the strategic review by the Company's Board of Directors and reserves for certain divestiture related litigation.

The costs included in the nine months ended September 30, 2019 consist of $5 million of changes in estimates related to losses on divestitures, $2 million related to a loss on sale of assets and $12 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 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.

Net litigation costs for the nine months ended September 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 nine months ended September 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.

CNDT Q2 2020 Form 10-Q

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law.

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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 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.

CNDT Q3 2020 Form 10-Q

The effective tax rate for the three months ended September 30, 2020 was 46.2%, compared to (14.3)% for the three months ended September 30, 2019.

The September 30, 2020 rate was higher than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income, the election of the high tax exception for Global Intangible Low Tax Income (GILTI), an increase in the U.S.

federal tax credits and a benefit attributable to the 2019 return to provision adjustment, partially offset by audit adjustments.

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

statutory rate of 21%, primarily due to pre-tax loss, tax from the geographic mix of income and the inclusion of GILTI.

Excluding the impact of true up for divestitures, amortization of intangible assets, restructuring costs and certain discrete tax items, the normalized effective tax rate for the three months ended September 30, 2020 was 23.0%.

The normalized effective tax rate for the three months ended September 30, 2019 of 28.8% was predominantly impacted by the exclusion of the impact of divestitures, charges for amortization of intangible assets and restructuring costs.

The effective tax rate for the nine months ended September 30, 2020 was 16.4%, compared to 8.0% for the nine months ended September 30, 2019.

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

statutory rate of 21%, primarily due to the geographic mix of income, increase in valuation allowances, audit adjustments and tax charges recognized on the vesting of employee equity awards, partially offset by an increase in the U.S.

federal tax credits and a benefit attributable to the 2019 return to provision adjustment.

The September 30, 2019 rate was lower than the U.S.

statutory 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.

Excluding the impact of the true up for divestitures, amortization of intangible assets, restructuring costs and certain discrete tax items, the normalized effective tax rate for the nine months ended September 30, 2020 was 27.4%.

The normalized effective tax rate of 31.3% for the nine months ended September 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.

Operations Review of Segment Revenue and Profit

During the first quarter of 2020, we realigned our sales organization and certain shared IT and other allocated costs to reflect how we currently manage our business.

All prior periods presented have been revised to reflect this change.

In the first quarter of 2020, we realigned our sales organization and certain shared IT and other allocated functions to reflect how we currently manage our business.

In the third quarter of 2020, in order to provide greater visibility into the profitability of our segments, certain costs that were previously included in the Shared IT/Infrastructure and Corporate Costs (now referred to as Unallocated Costs) are being allocated to each of the reportable segments.

All prior periods presented have been recast to reflect these changes.

Our financial performance is based on Segment Profit/(Loss) and Segment Adjusted EBITDA for the following three segments:

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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.

Unallocated Costs includes IT infrastructure costs that are shared by multiple reportable segments, enterprise application costs and certain corporate overhead expenses not directly attributable or allocated to our reportable segments.

CNDT Q3 2020 Form 10-Q

We continue to modernize a significant portion of our infrastructure with new systems and processes and consolidate our data centers as part of our transformation initiatives.

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

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.

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.

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

Results of financial performance by segment were:

Three Months Ended

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

September 30,

(in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total

2020 Divestitures Other

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CNDT Q3 2020 Form 10-Q

Six Months Ended

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

Nine Months Ended

September 30,

(in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total

2020 Divestitures Other

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Commercial Industries Segment

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.

Commercial Industries revenue for the three months ended September 30, 2020 decreased, compared to the prior year period, due to COVID-19 related volume declines and interest rate impact in our BenefitWallet business and prior year lost business.

For the three months ended September 30, 2020, approximately $48 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 the following year-over-year changes:

1) lower transaction processing volumes for client in the auto, dental and financial services industries within our Business Operations Solutions (BOS) service offering, 2) reduced workers compensation claims and commercial healthcare claims processing in our Commercial Healthcare Solutions (CHS) service offering, 3) reduced revenue from BenefitWallet in our HRS service offering, as a result of interest rate reductions and 4) a slightly reduced call volumes within our CXM service offering across travel and retail clients.

Commercial Industries revenue for the nine months ended September 30, 2020 decreased, compared to the prior year period, primarily driven by loss of business, as well as COVID 19 related volume declines and interest rate impact.

For the nine months ended September 30, 2020, approximately $99 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 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.

Decreases in the Commercial Industries segment profit and adjusted EBITDA margin for the three months ended September 30, 2020, compared to the prior year period, were mainly driven by overall revenue declines, the adverse effects of the COVID-19 pandemic and a certain non-recurring client item, partially offset by reductions from our cost reduction program.

Decreases in the Commercial Industries segment profit and adjusted EBITDA margin for the nine months ended September 30, 2020, compared to the prior year period, were mainly driven by overall revenue declines, the adverse effects of the COVID-19 pandemic and exit costs from prior year contract losses, partially offset by reductions from our cost reduction program.

CNDT Q3 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.

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

These increases were partially offset by prior year contract losses.

For the three months ended September 30, 2020, approximately $68 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 the following year-over-year changes:

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) one month of 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.

Government Services revenue for the nine months ended September 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 in the second and third quarters of 2020.

For the nine months ended September 30, 2020, approximately $114 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 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.

Increases in the Government Services segment profit and adjusted EBITDA margin for the three months ended September 30, 2020, compared to the prior year period, were mainly driven by increased revenue and reductions from our cost reduction program.

Increases in the Government Services segment profit and adjusted EBITDA margin for the nine months ended September 30, 2020, compared to the prior year period, were mainly driven by reductions from our cost reduction program.

Transportation Segment

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.

Transportation revenue for the three months ended September 30, 2020 decreased, compared to the prior year period, primarily driven by one-time equipment sales in the prior year and COVID-19 related impacts, partially offset by the ramp of new business.

For the three months ended September 30, 2020, approximately $17 million of the revenue decline in the Transportation segment was attributable to the COVID-19 pandemic or COVID-19 related effects.

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

Transportation revenue for the nine months ended September 30, 2020 decreased, compared to the prior year period, primarily driven by loss of business and COVID-19 related impact, partially offset by the ramp of new business.

For the nine months ended September 30, 2020, approximately $61 million of the revenue decline in the Transportation segment was 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 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.

Transportation segment profit and adjusted EBITDA margin for the three and nine months ended September 30, 2020 increased, compared to the prior year periods, mainly driven by reductions from our cost reduction program, partially offset by overall revenue declines and the adverse effects of the COVID-19 pandemic.

CNDT Q3 2020 Form 10-Q

Segment Profit (Loss) and Adjusted EBITDA

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 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.

Increase in Other segment profit for the nine months ended September 30, 2020, compared to the prior year period, was primarily due to the adjustment to the remaining California Medicaid Management Information System settlement liability of $7 million as a result of the contract expiration in March 2020.

This benefit was removed from adjusted EBITDA for segment reporting purposes due to its non-recurring nature.

Unallocated Costs

Unallocated Costs for the three months ended September 30, 2020 increased, compared to the prior year period.

This was primarily driven by the accrual for management incentive compensation due to certain business results meeting or exceeding internal targets and a one-time COVID-19 related item, partially offset by efficiencies created by our cost reduction program.

Unallocated Costs for the nine months ended September 30, 2020 was flat, compared to the prior year period.

This was primarily driven by the efficiencies created by our cost reduction program, 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 and increase in management incentive compensation due to certain business results meeting or exceeding internal targets.

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.

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.

Total signings for the three and nine months ended September 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.

For the three months ended September 30, 2020, the Company signed $468 million of new business, representing a 100% increase compared to the prior year period.

Renewal TCV for the three months ended September 30, 2020 was $745 million, an increase of 46% 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.

For the nine months ended September 30, 2020, the Company signed $1,415 million of new business, representing 80% increase compared to the prior year period.

Renewal TCV for the nine months ended September 30, 2020 was $2,172 million, an increase of 26% compared to the prior year period.

The amounts in the following table exclude divestitures.

Three Months Ended

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September 30, 2020 vs.

($ in millions) 2020 2019 $ Change % Change

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CNDT Q3 2020 Form 10-Q

Six Months Ended

June 30, 2020 vs.

Nine Months Ended

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(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.

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

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

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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 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.

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 by 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.

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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 remains ongoing.

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.

For additional information on various COVID-19 impacts, uncertainties and risks, see Part I, 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 and June 30, 2020.

CNDT Q3 2020 Form 10-Q

Capital Resources and Liquidity

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

As of September 30, 2020, and December 31, 2019, total cash and cash equivalents were $488 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.

The net amount available to be drawn upon under our Revolver as of September 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 June 30, 2020, our total long-term debt outstanding was $1.6 billion of which $68 million was due within one year.

As of September 30, 2020, our total long-term debt outstanding was $1.7 billion of which $78 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:

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Nine Months Ended

September 30,

(in millions) 2020 2019 Better (Worse)

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Operating activities

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.

The net improvement in cash used in operating activities of $205 million, compared to the prior year period, was primarily related to accelerated collections of Accounts receivable of $49 million, timing of payments of Accounts payable and other current liabilities of $40 million, lower net cash income tax payments of $39 million, the deferral of payroll taxes allowed by the CARES Act of $32 million, lower management incentive payments and the impact of lower headcount on payroll of $28 million and other working capital changes of $17 million.

Investing activities

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.

The decrease in cash used in investing activities of $161 million was primarily due to decreased spending for capital expenditures and the absence of the HSP acquisition which occurred 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 Revolver in the first quarter of 2020.

The increase in cash from financing activities was primarily related to the $150 million draw down from our $750 million Revolver and lower tax payment related stock compensation payments of $9 million.

CNDT Q3 2020 Form 10-Q

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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