What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-27 · 175 added, 171 removed, 239 unchanged (59% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Conduent Incorporated.

The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Conduent.

This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes in this Form 10-K for the year ended December 31, 2020.

6 unchanged sentences

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate.

We organize and manage our businesses through three reportable segments, Other operations and Shared IT / Infrastructure & Corporate Costs.

We organize and manage our businesses through three reportable segments.

• Commercial Industries – Our Commercial Industries segment provides business process services and customized solutions to clients in a variety of industries.

1 unchanged sentence

• Government Services – Our Government Services segment provides government-centric business process services to U.S.

federal, state and local and foreign governments for public assistance, program administration, transaction processing and payment services.

federal, state and local and foreign governments for public assistance, health services, program administration, transaction processing and payment services.

Our solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations.

1 unchanged sentence

On behalf of government agencies and authorities in the transportation industry, we deliver mission-critical mobility and payment solutions that improve automation, interoperability and decision-making to streamline operations, increase revenue and reduce congestion while creating safer communities and seamless travel experiences for consumers.

Other operations include our divestitures, 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 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.

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

These costs are not allocated to the reportable segments.

We expect that our transformation initiatives will provide greater strategic and operational flexibility and efficiency and better control of our systems and processes.

There is a risk, however, that our efforts, plans and transactions related to our strategic and operational review, as well as our modernization efforts and data center consolidations could materially and adversely disrupt our operations.

Refer to Part I, Item 1A – Risk Factors of this Form 10-K for additional information.

CNDT 2020 Annual Report

Significant 2020 Actions

• Strong new business signings results – A strong year of new business with total contract value (TCV) signings of $1,934 million in 2020, representing an increase of 94% compared to that of the prior year period.

• Draw down on revolver – In March 2020, we drew down $150 million of our $750 million Senior Credit Facility (Revolver) as a precautionary measure in response to the COVID-19 pandemic.

This amount was repaid in December 2020.

• Cost savings initiative – Beginning in the first quarter of 2020, we expanded the focus of our efficiency initiatives to include both permanent and temporary cost efficiencies, aimed to offset as much of the COVID-19 related negative impacts as possible.

We announced an initial target amount of approximately $100 million of cost savings impact in 2020 and subsequently increased this amount throughout the year.

We achieved approximately $145 million of cost savings impact in 2020 in both permanent savings, such as headcount and vendor optimization, and temporary savings, such as furloughs and reduced travel.

• Operational improvements – We have made significant progress on our “Growth”, “Quality”, and “Efficiency” initiatives by leveraging changes to people, process, and technology.

Specific actions have included standardizing governance processes for client implementations, account management, and incident response, centralizing and enhancing the salesforce, restructuring to leverage a shared services model and addressing spans and layers, instituting a global IT command center, continuing to make progress on the data center consolidation plan, among others.

These actions have resulted in improvements across the “Growth”, “Quality”, and “Efficiency” pillars.

For example, we have shown a significant reduction of the number of technology-related incidents and outages, improvements in associate satisfaction survey results, and increases in service level agreement payments from customers.

Significant 2019 Actions

• Business acquisition – In January 2019, we acquired Health Solution Plus, a software provider of healthcare payer administration solutions for a total base consideration of $90 million.

7 unchanged sentences

Refer to Note 17 – Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding this litigation settlement.

• Goodwill Impairment – During the first quarter of 2019, we recorded a pre-tax impairment charge of $ 284 million related to our Transportation reporting unit.

Also, during the second quarter of 2019, we performed an interim goodwill impairment assessment for all reporting units and recognized a total pre-tax impairment charge of $ 1.1 billion.

No impairment was identified during our annual impairment test performed as of October 1, 2019.

Subsequent to completing the annual impairment test, the Company experienced further unanticipated contract losses within the Government Services reporting unit, and as result, management performed a goodwill impairment assessment for this reporting unit as of December 31, 2019 which resulted in a pre-tax impairment charge of $512 million.

In addition, in the fourth quarter we recorded an immaterial correction to the impairment charges recorded in the first and second quarters to properly reflect the impact of tax deductible goodwill on the previous impairments as well as the related income tax benefit.

The impairment adjustment and related income tax benefit to the first quarter charge for the Transportation reporting unit totaled $20 million and $1 million, respectively.

The impairment adjustment and related income tax benefit to the second quarter charge totaled $69 million and $6 million, respectively.

The second quarter impairment and income tax benefit adjustments corrected the combined Commercial Industries reporting units by $53 million and $5 million, respectively, and the Government Services reporting unit by $16 million and $1 million, respectively.

We believe these adjustments are not material to the current period or any prior period.

The cumulative impairment charge for the year ended December 31, 2019 was approximately $2.0 billion.

Refer to Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements and MD&A – Critical Accounting Policies – Goodwill for additional information regarding the goodwill impairment assessment and resulting charges.

Significant 2018 Actions

• Loan Redemption – In July 2018, we redeemed $476 million of our $510 million Senior Notes due 2024 at a premium of $95 million.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information regarding this redemption.

• Dispositions – In 2018, we completed divestitures of:

(1) our Commercial Vehicle Operations business;

(2) our off-street parking business;

human resource consulting and actuarial business and the human resource consulting and outsourcing business located in Canada and the United Kingdom;

and (4) our local and municipal constituent government software solutions business.

The aggregate proceeds for these divestitures was $703 million in cash.

The businesses sold represented $304 million and $500 million of 2018 and 2017 revenue, respectively.

We recorded a pre-tax gain of $78 million on these divestitures for the year ended December 31, 2018.

• Goodwill impairment – During 2019, we performed interim goodwill impairment assessments for all our reporting units which resulted in a cumulative impairment charge of $2.0 billion.

Refer to Note 9 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for details regarding the facts and circumstances that led to this impairment charge.

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 associates.

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 throughout the year, which includes:

CNDT 2020 Annual Report

• 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.

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

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

We will start a slow and measured approach to bring associates back to our offices, as appropriate.

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

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 as well as the Company's needs and to continue to provide our mission-critical services and solutions.

For the year ended December 31, 2020, we estimated an $85 million unfavorable impact on revenue was attributable to the COVID-19 pandemic or COVID-19 related effects.

In addition to reductions in certain direct costs, we also achieved certain temporary cost savings associated with our cost reduction program which were estimated to be $59 million for the year ended December 31, 2020.

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

The estimated effect of the COVID-19 pandemic on our pre-tax income, which includes the net revenue impact, incremental costs and benefit from temporary cost savings was a reduction of $23 million for the year ended December 31, 2020.

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

Critical Accounting Policies

10 unchanged sentences

The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period.

Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such policies affect our reported and expected financial results.

Specific risks associated with these critical accounting policies are discussed in the MD&A, where such policies affect our reported and expected financial results.

For a detailed discussion of the application of these and other accounting policies, refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements.

1 unchanged sentence

The Company accounts for lease and non-lease components separately for its equipment leases, based on the estimated standalone price of each component, and combines lease and non-lease components for its real estate leases.

The Company's leases generally do not provide an implicit rate, therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities.

The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment.

The Company's leases generally do not provide an implicit rate;

therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities.

The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a

CNDT 2020 Annual Report

collateralized basis over the term of a lease within a particular currency environment.

Refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies for additional information regarding our lease accounting policies.

4 unchanged sentences

Refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies and Note 2 – Revenue to the Consolidated Financial Statements for additional information regarding our revenue recognition policies.

Held for Sale

We classify assets as held for sale in the period when the following conditions are met:

(i) management, having the authority to approve the action, commits to a plan to sell the asset (disposal group);

(ii) the asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal group);

(iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated;

(iv) the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal group) beyond one year;

(v) the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value;

and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

CNDT 2019 Annual Report

A long-lived asset (disposal group) that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell.

Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met.

Conversely, gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale.

The fair value of a long-lived asset (disposal group) less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.

Upon determining that a long-lived asset (disposal group) meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group in the line items Assets held for sale and Liabilities held for sale, respectively, in the Consolidated Balance Sheets.

In 2018, management approved the disposal through sale of certain assets and businesses, which were a mix of Commercial Industries, Government Services and Transportation businesses.

This action was taken as a result of our evaluation of these businesses as they represent businesses in markets or with services that we did not see as strategic or core.

As of December 31, 2019, all of these businesses have been sold.

Refer to Note 4 – Divestiture to the Consolidated Financial Statements for additional information.

Intangible Assets

2 unchanged sentences

Other key inputs include assumptions about technological obsolescence, customer attrition rates, brand recognition, the allocation of projected cash flows to identifiable intangible assets and discount rates.

We regularly review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

We regularly review for impairment intangible assets with finite lives whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Factors we consider important which could trigger an impairment review include the following:

5 unchanged sentences

Differing estimates and assumptions as to any of the factors described above could result in a materially different impairment charge, if any, and thus materially different results of operations.

In January 2017, the FASB issued updated accounting guidance for simplifying the goodwill impairment test.

We early adopted this guidance for our goodwill impairment tests performed after January 1, 2017.

Goodwill is not amortized but rather tested for impairment annually, or more frequently if an event or circumstance indicates that impairment may have been incurred.

Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated adverse events or conditions impacting revenues, cash flows or profitability, unanticipated competitive activities and acts by governments and courts.

CNDT 2019 Annual Report

Application of the interim and annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment of the fair value of each reporting unit.

We determined during the first three quarters of 2019 that we had five reporting units (Financial Services & Healthcare (FS&H), Consumer & Industrial (C&I), Europe (together comprising Commercial Industries), Government Services and Transportation).

During the fourth quarter of 2019, we changed our reporting units within the Commercial Industries reportable segment to reflect how we currently manage our business.

We currently have six reporting units (End-User Customer Experience (EUCE), Transaction Processing (TP), Commercial Healthcare (CH) and Human Resources and Learning Services (HRL) (together comprising Commercial Industries), Government Services and Transportation), which support our three reportable segments.

Interim Goodwill Impairment Evaluation

During the first quarter of 2019, the Transportation reporting unit experienced unanticipated losses of certain customer contracts, lower than expected new customer contracts and higher costs of delivery (all subsequent to February 2019), and as a result, the expected growth of this reporting unit decreased resulting in its fair value being below its carrying value by an estimated $284 million.

Accordingly, the Company recorded a pre-tax impairment charge of $284 million for the three months ended March 31, 2019.

In the second quarter of 2019, there were further unanticipated losses of certain customer contracts, lower potential future volumes and lower than expected new customer contracts (all subsequent to May 9, 2019).

This led to actual results being below budget and a further downward revision of the long-term forecast across all of the Company’s former reporting units (FS&H, C&I, Europe, Government Services, and Transportation).

As a consequence of the business performance and the strategy pivot due to changes in management that occurred in the second quarter of 2019, we lowered our sales outlook, average margin expectation for the future years, and increased our weighted average cost of capital.

The table below summarizes key factors (by reporting unit) impacting our revised forecast within the second quarter of 2019 goodwill assessment.

Key Factors FS&H C&I Europe Government Services Transportation

Lower anticipated new business X X X X X

Potential higher than anticipated contract losses X X X X

Potential volume pressures X X X

Strategic pivot X X X X X

Based upon the information identified in the second quarter of 2019, we performed an interim goodwill impairment assessment for all our reporting units which resulted in a pre-tax impairment charge of $1.1 billion for the three months ended June 30, 2019.

Annual Goodwill Impairment Evaluation

We currently have six reporting units which support our three reportable segments:

Customer Experience Management, Business Operations Solutions, Commercial Healthcare and Human Resources and Learning Services (together comprising Commercial Industries), Government Services and Transportation.

Our annual quantitative impairment test of goodwill was performed as of October 1, 2020.

4 unchanged sentences

When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions.

The cash-flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, restructuring and strategic transformation activities, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business.

The cash-flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, restructuring activities, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business.

The selected discount rates consider the risk and nature of the respective reporting units' cash flows, appropriate capital structure and rates of return that market participants would require to invest their capital in our reporting units.

We believe these assumptions are appropriate and reflect our forecasted long-term business model and consider our historical results as well as the current economic environment and markets that we serve.

Based on our quantitative assessments, we concluded that the fair value of our reporting units exceeded their respective carrying values by approximately $100 million (for all Commercial Industries), $21 million for Government Services and $24 million for Transportation, respectively.

The most significant assumption used in the goodwill analysis relates to the discount rates (ranging from 8.75% to 12.75%) and long-term organic growth rates (ranging from 2.5% to 3.0%) for the reporting units comprising the Commercial Industries, Government Services and Transportation reporting units.

Subsequent to completing the annual impairment test, the Company experienced further unanticipated contract losses within the Government Services reporting unit, and as result, management performed a goodwill impairment assessment for this reporting unit as of December 31, 2019, which resulted in a pre-tax impairment charge of $512 million.

The impairment adjustment and related income tax benefit to the first quarter charge for the Transportation reporting unit totaled $20 million and $1 million, respectively.

The impairment adjustment and related income tax benefit to the second quarter charge totaled $69 million and $6 million, respectively.

We believe these adjustments are not material to the current period or any prior period.

The cumulative impairment charge for the year ended December 31, 2019 was approximately $2.0 billion.

Refer to Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information regarding goodwill by reportable segment.

The most significant assumption used in the goodwill analysis relates to the discount rates (ranging from 12.25% to 13.00%) and long-term organic growth rates (ranging from 2.5% to 3.0%) for the reporting units within the Commercial Industries, Government Services and Transportation reportable segments.

Based on our quantitative assessments, we concluded that the fair value of our reporting units exceeded their respective carrying values and, accordingly, we did not record any goodwill impairment charge in the year ended December 31, 2020.

During 2019, we performed interim goodwill impairment assessments for all our reporting units which resulted in a cumulative impairment charge of $2.0 billion.

Refer to Note 9 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for details regarding the facts and circumstances that led to this impairment charge.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

2 unchanged sentences

In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances and other factors, that may not be predictable.

In the event that there is a significant unusual or one-time item recognized in our operating results, the taxes attributable to that item would be separately calculated and recorded at the same time as an unusual or one-time item.

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards.

2 unchanged sentences

Gross deferred tax assets of $294 million and $309 million had valuation allowances of $83 million and $72 million at December 31, 2020 and 2019, respectively.

CNDT 2019 Annual Report

On December 22, 2017, the U.S.

enacted the Tax Cuts and Jobs Act (Tax Reform).

The Tax Reform includes a tax on global intangible low-taxed income (“GILTI”), which imposes a U.S.

tax on certain income earned by the Company’s foreign subsidiaries.

The Company elected to treat the tax on GILTI as a period cost when incurred and therefore, no deferred taxes for GILTI have been recognized for the year ended December 31, 2019.

We are subject to ongoing tax examinations and assessments in various jurisdictions.

4 unchanged sentences

Refer to Note 16 – Income Taxes to the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.

CNDT 2020 Annual Report

Loss Contingencies

11 unchanged sentences

Other Developments

SEC Rule—FAST Act Modernization and Simplification of Regulation S-K

In March 2019, the SEC adopted amendments to modernize and simplify certain disclosure requirements in Regulation S-K as part of modernization and simplification of Regulation S-K and related rules and forms.

The amendments, which, among other things, change the requirements for the content of MD&A and change the process for redacting confidential information in certain exhibits, are intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.

The final rule became effective May 2, 2019.

SEC Rule - Modernize and Enhance Management’s Discussion and Analysis and other Financial Disclosures

In November 2020, the SEC adopted amendments to modernize, simplify and enhance certain financial disclosures called for by Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide material information to investors.

The amendments are also designed to improve the readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information.

The provisions of the rule that have the most significant impact on our disclosures under Regulation S-K and the content of this Form 10-K include:

(i) the elimination, where appropriate, of the requirement to include in MD&A a discussion of the earliest year for registrants that provide financial statements covering three years in their filings, as such discussion is already included in prior filings;

and (ii) a requirement that registrants identify the location in the prior filing where the omitted discussion can be found.

(i) elimination of the requirement to include a five year financial highlights table in the Form 10-K;

(ii) amending the requirement to present quarterly financial information for the two most recent years in tabular form to a principals-based approach to discuss material retrospective changes;

(iii) elimination of the requirement to present a tabular summary of contractual obligations;

(iv) adding a requirement to state the principal objectives of the MD&A;

and (v) adding a requirement to present and discuss critical accounting estimates in the MD&A.

We will be required to comply with these amendments for our Form 10-K for the year ended December 31, 2021.

Early application is permitted for each amended item.

We have elected to apply the guidance to eliminate the disclosure of the five-year highlights for this Form 10-K for the year ended December 31, 2020.

CNDT 2020 Annual Report

12 unchanged sentences

Interest expense 60 78 (18) (23) %

(Gain) loss on extinguishment of debt — 108 (108) (100) %

Goodwill impairment 1,952 — 1,952

(Gain) loss on divestitures and transaction costs 25 42 (17) (40) %

Litigation costs (recoveries), net 17 227 (210) (93) %

Goodwill impairment — 1,952 (1,952) n/m

Loss on divestitures and transaction costs 17 25 (8) (32) %

Litigation costs, net 20 17 3 18 %

Other (income) expenses, net 1 (10) 11 (110) %

Total Operating Costs and Expenses 4,302 6,573 (2,271)

Income (Loss) Before Income Taxes (2,106) (395) (1,711)

Loss Before Income Taxes (139) (2,106) 1,967

Income tax expense (benefit) (21) (172) 151

Net Income (Loss) $ (1,934) $ (416) $ (1,518)

Revenue for 2019 decreased, compared to the prior year period, mainly due to the impact from divestitures completed in 2019 and 2018, lost business in the Commercial Industries and Government Services segments, price and volume pressure and currency fluctuations.

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

Net Loss $ (118) $ (1,934) $ 1,816

Revenue for 2020 decreased, compared to the prior year, mainly driven by lost business and the effects of the COVID-19 pandemic across our Commercial and Transportation segments.

These were partially offset by increases from the ramp of new business and increases in COVID-19 related revenues in our Government segment.

We estimated approximately $85 million of the revenue decline for the year was attributable to the net effect of the COVID-19 pandemic or COVID-19 related effects.

Cost of Services (excluding depreciation and amortization)

Cost of services for 2019 decreased, compared to the prior year period, mainly driven by the divestitures completed in 2019 and 2018, reductions in real estate, IT and labor costs from our transformation initiatives, lost business and lower volumes.

Cost of services for 2020 decreased, compared to the prior year, mainly driven by lost business, our efficiency initiatives and cost actions.

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

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

Lower SG&A for 2019, compared to the prior year period, was reflective of divested SG&A expenses, reductions in real estate costs, lower corporate overhead costs and reductions labor costs, including reductions in 401(k) costs.

SG&A for 2020 declined, compared to the prior year, mainly driven by reductions in real estate costs, lower corporate overhead costs and reductions in labor costs, including reductions in 401(k) costs, partially offset by increases in certain other employee costs.

CNDT 2020 Annual Report

Depreciation and Amortization

Depreciation and amortization for 2019 decreased, compared to the prior year period, primarily due to the divestitures in 2019 and 2018, partially offset by the HSP acquisition and increased capitalized software amortization for new projects placed in service.

Refer to Note 5 – Business Acquisition and Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information regarding the HSP acquisition and our intangible assets, respectively.

Depreciation and amortization (D&A) for 2020 was flat compared to the prior year due to D&A on new capital expenditure spend being offset by the run-off of D&A on older assets.

Restructuring and Related Costs

5 unchanged sentences

Data center consolidation 23 21

Other contractual termination costs 3 37

Asset impairment 15 3

Termination, asset impairment and other costs 22 18

Total Net Current Period Charges 59 67

2 unchanged sentences

Reduction in headcount (2)

(1) Represents professional support costs associated with our strategic transformation program.

(1) Represents professional support costs associated with certain strategic transformation programs.

(2) Relates to headcount reductions worldwide associated with Severance and related costs

1 unchanged sentence

Interest Expense

The decrease in Interest expense for 2019, compared to the prior year period, was driven primarily by lower average debt balances resulting mostly from the tender offer in 2018 and repricing.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information.

(Gain) Loss on Extinguishment of Debt

The loss on extinguishment of debt in 2018 related to the premium paid for the substantial buyback of the 10.5% Senior Notes due 2024.

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

The decrease in Interest expense for 2020, compared to the prior year, 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 12 – Debt to the Consolidated Financial Statements for additional information.

Goodwill Impairment

The goodwill impairment for 2019 related to the write-down of the carrying values of the reporting units.

Refer to Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements and MD&A–Overview–Significant 2019 Actions–Goodwill Impairment for additional information.

There was no goodwill impairment identified for 2020.

The goodwill impairment for 2019 related to the write-down of the carrying values of all of the reporting units.

Refer to Note 9 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information.

CNDT 2020 Annual Report

(Gain) Loss on Divestitures and Transaction Costs

The loss in 2019 consists of $6 million of changes in estimates related to losses on divestitures, $2 million related to a loss on sale of assets and $17 million of transaction and related costs, $4 million of which related 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 loss in 2018 was mainly related to the impairment charge on the anticipated sale of a portfolio of select standalone customer care contracts to Skyview Capital LLC.

Litigation Costs (Recoveries), Net

Loss on Divestitures and Transaction Costs

The costs included in 2020 amount 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 in 2019 consist of transaction and related costs, changes in estimates related to losses on divestitures and a loss on sale of assets.

Litigation Costs, Net

Net litigation costs for 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 2019 consist primarily of the recognition of the $13 million discount on the fair value of the Texas litigation liability established in 2018, due to the 2019 acceleration of the payment terms of the settlement.

The 2018 expenses were primarily due to the increase in reserves for the Texas litigation and establishment of reserves for the Cognizant terminated contracts.

Refer to Note 17 – Contingencies and Litigation to the Consolidated Financial Statements for additional information.

Other (Income) Expenses, Net

Other (income) expenses, net primarily includes foreign currency transaction losses (gains), interest income, the Student Loan business shut-down costs and other deferred compensation investment results.

Other (income) expenses, net primarily includes foreign currency transaction losses (gains), interest income and the Student Loan business shut-down costs.

The 2020 effective tax rate was 15.1%, compared to 8.2% for 2019.

The 2020 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.

statutory rate of 21% primarily due to geographic mix of income, tax settlements and valuation allowances partially offset by tax credits.

The 2019 rate was lower than the statutory rate, 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.

The 2018 rate was lower than the U.S.

statutory tax rate of 21%, primarily due to pre-tax loss and tax from the divestitures, partially offset by U.S.

foreign tax credits.

Excluding the impact of goodwill impairment, divestitures, the Texas litigation reserve, amortization and restructuring, the normalized effective tax rate for 2019 was 30.0%.

The normalized effective tax rate of 25.1% for 2018, was predominantly impacted by the exclusion of divestitures, the Texas litigation reserve, the loss on extinguishment of debt, amortization, restructuring and divestiture related costs.

Excluding the impact of amortization, restructuring and discrete tax items the normalized effective tax rate for 2020 was 27.3%.

The normalized effective tax rate of 30.0% for 2019, was predominately impacted by the exclusion of the impact of goodwill impairment, divestitures, the Texas litigation reserve, amortization and restructuring.

The decline in the normalized effective tax rate from 2019 to 2020 is attributable to an increase in tax credits, favorable changes to certain U.S.

tax rules and geographic mix of income in 2020.

The Company believes it is reasonably possible that unrecognized tax benefits of approximately $14 million will reverse within 12 months due to anticipated audit settlements.

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

The CARES Act provides for various tax relief and tax incentive measures.

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

The CARES Act also retroactively allowed for the immediate recovery of qualified improvement property (QIP) costs rather than over a 39 year recovery period, resulting in additional tax deductions for 2018 and 2019.

Lastly, the CARES Act provided an elective five-year carry back for net operating losses (NOLs) incurred in taxable years starting after December 31, 2017, and before January 1, 2021.

This allowed the Company to carry back the loss it incurred in 2019 to 2018, resulting in a tax refund.

CNDT 2020 Annual Report

Operations Review of Segments

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate.

We organize and manage our businesses through three reportable segments (Commercial Industries, Government Services and Transportation), Other operations and Shared IT / Infrastructure & Corporate Costs.

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

• Commercial Industries,

• Government Services, and

• Transportation.

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

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.

The section below provides a comparative discussion of our financial performance by segment between the year ended December 31, 2020 and 2019.

MD&A–Operations Review of Segment in our Annual Report on Form 10-K for the year ended December 31, 2018, for a comparative discussion of our consolidated results of operations between 2018 and 2017.

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

As described in Note 3 – Segment Reporting to our Consolidated Financial Statements, in 2020 we realigned our sales organization and certain shared IT and other allocated functions and reallocated certain costs that were previously included in the Shared IT/Infrastructure and Corporate Costs (now referred to as Unallocated Costs) to each of the reportable segments.

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

We include a discussion of our recast financial performance by segment for the years ended December 31, 2019 and 2018 immediately after the discussion of financial performance for the years ended December 31, 2020 and 2019 below.

Segment Performance Review - 2020 compared to 2019

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

Year Ended Dec 31, 2020 Divestitures Other

10 unchanged sentences

Adjusted EBITDA Margin 15.8 % 24.6 % 13.8 % 2.8 % (50.0) % — % 11.1 %

CNDT 2020 Annual Report

Commercial Industries Segment

Commercial Industries revenue for 2019 decreased, compared to the prior year period, primarily driven by contract losses, volume pressure, price pressure upon renewals, strategic exits and currency fluctuations.

Commercial Industries revenue for 2020 decreased, compared to the prior year, due to an estimated $158 million of negative COVID-19 impacts as well as prior year lost business.

This pressure was partially offset by new business ramp.

The COVID-19 impact is primarily due to the following year-over-year changes:

1) lower transaction processing volumes for clients within our BOS service offering, 2) reduced workers compensation claims and commercial healthcare claims processing in our Commercial Healthcare Solutions service offering, 3) reduced revenue from our HSA offering "BenefitWallet" (within our HRLS business) as a result of interest rate reductions, 4) slightly reduced call volumes within our CXM service offering across travel and retail clients, and 5) COVID-19 related delays of new business ramp across multiple clients and offerings.

Segment Profit and Adjusted EBITDA

Decreases in the Commercial Industries segment profit and adjusted EBITDA for 2020, compared to the prior year, were mainly driven by overall revenue declines, one-time items, certain employee costs and the adverse effects of the COVID-19 pandemic, partially offset by reductions from the cost savings program.

Government Services Segment

Government Services revenue for 2020 increased, compared to the prior year, primarily driven by an estimated $149 million of COVID-19 related benefit.

These increases were partially offset by prior year contract losses.

The COVID-19 benefit is 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) incremental additional unemployment insurance benefit distributions provided by the CARES Act.

Segment Profit and Adjusted EBITDA

Increases in the Government Services segment profit and adjusted EBITDA for 2020, compared to the prior year, were primarily driven by higher margin revenue mix due to COVID-19, the cost savings program and lower IT costs associated with contract losses.

Transportation Segment

Transportation revenue for 2020 decreased, compared to the prior year, primarily driven by an estimated $76 million of negative COVID-19 related volume impacts as well as lost business, partially offset by the ramp of new business.

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

Segment Profit and Adjusted EBITDA

Transportation segment profit and adjusted EBITDA for 2020 increased, compared to the prior year, primarily driven by the cost savings program and revenue mix.

CNDT 2020 Annual Report

Other revenue for 2020 decreased, compared to the prior year, driven mainly by the divestiture completed in early 2019.

Segment Profit (Loss) and Adjusted EBITDA

Increase in Other segment profit for 2020 compared to the prior year, 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

Improvements in adjusted EBITDA within our Unallocated Costs for 2020, compared to the prior year, were mainly driven by the efficiencies created by the cost reduction initiative, partially offset by an increase in costs incurred due to the effects of the COVID-19 pandemic and an increase in certain employee costs.

Segment Performance Review - 2019 compared to 2018

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

Year Ended December 31, 2019 Divestitures Other

Total Revenue $ 2,385 $ 1,263 $ 781 $ 36 $ 2 $ — $ 4,467

Segment profit (Loss) $ 270 $ 279 $ 69 $ 1 $ ( 1 ) $ ( 345 ) $ 273

Adjusted EBITDA $ 376 $ 311 $ 108 $ 1 $ ( 1 ) $ ( 301 ) $ 494

% of Total Revenue 53.4 % 28.3 % 17.4 % 0.8 % — % — % 100.0 %

Adjusted EBITDA Margin 15.8 % 24.6 % 13.8 % 2.8 % (50.0) % — % 11.1 %

Year Ended December 31, 2018

Total Revenue $ 2,550 $ 1,351 $ 729 $ 752 $ 11 $ — $ 5,393

Segment profit (Loss) $ 346 $ 296 $ 61 $ 98 $ ( 4 ) $ ( 375 ) $ 422

Adjusted EBITDA $ 454 $ 328 $ 99 $ 105 $ ( 2 ) $ ( 344 ) $ 640

% of Total Revenue 47.3 % 25.1 % 13.5 % 13.9 % 0.2 % — % 100.0 %

Adjusted EBITDA Margin 17.8 % 24.3 % 13.6 % 14.0 % (18.2) % — % 11.9 %

Commercial Industries Segment

Commercial Industries revenue for 2019 decreased, compared to the prior year, primarily driven by contract losses, volume pressure, price pressure upon renewals, strategic exits and currency fluctuations.

These losses were partially offset by revenue from new contracts.

Segment Profit and Adjusted EBITDA

Decreases in the Commercial Industries segment profit and adjusted EBITDA margin for 2019, compared to the prior year period, were mainly driven by the overall revenue declines, partially offset by reductions in labor, IT and real estate costs from our transformation initiatives.

Decreases in the Commercial Industries segment profit and adjusted EBITDA margin for 2019, compared to the prior year, were mainly driven by the overall revenue declines, partially offset by reductions in labor and real estate costs from our efficiency initiatives.

CNDT 2020 Annual Report

Government Services Segment

Government Services revenue for 2019 decreased, compared to the prior year period, primarily driven by contract losses and pricing and scope changes associated with a large renewal.

Government Services revenue for 2019 decreased, compared to the prior year, primarily driven by contract losses and pricing and scope changes associated with a large renewal.

These declines were partially offset by ramp of new business.

CNDT 2019 Annual Report

Segment Profit and Adjusted EBITDA

Decreases in the Government Services segment profit and adjusted EBITDA margin for 2019, compared to the prior year period, were mainly driven by lower revenue, partially offset by lower IT and delivery costs.

Decreases in the Government Services segment profit and adjusted EBITDA margin for 2019, compared to the prior year, were mainly driven by lower revenue, partially offset by lower IT and delivery costs.

Transportation Segment

Transportation revenue for 2019 increased, compared to the prior year period, primarily driven by ramp of new business and volume increases.

Transportation revenue for 2019 increased, compared to the prior year, primarily driven by ramp of new business and volume increases.

Segment Profit and Adjusted EBITDA

Transportation segment profit and adjusted EBITDA margin for 2019 increased, compared to the prior year period, mainly driven by increased revenue and reduced IT platform spend.

Other revenue for 2019 decreased, compared to the prior year period, driven mainly by the divestitures completed in 2018 and 2019 and the run-off of our Student Loan Services business.

Transportation segment profit and adjusted EBITDA margin for 2019 increased, compared to the prior year, mainly driven by increased revenue and reduced labor and real estate costs from our efficiency initiatives.

Other revenue for 2019 decreased, compared to the prior year, driven mainly by the divestitures completed in 2018 and 2019 and the run-off of our Student Loan Services business.

Segment Profit (Loss) and Adjusted EBITDA

Decreases in Other segment profit and adjusted EBITDA for 2019, compared to the prior year period, were primarily due to divestitures completed in 2019 and 2018 and the run-off of our Student Loan Services business.

Shared IT / Infrastructure & Corporate Costs

Improvements in Shared IT/Infrastructure and Corporate costs for 2019, compared to the prior year period, were mainly due to reductions in corporate overhead costs.

Decreases in Other segment profit and adjusted EBITDA for 2019, compared to the prior year, were primarily due to divestitures completed in 2019 and 2018 and the run-off of our Student Loan Services business.

Unallocated Costs

Improvements in segment loss and adjusted EBITDA within our Unallocated Costs for 2019, compared to the prior year, were mainly due to reductions in IT and corporate overhead costs.

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, excluding the impact of divested business as required.

For the year ended December 31, 2020, the Company signed $1,934 million of new business, representing a 94% increase compared to the prior year.

Renewal TCV for the year ended December 31, 2020 was $2,809 million, an increase of 26% compared to the prior year.

CNDT 2020 Annual Report

The amounts in the following table exclude divestitures.

4 unchanged sentences

Total Signings $ 4,743 $ 3,226 $ 1,517 47 %

Annual recurring revenue signings (1)

New business annual recurring revenue (ARR) signings (1)

$ 353 $ 281 $ 72 26 %

Non-recurring revenue signings (2)

New business non-recurring revenue (NRR) signings (2)

$ 255 $ 166 $ 89 54 %

(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.

CNDT 2019 Annual Report

Signings for the 2019 decreased, compared to the prior year, primarily due to sales headcount challenges and market positioning.

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, renewal rates for 2019 and 2018 were 81% and 95%, respectively.

A large part of the decline was attributable to the loss of our California Medicaid contract.

(1) New business ARR measures the revenue from recurring services provided to the client for any new business signing.

ARR represents the recurring services provided to a customer with the opportunity for renewal at the end of the contract term.

(2) New business NRR measures the non-recurring revenue for any new business signing, including (i) signing value of any contract with term less than 12 months and (ii) signing value of project based revenue, not expected to continue long term.

Total signings for 2020 increased, compared to the prior year, primarily due to strong conversion of the pipeline as a result of centralizing the sales organization, new sales leadership, top-grading and expanding of sales headcount, new sales bidding processes, and a simplified go-to-market strategy, among other initiatives.

Capital Resources and Liquidity

11 unchanged sentences

Cash Flow Analysis

The following summarizes our cash flows for the three years ended December 31, 2019, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:

The following summarizes our cash flows for the two years ended December 31, 2020, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:

Year Ended December 31, Change

4 unchanged sentences

Operating Activities

The decrease in cash generated from operating activities of $151 million, compared to the prior year period, was primarily attributable to $131 million of payments for the Texas and other litigation and lower adjusted EBITDA of $146 million, partially offset by lower cash income tax payments of $62 million, lower restructuring payments of $14 million and other working capital improvements of $50 million.

CNDT 2020 Annual Report

The net improvement in cash flow from operating activities of $29 million, compared to the prior year, was primarily attributable to the deferral of payroll taxes allowed by the CARES Act and other COVID-19 related relief of $57 million, lower income tax payments of $47 million and other working capital changes of $44 million, partially offset by the timing of collection of receivables of $119 million.

Investing Activities

The increase in cash used in investing activities of $770 million, compared to the prior year period, was primarily due to the absence of the proceeds from the divestitures and asset sales in 2018, the acquisition of HSP and increased spending for capital expenditures related to modernizing our IT infrastructure for both customer-facing and internal functions in 2019.

The decrease in cash used in investing activities of $176 million, compared to the prior year, was primarily due to the HSP acquisition in 2019 and decreased spending for capital expenditures.

Spending related to modernizing our IT infrastructure for both customer-facing and internal functions continued but was on a downward trajectory compared to the higher 2019 and 2018 levels.

Financing Activities

The decrease in cash used in financing activities for 2019, compared to the prior year period, was related to lower debt repayments.

The decrease in cash used in financing activities for 2020, compared to the prior year, was primarily due to lower tax payments related to stock compensation of $ 10 million for the year ended December 31, 2020, compared to $ 21 million for the prior year.

Sales of Accounts Receivable

2 unchanged sentences

(i) collections prior to the end of the year and (ii) currency.

Capital Market Activity

On June 28, 2018, the Company entered into Amendment No.

3 (Amendment) to the December 7, 2016 Credit Agreement and in July 2018, the Company redeemed $476 million of its $510 million 10.5 % Senior Notes due 2024.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information on both Amendment No.

3 and the partial redemption of the Senior Notes.

Financial Instruments

16 unchanged sentences

Refer to Note 12 – Debt to the Consolidated Financial Statements for additional information regarding debt.

(2) Represents interest on debt.

(2) Refer to Note 12 – Debt in the Consolidated Financial Statements for additional information.

(3) Refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements for additional information.

(4) Other purchase commitments:

We enter into other purchase commitments with vendors in the ordinary course of business.

(3) Refer to Note 8 – Leases to the Consolidated Financial Statements for additional information.

(4) We enter other purchase commitments with vendors in the ordinary course of business, generally IT-related expenditures.

Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable.

We currently do not have, nor do we anticipate, material loss contracts.

The table above does not include the amounts payable under the Texas Agreement.

Refer to Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information.

CNDT 2020 Annual Report

16 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis