What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-02-27 · 471 added, 502 removed, 939 unchanged (51% of the section changed)

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Conduent Incorporated and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income (loss), of comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of Conduent Incorporated and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income (loss), of comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,528 million as of December 31, 2020.

The goodwill associated with the Commercial Industries reportable segment, Government Services reportable segment and Transportation reporting segment was $821 million, $621 million and $60 million, respectively.

The goodwill associated with the Commercial Industries reportable segment, Government Services reportable segment and Transportation reportable segment was $837 million, $623 million and $68 million, respectively.

Management tests goodwill for impairment annually or more frequently if an event or change in circumstances indicate the asset may be impaired.

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If the fair value of a reporting unit is less than its carrying amount, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

In Q1 and Q2 2019, the Company experienced unanticipated losses of certain customer contracts, lower potential future volumes, lower than expected new customer contracts and higher costs of delivery.

This led to actual results being below budget and a further downward revision of the long-term forecast across all the Company's reporting units (Financial Services & Healthcare, Consumer & Industrial, Europe (together comprising Commercial Industries), 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, the Company lowered its sales outlook, average margin expectation for future years, and increased its weighted average cost of capital.

Based upon the events that occurred during Q1 and Q2 2019, management performed interim goodwill impairment assessments for all its reporting units which resulted in a pre-tax impairment charge of $284 million in Q1 and approximately $1.1 billion in Q2.

No impairment was identified during the 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.

There was no impairment identified for the year ended December 31, 2020.

As disclosed by management, the most significant assumptions used in the goodwill analysis relate to the long-term organic growth rates as well as the discount rates.

CNDT 2019 Annual Report

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are that there was significant judgment by management when determining the fair value measurement of the reporting units.

This in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate management’s cash flow projections, including significant assumptions related to the long-term organic growth rates and the discount rates.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when determining the fair value measurement of the reporting units;

(ii) a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate management’s cash flow projections and significant assumptions related to the long-term organic growth rates and the discount rates;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

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evaluating the appropriateness of the discounted cash flow analysis;

CNDT 2020 Annual Report

testing the completeness, accuracy and relevance of underlying data used in the estimate;

and evaluating the significant assumptions used by management, including the long-term organic growth rates and the discount rates.

Evaluating management’s assumptions related to the long-term organic growth rates involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of each reporting unit, (ii) the consistency with external market and industry data and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

and evaluating the significant assumptions used by management related to the long-term organic growth rates and the discount rates.

(ii) the consistency with external market and industry data;

and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow analysis and certain significant assumptions, including the discount rates.

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The independent registered public accountants and internal auditors have free access to the Audit Committee.

/s/ CLIFFORD SKELTON /s/ BRIAN WEBB-WALSH /s/ MARIO A.

Chief Executive Officer Chief Financial Officer Chief Accounting Officer

/s/ CLIFFORD SKELTON /s/ BRIAN WEBB-WALSH /s/ STEPHEN WOOD

Chief Executive Officer Chief Financial Officer Corporate Controller & Principal Accounting Officer

CNDT 2020 Annual Report

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Interest expense 60 78 112

(Gain) loss on extinguishment of debt — 108 —

Loss on extinguishment of debt — — 108

Goodwill impairment — 1,952 —

(Gain) loss on divestitures and transaction costs 25 42 ( 42 )

Litigation costs (recoveries), net 17 227 ( 11 )

Separation costs — — 12

Loss on divestitures and transaction costs 17 25 42

Litigation costs, net 20 17 227

Other (income) expenses, net 1 ( 10 ) 5

Total Operating Costs and Expenses 4,302 6,573 5,788

Income (Loss) Before Income Taxes ( 2,106 ) ( 395 ) ( 16 )

Loss Before Income Taxes ( 139 ) ( 2,106 ) ( 395 )

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

Income (Loss) From Continuing Operations ( 1,934 ) ( 416 ) 177

Income (loss) from discontinued operations, net of tax — — 4

Net Income (Loss) $ ( 1,934 ) $ ( 416 ) $ 181

Basic Earnings (Loss) per Share:

Continuing operations $ ( 9.29 ) $ ( 2.06 ) $ 0.82

Discontinued operations — — 0.02

Total Basic Earnings (Loss) per Share $ ( 9.29 ) $ ( 2.06 ) $ 0.84

Diluted Earnings (Loss) per Share:

Continuing operations $ ( 9.29 ) $ ( 2.06 ) $ 0.81

Discontinued operations — — 0.02

Total Diluted Earnings (Loss) per Share $ ( 9.29 ) $ ( 2.06 ) $ 0.83

Net Loss $ ( 118 ) $ ( 1,934 ) $ ( 416 )

Basic Loss per Share $ ( 0.61 ) $ ( 9.29 ) $ ( 2.06 )

Diluted Loss per Share $ ( 0.61 ) $ ( 9.29 ) $ ( 2.06 )

The accompanying notes are an integral part of these Consolidated Financial Statements.

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(in millions) 2020 2019 2018

Net Income (Loss) $ ( 1,934 ) $ ( 416 ) $ 181

Net Loss $ ( 118 ) $ ( 1,934 ) $ ( 416 )

Other Comprehensive Income (Loss), Net (1)

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Other Comprehensive Income (Loss), Net 9 18 74

Comprehensive Income (Loss), Net $ ( 1,916 ) $ ( 342 ) $ 213

Comprehensive Loss, Net $ ( 109 ) $ ( 1,916 ) $ ( 342 )

(1) All amounts are net of tax.

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Accounts receivable, net 670 652

Assets held for sale — 15

Contract assets 151 155

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Unearned income 133 108

Liabilities held for sale — 40

Other current liabilities 450 647

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Net income (loss) $ ( 118 ) $ ( 1,934 ) $ ( 416 )

Adjustments required to reconcile net income to cash flows from operating activities:

Adjustments required to reconcile net income (loss) to cash flows from operating activities:

Depreciation and amortization 459 459 460

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Deferred income taxes ( 21 ) ( 220 ) ( 75 )

(Gain) loss from investments ( 4 ) ( 2 ) ( 10 )

Loss from investments ( 3 ) ( 4 ) ( 2 )

Amortization of debt financing costs 7 7 11

(Gain) loss on extinguishment of debt — 108 —

(Gain) loss on divestitures and transaction costs 25 42 ( 42 )

Loss on extinguishment of debt — — 108

Loss on divestitures and sales of fixed assets, net 6 8 —

Stock-based compensation 20 24 38

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Changes in operating assets and liabilities:

(Increase) decrease in accounts receivable 107 133 32

(Increase) decrease in other current and long-term assets ( 14 ) ( 111 ) ( 32 )

Increase (decrease) in accounts payable and accrued compensation ( 32 ) ( 56 ) ( 49 )

Increase (decrease) in restructuring liabilities 10 8 34

Increase (decrease) in other current and long-term liabilities ( 257 ) 161 ( 125 )

Accounts receivable ( 14 ) 107 133

Other current and long-term assets ( 36 ) ( 14 ) ( 111 )

Accounts payable and accrued compensation 39 ( 15 ) ( 14 )

Restructuring liabilities — 10 8

Other current and long-term liabilities ( 174 ) ( 257 ) 161

Net change in income tax assets and liabilities ( 8 ) 3 ( 17 )

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Cost of additions to internal use software ( 63 ) ( 67 ) ( 45 )

Proceeds from investments — 1 117

Payments for acquisitions, net of cash acquired — ( 90 ) —

Proceeds from divestitures and sale of assets, net of cash — 675 56

Payments from divestitures, including cash sold ( 7 ) — —

Proceeds (payments) from divestitures, net of cash 5 ( 7 ) 675

Other investing, net — — ( 4 )

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Cash Flows from Financing Activities:

Proceeds on long-term debt — — 306

Debt issuance fee payments — ( 3 ) ( 8 )

Proceeds from revolving credit facility and other loans 155 — —

Payments on revolving credit facility ( 150 ) — —

Payments on debt ( 55 ) ( 54 ) ( 519 )

Debt issuance fee payments — — ( 3 )

Premium on debt redemption — — ( 95 )

Net payments to former parent company — — ( 161 )

Payment of contingent consideration related to acquisition ( 4 ) — —

Taxes paid for settlement of stock-based compensation ( 10 ) ( 21 ) ( 10 )

Dividends paid on preferred stock ( 10 ) ( 10 ) ( 10 )

Other financing — — ( 5 )

Net cash provided by (used in) financing activities ( 74 ) ( 85 ) ( 637 )

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$ 458 $ 505 $ 765

(1) Includes $9 million of restricted cash as of each of the years December 31, 2019, 2018 and 2017, that was included in Other current assets on their respective Consolidated Balance Sheets.

(1) Includes $ 8 million, $ 9 million and $ 9 million of restricted cash as of the years ended December 31, 2020, 2019 and 2018, respectively, that was included in Other current assets on their respective Consolidated Balance Sheets.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Balance at December 31, 2017 $ 2 $ 3,850 $ 171 $ ( 494 ) $ 3,529

Cash dividends paid - preferred stock, $80/per share — — ( 10 ) — ( 10 )

Dividend - preferred stock, $80/per share — — ( 10 ) — ( 10 )

Cumulative effect of accounting change - revenue standard — — 17 — 17

Reclassification of amounts impacted by Tax Reform — — 5 ( 5 ) —

Stock option and incentive plans, net — 28 — — 28

Comprehensive Income (Loss):

Net Income (Loss) — — 181 — 181

Net Loss — — ( 416 ) — ( 416 )

Other comprehensive income (loss), net — — — 74 74

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Balance at December 31, 2018 $ 2 $ 3,878 $ ( 233 ) $ ( 425 ) $ 3,222

Cash dividends paid - preferred stock, $80/per share — — ( 10 ) — ( 10 )

Cumulative impact of adopting the new revenue standard — — 17 — 17

Reclassification of amounts impacted by Tax Reform — — 5 ( 5 ) —

Dividend - preferred stock, $80/per share — — ( 10 ) — ( 10 )

Cumulative effect of accounting change - lease standard — — ( 8 ) — ( 8 )

Stock option and incentive plans, net — 12 — — 12

Comprehensive Income (Loss):

Net Income (Loss) — — ( 416 ) — ( 416 )

Net Loss — — ( 1,934 ) — ( 1,934 )

Other comprehensive income (loss), net — — — 18 18

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Balance at December 31, 2019 $ 2 $ 3,890 $ ( 2,185 ) $ ( 407 ) $ 1,300

Cash dividends paid - preferred stock, $80/per share — — ( 10 ) — ( 10 )

Cumulative impact of adopting the new lease standard — — ( 8 ) — ( 8 )

Dividend - preferred stock, $80/per share — — ( 10 ) — ( 10 )

Stock option and incentive plans, net — 9 — — 9

Comprehensive Income (Loss):

Net Income (Loss) — — ( 1,934 ) — ( 1,934 )

Net Loss — — ( 118 ) — ( 118 )

Other comprehensive income (loss), net — — — 9 9

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Description of Business

Conduent is a global enterprise and leading provider of mission-critical services and solutions on behalf of businesses and governments – creating exceptional outcomes for its clients and the millions of people who count on them.

Through people, process expertise in transaction-intensive processing, and technology such as analytics and automation, Conduent solutions and services create value by improving efficiencies, reducing costs and enabling revenue growth.

As one of the largest business process services companies in the world, Conduent delivers mission-critical services and solutions on behalf of businesses and governments – creating exceptional outcomes for its clients and the millions of people who count on them.

Through people, process, expertise in transaction-intensive processing and technology such as analytics and automation, Conduent's services and solutions create value by improving efficiencies, reducing costs and enabling revenue growth.

A majority of Fortune 100 companies and over 500 government entities depend on Conduent every day to manage their business processes and essential interactions with their end-users.

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Basis of Presentation

Our Consolidated Financial Statements included the historical basis of assets, liabilities, revenues and expenses of the individual businesses of the Company, including joint ventures and partnerships over which the Company has a controlling financial interest.

We have prepared the Consolidated Financial Statements pursuant to the rules and regulations of the SEC.

The Company's Consolidated Financial Statements included the historical basis of assets, liabilities, revenues and expenses of the individual businesses of the Company, including joint ventures and partnerships over which the Company has a controlling financial interest.

The Company has prepared the Consolidated Financial Statements pursuant to the rules and regulations of the SEC.

Certain reclassifications have been made to prior years' amounts to conform to the current year presentation.

All intercompany transactions and balances have been eliminated.

The Company has evaluated subsequent events through February 26, 2020.

Subsequent events are disclosed throughout the Notes to these Consolidated Financial Statements.

The Company has evaluated subsequent events through February 24, 2021 and no material subsequent events were identified.

Conduent Incorporated is a New York corporation, organized in 2016.

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Use of Estimates

We prepared the Consolidated Financial Statements using financial information available at the time of preparation, which requires us to make estimates and assumptions that affect the amounts reported.

Our most significant estimates pertain to the intangible and long-lived assets, valuation of goodwill, contingencies and litigation and income taxes.

Our estimates are based on management's best knowledge of current events, historical experience, and on various other assumptions that are believed to be reasonable under the circumstances.

The Company prepared the Consolidated Financial Statements using financial information available at the time of preparation, which requires it to make estimates and assumptions that affect the amounts reported.

The Company's most significant estimates pertain to the intangible assets, valuation of goodwill, contingencies and litigation and income taxes.

These estimates are based on management's best knowledge of current events, historical experience, and on various other assumptions that are believed to be reasonable under the circumstances.

As a result, actual results may be different from these estimates.

As of December 31, 2020, the impact of the outbreak of the COVID-19 pandemic continues to unfold.

As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility.

As events continue to evolve and additional information becomes available, our estimates may change materially in the future.

CNDT 2020 Annual Report

New Accounting Standards

Income Taxes :

In December 2019, the Financial Accounting Standards Board (FASB) issued final guidance that simplifies the accounting for income taxes by eliminating some exceptions to the general approach in Accounting Standards Codification (ASC) 740, Income Taxes.

The Company has analyzed the guidance and this guidance is not expected to have a material impact on the Company's income tax provision.

The Company is not early adopting the guidance;

as such, the guidance will be effective beginning in tax year 2021.

Reference Rate Reform :

In March 2020, the FASB issued updated guidance relating to the accounting for the discontinuation of the London Inter-bank Offered Rate (LIBOR), referred to as the reference rate reform.

This guidance provides practical expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships and other transactions affected by the reference rate reform if certain criteria are met.

This guidance is applicable to contract modifications that replace a reference LIBOR rate affected by reference rate reform.

The amendments may be applied through December 31, 2022.

The Company is currently evaluating the impact of the new guidance on its

consolidated financial statements.

Recently Adopted Accounting Standards

Credit Losses:

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The CECL model requires us to measure lifetime expected credit losses for financial instruments held at the reporting date using historical experience, current conditions and reasonable supportable forecasts.

The guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

This updated guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Early adoption is permitted.

The Company has determined, after gathering data and developing models, that the adoption of the new standard will not have any material impact on its Consolidated Financial Statements.

Recently Adopted Accounting Standards

The Company adopted the new lease guidance as of January 1, 2019, using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented.

The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are, or contain, leases, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date.

The Company did not elect to apply the hindsight practical expedient.

Additionally, the Company has elected not to include short-term leases, with a term of 12 months or less, on its Consolidated Balance Sheets.

The impact of adopting this new guidance included the establishment of Operating lease right-of-use (ROU) assets of $ 387 million, an increase to Other current liabilities of $ 103 million, a decrease to Other long-term liabilities of $ 21 million, the establishment of Operating lease liabilities of $ 316 million and a net decrease to opening retained earnings (deficit) of $ 8 million, as of January 1, 2019.

The adoption did not have an impact on the Company’s Consolidated Statements of Income (Loss) or Consolidated Statements of Cash Flows.

The Company adopted the new guidance as of January 1, 2020 and the adoption of the new guidance did not have a material impact on its Consolidated Financial Statements.

Summary of Accounting Policies

The Company determines if an arrangement is a lease at the inception of the contract and whether that lease meets the classification criteria of a finance or operating lease.

The Company has operating and finance leases for real estate and equipment.

Operating leases are included in Operating lease ROU assets, Other current liabilities, and Operating lease liabilities in our Consolidated Balance Sheets.

Finance leases are included in Land, buildings and equipment, net, Current portion of long-term debt, and Long-term debt in our Consolidated Balance Sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease.

ROU assets and liabilities are recognized at the commencement date based on the net present value of lease payments over the lease term using the Company’s incremental borrowing rates or implicit rates.

The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option based on economic factors.

The Company recognizes operating fixed lease expense and finance lease depreciation on a straight-line basis over the lease term.

Variable lease expense is recognized in the period in which the obligation for those payments is incurred.

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.

CNDT 2019 Annual Report

The components of lease costs were as follows:

(in millions) Year Ended December 31, 2019

Finance Lease Costs:

Amortization of right of use assets $ 10

Interest on lease liabilities 1

Total Finance Lease Costs $ 11

Operating lease costs:

Base rent $ 112

Short-term lease costs 12

Variable lease costs (1)

Sublease income ( 7 )

Total Operating Lease Costs $ 147

(1) Primarily related to taxes, insurance and common area and other maintenance costs for real estate leases .

Supplemental cash flow information related to leases was as follows:

(in millions) Year Ended December 31, 2019

Cash paid for the amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 137

Operating cash flows from finance leases 1

Total Cash Flow from Operating Activities $ 138

Financing cash flow from finance leases $ 11

Supplemental non-cash information on right of use assets obtained in exchange for new lease obligations:

Operating leases $ 32

Finance leases $ 2

Supplemental balance sheet information related to leases was as follows:

(in millions) December 31, 2019

Operating lease assets:

Operating lease right-of-use assets $ 271

Operating lease liabilities:

Other current liabilities $ 91

Operating lease liabilities 229

Total Operating Lease Liabilities $ 320

Finance lease assets:

Land, buildings and equipment, net $ 14

Finance lease liabilities:

Current portion of long-term debt $ 7

Long-term debt 10

Total Finance Lease Liabilities $ 17

CNDT 2019 Annual Report

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 weighted average discount rates for operating and finance leases were 5.5 % and 4.8 %, respectively.

The weighted average remaining lease terms for operating and finance leases at December 31, 2019, were 5 years and 3 years, respectively.

Maturities of operating lease liabilities were as follows:

December 31, 2019

(in millions) Operating Lease Payments

Thereafter 62

Total undiscounted operating lease payments 368

Less imputed interest 48

Present value of operating lease liabilities $ 320

Maturities of finance lease liabilities were as follows:

December 31, 2019

(in millions) Finance Lease Payments

Total undiscounted finance lease payments 18

Less imputed interest 1

Present value of finance lease liabilities $ 17

As of December 31, 2019, the Company had entered into additional operating lease agreements for real estate of $ 15 million, which have not commenced and have not been recognized on the Company's Consolidated Balance Sheet.

These operating leases are expected to commence in 2020 with lease terms of 3 to 10 years.

CNDT 2019 Annual Report

Under the previous lease accounting guidance, future minimum operating lease commitments that have initial or remaining non-cancelable lease term in excess of one year at December 31, 2018 were as follows:

December 31, 2018

(in millions) Operating Lease Payments

Thereafter 76

Total minimum operating lease payments $ 506

Cash and Cash Equivalents

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In 2020, 2019 and 2018, the Company sold certain accounts receivable and derecognized the corresponding receivable balance.

Refer to Note 6 – Accounts Receivable, Net for more details on our receivable sales.

Assets/Liabilities 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.

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.

In 2018, management approved the disposal through sale of certain assets and businesses.

This action was taken as a result of the Company's strategic evaluation of these businesses.

As of December 31, 2018, one of these businesses remained unsold and qualified as assets held for sale and we reclassified $ 15 million to assets held for sale and $ 40 million to liabilities held for sale.

Refer to Note 4 – Divestiture for further discussion.

CNDT 2019 Annual Report

Refer to Note 6 – Accounts Receivable, Net for more details on the Company's receivable sales.

Land, Buildings and Equipment

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Refer to Note 7 – Land, Buildings, Equipment and Software, Net for further discussion.

Software - Internal Use and Product

Internal Use:

We capitalize direct costs associated with developing, purchasing or otherwise acquiring software for internal use and amortize these costs on a straight-line basis over the expected useful life of the software, beginning when the software is implemented.

Internal Use and Product Software

Internal Use Software:

The Company capitalizes direct costs associated with developing, purchasing or otherwise acquiring software for internal use and amortizes these costs on a straight-line basis over the expected useful life of the software, beginning when the software is implemented.

Costs for upgrades and enhancements that will not result in additional functionality are expensed as incurred.

Amounts incurred for Internal Use Software are included in Cash Flows from Investing.

Amounts incurred for Internal Use Software are included in Cash Flows from Investing Activities.

CNDT 2020 Annual Report

Produc t Software :

The Company also capitalizes certain costs related to the development of software solutions to be sold to its customers upon reaching technological feasibility.

These costs are amortized on a straight-line basis over the estimated economic life of the software.

Amounts incurred for Product Software are included in Cash Flows from Operations.

The Company performs annual reviews to ensure that unamortized Product Software costs remain recoverable from estimated future operating profits (net realizable value or NRV).

Costs to support or service licensed software are charged to Costs of services as incurred.

Internal use and Product software are included in Other long-term assets on the Company's Consolidated Balance Sheets.

Refer to Note 7 – Land, Buildings, Equipment and Software, Net for further information.

Cloud Computing Arrangements

The Company incurs costs to implement cloud computing arrangements that are hosted by third party vendors.

Implementation costs associated with cloud computing arrangements are capitalized when incurred during the application development phase.

Amortization is calculated on a straight-line basis over the contractual term of the cloud computing arrangement, which includes renewal options that are reasonably certain to be exercised.

Capitalized amounts related to such arrangements are recorded within Other current assets and Other long-term assets in the Consolidated Balance Sheets.

The amortization expense and the associated hosting fees are included in Cost of services and Selling, general and administrative expenses, depending on the nature of the underlying use of the cloud computing arrangement, in the Company’s Consolidated Statements of Income (Loss).

Refer to Note 7 – Land, Buildings, Equipment and Software, Net for further information.

The Company determines if an arrangement is a lease at the inception of the contract and whether that lease meets the classification criteria of a finance or operating lease.

The Company has operating and finance leases for real estate and equipment.

Operating leases are included in Operating lease ROU assets, Other current liabilities, and Operating lease liabilities in our Consolidated Balance Sheets.

Finance leases are included in Land, buildings and equipment, net, Current portion of long-term debt, and Long-term debt in the Company's Consolidated Balance Sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease.

The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option based on economic factors.

The Company recognizes operating fixed lease expense and finance lease depreciation on a straight-line basis over the lease term.

Variable lease expense is recognized in the period in which the obligation for those payments is incurred.

Refer to Note 8 – Leases for further information.

For acquired businesses, the Company records the acquired assets and assumed liabilities based on their relative fair values at the date of acquisitions (commonly referred to as the purchase price allocation).

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For the Company’s business acquisitions, the purchase price is allocated to identifiable intangible assets separate from goodwill if they are from contractual or other legal rights, or if they could be separated from the acquired business and sold, transferred, licensed, rented or exchanged.

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.

We test goodwill for impairment annually or more frequently if an event or change in circumstances indicate the asset may be impaired.

CNDT 2020 Annual Report

The Company tests goodwill for impairment annually or more frequently if an event or change in circumstances indicate the asset may be impaired.

Impairment testing for goodwill is done at the reporting unit level.

We determined the fair value of our reporting units utilizing a combination of both an Income Approach and a Market Approach.

The Income Approach utilizes a discounted cash flow analysis based upon the forecasted future business results of our reporting units.

The Company determined the fair value of its reporting units utilizing a combination of both an Income Approach and a Market Approach.

The Income Approach utilizes a discounted cash flow analysis based upon the forecasted future business results of its reporting units.

The Market Approach utilizes the guideline public company method.

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Other Intangible Assets

Other intangible assets primarily consist of assets acquired through business combinations, including installed customer base and distribution network relationships, patents and trademarks.

Other intangible assets primarily consist of assets acquired through business combinations, primarily installed customer base.

Other intangible assets are amortized on a straight-line basis over their estimated economic lives unless impairment is identified.

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Impairment of Long-Lived Assets

We review the recoverability of our long-lived assets, including buildings, equipment, internal use software, product software and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable.

The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations.

The Company reviews the recoverability of its long-lived assets, including buildings, equipment, internal use software, product software, right-of-use assets and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable.

The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset from the expected future cash flows (undiscounted and without interest charges) of the related operations.

If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value.

Our primary measure of fair value is based on forecasted cash flows.

CNDT 2019 Annual Report

We account for income taxes under the asset and liability method.

The Company's primary measure of fair value is based on forecasted cash flows.

The Company accounts for income taxes under the asset and liability method.

Deferred tax assets and liabilities are based on differences between U.S.

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Management considers positive and negative evidence in evaluating the ability of the Company to realize its deferred tax assets, including its historical results and forecasts of future ability to realize its deferred tax assets, including projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.

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

We have unrecognized tax benefits for uncertain tax positions.

We follow U.S.

The Company is subject to ongoing tax examinations and assessments in various jurisdictions.

The Company has unrecognized tax benefits for uncertain tax positions.

The Company follows U.S.

GAAP which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results.

The Company's ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease its effective tax rate, as well as impact its operating results.

CNDT 2020 Annual Report

On December 22, 2017, the U.S.

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The Company elected to treat the tax on GILTI as a period cost when incurred and therefore, no deferred taxes for GILTI were recognized for the year ended December 31, 2020.

On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, which provides for coronavirus related tax relief as well as an omnibus appropriations package that extends various expiring tax provisions.

The work opportunity tax credit has been extended through December 31, 2025, and a 100% deduction for the cost of business meals is allowed for 2021 and 2022, which will provide a permanent benefit.

The Consolidated Appropriations Act is not expected to have a material impact on the Company's income tax provision.

Refer to Note 16 – Income Taxes for further discussion.

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Revenue Recognition

In May 2014, the FASB updated the accounting guidance related to revenue recognition, which is also referred to herein as "the new revenue standard" to clarify the principles for recognizing revenue and replaced all existing revenue recognition guidance in U.S.

GAAP with one accounting model.

The core principle of the guidance is that an entity should recognize revenue when the promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.

The updated guidance also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers largely on a disaggregated basis.

The Company adopted the new revenue standard as of January 1, 2018, using the modified retrospective method.

The Company has applied the new revenue standard only to contracts not completed as of the date of initial application.

The adoption has primarily impacted the following:

(1) revenue associated with postage recognized on a net basis versus previously being recognized on a gross basis;

(2) the timing of revenue recognition associated with fixed fees for certain contracts with more than one performance obligation;

and (3) the timing of recognition of certain pricing discounts and credits.

The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

CNDT 2019 Annual Report

The Company's contracts with customers often include promises to transfer multiple products and services to a customer.

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Accordingly, the promise to stand-ready is accounted for as a single-series performance obligation.

Once the Company determines the performance obligations, the Company estimates the amount of variable consideration, if any, to be included in determining the transaction price.

Once the Company determines the performance obligations, the Company determines the transaction price, which is based on fixed and variable consideration.

Typical forms of variable consideration include variable pricing based on the number of transactions processed or usage-based pricing arrangements.

Variable consideration is also present in the form of volume discounts, tiered and declining pricing, penalties for service level agreements, performance bonuses and credits.

In circumstances where we meet certain requirements to allocate variable consideration to a distinct service within a series of related services, we allocate variable consideration to each distinct period of service within the series.

If we do not meet those requirements, we include an estimate of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty is resolved.

In circumstances where the Company meets certain requirements to allocate variable consideration to a distinct service within a series of related services, it allocates variable consideration to each distinct period of service within the series.

In limited circumstances, if the Company does not meet those requirements, it includes an estimate of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty is resolved.

For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.

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The Company has determined that the above methods provide a faithful depiction of the transfer of services to the customer.

CNDT 2020 Annual Report

Estimates of revenue expected to be recognized in future periods exclude unexercised customer options to purchase additional services that do not represent material rights to the customer.

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Disaggregation of Revenue

In 2019, the Company changed how it presents its disaggregated revenue by major service offering to reflect how the Company currently manages its businesses.

During the first quarter of 2020, the Company changed how it presents its disaggregated revenue by major service offering.

This change had no impact on disaggregated revenue by reportable segments or the timing of revenue recognition.

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

These changes have no impact on disaggregated revenue by reportable segment or the timing of revenue recognition.

The following table provides information about disaggregated revenue by major service offering, the timing of revenue recognition and a reconciliation of the disaggregated revenue by reportable segments.

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Commercial Industries:

End-user customer experience $ 669 $ 710

Transaction processing 595 651

Commercial healthcare 519 510

Customer experience management $ 648 $ 669 $ 710

Business operations solutions 566 632 716

Commercial healthcare solutions 431 482 445

Human resource and learning services 518 602 679

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Government Services:

Government healthcare 680 731

Payment solutions 292 321

State and local 235 245

Federal 56 54

Government healthcare solutions 603 675 727

Government services solutions 678 588 624

Total Government Services 1,281 1,263 1,351

Transportation:

Tolling 327 300

Transit 254 226

Photo and parking 190 188

Commercial vehicle 10 15

Roadway charging & management services 318 327 300

Transit solutions 248 254 226

Curbside management solutions 72 107 109

Public safety solutions 73 83 79

Commercial vehicles 8 10 15

Total Transportation 719 781 729

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The following is a description of the major service offerings:

End-User Customer Experience:

Customer Experience Management :

The Company offers a range of services that help its clients support their end-users.

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The Company also provides multi-channel communication support (both print and digital) across a range of industries .

CNDT 2019 Annual Report

Transaction Processing:

Business Operations Solutions :

The Company helps its clients improve communications with their customers and constituents, whether it is on paper, on-line or through other communication channels.

The Company also offers a broad array of flexible transaction processing services that include data entry, scanning, image processing, enrollment processing, claims processing, high volume offsite print and mail services and file indexing.

The Company serves clients by managing their critical finance, accounting and procurement processes.

CNDT 2020 Annual Report

Company serves clients by managing their critical finance, accounting and procurement processes.

These services include general accounting and reporting, billing and accounts receivable and purchasing, accounts payable and expense management services.

The Company also offers wholesale and retail lockbox services and process auto and mortgage loans in the United States.

Commercial Healthcare:

On behalf of the healthcare industry, the Company delivers administration, clinical support and medical management solutions across the health ecosystem to reduce costs, increase compliance and enhance utilization, while improving health outcomes and experience for members and patients.

Commercial Healthcare Solutions :

The Company delivers administration, clinical support and medical management solutions across the health ecosystem to reduce costs, increase compliance and enhance utilization, while improving health outcomes and experience for members and patients.

The Company's solutions span:

trials, sales, access, adherence and long-term differentiation solutions to pharmaceutical clients;

trials, sales, access, and adherence to pharmaceutical clients;

case management, performance management and patient safety for hospital clients;

medical bill review, care integration, subrogation and payment integrity solutions to managed care companies;

medical bill review, claim processing, care integration, subrogation and payment integrity solutions to managed care companies;

and workers compensation medical bill review, mailroom/data capture and medical management services to claims payers and third-party administrators .

Human Resource and Learning Services :

The Company helps its clients support their employees at all stages of employment from initial on-boarding through retirement as well as health savings account (HSA) administration.

The Company offers clients a range of customized advisory, technology and administrative services that improve the ability of employees to manage their benefits, professional development and retirement planning.

Also, the Company provides clients with a simplified approach to help their employees manage their healthcare costs and accumulate wealth with tax-advantaged accounts, as well as end-to-end learning services, designed to accelerate the productivity and development of its clients’ employees and extended work forces.

The Company's global presence, superior innovation and expertise allow it to deliver performance-based learning services tailored to its clients’ unique strategic business goals.

Offerings include learning strategy and assessment, instructor management and learning administration.

Government Healthcare:

The Company provides medical management and fiscal agent care management services to Medicaid programs and federally-funded U.S.

The Company helps its clients support their employees at all stages of employment from initial on-boarding through retirement.

The Company delivers mission-critical, technology-enabled HR services and solutions that improve business processes across the employee journey to maximize business performance, while increasing employee satisfaction, engagement and overall well-being.

These solutions span health, benefits, payroll, onboarding and learning administration, annual enrollment, wealth & retirement, HR, talent, and workforce management.

Government Healthcare Solutions :

The Company provides medical management and fiscal agent care management services, eligibility and enrollment services and support to Medicaid programs and federally funded U.S.

government healthcare programs.

The Company's services include a range of innovative solutions such as Medicaid management, provider services, Medicaid business intelligence, pharmacy benefits management, eligibility, electronic visit verification and case management solutions.

Payment Solutions:

The Company is a leader in government payment disbursements for federally sponsored programs like SNAP, commonly known as food stamps and Women, Infant and Children (WIC) as well as government-initiated cash disbursements such as child support and unemployment.

State and Local:

The Company delivers innovative services and solutions to help agencies reduce costs and improve processes.

The Company offers a broad set of solutions and services such as child support services, case management, labor, workforce and other government solutions.

As a preferred partner to government IT clients, the Company leverages technology as a key mechanism for improving citizen service and cost savings.

The Company's solutions include:

technology infrastructure, application portfolio management, IT consulting and other IT managed services.

The Company's services include a range of innovative solutions such as Medicaid management, provider services, Medicaid business intelligence, pharmacy benefits management, eligibility and enrollment support, contract center services, application processing, premium billing, disease surveillance and outbreak management and case management solutions.

Government Services Solutions :

Roadway Charging & Management Services :

The Company's electronic tolling, urban congestion management and mileage-based user solutions help clients keep up with an ever-changing environment and get more travelers where they need to go while generating revenue for much-needed infrastructure improvements.

The Company's solutions include vehicle passenger detection systems, electronic toll collection, automated license plate recognition and congestion management solutions.

Transit Solutions :

The Company aims to make journeys more personalized and convenient while increasing capacity and profitability for authorities and agencies.

The Company combines the latest in fare collection and intelligent mobility so that clients can get the added efficiency of having a single point of contact for all their transit solutions.

CNDT 2019 Annual Report

Photo and Parking:

Curbside Management Solutions :

The Company delivers intelligent curbside management systems that simplify parking programs and deliver convenient and hassle-free experience for drivers.

The Company's curbside solutions include citation and permit administration, parking enforcement and curbside demand management.

The Company also provides data analytics, automated photo enforcement and other public safety solutions to make streets and communities safer.

Commercial Vehicle:

Public Safety Solutions :

The company provides data analytics, automated photo enforcement and other public safety solutions to make streets and communities safer.

Photo enforcement systems include red light, fixed and mobile speed, school bus, work zone, school zone, bus lane only, high occupancy and other forms of photo enforcement systems.

Commercial Vehicles :

The Company provides computer-aided dispatch/automatic vehicle location technology to help customers manage their fleet operations.

Divestitures:

This represents divestitures that were previously reported as Commercial Industries, Government Services and Transportation.

This represents Student Loan business, which the Company exited in the third quarter of 2018.

CNDT 2020 Annual Report

Contract Balances

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Revenues of $ 101 million and $ 101 million were recognized during the years ended December 31, 2020 and 2019, respectively, related to the Company's unearned income at December 31, 2019 and January 1, 2019.

The Company had no asset impairment charges related to contract assets for the year ended December 31, 2019.

The Company had no material asset impairment charges related to contract assets for the year ended December 31, 2020.

Transaction Price Allocated to the Remaining Performance Obligations

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The Company expects to recognize approximately 82 % of this revenue over the next 2 years and the remainder thereafter.

CNDT 2019 Annual Report

Costs to Obtain and Fulfill a Contract

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These costs are amortized in Depreciation and amortization over the term of the contract or the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission.

These costs are periodically reviewed for impairment.

The Company expenses sales commissions when incurred if the amortization period of the sales commission is one year or less.

In addition, the Company may provide inducement payments to secure customer contracts.

These inducement payments are capitalized and amortized to expense over the term of the customer contract.

These inducement payments are capitalized and amortized as a reduction of revenue over the term of the customer contract.

The net book value of these costs totaled $ 21 million and $ 21 million as of December 31, 2020 and 2019, respectively, and are included in Other long-term assets.

Also, the Company capitalizes costs incurred to fulfill its contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and (iii) are expected to be recovered through revenue generated under the contract.

The net book value of these costs, which comprise set-up/transition activities, was $ 45 million and $ 53 million as of December 31, 2019 and 2018, respectively, and are classified in Other long-term assets on the Consolidated Balance Sheets.

The net book value of

CNDT 2020 Annual Report

these costs, which comprise set-up/transition activities, was $ 32 million and $ 45 million as of December 31, 2020 and 2019, respectively, and are classified in Other long-term assets on the Consolidated Balance Sheets.

Contract fulfillment costs are expensed to Depreciation and amortization as the Company satisfies its performance obligations by transferring the service to the customer.

These costs are amortized on a systematic basis over the expected period of benefit.

The amortization of costs incurred to obtain and fulfill a contract for the years ended December 31, 2019 and 2018, were $ 42 million and $ 50 million, respectively.

These costs are periodically reviewed for impairment.

The amortization of costs incurred to obtain and fulfill a contract, excluding contract inducements, for the years ended December 31, 2020, 2019 and 2018, were $ 41 million, $ 42 million and $ 50 million, respectively.

The expected amortization expense for the next five years and thereafter for these costs is as follows:

2021 2022 2023 2024 2025 Thereafter

$ 36 $ 8 $ 4 $ 2 $ 2 $ 24

Note 3 – Segment Reporting

Our reportable segments correspond to how we organize and manage the business, as defined by our CEO who is also our Chief Operating Decision Maker and are aligned to the industries in which our clients operate.

Our segments involve the delivery of business process services and include service arrangements where we manage a customer's business activity or process.

Our financial performance is based on Segment Profit / (Loss) and Segment Adjusted EBITDA for our three reportable segments (Commercial Industries, Government Services and Transportation), Other operations and Shared IT / Infrastructure & Corporate Costs.

The Company's reportable segments correspond to how it organizes and manages the business, as defined by the Company's Chief Executive Officer, who is also its Chief Operating Decision Maker (CODM), and are aligned to the industries in which the Company's clients operate.

The Company's segments involve the delivery of business process services and include service arrangements where it manages a customer's business activity or process.

In 2020, the Company realigned its 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.

The Company's financial performance is based on Segment Profit/(Loss) and Segment Adjusted EBITDA for its three reportable segments (Commercial Industries, Government Services and Transportation), Other and Unallocated Costs.

The Company's CODM does not evaluate operating segments using discrete asset information.

• Commercial Industries:

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

Across the Commercial Industries segment, we operate on our clients’ behalf to deliver mission-critical solutions and services to reduce costs, improve efficiencies and enable revenue growth for our clients and their consumers and employees.

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

Across the Commercial Industries segment, the Company operates on its clients’ behalf to deliver mission-critical solutions and services to reduce costs, improve efficiencies and enable revenue growth for the Company's clients and their consumers and employees.

• Government Services:

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

The 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.

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

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

• Transportation:

Our Transportation segment provides systems and support, as well as revenue-generating services, to government clients.

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

The Transportation segment provides systems and support, as well as revenue-generating services, to government clients.

On behalf of government agencies and authorities in the transportation industry, the Company delivers 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 includes the Company's divestitures and the 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 the reportable segments.

CNDT 2020 Annual Report

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.

Selected financial information for our reportable segments was as follows:

Year Ended December 31,

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

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

2020 Divestitures Other

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Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2020 2019 2018

Income (Loss) Before Income Taxes $ ( 2,106 ) $ ( 395 ) $ ( 16 )

Loss Before Income Taxes $ ( 139 ) $ ( 2,106 ) $ ( 395 )

Reconciling items:

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Interest expense 60 78 112

(Gain) loss on extinguishment of debt — 108 —

Loss on extinguishment of debt — — 108

Goodwill impairment — 1,952 —

(Gain) loss on divestitures and transaction costs 25 42 ( 42 )

Litigation costs (recoveries), net 17 227 ( 11 )

Separation costs — — 12

Loss on divestitures and transaction costs 17 25 42

Litigation costs, net 20 17 227

Other (income) expenses, net 1 ( 10 ) 5

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Segment depreciation and amortization 222 216 221

NY MMIS charge (credit) 1 ( 2 ) 9

HE charge (credit) — ( 1 ) ( 8 )

NY MMIS/HE charge (credit) — 1 ( 3 )

CA MMIS charge (credit) ( 7 ) — —

Other adjustments $ — $ 4 $ —

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Total Revenues and Long-Lived Assets $ 4,163 $ 4,467 $ 5,393 $ 786 $ 802

(1) Long-lived assets are comprised of (i) Land, buildings and equipment, net, (ii) Internal use software, net, and (iii) Product software, net.

(2) Amounts include operating lease right-of-use assets.

(1) Long-lived assets are comprised of (i) Land, buildings and equipment, net, (ii) Internal use software, net, (iii) Product software, net and (iv) Operating lease right-of-use assets.

Note 4 – Divestiture

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The acquired goodwill is associated with the Company's Commercial Industries segment.

This acquired goodwill, while tax deductible, includes $ 7 million related to contingent consideration payable that is not tax deductible until it is earned and paid.

The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of HSP.

The Developed technology is classified as Product Software within Other long-term assets on the Consolidated Balance Sheets.

This acquired goodwill, while tax deductible, includes $ 7 million related to contingent consideration payable that was not tax deductible until it was earned and paid.

During the third quarter of 2020, the contingent consideration payable was settled.

The goodwill recognized is attributable primarily to

CNDT 2020 Annual Report

expected synergies and the assembled workforce of HSP.

The Developed technology is classified as Product Software within Other long-term assets on the Consolidated Balance Sheets.

The Company has not presented separate results of operations or combined pro forma financial information of the Company and the acquired business because the results of operations of the acquired business are considered immaterial.

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The Accounts receivable, net balance of $ 670 million and $ 652 million at December 31, 2020 and 2019, respectively, included allowance for doubtful accounts of $ 2 million and $ 2 million at December 31, 2020 and 2019, respectively.

The Company enters into various factoring and supply chain financing programs from time to time, in the normal course of business as part of our cash and liquidity management, to sell certain accounts receivable without recourse to third-party financial institutions.

Sales of accounts receivable are reflected as a reduction of accounts receivable on the Consolidated Balance Sheets and the proceeds are included in cash flow from operating activities in the Consolidated Statements of Cash Flows.

Accounts receivable sales were as follows:

The Company enters into factoring agreements in the normal course of business as part of our cash and liquidity management, to sell certain accounts receivable without recourse to third-party financial institutions.

These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreements transfer effective control over, and risk related to, the receivables to the buyers.

Cash proceeds from these arrangements are included in cash flow from operating activities in the Consolidated Statements of Cash Flows.

A ccounts receivable sales for the years ended December 31, 2020 and 2019 were as follows:

Year Ended December 31,

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Product software 36 9 8

(in millions) December 31,

Capitalized Costs, Net 2019 2018

Internal use software (1)

Product software (1)

(1) Refer to Note 10 – Supplementary Financial Information for additional information.

(in millions) 2020 2019

Internal use software, at cost $ 524 $ 508

Accumulated amortization ( 361 ) ( 358 )

Internal use software, net (1)

Product software, at cost $ 144 $ 104

Accumulated amortization ( 72 ) ( 64 )

Product software, net (1)

Useful lives of our Internal use and Product software generally vary from one to seven years.

Amortization expense for Internal use and Product software for the years ended December 31, 2020, 2019 and 2018 was $ 54 million, $ 48 million and $ 46 million, respectively.

Cloud Computing Arrangements

Cloud computing implementation costs are included in Other current assets and Other long-term assets on the Company's Consolidated Balance Sheets.

Additions to Cloud computing implementation costs as well as year-end balances for these assets were as follows:

(in millions) Year Ended December 31,

Additions to:

2020 2019 2018

Cloud computing implementation costs $ 3 $ 39 $ 5

(in millions) December 31,

Capitalized Costs, Net 2020 2019

Cloud computing implementation costs, at cost

Accumulated amortization ( 6 ) ( 2 )

Cloud computing implementation costs, net (1)

(1) Refer to Note 11 – Supplementary Financial Information for additional information on the current and long-term portions of this asset.

Useful lives of Cloud computing implementation costs are three to five years.

Amortization expense for Cloud computing implementation costs for the years ended December 31, 2020, 2019 and 2018 were $ 4 million, $ 2 million and $ 0 million, respectively.

CNDT 2020 Annual Report

Note 8 - Leases

The Company did not elect to apply the hindsight practical expedient.

Additionally, the Company has elected not to include short-term leases, with a term of 12 months or less, on its Consolidated Balance Sheets.

The components of lease costs were as follows:

Year Ended December 31,

(in millions) 2020 2019

Finance Lease Costs:

Amortization of right of use assets $ 8 $ 10

Interest on lease liabilities 1 1

Total Finance Lease Costs $ 9 $ 11

Operating lease costs:

Base rent $ 95 $ 112

Short-term lease costs 5 12

Variable lease costs (1)

Sublease income ( 3 ) ( 7 )

Total Operating Lease Costs $ 123 $ 147

(1) Primarily related to taxes, insurance and common area and other maintenance costs for real estate leases.

Supplemental cash flow information related to leases was as follows:

Year Ended December 31,

(in millions) 2020 2019

Cash paid for the amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 117 $ 137

Operating cash flows from finance leases 1 1

Total Cash Flow from Operating Activities $ 118 $ 138

Financing cash flow from finance leases $ 11 $ 11

Supplemental non-cash information on right of use assets obtained in exchange for new lease obligations:

Operating leases $ 73 $ 32

Finance leases $ 14 $ 2

Supplemental balance sheet information related to leases was as follows:

CNDT 2020 Annual Report

(in millions) 2020 2019

Operating lease assets:

Operating lease right-of-use assets $ 246 $ 271

Operating lease liabilities:

Other current liabilities $ 81 $ 91

Operating lease liabilities 207 229

Total Operating Lease Liabilities $ 288 $ 320

Finance lease assets:

Land, buildings and equipment, net $ 19 $ 14

Finance lease liabilities:

Current portion of long-term debt $ 8 $ 7

Long-term debt 12 10

Total Finance Lease Liabilities $ 20 $ 17

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 that 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 weighted average discount rates and weighted average remaining lease terms for operating and finance leases as of December 31, 2020 and 2019 were as follows:

December 31, 2020 December 31, 2019

Operating Leases Finance Leases Operating Leases Finance Leases

Weighted average discount rates 6.1 % 5.3 % 5.5 % 4.8 %

Weighted average remaining lease term (in years) 5 3 5 3

Maturities of operating and finance lease liabilities as of December 31, 2020 were as follows:

December 31, 2020

(in millions) Operating Lease Payments Finance Lease Payments

2021 $ 95 $ 8

Thereafter 59 —

Total undiscounted lease payments 336 21

Less imputed interest 48 1

Present value of lease liabilities $ 288 $ 20

CNDT 2020 Annual Report

Note 9 - Goodwill and Intangible Assets, Net

The following table presents the changes in the carrying amount of goodwill, by reportable segments:

The following table presents the changes in the carrying amount of goodwill, by reportable segment:

(in millions) Commercial Industries Government Services Transportation Total

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Foreign currency translation — ( 1 ) ( 1 ) ( 2 )

Assets held-for-sale ( 12 ) — — ( 12 )

Acquisitions 49 — — 49

Impairment ( 618 ) ( 754 ) ( 580 ) ( 1,952 )

Other ( 1 ) — — ( 1 )

Balance at December 31, 2019 $ 821 $ 621 $ 60 $ 1,502

Foreign currency translation 16 2 8 26

Acquisition 49 — — 49

Impairment ( 618 ) ( 754 ) ( 580 ) ( 1,952 )

( 1 ) — — ( 1 )

Balance at December 31, 2020 $ 837 $ 623 $ 68 $ 1,528

(1) Represents 2018 true-up to the 2017 Assets held for sale.

Impairment Charge

In 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 growth of this reporting unit decreased resulting in its fair value being below its carrying value by an estimated $ 284 million.

Gross goodwill $ 2,390 $ 1,377 $ 648 $ 4,415

Accumulated impairment ( 1,553 ) ( 754 ) ( 580 ) ( 2,887 )

Balance at December 31, 2020 $ 837 $ 623 $ 68 $ 1,528

The Company performed its annual goodwill impairment test for the year ended December 31, 2020 as of October 1, 2020.

This testing did not identify any goodwill impairment and, accordingly, no impairment charge was recorded.

To the extent the COVID-19 pandemic continues to disrupt the economic environment, such as a decline in the performance of the reporting units or loss of a significant contract or multiple significant contracts, the fair value of one or more of the reporting units could fall below their carrying value, resulting in a goodwill impairment charge.

2019 Goodwill Impairment Charge

In 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, and as a result, the 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.

CNDT 2019 Annual Report

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 the Company's former reporting units (Financial Services & Healthcare, Consumer & Industrial, Europe (together comprising Commercial Industries), 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, the Company lowered its sales outlook, average margin expectation for the future years, and increased its weighted average cost of capital.

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

During the fourth quarter of 2019, the Company changed its reporting units within the Commercial Industries reportable segment to reflect how the Company currently manages its business.

The Company currently has six reporting units (End-User Customer Experience, Transaction Processing, Commercial Healthcare and Human Resources and Learning Services, (together comprising Commercial Industries), Government Services and Transportation), which support its three reportable segments.

No impairment was identified during the 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 the Company 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 Commercial Industries reporting unit 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.

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.

This led to actual results being below budget and a further downward revision of the long-term forecast across all the Company's reporting units.

As a consequence of the business performance and the strategy pivot due to changes in management that occurred in the second quarter of 2019, the Company performed an interim goodwill impairment assessment for all its reporting units which resulted in a pre-tax impairment charge of $ 1.1 billion for the three months ended June 30, 2019.

As of December 31, 2019, the Company performed an interim impairment assessment due to a triggering event caused by 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 of 2019, the Company 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 cumulative impairment charge for the year ended December 31, 2019 was approximately $2.0 billion.

The fair values of the goodwill impairment charges were estimated based on a determination of the implied fair value of goodwill, leveraging discounted cash flows and designated as level 3 of the fair value hierarchy.

CNDT 2020 Annual Report

Intangible Assets, Net

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The Company engages in a series of restructuring programs related to downsizing its employee base, exiting certain activities, outsourcing certain internal functions and engaging in other actions designed to reduce its cost structure and improve productivity.

The implementation of the Company's strategic transformation program and various productivity initiatives have reduced the Company's real estate footprint across all geographies and segments resulting in increased lease cancellation and other related costs.

Also included in Restructuring and Related Costs are incremental, non-recurring costs related to the consolidation of our data centers, which totaled $ 21 million and $ 4 million for the years ended December 31, 2019 and 2018, respectively.

The implementation of the Company's operational efficiency improvement initiatives have reduced the Company's real estate footprint across all geographies and segments resulting in lease right-of-use asset impairments and other related costs.

Also included in Restructuring and Related Costs are incremental, non-recurring costs related to the consolidation of the Company's data centers, which totaled $ 23 million, $ 21 million and $ 4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Management continues to evaluate the Company's business and, in the future, there may be additional provisions for new plan initiatives and/or changes in previously recorded estimates as payments are made, or actions are completed.

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In those geographies where we have either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, we recognize employee severance costs when they are both probable and reasonably estimable.

A summary of our restructuring program activity during the two years ended December 31, 2019 is as follows:

(in millions) Severance and Related Costs Other Contractual Termination Costs Asset Impairments Total

Asset impairment costs related to the reduction of our real estate footprint include impairment of operating lease right-of-use (ROU) assets and associated leasehold improvements.

A summary of the Company's restructuring program activity during the two years ended December 31, 2020 is as follows:

(in millions) Severance and Related Costs Termination and Other Costs Asset Impairments Total

Balance at December 31, 2018 $ 13 $ 36 $ — $ 49

3 unchanged sentences

Charges against reserve and currency ( 26 ) ( 32 ) ( 15 ) ( 73 )

Reclassification to operating lease ROU assets (2)

— ( 22 ) — ( 22 )

Balance at December 31, 2019 $ 15 $ 6 $ — $ 21

3 unchanged sentences

Charges against reserve and currency ( 26 ) ( 33 ) ( 15 ) ( 74 )

Reclassification to operating lease ROU assets (2)

— ( 22 ) — ( 22 )

Balance at December 31, 2020 $ 3 $ 3 $ — $ 6

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(2) Relates to the adoption of the new lease guidance.

We also recorded costs related to professional support services associated with the implementation of the strategic transformation program of $ 4 million, $ 3 million and $ 9 million during the years ended December 31, 2019, 2018 and 2017, respectively.

We also recorded costs related to professional support services associated with the implementation of certain strategic transformation programs of $ 8 million, $ 4 million and $ 3 million during the years ended December 31, 2020, 2019 and 2018, respectively.

The following table summarizes the total amount of costs incurred in connection with these restructuring programs by reportable and non-reportable segments:

CNDT 2020 Annual Report

Year Ended December 31,

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Transportation 2 2 3

Shared IT / Infrastructure & Corporate Costs 40 42 70

Unallocated Costs 45 40 42

Total Net Restructuring Charges $ 59 $ 67 $ 78

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Restricted cash 8 9

Current portion of capitalized cloud computing implementation costs, net 8 5

Net receivable from buyers of divested businesses 53 52

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Product software, net 72 40

Cloud computing implementation costs, net 33 37

Total Other Long-term Assets $ 413 $ 387

Other Long-term Liabilities

Litigation related accruals $ — $ 144

Deferred payroll tax related to the CARES Act (1)

Income tax liabilities 15 20

2 unchanged sentences

Total Other Long-term Liabilities $ 108 $ 91

(1) The balances at December 31, 2019 and 2018 include capitalized cloud computing implementation costs, net, which represents technology solutions, of $ 40 million and $ 5 million at December 31, 2019 and 2018, respectively.

The costs have estimated useful lives of 3 to 5 years with amortization expense of $ 2 million, $ 0 million and $ 0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The amortization expense and the associated hosting fees are included in Cost of services and Selling, general and administrative expenses on the Company's Consolidated Statements of Income (Loss).

(1) The CARES Act allows for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with 50% due on December 31, 2021 and the remainder due on December 31, 2022.

The current portion of this liability is included in Accrued compensation and benefits costs.

(2) Represents capitalized costs associated with obtaining or fulfilling a contract with a customer.

The balances at December 31, 2020 and 2019 are expected to be amortized over a weighted average remaining life of approximately 11 and 12 years, respectively .

Amortization expense for deferred contract costs for the years ended December 31, 2019, 2018 and 2017 was $ 42 million, $ 50 million and $ 62 million, respectively.

See Note 2 – Revenue for more information.

CNDT 2020 Annual Report

Amortization expense for the next five years and thereafter for deferred contract costs is expected as follows:

2020 2021 2022 2023 2024 Thereafter

$ 32 $ 9 $ 7 $ 4 $ 2 $ 30

Note 12 – Debt

We classify our debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest put date available to the debt holders.

We defer costs associated with debt issuance over the applicable term.

These costs are amortized as interest expense in our Consolidated Statements of Income (Loss).

The Company classifies its debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest put date available to the debt holders.

The Company defers costs associated with debt issuance over the applicable term.

These costs are amortized as interest expense in the Consolidated Statements of Income (Loss).

Long-term debt was as follows:

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Finance lease obligations 5.29 % 20 17

Other loans 4 —

Principal Debt Balance $ 1,528 $ 1,539

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(1) Represents weighted average effective interest rate which includes the effect of discounts and premiums on issued debt.

Scheduled principal payments due on our long-term debt for the next five years and thereafter are as follows:

2020 2021 2022 2023 2024 Thereafter Total

Scheduled principal payments due on long-term debt for the next five years are as follows:

2021 2022 2023 2024 2025 Total

$ 90 $ 598 $ 804 $ 36 $ — $ 1,528

Credit Facility

On December 7, 2016, we entered into a senior secured credit agreement (Credit Agreement) among the Company, its subsidiaries:

On December 7, 2016, the Company entered into a senior secured credit agreement (Credit Agreement) among the Company, its subsidiaries:

Conduent Business Services, LLC (CBS), Affiliated Computer Services International B.V.

and Conduent Finance, Inc.

(CFI), the lenders party and JP Morgan Chase Bank, N.A., as the administrative agent.

(CFI), the lenders party thereto and JP Morgan Chase Bank, N.A., as the administrative agent.

The Credit Agreement contains senior secured credit facilities (Senior Credit Facilities) consisting of:

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(iii) Senior Revolving Credit Facility (Revolving Credit Facility) with an aggregate available amount of $ 750 million including a sub-limit for up to $ 300 million available for the issuance of letters of credit.

As of December 31, 2019, we have utilized $ 83 million of our revolving credit facility capacity to issue letters of credit.

The Credit Agreement permits us to incur incremental term loan borrowings and /or increase commitments under the revolving credit facility, subject to certain limitations and satisfaction of certain conditions.

During the first quarter of 2020, the Company borrowed $150 million of its $ 750 million Revolving Credit Facility, which was subsequently fully repaid in December 2020.

As of December 31, 2020, the Company has utilized $ 7 million of its revolving credit facility capacity to issue letters of credit.

The net amount available to be drawn upon under the Credit Agreement as of December 31, 2020 was $743 million.

The Credit Agreement permits the Company to incur incremental term loan borrowings and /or increase commitments under the revolving credit facility, subject to certain limitations and satisfaction of certain conditions.

Currently additional term loans of up to $ 300 million are permitted.

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The Credit Agreement contains certain customary affirmative and negative covenants, restrictions and events of default.

The Credit Agreement requires total net leverage ratio for December 31, 2019 and thereafter not to exceed 3.75 to 1.00.

The Credit Agreement requires the total net leverage ratio for December 31, 2020 and thereafter not to exceed 3.75 to 1.00.

The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by the Company and each of the existing and future domestic subsidiaries of CFI or CBS that guarantee the obligations under the Senior Credit Facilities.

Interest is payable semi-annually.

At the option of the Issuers, the Senior Notes are redeemable in whole or in part, at any time prior to December 15, 2020, at a price equal to 100 % of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus a “make-whole” premium.

The Issuers may also redeem the Senior Notes, in whole or in part, at any time on or after December 15, 2020, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to but excluding the redemption date.

Loans Repricing and Redemption

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

3 (Amendment) to the December 7, 2016 Credit Agreement, which (i) extended the revolving credit maturity from December 7, 2021 to December 7, 2022 and reduced the interest rate on the revolving credit by 0.5 % from 2.25 % over LIBOR to 1.75 % over LIBOR;

(ii) extended the maturity date of the Term A Loans from December 7, 2021 to December 7, 2022 and reduced the interest rate by 0.5 % from 2.25 % over LIBOR to 1.75 % over LIBOR, and (iii) reduced the interest rate on the Term B Loans by 0.5 % from 3.0 % over LIBOR to 2.5 % over LIBOR.

These transactions resulted in a write-off of unamortized discount and issuance costs of $ 3 million.

In July 2018, the Company redeemed $ 476 million of its $510 million 10.50 % Senior Notes due 2024.

As part of the redemption, the Company paid a premium of $ 95 million and wrote off the associated unamortized discount and issuance costs of $ 13 million.

Interest paid on our short-term and long-term debt amounted to $ 69 million, $ 100 million, $ 129 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The Issuers may redeem the Senior Notes, in whole or in part, at any time on or after December 15, 2020, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to but excluding the redemption date.

No Senior Notes were redeemed between December 15, 2020 and December 31, 2020.

Interest paid on short-term and long-term debt amounted to $ 51 million, $ 69 million, $ 100 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Interest expense and interest income were as follows:

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Note 13 – Financial Instruments

We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows.

We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.

The Company is exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows.

The Company manages its exposure to these market risks through regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.

These derivative financial instruments are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates.

We enter into limited types of derivative contracts to manage foreign currency exposures that we hedge.

Our primary foreign currency market exposures include the Philippine Peso, Indian Rupee and Mexican Peso.

The fair market values of all our derivative contracts change with fluctuations in interest rates or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures.

The Company enters into limited types of derivative contracts to manage foreign currency exposures that it hedges.

The primary foreign currency market exposures include the Philippine Peso and Indian Rupee.

The fair market values of all the Company's derivative contracts change with fluctuations in interest rates or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures.

Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes.

The related cash flow impacts of all our derivative activities are reflected as cash flows from operating activities.

We do not believe there is significant risk of loss in the event of non-performance by the counterparty associated with our derivative instruments because these transactions are executed with a major financial institution.

Further, our policy is to deal only with counterparties having a minimum investment grade or better credit rating.

The related cash flow impacts of all derivative activities are reflected as cash flows from operating activities.

The Company does not believe there is significant risk of loss in the event of non-performance by the counterparty associated with its derivative instruments because these transactions are executed with a major financial institution.

Further, the Company's policy is to deal only with counterparties having a minimum investment grade or better credit rating.

Credit risk is managed through the continuous monitoring of exposures to such counterparties.

Summary of Foreign Exchange Hedging Positions

At December 31, 2019 and 2018, we had outstanding forward exchange with gross notional values of $ 207 million and $ 167 million, respectively.

At December 31, 2020 and 2019, the Company had outstanding forward exchange with gross notional values of $ 180 million and $ 207 million, respectively.

At December 31, 2020, approximately 77 % of these contracts mature within three months, 9 % in three to six months, 11 % in six to twelve months and 3 % in greater than 12 months.

11 unchanged sentences

Dollar 52 1 85 1

Dollar 17 — — —

Mexican Peso/U.S.

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Total Assets $ 2 $ 2

Foreign exchange contracts - forwards $ — $ 1

Foreign exchange contracts - forward $ — $ —

Total Liabilities $ — $ —

Summary of Other Financial Assets and Liabilities

The estimated fair values of our other financial assets and liabilities were as follows:

The estimated fair values of other financial assets and liabilities were as follows:

December 31, 2020 December 31, 2019

1 unchanged sentence

Value Carrying

Assets held for sale $ — $ — $ 15 $ 15

Long-term debt $ 1,420 $ 1,378 $ 1,464 $ 1,449

Liabilities held for sale $ — $ — $ 40 $ 40

Contingent consideration payable $ — $ — $ 4 $ 4

1 unchanged sentence

The fair value of the contingent consideration payable related to the HSP acquisition was measured using a Monte Carlo simulation model and calibrated to management’s financial projections of the acquired business.

The value of the contingent consideration payable is then estimated to be the arithmetic average of all simulation paths, discounted to the valuation date (Level 3).

The changes in the fair value are recorded in Other income (expense), net on the Consolidated Statements of Income (Loss).

Refer to Note 5 – Business Acquisition for additional information.

CNDT 2019 Annual Report

The fair value of the Assets held for sale and the Liabilities held for sale were measured based on the sale’s price less estimated transactions costs (Level 3).

Refer to Note 4 – Divestiture for additional information.

The value of the contingent consideration payable was then estimated to be the arithmetic average of all simulation paths, discounted to the valuation date (Level 3).

During the third quarter of 2020, the contingent consideration payable was settled.

The fair value of Long-term debt was estimated based on the current rates offered to the Company for debt of similar maturities (Level 2).

CNDT 2020 Annual Report

Note 15 – Employee Benefit Plans

6 unchanged sentences

Defined Contribution Plans

We have post-retirement savings and investment plans in several countries, including the U.S., U.K.

The Company has post-retirement savings and investment plans in several countries, including the U.S., U.K.

In many instances, employees from those defined benefit pension plans that have been amended to freeze future service accruals were transitioned to an enhanced defined contribution plan.

In these plans employees are allowed to contribute a portion of their salaries and bonuses to the plans, and we match a portion of the employee contributions.

However, beginning in 2019, the Company suspended its match to the 401(k) plan for all U.S.

salaried employees.

In these plans employees are allowed to contribute a portion of their salaries and bonuses to the plans, and the Company matches a portion of the employee contributions.

Beginning in 2019, the Company suspended its match to the 401(k) plan for all U.S.

salaried employees and extended the suspension to all U.S.

hourly employees in the second quarter of 2020.

However, the match was reinstated for all U.S.

employees in November of 2020.

The Company recorded charges related to its defined contribution plans of $ 6 million in 2020, $ 9 million in 2019 and $ 28 million in 2018.

As a result of suspending 401(k) match for U.S.

employees in 2019, there was a $ 12 million reduction in expense for the year ended December 31, 2019.

Note 16 - Income Taxes

I ncome (loss) before income taxes (pre-tax income (loss)) was as follows:

L oss before income taxes (pre-tax income (loss)) was as follows:

Year Ended December 31,

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Loss Before Income Taxes $ ( 139 ) $ ( 2,106 ) $ ( 395 )

CNDT 2019 Annual Report

Provision (benefit) for income taxes were as follows:

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Total Provision (Benefit) $ ( 21 ) $ ( 172 ) $ 21

CNDT 2020 Annual Report

A reconciliation of the U.S.

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( 2.1 ) % ( 0.2 ) % ( 3.7 ) %

Effect of tax law changes — % 0.5 % 1,282.4 %

Change in valuation allowance for deferred tax assets 0.6 % ( 1.2 ) % ( 1.7 ) %

8 unchanged sentences

— % ( 14.1 ) % — %

Unrecognized tax benefits and other 0.6 % ( 2.9 ) % ( 3.5 ) %

Unrecognized tax benefits ( 1.2 ) % ( 0.3 ) % ( 1.9 ) %

Audit and other tax return adjustments ( 5.3 ) % 0.1 % 0.2 %

Other — % 0.8 % ( 0.4 ) %

Effective Income Tax Rate 15.1 % 8.2 % ( 5.3 ) %

(1) In 2017, nondeductible expenses primarily related to officers life insurance.

(2) The “U.S.

taxation of foreign profits” represents the U.S.

_______________

(1) The “Foreign rate differential adjusted for U.S.

taxation of foreign profits” includes the U.S.

tax, net of foreign tax credits, associated with actual and deemed repatriations of earnings from our non-U.S.

subsidiaries.

(3) 2018 and 2017 divestitures include nondeductible goodwill allocated to divested businesses.

(2) 2018 divestitures include nondeductible goodwill allocated to divested businesses.

(3) Goodwill impairment represents adjustments for impairment of non-deductible component of goodwill.

On a consolidated basis, we paid a total of $ 46 million, $ 108 million and $ 29 million in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2019, 2018 and 2017, respectively.

CNDT 2019 Annual Report

Total income tax expense (benefit) was allocated as follows:

Year Ended December 31,

(in millions) 2019 2018 2017

Income tax expense (benefit) $ ( 172 ) $ 21 $ ( 193 )

Discontinued operations — — 3

Total Income Tax Expense (Benefit) $ ( 172 ) $ 21 $ ( 190 )

On a consolidated basis, the Company received a refund of $( 1 ) million and paid a total of $ 46 million and $ 108 million in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2020, 2019 and 2018, respectively.

Unrecognized Tax Benefits and Audit Resolutions

We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that certain positions may not be fully sustained upon review by tax authorities.

Each period we assess uncertain tax positions for recognition, measurement and effective settlement.

The Company recognizes tax liabilities when, despite its belief that its tax return positions are supportable, the Company believes that certain positions may not be fully sustained upon review by tax authorities.

Each period the Company assesses uncertain tax positions for recognition, measurement and effective settlement.

Benefits from uncertain tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.

Where we have determined that our tax return filing position does not satisfy the more-likely-than-not recognition threshold, we have recorded no tax benefits.

We are also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope of our operations.

Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease our effective tax rate, as well as impact our operating results.

Where the Company has determined that its tax return filing position does not satisfy the more-likely-than-not recognition threshold, the Company has recorded no tax benefits.

The Company is also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope of its operations.

Ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease the Company's effective tax rate, as well as impact its operating results.

The specific timing of when the resolution of each tax position will be reached is uncertain.

As of December 31, 2019, the Company had $ 24 million of total unrecognized tax benefits, of which $ 23 million, if recognized, would impact the Company's effective tax rate.

As of December 31, 2020, the Company had $ 23 million of unrecognized tax benefits, of which $ 21 million, if recognized, would impact the Company's effective tax rate.

Due to expected settlements, the Company estimates that $ 14 million of the total unrecognized tax benefits will reverse within the next twelve months.

CNDT 2020 Annual Report

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

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(1) 2020 and 2019 settlement resulted in $ 4 million and $ 1 million cash paid, respectively .

We maintain offsetting benefits from other jurisdictions of $ 16 million, $ 15 million and $ 16 million, at December 31, 2019, 2018 and 2017, respectively.

We recognized interest and penalties accrued on unrecognized tax benefits within income tax expense.

We had $ 14 million, $ 10 million and $ 6 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2019, 2018 and 2017, respectively.

In the U.S., we are no longer subject to U.S.

The Company maintains offsetting benefits from other jurisdictions of $ 15 million, $ 16 million and $ 15 million, at December 31, 2020, 2019 and 2018, respectively.

The Company recognized interest and penalties accrued on unrecognized tax benefits within income tax expense.

The Company had $ 13 million, $ 14 million and $ 10 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2020, 2019 and 2018, respectively.

In the U.S., the Company is no longer subject to U.S.

federal income tax examinations for years before 2015.

With respect to our major foreign jurisdictions, the years generally remain open back to 2006.

CNDT 2019 Annual Report

With respect to major foreign jurisdictions, the years generally remain open back to 2003.

Deferred Income Taxes

4 unchanged sentences

However, the repatriation of earnings could give rise to additional tax liabilities.

We have also not provided for deferred taxes on outside basis differences in our investments in our foreign subsidiaries that are unrelated to unremitted earnings.

The Company has also not provided for deferred taxes on outside basis differences in its investments in its foreign subsidiaries.

A determination of the unrecognized deferred taxes related to these other components of our outside basis differences is not practicable.

We have provided for deferred taxes with respect to certain unremitted earnings of foreign subsidiaries that are not indefinitely reinvested between foreign subsidiaries outside of the U.S.

The Company has provided for deferred taxes with respect to certain unremitted earnings of foreign subsidiaries that are not indefinitely reinvested between foreign subsidiaries outside of the U.S.

CNDT 2020 Annual Report

The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows:

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Operating lease liabilities 68 78

Tax credits 42 14

Subtotal 294 309

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The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future income or income tax rates are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.

CNDT 2019 Annual Report

At December 31, 2020, we had tax credit carryforwards of $ 42 million available to offset future income taxes which will expire between 2027 and 2040 if not utilized.

2 unchanged sentences

We had $ 8 million of capital loss carryforwards for income tax purposes that will expire in 2024, if not utilized, and $ 11 million available to offset future capital gains income indefinitely.

CNDT 2020 Annual Report

Note 17 – Contingencies and Litigation

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As of December 31, 2020, the Company had accrued its estimate of liability incurred under its indemnification arrangements and guarantees.

CNDT 2020 Annual Report

Litigation Against the Company

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In February 2019 a settlement agreement and release was reached among the Defendants, the State and HHSC which was amended in May 2019 ("Texas Agreement").

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

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

The case has been dismissed with prejudice with a full release and discharge of the Defendants.

CNDT 2019 Annual Report

Employees’ Retirement System of the Puerto Rico Electric Power Authority et al v.

Conduent Inc.

On March 8, 2019, a putative class action lawsuit alleging violations of certain federal securities laws in connection with our statements and alleged omissions regarding our financial guidance and business and operations was filed against us, our former Chief Executive Officer, and our Chief Financial Officer in the United States District Court for the District of New Jersey.

The complaint seeks certification of a class of all persons who purchased or otherwise acquired our securities from February 21, 2018 through November 6, 2018, and also seeks unspecified monetary damages, costs, and attorneys’ fees.

We moved to dismiss the class action complaint in its entirety.

In June 2020, the court denied the motion to dismiss and allowed the claims to proceed.

We intend to defend the litigation vigorously.

The Company maintains insurance that may cover any costs arising out of this litigation up to the insurance limits, and subject to meeting certain deductibles and to other terms and conditions thereof.

The Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome or loss, if any, in excess of currently recorded reserves.

Skyview Capital LLC and Continuum Global Solutions, LLC v.

6 unchanged sentences

Plaintiffs allege that their obligation to mitigate damages and their contractual right of set-off permits them to withhold and deduct from any amounts that are owed to CBS under the Notes, and plaintiffs seek a judgement that they have no obligation to pay the Notes.

Conduent denies all of these allegations, believes that it has strong defenses to all of plaintiffs’ claims and will vigorously defend itself against these claims.

The Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome or loss, if any.

On August 20, 2020 Conduent filed a Counterclaim against Skyview seeking the outstanding balance on the notes, the amounts owed for the Jamaica deferred closing, and other Transition Services Agreement and late rent payment obligations.

Conduent denies all of the plaintiffs' allegations, believes that it has strong defenses to all of plaintiffs’ claims and will vigorously defend itself against these claims.

CNDT 2020 Annual Report

Dennis Nasrawi v.

28 unchanged sentences

Conduent also alleges that it terminated the Contract for cause, because, among other things, Cognizant violated the Foreign Corrupt Practices Act.

Cognizant asserted two counterclaims for breach of contract seeking recovery of damages in excess of $ 47 million, which includes amounts alleged not paid to Cognizant under the contract and an alleged $ 25 million termination fee.

Conduent has responded to Cognizant’s counterclaims by denying the allegations.

Cognizant filed a second amended counterclaim seeking an additional $ 43 million to satisfy the minimum revenue commitment attributable to the years 2017-2020, which increased Cognizant's damages claim to $ 90 million.

Conduent will continue to vigorously defend itself against the counterclaims but the Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome.

In its answer, Cognizant asserted two counterclaims for breach of contract seeking recovery of damages in excess of $ 47 million, which includes amounts alleged not paid to Cognizant under the contract and an alleged $ 25 million termination fee.

Cognizant's second amended counterclaim increased its damages to $89 million.

CNDT 2020 Annual Report

6 unchanged sentences

The Company cannot provide assurance that the CFPB, another regulator, a financial institution on behalf of which the Company serviced third-party student loans, or another party will not ultimately commence a legal action against XES in which fines, penalties or other liabilities are sought from XES.

Nor is the Company able to predict the likely outcome of these matters, should any such matter be commenced, or reasonably provide an estimate or range of estimates of any loss in excess of current reserves.

The Company could, in future periods, incur judgments or enter into settlements to resolve these potential matters for amounts in excess of current reserves and there could be a material adverse effect on the Company's results of operations, cash flows and financial position in the period in which such change in judgment or settlement occurs.

2 unchanged sentences

Acquisitions/Divestitures:

We have indemnified, subject to certain deductibles and limits, the purchasers of businesses or divested assets for the occurrence of specified events under certain of our divestiture agreements.

In addition, we customarily agree to hold the other party harmless against losses arising from a breach of representations and covenants, including such matters as adequate title to assets sold, intellectual property rights and certain income taxes arising prior to the date of acquisition.

The Company has indemnified, subject to certain deductibles and limits, the purchasers of businesses or divested assets for the occurrence of specified events under certain of its divestiture agreements.

In addition, the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants, including such matters as adequate title to assets sold, intellectual property rights and certain income taxes arising prior to the date of acquisition.

Where appropriate, an obligation for such indemnifications is recorded as a liability at the time of the acquisition or divestiture.

Since the obligated amounts of these types of indemnifications are often not explicitly stated or are contingent on the occurrence of future events, the overall maximum amount, or range of amount of the obligation under such indemnifications cannot be reasonably estimated.

Other than obligations recorded as liabilities at the time of divestiture, we have not historically made significant payments for these indemnifications.

Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets are achieved within specific timeframes post-closing.

We have recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition.

Contingent obligations related to indemnifications arising from our divestitures and contingent consideration provided for by our acquisitions are not expected to be material to our financial position, results of operations or cash flows.

Other than obligations recorded as liabilities at the time of divestiture, the Company has not historically made significant payments for these indemnifications.

Additionally, under certain of the Company's acquisition agreements, it has provided for additional consideration to be paid to the sellers if established financial targets are achieved within specific timeframes post-closing.

The Company has recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition.

Contingent obligations related to indemnifications arising from divestitures and contingent consideration provided for by acquisitions are not expected to be material to the Company's financial position, results of operations or cash flows.

Other Agreements:

We are also party to the following types of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters:

• Guarantees on behalf of our subsidiaries with respect to real estate leases.

The Company is also party to the following types of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters:

• Guarantees on behalf of the Company's subsidiaries with respect to real estate leases.

These lease guarantees may remain in effect subsequent to the sale of the subsidiary.

• Agreements to indemnify various service providers, trustees and bank agents from any third-party claims related to their performance on our behalf, with the exception of claims that result from the third-party's own willful misconduct or gross negligence.

• Guarantees of our performance in certain services contracts to our customers and indirectly the performance of third parties with whom we have subcontracted for their services.

This includes indemnifications to customers for losses that may be sustained as a result of our performance of services at a customer's location.

• Agreements to indemnify various service providers, trustees and bank agents from any third-party claims related to their performance on the Company's behalf, with the exception of claims that result from the third-party's own willful misconduct or gross negligence.

• Guarantees of the Company's performance in certain services contracts to its customers and indirectly the performance of third parties with whom the Company has subcontracted for their services.

This includes indemnifications to customers for losses that may be sustained as a result of the Company's performance of services at a customer's location.

CNDT 2020 Annual Report

In each of these circumstances, our payment is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract and such procedures also typically allow us to challenge the other party's claims.

In the case of lease guarantees, we may contest the liabilities asserted under the lease.

Further, our obligations under these agreements and guarantees may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments we made.

In each of these circumstances, payment is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract and such procedures also typically allow the Company to challenge the other party's claims.

In the case of lease guarantees, the Company may contest the liabilities asserted under the lease.

Further, obligations under these agreements and guarantees may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments it made.

Intellectual Property Indemnifications

We do not own most of the software that we use to run our business.

Instead, we license this software from a small number of primary vendors.

We indemnify certain software providers against claims that may arise as a result of our use or our subsidiaries', customers' or resellers' use of their software in our services and solutions.

The Company does not own all of the software that it uses to run its business.

Instead, the Company licenses this software from a small number of primary vendors.

The Company indemnifies certain software providers against claims that may arise as a result of the Company's use or its subsidiaries', customers' or resellers' use of their software in the Company's services and solutions.

These indemnities usually do not include limits on the claims, provided the claim is made pursuant to the procedures required in the services contract.

Indemnification of Officers and Directors

Our corporate by-laws require that, except to the extent expressly prohibited by law, we must indemnify our officers and directors against judgments, fines, penalties and amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with civil or criminal action or proceedings or any appeal, as it relates to their services to our Company and our subsidiaries.

Although the by-laws provide no limit on the amount of indemnification, we may have recourse against our insurance carriers for certain payments made by us.

However, certain indemnification payments may not be covered under our directors' and officers' insurance coverage.

We also indemnify certain fiduciaries of our employee benefit plans for liabilities incurred in their service as fiduciary whether or not they are officers of the Company.

Finally, in connection with our acquisition of businesses, we may become contractually obligated to indemnify certain former and current directors, officers and employees of those businesses in accordance with pre-acquisition by-laws or indemnification agreements or applicable state law.

The Company's corporate by-laws require that, except to the extent expressly prohibited by law, the Company must indemnify its officers and directors against judgments, fines, penalties and amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with civil or criminal action or proceedings or any appeal, as it relates to their services to the Company and its subsidiaries.

Although the by-laws provide no limit on the amount of indemnification, the Company may have recourse against its insurance carriers for certain payments made by the Company.

However, certain indemnification payments may not be covered under the Company's directors' and officers' insurance coverage.

The Company also indemnifies certain fiduciaries of its employee benefit plans for liabilities incurred in their service as fiduciary whether or not they are officers of the Company.

Finally, in connection with the Company's acquisition of businesses, it may become contractually obligated to indemnify certain former and current directors, officers and employees of those businesses in accordance with pre-acquisition by-laws or indemnification agreements or applicable state law.

Other Contingencies

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Series A Preferred Stock

In connection with the December 31, 2016 separation from our former parent company (Separation), we issued 120,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $ 120 million and an initial fair value of $ 142 million.

In connection with the December 31, 2016 separation from the Company's former parent company (Separation), the Company issued 120,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $ 120 million and an initial fair value of $ 142 million.

The Series A convertible preferred stock pays quarterly cash dividends at a rate of 8 % per year ($ 9.6 million per year).

Each share of the Series A convertible preferred stock is convertible at any time, at the option of the holder, into 44.9438 shares of common stock for a total of 5,393,000 shares (reflecting an initial conversion price of approximately $ 22.25 per share of common stock), subject to customary anti-dilution adjustments.

If the closing price of our common stock exceeds 137 % of the initial conversion price for 20 out of 30 trading days, we have the right to cause any or all of the Series A convertible preferred stock to be converted into shares of common stock at the then applicable conversion rate.

The Series A convertible preferred stock is also convertible, at the option of the holder, upon a change in control, at the applicable conversion rate plus an additional number of shares determined by reference to the price paid for our common stock upon such change in control.

In addition, upon the occurrence of certain fundamental change events, including a change in control or the delisting of Conduent's common stock, the holder of Series A convertible preferred stock has the right to require us to redeem any or all of the Series A convertible preferred stock in cash at a redemption price per share equal to the liquidation preference and any accrued and unpaid dividends to, but not including, the redemption date.

If the closing price of the Company's common stock exceeds 137 % of the initial conversion price for 20 out of 30 trading days, the Company has the right to cause any or all of the Series A convertible preferred stock to be converted into shares of common stock at the then applicable conversion rate.

In addition, upon the occurrence of certain fundamental change events, including a change in control or the delisting of Conduent's common stock, the holder of Series A convertible preferred stock has the right to require the Company to redeem any or all of the Series A convertible preferred stock in cash at a redemption price per share equal to the liquidation preference and any accrued and unpaid dividends to, but not including, the redemption date.

As a result of the contingent redemption feature, the Series A convertible preferred stock is classified as temporary equity and reflected separately from permanent equity in the Consolidated Balance Sheets.

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Preferred Stock

As of December 31, 2019, we had one class of preferred stock outstanding.

As of December 31, 2020, the Company had one class of preferred stock outstanding.

Refer to Note 18 – Preferred Stock for further information.

We are authorized to issue approximately 100 million shares of convertible preferred stock at $ 0.01 par value per share.

We have 1 billion authorized shares of common stock at $ 0.01 par value per share.

At December 31, 2019, 17 million shares were reserved for issuance under our incentive compensation plans and 5.4 million shares were reserved for conversion of the Series A convertible preferred stock.

The Company is authorized to issue approximately 100 million shares of convertible preferred stock at $ 0.01 par value per share.

The Company has 1 billion authorized shares of common stock at $ 0.01 par value per share.

At December 31, 2020, 17 million shares were reserved for issuance under the Company's incentive compensation plans and 5.4 million shares were reserved for conversion of the Series A convertible preferred stock.

Stock Compensation Plans

Certain of our employees participate in a long-term incentive plan.

Our long-term incentive plan authorizes the issuance of restricted stock units / shares (RSU), performance stock units / share (PSU) and non-qualified stock options to employees.

All awards for these plans prior to 2017 were made in Xerox stock and therefore converted into Conduent stock effective upon the Separation.

Using a formula designed to preserve the value of the award immediately prior to the Separation, all of these awards will be settled in Conduent's common stock and are reflected in the Company's Consolidated Statements of Shareholders' Equity.

Certain of the Company's employees participate in a long-term incentive plan.

The Company's long-term incentive plan authorizes the issuance of restricted stock units / shares (RSU), performance stock units / share (PSU) and non-qualified stock options to employees.

Stock-based compensation expense includes expense based on the awards and terms previously granted to the employees.

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Income tax benefit recognized in earnings 3 — 7

CNDT 2019 Annual Report

Restricted Stock Units / Shares Compensation expense is based upon the grant date market price.

The compensation expense is recorded over the vesting period, which is normally three years from the date of grant, based on management's estimate of the number of shares expected to vest.

The compensation expense is recorded over the vesting period based on management's estimate of the number of shares expected to vest.

The Company’s RSU awards typically vest in three separate and equal tranches over a three-year period.

Each tranche vests annually, at December 31, following the date of grant.

CNDT 2020 Annual Report

In 2020, the Company issued 389 thousand Deferred Stock Units (DSU) to non-employee members of the Board of Directors.

DSU awards typically vest in accordance with certain service conditions.

Performance Stock Units / Shares:

The Company granted PSUs that vest contingent upon its achievement of certain specified financial performance criteria over a three -year period.

The Company has granted PSUs under various scenarios including:

• PSUs that vest contingent upon its achievement of certain specified financial performance criteria over a three -year period.

If the three -year actual results exceed the stated targets, then the plan participants have the potential to earn additional shares of common stock, which cannot exceed 100 % of the original grant.

The fair value of PSUs is based upon the market price of Conduent's common stock on the date of the grant.

Compensation expense is recognized over the vesting period, which is normally three years from the date of grant, based on management's estimate of the number of shares expected to vest.

The fair value of these PSUs is based upon the market price of Conduent's common stock on the date of the grant.

Compensation expense is recognized over the vesting period, which is two years and nine months from the date of grant, based on management's estimate of the number of shares expected to vest.

If the stated targets are not met, any recognized compensation cost would be reversed.

• PSUs that vest contingent upon the increase of Conduent’s stock price to certain levels over a two year and nine-month period from the date of grant.

These PSUs also have a service requirement that must be met in order for them to vest.

The fair value of these PSUs is based upon a Monte Carlo simulation.

Compensation expense is recognized over the vesting period based on management's estimate of the number of shares expected to vest.

Employee Stock Options:

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Outstanding at December 31 5,453 3.83 3,597 16.17 4,557 16.76

The Company issued 182 thousand Deferred Stock Units (DSU) to non-employee members of the Board of Directors.

These DSUs are fully vested and will be issued when the directors leave the Board.

The total unrecognized compensation cost related to non-vested stock-based awards at December 31, 2020 was as follows (in millions):

Awards Unrecognized Compensation Remaining Weighted-Average Vesting Period (Years)

Awards Unrecognized Compensation Remaining Weighted-Average Expense Period (Years)

Restricted Stock Units / Shares $ 13 1.7

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Note 20 – Other Comprehensive Income (Loss)

Other Comprehensive Loss is comprised of the following:

Other Comprehensive Income (Loss) is comprised of the following:

Year Ended December 31,

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Net actuarial/prior service gains (losses) 1 1 — — — —

Actuarial loss amortization/settlement (2)

Other gains (losses) (3)

— — — — ( 4 ) ( 3 )

Changes in Defined Benefit Plans Gains (Losses) $ 1 $ 1 $ 1 $ ( 1 ) $ 65 $ 62

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____________________________

(1) Reclassified to Cost of sales - refer to Note 12 – Financial Instruments for additional information regarding our cash flow hedges.

(2) Reclassified to total net periodic benefit cost.

(3) Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL.

CNDT 2019 Annual Report

(1) Reclassified to Cost of services - refer to Note 13 – Financial Instruments for additional information regarding our cash flow hedges.

Accumulated Other Comprehensive Loss (AOCL)

Below are the balances and changes in AOCL (1) :

CNDT 2020 Annual Report

(in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total

Balance at December 31, 2017 $ ( 437 ) $ 1 $ ( 58 ) $ ( 494 )

Reclassification of amounts impacted by Tax Reform — — ( 5 ) ( 5 )

Other comprehensive income (loss) before reclassifications ( 31 ) 1 — ( 30 )

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Balance at December 31, 2018 $ ( 426 ) $ 2 $ ( 1 ) $ ( 425 )

(in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total

Balance at December 31, 2017 $ ( 437 ) $ 1 $ ( 58 ) $ ( 494 )

Reclassification of amounts impacted by Tax Reform — — ( 5 ) ( 5 )

Other comprehensive income (loss) before reclassifications 3 1 — 4

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Balance at December 31, 2019 $ ( 408 ) $ 3 $ ( 2 ) $ ( 407 )

(in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total

Balance at December 31, 2016 $ ( 472 ) $ ( 1 ) $ ( 53 ) $ ( 526 )

Other comprehensive income (loss) before reclassifications 8 — 1 9

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CNDT 2020 Annual Report

Note 20 – Earnings per Share

Note 21 – Earnings (Loss) per Share

We did not declare any common stock dividends in the periods presented.

The following table sets forth the computation of basic and diluted earnings per share of common stock:

The following table sets forth the computation of basic and diluted loss per share of common stock:

Year Ended December 31,

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Shares in thousands) 2020 2019 2018

Net Income (Loss) per Share:

Net income (loss) $ ( 1,934 ) $ ( 416 ) $ 177

Cash dividend paid - preferred stock ( 10 ) ( 10 ) ( 10 )

Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders ( 1,944 ) ( 426 ) 167

Net income (loss) from discontinued operations — — 4

Adjusted Net Income (Loss) Available to Common Shareholders $ ( 1,944 ) $ ( 426 ) $ 171

Net Loss per Share:

Net loss $ ( 118 ) $ ( 1,934 ) $ ( 416 )

Dividend - preferred stock ( 10 ) ( 10 ) ( 10 )

Adjusted Net Loss Available to Common Shareholders $ ( 128 ) $ ( 1,944 ) $ ( 426 )

Weighted average common shares outstanding 210,018 209,318 206,056

Basic Earnings (Loss) per Share:

Continuing operations $ ( 9.29 ) $ ( 2.06 ) $ 0.82

Discontinued operations — — 0.02

Basic Earnings (Loss) per Share $ ( 9.29 ) $ ( 2.06 ) $ 0.84

Diluted Earnings (Loss) per Share:

Net income (loss) from continuing operations $ ( 1,934 ) $ ( 416 ) $ 177

Accrued dividends on preferred stock ( 10 ) ( 10 ) ( 10 )

Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders ( 1,944 ) ( 426 ) 167

Net income (loss) from discontinued operations — — 4

Adjusted Net Income (Loss) Available to Common Shareholders $ ( 1,944 ) $ ( 426 ) $ 171

Basic Loss per Share $ ( 0.61 ) $ ( 9.29 ) $ ( 2.06 )

Diluted Loss per Share:

Net loss from continuing operations $ ( 118 ) $ ( 1,934 ) $ ( 416 )

Dividend - preferred stock ( 10 ) ( 10 ) ( 10 )

Adjusted Net Loss Available to Common Shareholders $ ( 128 ) $ ( 1,944 ) $ ( 426 )

Weighted average common shares outstanding 210,018 209,318 206,056

Common shares issuable with respect to:

Stock options — — 195

Restricted stock and performance units / shares — — 2,591

8% Convertible preferred stock — — —

Adjusted Weighted Average Common Shares Outstanding 209,318 206,056 206,793

Diluted Earnings (Loss) per Share:

Continuing operations $ ( 9.29 ) $ ( 2.06 ) $ 0.81

Discontinued operations — — 0.02

Diluted Earnings (Loss) per Share $ ( 9.29 ) $ ( 2.06 ) $ 0.83

The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive (shares in thousands):

Stock Options — — —

Restricted stock and performance shares/units — — 2,568

Convertible preferred stock — — 5,393

Total Anti-Dilutive Securities — — 7,961

Diluted Loss per Share $ ( 0.61 ) $ ( 9.29 ) $ ( 2.06 )

There were no securities excluded from the computation of diluted earnings per share for being either contingently issuable shares or shares that if included would have been anti-dilutive for any of the years ended December 31, 2020, 2019 or 2018.

CNDT 2020 Annual Report

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The purchases from these entities included office equipment and related services and supplies.

Revenue and purchases from these entities were included in Revenue and Costs of services / Selling, General and administrative, respectively, on the Company's Consolidated Statements of Income (Loss).

Revenue and purchases from these entities were included in Revenue and Costs of services or Selling, general and administrative, respectively, on the Company's Consolidated Statements of Income (Loss).

Transactions with related parties were as follows:

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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-K

Item 8. Financial Statements and Supplementary Data