CONDUENT Inc 10-Q

ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED) CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions, except per share data) 2021 2020 2021 2020 Revenue $ 1,038 $ 1,041 $ 3,092 $ 3,108 Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 776 779 2,335 2,406 Selling, general and administrative (excluding depreciation and amortization) 131 122 382 349 Research and development (excluding depreciation and amortization) 2 — 3 1 Depreciation and amortization 84 112 265 344 Restructuring and related costs 10 20 31 56 Interest expense 12 14 38 46 (Gain) loss on divestitures and transaction costs — 8 1 14 Litigation costs — — 2 20 Loss on extinguishment of debt — — 2 — Other (income) expenses, net 4 ( 1 ) 4 — Total Operating Costs and Expenses 1,019 1,054 3,063 3,236 Income (Loss) Before Income Taxes 19 ( 13 ) 29 ( 128 ) Income tax expense (benefit) 8 ( 6 ) 17 ( 21 ) Net Income (Loss) $ 11 $ ( 7 ) $ 12 $ ( 107 ) Net Earnings (Loss) per Share: Basic $ 0.04 $ ( 0.04 ) $ 0.02 $ ( 0.54 ) Diluted $ 0.04 $ ( 0.04 ) $ 0.02 $ ( 0.54 ) The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 2021 Form 10-Q 3 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Net Income (Loss) $ 11 $ ( 7 ) $ 12 $ ( 107 ) Other Comprehensive Income (Loss), Net (1) Currency translation adjustments, net ( 16 ) 11 ( 23 ) ( 15 ) Unrecognized gains (losses), net — 1 ( 1 ) — Changes in benefit plans, net — — ( 1 ) 1 Other Comprehensive Income (Loss), Net ( 16 ) 12 ( 25 ) ( 14 ) Comprehensive Income (Loss), Net $ ( 5 ) $ 5 $ ( 13 ) $ ( 121 ) __________ (1) All amounts are net of tax. Tax effects were immaterial. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 2021 Form 10-Q 4 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in millions, except share data in thousands) September 30, 2021 December 31, 2020 Assets Cash and cash equivalents $ 394 $ 450 Accounts receivable, net 701 670 Contract assets 159 151 Other current assets 257 306 Total current assets 1,511 1,577 Land, buildings and equipment, net 273 305 Operating lease right-of-use assets 243 246 Intangible assets, net 84 187 Goodwill 1,506 1,528 Other long-term assets 475 413 Total Assets $ 4,092 $ 4,256 Liabilities and Equity Current portion of long-term debt $ 21 $ 90 Accounts payable 169 182 Accrued compensation and benefits costs 252 237 Unearned income 111 133 Other current liabilities 434 450 Total current liabilities 987 1,092 Long-term debt 1,384 1,420 Deferred taxes 87 97 Operating lease liabilities 195 207 Other long-term liabilities 114 108 Total Liabilities 2,767 2,924 Contingencies (See Note 11) Series A convertible preferred stock 142 142 Common stock 2 2 Additional paid-in capital 3,912 3,899 Retained earnings (deficit) ( 2,308 ) ( 2,313 ) Accumulated other comprehensive loss ( 423 ) ( 398 ) Total Equity 1,183 1,190 Total Liabilities and Equity $ 4,092 $ 4,256 Shares of common stock issued and outstanding 212,672 212,074 Shares of series A convertible preferred stock issued and outstanding 120 120 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 2021 Form 10-Q 5 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, (in millions) 2021 2020 Cash Flows from Operating Activities: Net income (loss) $ 12 $ ( 107 ) Adjustments required to reconcile net income (loss) to cash flows from operating activities: Depreciation and amortization 265 344 Contract inducement amortization 1 2 Deferred income taxes ( 7 ) ( 38 ) (Gain) loss from investments 5 ( 3 ) Amortization of debt financing costs 5 5 Loss on extinguishment of debt 2 — Loss on divestitures and sales of fixed assets, net 1 5 Stock-based compensation 14 14 Allowance for doubtful accounts ( 1 ) 1 Changes in operating assets and liabilities: Accounts receivable ( 34 ) ( 36 ) Other current and long-term assets ( 59 ) ( 51 ) Accounts payable and accrued compensation and benefits costs 5 ( 5 ) Restructuring liabilities — 3 Other current and long-term liabilities ( 57 ) ( 152 ) Net change in income tax assets and liabilities 6 7 Net cash provided by (used in) operating activities 158 ( 11 ) Cash Flows from Investing Activities: Cost of additions to land, buildings and equipment ( 52 ) ( 48 ) Cost of additions to internal use software ( 49 ) ( 47 ) Proceeds from divestitures 4 3 Net cash provided by (used in) investing activities ( 97 ) ( 92 ) Cash Flows from Financing Activities: Proceeds from revolving credit facility and other loans — 152 Payments on debt ( 102 ) ( 41 ) Payment of contingent consideration related to acquisition — ( 4 ) Premium on debt redemption ( 2 ) — Taxes paid for settlement of stock-based compensation ( 1 ) ( 3 ) Dividends paid on preferred stock ( 7 ) ( 5 ) Net cash provided by (used in) financing activities ( 112 ) 99 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 7 ) ( 5 ) Increase (decrease) in cash, cash equivalents and restricted cash ( 58 ) ( 9 ) Cash, Cash Equivalents and Restricted Cash at Beginning of Period 458 505 Cash, Cash Equivalents and Restricted Cash at End of period (1) $ 400 $ 496 ___________ (1) Includes $ 6 million and $ 8 million of restricted cash as of September 30, 2021 and 2020, respectively, that were included in Other current assets on their respective Condensed Consolidated Balance Sheets. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 2021 Form 10-Q 6 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) Three Months Ended September 30, 2021 (in millions) Common Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Shareholders' Equity Balance at June 30, 2021 $ 2 $ 3,907 $ ( 2,317 ) $ ( 407 ) $ 1,185 Dividends - preferred stock, $ 20 /share — — ( 2 ) — ( 2 ) Stock incentive plans, net — 5 — — 5 Comprehensive Income (Loss): Net Income (Loss) — — 11 — 11 Other comprehensive income (loss), net — — — ( 16 ) ( 16 ) Total Comprehensive Income (Loss), Net — — 11 ( 16 ) ( 5 ) Balance at September 30, 2021 $ 2 $ 3,912 $ ( 2,308 ) $ ( 423 ) $ 1,183 Three Months Ended September 30, 2020 (in millions) Common Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Shareholders' Equity Balance at June 30, 2020 $ 2 $ 3,896 $ ( 2,290 ) $ ( 433 ) $ 1,175 Dividends - preferred stock, $ 20 /share (2) — — ( 2 ) — ( 2 ) Stock incentive plans, net — 5 — — 5 Comprehensive Income (Loss): Net Income (Loss) — — ( 7 ) — ( 7 ) Other comprehensive income (loss), net — — — 12 12 Total Comprehensive Income (Loss), Net — — ( 7 ) 12 5 Balance at September 30, 2020 $ 2 $ 3,901 $ ( 2,299 ) $ ( 421 ) $ 1,183 Nine Months Ended September 30, 2021 (in millions) Common Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Shareholders' Equity Balance at December 31, 2020 $ 2 $ 3,899 $ ( 2,313 ) $ ( 398 ) $ 1,190 Dividends - preferred stock, $ 60 /share — — ( 7 ) — ( 7 ) Stock incentive plans, net — 13 — — 13 Comprehensive Income (Loss): Net Income (Loss) — — 12 — 12 Other comprehensive income (loss), net — — — ( 25 ) ( 25 ) Total Comprehensive Income (Loss), Net — — 12 ( 25 ) ( 13 ) Balance at September 30, 2021 $ 2 $ 3,912 $ ( 2,308 ) $ ( 423 ) $ 1,183 Nine Months Ended September 30, 2020 (in millions) Common Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Shareholders' Equity Balance at December 31, 2019 2 3,890 ( 2,185 ) ( 407 ) 1,300 Dividends - preferred stock, $ 60 /share (2) — — ( 7 ) — ( 7 ) Stock incentive plans, net — 11 — — 11 Comprehensive Income (Loss): Net Income (Loss) — — ( 107 ) — ( 107 ) Other comprehensive income (loss), net — — — ( 14 ) ( 14 ) Total Comprehensive Income (Loss), Net — — ( 107 ) ( 14 ) ( 121 ) Balance at September 30, 2020 $ 2 $ 3,901 $ ( 2,299 ) $ ( 421 ) $ 1,183 ___________ (1) AOCL - Accumulated other comprehensive loss. Refer to Note 10 – Accumulated Other Comprehensive Loss for the components of AOCL. (2) The preferred dividend for the third quarter of 2020 was accrued but unpaid as of September 30, 2020. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 2021 Form 10-Q 7 Table of Contents CONDUENT INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 – Basis of Presentation References herein to “we,” “us,” “our,” the “Company” and “Conduent” refer to Conduent Incorporated and its consolidated subsidiaries unless the context suggests otherwise. Description of Business 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. The Company's portfolio includes industry-focused solutions in attractive growth markets such as healthcare and transportation, as well as solutions that serve multiple industries such as transaction processing, customer care, human resource solutions and payment services. Basis of Presentation The unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The year-end Condensed Consolidated Balance Sheet was derived from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. Certain reclassifications have been made to prior year information to conform to current year presentation. Intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows have been made. These adjustments consist of normal recurring items. The interim results of operations are not necessarily indicative of the results of the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Use of Estimates Preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates, including those related to fair values of financial instruments, goodwill and intangible assets, income taxes and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. As of September 30, 2021, the impact of the COVID-19 pandemic, the mitigating impact of the rollout of a vaccine for it and fluctuating cases of new variants of the virus continue to unfold. As a result, many of the Company's estimates and assumptions continue to require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, the Company's estimates may change materially in the future. CNDT Q3 2021 Form 10-Q 8 Table of Contents Note 2 – Recent Accounting Pronouncements The Company's significant accounting policies are described in Note 1–Basis of Presentation and Summary of Significant Accounting Policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. Summarized below are the applicable accounting pronouncements adopted or to be adopted subsequent to December 31, 2020. New Accounting Standards Adopted I ncome Taxes: In December 2019, the Financial Accounting Standards Board (FASB) issued final guidance that simplified the accounting for income taxes by eliminating some exceptions to the general approach in Accounting Standards Codification (ASC) 740, Income Taxes. This final guidance was effective for fiscal years beginning January 1, 2021. The Company adopted the final income taxes guidance as of January 1, 2021. The adoption did not have any material impact on the Company's Condensed Consolidated Financial Statements. New Accounting Standards To Be Adopted 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 reference rate reform. This guidance provides optional practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. T his 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 this guidance on its Condensed Consolidated Financial Statements. CNDT Q3 2021 Form 10-Q 9 Table of Contents Note 3 – Revenue Disaggregation of Revenue 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 segment. Refer to Note 4 – Segment Reporting for additional information on the Company's reportable segments. Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Commercial Industries: Customer experience management $ 152 $ 149 $ 459 $ 474 Business operations solutions 139 140 418 426 Commercial healthcare solutions 109 106 329 322 Human resource and learning services 109 123 332 388 Total Commercial Industries 509 518 1,538 1,610 Government Services: Government healthcare solutions 143 153 432 459 Government services solutions 206 195 573 510 Total Government Services 349 348 1,005 969 Transportation: Roadway charging & management services 79 83 237 232 Transit solutions 60 53 194 181 Curbside management solutions 22 18 60 54 Public safety solutions 17 19 52 56 Commercial vehicles 2 2 6 6 Total Transportation 180 175 549 529 Total Consolidated Revenue $ 1,038 $ 1,041 $ 3,092 $ 3,108 Timing of Revenue Recognition: Point in time $ 26 $ 23 $ 83 $ 85 Over time 1,012 1,018 3,009 3,023 Total Revenue $ 1,038 $ 1,041 $ 3,092 $ 3,108 Contract Balances The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are the Company’s rights to consideration for services provided when the right is conditioned on something other than passage of time (for example, meeting a milestone for the right to bill under the cost-to-cost measure of progress). Contract assets are transferred to Accounts receivable, net when the rights to consideration become unconditional. Unearned income includes payments received in advance of performance under the contract, which are realized when the associated revenue is recognized under the contract. CNDT Q3 2021 Form 10-Q 10 Table of Contents The following table provides information about the balances of the Company's contract assets, unearned income and receivables from contracts with customers: (in millions) September 30, 2021 December 31, 2020 Contract Assets (Unearned Income) Current contract assets $ 159 $ 151 Long-term contract assets (1) 8 13 Current unearned income ( 111 ) ( 133 ) Long-term unearned income (2) ( 39 ) ( 29 ) Net Contract Assets (Unearned Income) $ 17 $ 2 Accounts receivable, net $ 701 $ 670 __________ (1) Presented in Other long-term assets in the Condensed Consolidated Balance Sheets. (2) Presented in Other long-term liabilities in the Condensed Consolidated Balance Sheets. Revenues of $ 11 million and $ 99 million were recognized during the three and nine months ended September 30, 2021, respectively, related to the Company's unearned income at December 31, 2020. Revenues of $ 20 million and $ 84 million were recognized during the three and nine months ended September 30, 2020, respectively, related to the Company's unearned income at December 31, 2019. The Company had no material asset impairment charges related to contract assets for the three and nine months ended September 30, 2021 or 2020. Transaction Price Allocated to the Remaining Performance Obligations Estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially satisfied at September 30, 2021 was approximately $ 1.3 billion. The Company expects to recognize approximately 76 % of this revenue over the next two years and the remainder thereafter. Note 4 – Segment Reporting 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 the Company's 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. The Company's financial performance is based on Segment Profit/(Loss) 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: 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: 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. The solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations. CNDT Q3 2021 Form 10-Q 11 Table of Contents Transportation: 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 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. Selected financial information for the Company's reportable segments was as follows: Three Months Ended September 30, (in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total 2021 Revenue $ 509 $ 349 $ 180 $ — $ — $ 1,038 Segment profit (loss) $ 29 $ 125 $ 16 $ — $ ( 94 ) $ 76 2020 Revenue $ 518 $ 348 $ 175 $ — $ — $ 1,041 Segment profit (loss) $ 32 $ 122 $ 26 $ 6 $ ( 98 ) $ 88 Nine Months Ended September 30, (in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total 2021 Revenue $ 1,538 $ 1,005 $ 549 $ — $ — $ 3,092 Segment profit (loss) $ 93 $ 322 $ 54 $ — $ ( 259 ) $ 210 2020 Revenue $ 1,610 $ 969 $ 529 $ — $ — $ 3,108 Segment profit (loss) $ 99 $ 282 $ 56 $ 9 $ ( 258 ) $ 188 (in millions) Three Months Ended September 30, Nine Months Ended September 30, Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2021 2020 2021 2020 Income (Loss) Before Income Taxes $ 19 $ ( 13 ) $ 29 $ ( 128 ) Reconciling items: Amortization of acquired intangible assets 31 60 103 180 Restructuring and related costs 10 20 31 56 Interest expense 12 14 38 46 (Gain) loss on divestitures and transaction costs — 8 1 14 Litigation costs — — 2 20 Loss on extinguishment of debt — — 2 — Other (income) expenses, net 4 ( 1 ) 4 — Segment Pre-tax Income (Loss) $ 76 $ 88 $ 210 $ 188 Refer to Note 3 – Revenue for additional information on disaggregated revenues of the reportable segments. CNDT Q3 2021 Form 10-Q 12 Table of Contents Note 5 – Restructuring Programs and Related Costs 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 operational efficiency improvement initiatives has 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 $ 4 million and $ 8 million for the three months ended September 30, 2021 and 2020, respectively, and $ 19 million and $ 16 million for the nine months ended September 30, 2021 and 2020, respectively. Management continues to evaluate the Company's businesses, 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. Costs associated with restructuring, including employee severance and lease termination costs, are generally recognized when it has been determined that a liability has been incurred, which is generally upon communication to the affected employees or exit from the leased facility. In those geographies where the Company has either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, it recognizes employee severance costs when they are both probable and reasonably estimable. 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 nine months ended September 30, 2021 and 2020 is as follows: (in millions) Severance and Related Costs Termination and Other Costs Asset Impairments Total Accrued Balance at December 31, 2020 $ 3 $ 3 $ — $ 6 Provision 2 23 7 32 Changes in estimates — ( 4 ) — ( 4 ) Total Net Current Period Charges (1) 2 19 7 28 Charges against reserve and currency ( 4 ) ( 21 ) ( 7 ) ( 32 ) Accrued Balance at September 30, 2021 $ 1 $ 1 $ — $ 2 (in millions) Severance and Related Costs Termination and Other Costs Asset Impairments Total Accrued Balance at December 31, 2019 $ 15 $ 6 $ — $ 21 Provision 13 19 15 47 Changes in estimates 1 2 — 3 Total Net Current Period Charges (1) 14 21 15 50 Charges against reserve and currency ( 22 ) ( 24 ) ( 15 ) ( 61 ) Accrued Balance at September 30, 2020 $ 7 $ 3 $ — $ 10 __________ (1) Represents amounts recognized within the Consolidated Statements of Income (Loss) for the years shown. In addition, the Company recorded professional support costs associated with the implementation of certain strategic transformation programs of $ 1 million and $ 2 million for the three months ended September 30, 2021 and 2020, respectively, and $ 3 million and $ 6 million for the nine months ended September 30, 2021 and 2020, respectively. CNDT Q3 2021 Form 10-Q 13 Table of Contents The following table summarizes the total amount of costs incurred in connection with these restructuring programs by reportable and non-reportable segment: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Commercial Industries $ 1 $ 4 $ 3 $ 11 Government Services — — — 1 Transportation — ( 1 ) — 2 Unallocated Costs (1) 8 15 25 36 Total Net Restructuring Charges $ 9 $ 18 $ 28 $ 50 __________ (1) Represents costs related to the consolidation of the Company's data centers, operating lease ROU assets impairment, termination and other costs not allocated to the segments. Note 6 – Debt Long-term debt was as follows: (in millions) September 30, 2021 December 31, 2020 Term loan A due December 2022 $ 585 $ 654 Term loan B due December 2023 810 816 Senior notes due 2024 — 34 Finance lease obligations 18 20 Other loans 5 4 Principal debt balance 1,418 1,528 Debt issuance costs and unamortized discounts ( 13 ) ( 18 ) Less: current maturities ( 21 ) ( 90 ) Total Long-term Debt $ 1,384 $ 1,420 As of September 30, 2021, the Company had no outstanding borrowings under its $ 750 million Senior Revolving Credit Facility in effect as of September 30, 2021 (Prior Revolver). However, the Company has utilized $ 10 million of the Prior Revolver to issue letters of credit. The net Prior Revolver available to be drawn upon as of September 30, 2021 was $ 740 million. On May 1, 2021, the Company redeemed all the previously outstanding $ 34 million 10.50% Senior Notes due 2024 and incurred $ 2 million of loss on extinguishment of debt. On October 15, 2021, the Company closed on a debt refinancing and extended its maturity profile. As described in Note 17 - Subsequent Event, the Term Loan A due 2022 and the Term Loan B due 2023 (collectively, the 2016 Credit Facilities) were repaid and the Prior Revolver was terminated. Under the applicable accounting rules, since the 2016 Credit Facilities were refinanced on a long-term basis before the issuance of these Condensed Consolidated Financial Statements, the Company has classified a portion of the current maturities related to the 2016 Credit Facilities to long-term debt as of September 30, 2021. At December 31, 2020, the Company was in compliance with all debt covenants related to the borrowings in the table above. As a result of the October 2021 refinancing, the Company’s financial covenants have been waived until March 31, 2022. CNDT Q3 2021 Form 10-Q 14 Table of Contents Note 7 – Financial Instruments The Company is a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As a part of the Company's foreign exchange risk management strategy, the Company uses derivative instruments, primarily forward contracts, to hedge the funding of foreign entities which have a non-dollar functional currency, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. At September 30, 2021 and December 31, 2020, the Company had outstanding forward exchange contracts with gross notional values of $ 147 million and $ 180 million, respectively. At September 30, 2021, approximately 72 % of these contracts mature within three months, 11 % in three to six months, 13 % in six to twelve months and 4 % in greater than twelve months. Most of these foreign currency derivative contracts are designated as cash flow hedges and did not have a material impact on the Company's balance sheet, income statement or cash flows for the periods presented. Refer to Note 8 – Fair Value of Financial Assets and Liabilities for additional information regarding the fair value of the Company's foreign exchange forward contracts. Note 8 – Fair Value of Financial Assets and Liabilities Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP established a hierarchy framework to classify the fair value based on the observability of significant inputs to the measurement. The levels of the fair value hierarchy are as follows: Level 1: Fair value is determined using an unadjusted quoted price in an active market for identical assets or liabilities. Level 2: Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. Level 3: Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Summary of Financial Assets and Liabilities Accounted for at Fair Value on a Recurring Basis The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases was Level 2. (in millions) September 30, 2021 December 31, 2020 Assets: Foreign exchange contract - forward $ 1 $ 2 Total Assets $ 1 $ 2 Liabilities: Foreign exchange contracts - forward $ 2 $ — Total Liabilities $ 2 $ — Summary of Other Financial Assets and Liabilities The estimated fair values of other financial assets and liabilities were as follows: September 30, 2021 December 31, 2020 (in millions) Carrying Amount Fair Value Carrying Amount Fair Value Liabilities: Long-term debt $ 1,384 $ 1,372 $ 1,420 $ 1,378 The fair value amounts for Cash and cash equivalents, Restricted cash, Accounts receivable, net and Short-term debt approximate carrying amounts due to the short-term maturities of these instruments. CNDT Q3 2021 Form 10-Q 15 Table of Contents The fair value of Long-term debt was estimated using quoted market prices for identical or similar instruments (Level 2 inputs). Note 9 – Employee Benefit Plans The Company has post-retirement savings and investment plans in several countries, including the U.S., U.K. and Canada. In many instances, employees participating in 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 permitted to contribute a portion of their salaries and bonuses to the plans. Historically, the Company matched a portion of 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 Company match was reinstated for all U.S. employees in November of 2020. The Company recognized an expense related to its defined contribution plans of $ 6 million and $ 1 million for the three months ended September 30, 2021 and 2020, respectively. The Company recognized an expense related to its defined contribution plans of $ 16 million and $ 2 million for the nine months ended September 30, 2021 and 2020, respectively. The balance sheet and income statement impacts of any remaining defined benefit plans are immaterial for all periods presented in these Consolidated Condensed Financial Statements. Note 10 – Accumulated Other Comprehensive Loss (AOCL) Below are the balances and changes in AOCL (1) : (in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total Balance at December 31, 2020 $ ( 400 ) $ 3 $ ( 1 ) $ ( 398 ) Other comprehensive income (loss) ( 23 ) ( 1 ) ( 1 ) ( 25 ) Balance at September 30, 2021 $ ( 423 ) $ 2 $ ( 2 ) $ ( 423 ) (in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total Balance at December 31, 2019 $ ( 408 ) $ 3 $ ( 2 ) $ ( 407 ) Other comprehensive income (loss) ( 15 ) — 1 ( 14 ) Balance at September 30, 2020 $ ( 423 ) $ 3 $ ( 1 ) $ ( 421 ) __________ (1) All amounts are net of tax. Tax effects were immaterial. CNDT Q3 2021 Form 10-Q 16 Table of Contents Note 11 – Contingencies and Litigation As more fully discussed below, the Company is involved in a variety of claims, lawsuits, investigations and proceedings concerning a variety of matters, including: governmental entity contracting, servicing and procurement law; intellectual property law; employment law; commercial and contracts law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing its litigation and regulatory matters using available information. The Company develops its view on estimated losses in consultation with outside counsel handling its defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in the Company's determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts in excess of any accrual for such matter or matters, this could have a material adverse effect on the Company's results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. The Company believes it has recorded adequate provisions for any such matters as of September 30, 2021. Litigation is inherently unpredictable, and it is not possible to predict the ultimate outcome of these matters and such outcome in any such matters could be in excess of any amounts accrued and could be material to the Company's results of operations, cash flows or financial position in any reporting period. Additionally, guarantees, indemnifications and claims arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, real estate, intellectual property such as patents, environmental matters and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's Consolidated Financial position or liquidity. As of September 30, 2021, the Company had accrued its estimate of liability incurred under its indemnification arrangements and guarantees. Litigation Against the Company Employees’ Retirement System of the Puerto Rico Electric Power Authority et al v. Conduent Inc. et al.: 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 former 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. CNDT Q3 2021 Form 10-Q 17 Table of Contents Skyview Capital LLC and Continuum Global Solutions, LLC v. Conduent Business Services, LLC: On February 3, 2020, plaintiffs filed a lawsuit in the Superior Court of New York County, New York. The lawsuit relates to the sale of a portion of Conduent Business Service, LLC's (CBS) select standalone customer care call center business to plaintiffs, which sale closed in February 2019. Under the terms of the sale agreement, CBS received approximately $ 23 million of notes from plaintiffs (Notes). The lawsuit alleges various causes of action in connection with the acquisition, including: indemnification for breach of representation and warranty; indemnification for breach of contract; and fraud. 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. On August 20, 2020, Conduent filed a counterclaim against Skyview LLC (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 also moved to dismiss Skyview’s claims in 2020. In May 2021, the court denied the motion and allowed the claims to proceed. Conduent denies all of the plaintiffs' allegations, believes that it has strong defenses to all of plaintiffs’ claims and it intends to defend the litigation vigorously. 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. Dennis Nasrawi v. Buck Consultants et al.: On October 8, 2009, plaintiffs filed a lawsuit in the Superior Court of California, Stanislaus County, and on November 24, 2009, the case was removed to the U.S. Court for the Eastern District of California, Fresno Division. Plaintiffs allege actuarial negligence against Buck Consultants, LLC (Buck), which was a wholly-owned subsidiary of Conduent, for the use of faulty actuarial assumptions in connection with the 2007 actuarial valuation for the Stanislaus County Employees Retirement Association (StanCERA). Plaintiffs allege that the employer contribution rate adopted by StanCERA based on Buck’s valuation was insufficient to fund the benefits promised by the County. On July 13, 2012, the Court entered its ruling that the plaintiffs lacked standing to sue in a representative capacity on behalf of all plan participants. The Court also ruled that plaintiffs had adequately pleaded their claim that Buck allegedly aided and abetted StanCERA in breaching its fiduciary duty. Plaintiffs then filed their Fifth Amended Complaint and added StanCERA to the litigation. Buck and StanCERA filed demurrers to the amended complaint. On September 13, 2012, the Court sustained both demurrers with prejudice, completely dismissing the matter and barring plaintiffs from refiling their claims. Plaintiffs appealed, and ultimately the California Court of Appeals (Sixth District) reversed the trial court’s ruling and remanded the case back to the trial court as to Buck only, and only with respect to plaintiff's claim of aiding and abetting StanCERA in breaching its fiduciary duty. This case has been stayed pending the outcome of parallel litigation the plaintiffs are pursuing against StanCERA. The parallel litigation was tried before the bench in June 2018, and on January 24, 2019, the court found in favor of StanCERA, holding that it had not breached its fiduciary duty to plaintiffs. On April 26, 2019, plaintiffs in the parallel litigation filed an appeal. Nasrawi remains stayed until the parallel litigation is finally concluded. Absent the court finding that StanCERA breached its fiduciary duty, plaintiffs’ claim against Buck for aiding and abetting said breach would not appear viable. Buck will continue to aggressively defend these lawsuits. In August 2018, Conduent sold Buck; however, the Company retained this liability after the sale. 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. CNDT Q3 2021 Form 10-Q 18 Table of Contents Conduent Business Services, LLC v. Cognizant Business Services Corporation: On April 12, 2017, CBS filed a lawsuit against Cognizant Business Services Corporation (Cognizant) in the Supreme Court of New York County, New York. The lawsuit relates to the Amended and Restated Master Outsourcing Services Agreement effective as of October 24, 2012, and the service delivery contracts and work orders thereunder, between CBS and Cognizant, as amended and supplemented (Contract). The Contract contains certain minimum purchase obligations by CBS through the date of expiration. The lawsuit alleges that Cognizant committed multiple breaches of the Contract, including Cognizant’s failure to properly perform its obligations as subcontractor to CBS under CBS’s contract with the New York Department of Health to provide Medicaid Management Information Systems. In the lawsuit, CBS seeks damages in excess of $ 150 million. During the first quarter of 2018, CBS provided notice to Cognizant that it was terminating the Contract for cause and recorded in the same period certain charges associated with the termination. CBS also alleges that it terminated the Contract for cause, because, among other things, Cognizant violated the Foreign Corrupt Practices Act. 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 Cognizant's damages to $ 89 million. CBS 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 or loss, if any, in excess of currently recorded reserves. Other Matters Since 2014, Xerox Education Services, Inc. (XES) has cooperated with several federal and state agencies regarding a variety of matters, including XES' self-disclosure to the U.S. Department of Education (Department) and the Consumer Financial Protection Bureau (CFPB) that some third-party student loans under outsourcing arrangements for various financial institutions required adjustments. With the exception of an inquiry the Illinois Attorney General's Office recently commenced, the Company has resolved the investigations the CFPB and several state agencies commenced and continues to work with the Department and the U.S. Department of Justice to resolve all outstanding issues, including a number of operational projects that XES discovered and disclosed since 2014. 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 currently recorded 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. Other Contingencies Certain contracts, primarily in the Company's Government Services and Transportation segments, require the Company to provide a surety bond or a letter of credit as a guarantee of performance. As of September 30, 2021, the Company had $ 553 million of outstanding surety bonds used to secure its performance of contractual obligations with its clients and $ 94 million of outstanding letters of credit issued to secure the Company's performance of contractual obligations to its clients as well as other corporate obligations. In general, the Company would only be liable for the amount of these guarantees in the event of default in the Company's performance of its obligations under each contract. The Company believes it has sufficient capacity in the surety markets and liquidity from its cash flow and its various credit arrangements to allow it to respond to future requests for proposals that require such credit support. CNDT Q3 2021 Form 10-Q 19 Table of Contents Note 12 – Preferred Stock Series A Preferred Stock In December 2016, 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 convertible preferred stock earns quarterly cash dividends at a rate of 8 % per year ($ 9.6 million per year). Each share of 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. Note 13 – Earnings (Loss) per Share The Company did not declare any common stock dividends in the periods presented. The following table sets forth the computation of basic and diluted earnings (loss) per share of common stock: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except per share data in whole dollars and shares in thousands) 2021 2020 2021 2020 Net Income (Loss) $ 11 $ ( 7 ) $ 12 $ ( 107 ) Dividend - Preferred Stock ( 2 ) ( 2 ) ( 7 ) ( 7 ) Adjusted Net Income (Loss) Available to Common Shareholders $ 9 $ ( 9 ) $ 5 $ ( 114 ) Weighted Average Common Shares Outstanding - Basic 212,633 209,244 212,438 209,958 Common Shares Issuable With Respect To: Restricted Stock And Performance Units / Shares 7,184 — 7,239 — Weighted Average Common Shares Outstanding - Diluted 219,817 209,244 219,677 209,958 Net Earnings (Loss) per Share: Basic $ 0.04 $ ( 0.04 ) $ 0.02 $ ( 0.54 ) Diluted $ 0.04 $ ( 0.04 ) $ 0.02 $ ( 0.54 ) 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): Restricted stock and performance shares/units 3,606 16,196 2,229 16,196 Convertible preferred stock 5,393 5,393 5,393 5,393 Total Anti-Dilutive and Contingently Issuable Securities 8,999 21,589 7,622 21,589 CNDT Q3 2021 Form 10-Q 20 Table of Contents Note 14 – Supplementary Financial Information The components of Other assets and Other liabilities were as follows: (in millions) September 30, 2021 December 31, 2020 Other Current Assets Prepaid expenses $ 96 $ 73 Income taxes receivable 42 48 Value-added tax (VAT) receivable 16 21 Restricted cash 6 8 Current portion of capitalized cloud computing implementation costs, net 10 8 Other 87 148 Total Other Current Assets $ 257 $ 306 Other Current Liabilities Accrued liabilities $ 232 $ 229 Litigation related accruals 64 73 Current operating lease liabilities 71 81 Restructuring liabilities 2 1 Income tax payable 18 16 Other taxes payable 14 16 Other 33 34 Total Other Current Liabilities $ 434 $ 450 Other Long-term Assets Internal use software, net $ 177 $ 163 Deferred contract costs, net 73 76 Product software, net 90 72 Cloud computing implementation costs, net 31 33 Other 104 69 Total Other Long-term Assets $ 475 $ 413 Other Long-term Liabilities Deferred payroll tax related to the CARES Act (1) $ 24 $ 24 Income tax liabilities 16 15 Unearned income 39 29 Restructuring liabilities — 5 Other 35 35 Total Other Long-term Liabilities $ 114 $ 108 __________ (1) The CARES Act allowed 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. CNDT Q3 2021 Form 10-Q 21 Table of Contents Note 15 – Related Party Transactions In the normal course of business, the Company provides services to, and purchases from, certain related parties with the same shareholders. The services provided to these entities included those related to human resources, end-user support and other services and solutions. The purchases from these entities included office equipment and related services and supplies. In addition, we have a receivable related to certain income tax matters with our former parent company, Xerox Corporation. Revenue and purchases from these entities were included in Revenue and Costs of services / Selling, General and administrative, respectively, on the Company's Condensed Consolidated Statements of Income (Loss). Transactions with related parties were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Revenue from related parties $ 3 $ 6 $ 12 $ 19 Purchases from related parties $ 6 $ 8 $ 22 $ 22 The Company's receivable and payable balances with related party entities were not material as of September 30, 2021 and December 31, 2020. Note 16 – Goodwill The following table presents the changes in the carrying amount of goodwill, by reportable segment: (in millions) Commercial Industries Government Services Transportation Total Balance at December 31, 2020 $ 837 $ 623 $ 68 $ 1,528 Foreign currency translation ( 11 ) ( 4 ) ( 7 ) ( 22 ) Balance at September 30, 2021 $ 826 $ 619 $ 61 $ 1,506 Gross goodwill $ 2,379 $ 1,373 $ 641 $ 4,393 Accumulated impairment ( 1,553 ) ( 754 ) ( 580 ) ( 2,887 ) Balance at September 30, 2021 $ 826 $ 619 $ 61 $ 1,506 In the first, second and third quarters of 2021, the Company performed its ongoing assessment to consider whether events or circumstances had occurred that could more likely than not reduce the fair value of a reporting unit below its carrying value. After evaluating and weighing all relevant events and circumstances, the Company concluded that it is not more likely than not that the fair values of any of its reporting units were less than their carrying values. Consequently, the Company determined that it was not necessary to perform an interim impairment test for any of its reporting units. 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. CNDT Q3 2021 Form 10-Q 22 Table of Contents Note 17 – Subsequent Event On October 15, 2021, the Company closed on a debt refinancing and extended its maturity profile. The debt refinancing transactions were as follows: (in millions) Amount Interest Rate Term Loan A due 2026 $ 265 LIBOR + 1.75 to 2.75% Term Loan B due 2028 515 LIBOR * + 4.25% Secured Notes due 2029 520 6.00 % Total new debt excluding revolving credit facility $ 1,300 Revolving Credit Facility maturing 2026 $ 550 LIBOR + 1.75 to 2.75% ___ * subject to a floor of 50 basis points Upon closing the debt refinancing, $ 100 million was borrowed under the new Revolving Credit Facility (Revolver). The net proceeds of the Term Loan A due 2026, Term Loan B due 2028, Secured Notes due 2029 and $ 100 million of borrowing under the Revolver were used to repay borrowings under the 2016 Credit Facilities that were outstanding on October 15, 2021. The amounts repaid were $ 587 million for Term Loan A due 2022 and $ 810 million for Term Loan B due 2023. As a part of the transactions, the Prior Revolver was terminated. CNDT Q3 2021 Form 10-Q 23 Table of Contents