CONDUENT INCORPORATED The following Management's Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition ofConduent . This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes in this Form 10-K for the year endedDecember 31, 2020 . This MD&A provides additional information about our operations, current developments, financial condition, cash flows and results of operations. Throughout the MD&A, we refer to various notes to our Consolidated Financial Statements which appear in Item 8 of this Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.
Overview
With revenues of$4.2 billion , we are a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experience.
Headquartered in
Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate.
We organize and manage our businesses through three reportable segments. •Commercial Industries - OurCommercial Industries segment provides business process services and customized solutions to clients in a variety of industries. Across theCommercial 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. •Government Services - Our Government Services segment provides government-centric business process services toU.S. federal, state and local and foreign governments for public assistance, health services, program administration, transaction processing and payment services. Our solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations. •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. CNDT 2020 Annual Report 33
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Table of Contents Significant 2020 Actions
•Strong new business signings results - A strong year of new business with total
contract value (TCV) signings of
•Draw down on revolver - InMarch 2020 , we drew down$150 million of our$750 million Senior Credit Facility (Revolver) as a precautionary measure in response to the COVID-19 pandemic. This amount was repaid inDecember 2020 . •Cost savings initiative - Beginning in the first quarter of 2020, we expanded the focus of our efficiency initiatives to include both permanent and temporary cost efficiencies, aimed to offset as much of the COVID-19 related negative impacts as possible. We announced an initial target amount of approximately$100 million of cost savings impact in 2020 and subsequently increased this amount throughout the year. We achieved approximately$145 million of cost savings impact in 2020 in both permanent savings, such as headcount and vendor optimization, and temporary savings, such as furloughs and reduced travel. •Operational improvements - We have made significant progress on our "Growth", "Quality", and "Efficiency" initiatives by leveraging changes to people, process, and technology. Specific actions have included standardizing governance processes for client implementations, account management, and incident response, centralizing and enhancing the salesforce, restructuring to leverage a shared services model and addressing spans and layers, instituting a global IT command center, continuing to make progress on the data center consolidation plan, among others. These actions have resulted in improvements across the "Growth", "Quality", and "Efficiency" pillars. For example, we have shown a significant reduction of the number of technology-related incidents and outages, improvements in associate satisfaction survey results, and increases in service level agreement payments from customers.
Significant 2019 Actions
•Business acquisition - InJanuary 2019 , we acquired Health Solution Plus, a software provider of healthcare payer administration solutions for a total base consideration of$90 million . This acquisition is part of theCommercial Industries segment. Refer to Note 5 - Business Acquisition to the Consolidated Financial Statements for additional information regarding this acquisition.
•Disposition - In
•Litigation settlement - InFebruary 2019 , we reached a settlement agreement and release with theState of Texas ("State") and theTexas Department of Health and Human Services , which was amended inMay 2019 ("Texas Agreement"). Pursuant to the terms of the Texas Agreement, the Company was required to pay the State$236 million , of which$118 million was paid in 2019 and the remaining$118 million paid inJanuary 2020 . Refer to Note 17 - Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding this litigation settlement. •Goodwill impairment - During 2019, we performed interim goodwill impairment assessments for all our reporting units which resulted in a cumulative impairment charge of$2.0 billion . Refer to Note 9 -Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for details regarding the facts and circumstances that led to this impairment charge.
COVID-19 Outbreak
Throughout the COVID-19 pandemic, we have continued to provide critical and
best-in-class services to our customers and their end-users, while ensuring the
health and safety of our associates. To address the potential impact to our
business over the near-term, our Business Continuity team established a
proactive plan in the first quarter of 2020 that has continued throughout the
year, which includes:
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•Supporting our associates with a number of specific initiatives, including making improvements to our policies to extend short term disability, providing extra supplemental sick leave coverage and introducing a hardship leave policy.
•Increased sanitation and social distancing for required on-site essential associates.
At the end of 2020, approximately 75% of our workforce had shifted to work-from-home. We will start a slow and measured approach to bring associates back to our offices, as appropriate. This will be a phased process based on the specific COVID-19 conditions in certain geographies, as well as, business requirements.
As the crisis continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and their end-users as well as the Company's needs and to continue to provide our mission-critical services and solutions.
For the year endedDecember 31, 2020 , we estimated an$85 million unfavorable impact on revenue was attributable to the COVID-19 pandemic or COVID-19 related effects. In addition to reductions in certain direct costs, we also achieved certain temporary cost savings associated with our cost reduction program which were estimated to be$59 million for the year endedDecember 31, 2020 . These temporary cost actions were primarily driven by pandemic related furloughs, reduced travel, vendor and facilities spend. The estimated effect of the COVID-19 pandemic on our pre-tax income, which includes the net revenue impact, incremental costs and benefit from temporary cost savings was a reduction of$23 million for the year endedDecember 31, 2020 .
Refer to the discussion of results of operations below for additional discussion of COVID-19 pandemic related effects.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America (U.S. GAAP) requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and notes thereto. In preparing our Consolidated Financial Statements, we have made our best estimates and judgments of certain amounts included in the Consolidated Financial Statements giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Senior management has discussed the development and selection of the critical accounting policies, estimates and related disclosures included herein with the Audit Committee of the Board of Directors. We consider these as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management's judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclose the impact of these different estimates on our operations. In certain instances, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period.
Specific risks associated with these critical accounting policies are discussed in the MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements.
Leases
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 accounts for lease and non-lease components separately for its equipment leases, based on the estimated standalone price of each component, and combines lease and non-lease components for its real estate leases. The Company's leases generally do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a
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collateralized basis over the term of a lease within a particular currency environment. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information regarding our lease accounting policies. Revenue Recognition Application of the accounting principles inU.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 2 - Revenue to the Consolidated Financial Statements for additional information regarding our revenue recognition policies.
Intangible Assets
The fair values of identifiable intangible assets are primarily estimated using an income approach. These estimates include market participant assumptions and require projected financial information, including assumptions about future revenue growth and costs necessary to facilitate the projected growth. Other key inputs include assumptions about technological obsolescence, customer attrition rates, brand recognition, the allocation of projected cash flows to identifiable intangible assets and discount rates. We regularly review for impairment intangible assets with finite lives whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include the following: •significant underperformance relative to historical or projected future operating results; •significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and •significant negative industry or economic trends. When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of potential impairment, we assess whether an impairment has occurred based on whether net book value of the assets exceeds the related projected undiscounted cash flows from these assets groups. We consider a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles in estimating future cash flows. Differing estimates and assumptions as to any of the factors described above could result in a materially different impairment charge, if any, and thus materially different results of operations.
Goodwill is not amortized but rather tested for impairment annually, or more frequently if an event or circumstance indicates that impairment may have been incurred. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated adverse events or conditions impacting revenues, cash flows or profitability, unanticipated competitive activities and acts by governments and courts. Application of the interim and annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment of the fair value of each reporting unit. We currently have six reporting units which support our three reportable segments: Customer Experience Management, Business Operations Solutions,Commercial Healthcare and Human Resources and Learning Services (together comprisingCommercial Industries ), Government Services and Transportation.
Our annual quantitative impairment test of goodwill was performed as of
In our quantitative test, we estimate the fair value of each reporting unit by
weighting the results from the income approach (discounted cash flow
methodology) and market approach. These valuation approaches require significant
judgment and consider several factors that include, but are not limited to,
expected future cash flows, growth rates and discount rates and comparable
multiples from publicly traded companies in our industry. In addition, we are
required to make certain assumptions and estimates regarding the current
economic environment, industry factors and the future profitability of our
businesses.
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When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions. The cash-flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, restructuring activities, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business. The selected discount rates consider the risk and nature of the respective reporting units' cash flows, appropriate capital structure and rates of return that market participants would require to invest their capital in our reporting units. We believe these assumptions are appropriate and reflect our forecasted long-term business model and consider our historical results as well as the current economic environment and markets that we serve. The most significant assumption used in the goodwill analysis relates to the discount rates (ranging from 12.25% to 13.00%) and long-term organic growth rates (ranging from 2.5% to 3.0%) for the reporting units within theCommercial Industries , Government Services and Transportation reportable segments. Based on our quantitative assessments, we concluded that the fair value of our reporting units exceeded their respective carrying values and, accordingly, we did not record any goodwill impairment charge in the year endedDecember 31, 2020 .
During 2019, we performed interim goodwill impairment assessments for all our
reporting units which resulted in a cumulative impairment charge of
Income Taxes
We are subject to income taxes inthe United States and numerous foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances and other factors, that may not be predictable. In the event that there is a significant unusual or one-time item recognized in our operating results, the taxes attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item. We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded in our Consolidated Balance Sheets and provide valuation allowances as required. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Gross deferred tax assets of$294 million and$309 million had valuation allowances of$83 million and$72 million atDecember 31, 2020 and 2019, respectively. We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were$23 million ,$24 million and$20 million atDecember 31, 2020 , 2019 and 2018, respectively.
Refer to Note 16 - Income Taxes to the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.
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Table of Contents Loss Contingencies We are currently involved in various claims and legal proceedings. At least quarterly, we review the status of each significant matter and assess its potential financial exposure considering all available information including, but not limited to, the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise estimates. These revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial position.
Refer to Note 17 - Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding loss contingencies.
Recent Accounting Changes
See Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for information on accounting standards adopted during the current year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A. Other Developments SEC Rule - Modernize and Enhance Management's Discussion and Analysis and other Financial Disclosures InNovember 2020 , theSEC adopted amendments to modernize, simplify and enhance certain financial disclosures called for by Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide material information to investors. The amendments are also designed to improve the readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information. The provisions of the rule that have the most significant impact on our disclosures under Regulation S-K and the content of this Form 10-K include: (i) elimination of the requirement to include a five year financial highlights table in the Form 10-K; (ii) amending the requirement to present quarterly financial information for the two most recent years in tabular form to a principals-based approach to discuss material retrospective changes; (iii) elimination of the requirement to present a tabular summary of contractual obligations; (iv) adding a requirement to state the principal objectives of the MD&A; and (v) adding a requirement to present and discuss critical accounting estimates in the MD&A. We will be required to comply with these amendments for our Form 10-K for the year endedDecember 31, 2021 . Early application is permitted for each amended item. We have elected to apply the guidance to eliminate the disclosure of the five-year highlights for this Form 10-K for the year endedDecember 31, 2020 . CNDT 2020 Annual Report 38
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Table of Contents Financial Information The section below provides a comparative discussion of our consolidated results of operations for the year endedDecember 31, 2020 and 2019. See Item 7. MD&A-Financial Information in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for a comparative discussion of our consolidated results of operations between 2019 and 2018. Year Ended December 31, 2020 vs. 2019 (in millions) 2020 2019 $ Change % Change Revenue$ 4,163 $ 4,467 $ (304) (7) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 3,209 3,494$ (285) (8) % Selling, general and administrative (excluding depreciation and amortization) 468 479$ (11) (2) % Research and development (excluding depreciation and amortization) 1 8 (7) (88) % Depreciation and amortization 459 459 - - % Restructuring and related costs 67 71 (4) (6) % Interest expense 60 78 (18) (23) % Goodwill impairment - 1,952 (1,952) n/m Loss on divestitures and transaction costs 17 25 (8) (32) % Litigation costs, net 20 17 3 18 % Other (income) expenses, net 1 (10) 11 (110) % Total Operating Costs and Expenses 4,302 6,573 (2,271) Loss Before Income Taxes (139) (2,106) 1,967 Income tax expense (benefit) (21) (172) 151 Net Loss$ (118) $ (1,934) $ 1,816 Revenue Revenue for 2020 decreased, compared to the prior year, mainly driven by lost business and the effects of the COVID-19 pandemic across our Commercial and Transportation segments. These were partially offset by increases from the ramp of new business and increases in COVID-19 related revenues in our Government segment.
We estimated approximately
Cost of Services (excluding depreciation and amortization)
Cost of services for 2020 decreased, compared to the prior year, mainly driven by lost business, our efficiency initiatives and cost actions. Also contributing to the decline were lower costs to support volume loss resulting from the effects of the COVID-19 pandemic.
Selling, General and Administrative (SG&A) (excluding depreciation and amortization)
SG&A for 2020 declined, compared to the prior year, mainly driven by reductions in real estate costs, lower corporate overhead costs and reductions in labor costs, including reductions in 401(k) costs, partially offset by increases in certain other employee costs.
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Depreciation and Amortization
Depreciation and amortization (D&A) for 2020 was flat compared to the prior year due to D&A on new capital expenditure spend being offset by the run-off of D&A on older assets.
Restructuring and Related Costs
We engage in a series of restructuring programs related to downsizing our
employee base, reducing our real estate footprint, exiting certain activities,
outsourcing certain internal functions, consolidating our data centers and
engaging in other actions designed to reduce our cost structure and improve
productivity. The following are the components of our Restructuring and related
costs:
Year Ended December 31,
(in millions, except headcount in whole numbers) 2020 2019
Severance and related costs $ 14 $ 28
Data center consolidation 23 21
Termination, asset impairment and other costs 22 18
Total Net Current Period Charges 59 67
Consulting and other costs(1) 8 4
Restructuring and Related Costs $ 67 $ 71
Reduction in headcount(2) 1,600 1,300
__________
(1)Represents professional support costs associated with certain strategic transformation programs. (2)Relates to headcount reductions worldwide associated with Severance and related costs
Refer to Note 10 - Restructuring Programs and Related Costs to the Consolidated Financial Statements for additional information regarding our restructuring programs.
Interest Expense
Interest expense represents interest on long-term debt and the amortization of debt issuance costs. The decrease in Interest expense for 2020, compared to the prior year, was driven primarily by lower interest rates, partially offset by a higher average debt balance that resulted from the$150 million withdrawn from our Senior Revolving Credit Facility (Revolver) inMarch 2020 . Refer to Note 12 - Debt to the Consolidated Financial Statements for additional information.
Goodwill Impairment
There was no goodwill impairment identified for 2020. The goodwill impairment for 2019 related to the write-down of the carrying values of all of the reporting units. Refer to Note 9 -Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information. CNDT 2020 Annual Report 40
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Loss on Divestitures and Transaction Costs
The costs included in 2020 amount consist of professional fees related to the strategic review by the Company's Board of Directors and reserves for certain divestiture related litigation. The costs in 2019 consist of transaction and related costs, changes in estimates related to losses on divestitures and a loss on sale of assets. Litigation Costs,Net Net litigation costs for 2020 primarily consist of reserves for various matters that are subject to litigation and costs related to certain reimbursement matters with our former parent company,Xerox Corporation . Net litigation costs for 2019 consist primarily of the recognition of the$13 million discount on the fair value of theTexas litigation liability established in 2018, due to the 2019 acceleration of the payment terms of the settlement.
Refer to Note 17 - Contingencies and Litigation to the Consolidated Financial Statements for additional information.
Other (Income) Expenses, Net
Other (income) expenses, net primarily includes foreign currency transaction losses (gains), interest income and the Student Loan business shut-down costs.
Income Taxes
The 2020 effective tax rate was 15.1%, compared to 8.2% for 2019. The 2020 rate was lower than theU.S. statutory rate of 21% primarily due to geographic mix of income, tax settlements and valuation allowances partially offset by tax credits. The 2019 rate was lower than the statutory rate, primarily due to the goodwill impairment charge being partially non-deductible for tax and the geographic mix of income, partially offset byU.S. federal tax credits and tax benefits recognized on the sale of a portfolio of select standalone customer care contracts toSkyview Capital LLC . Excluding the impact of amortization, restructuring and discrete tax items the normalized effective tax rate for 2020 was 27.3%. The normalized effective tax rate of 30.0% for 2019, was predominately impacted by the exclusion of the impact of goodwill impairment, divestitures, theTexas litigation reserve, amortization and restructuring. The decline in the normalized effective tax rate from 2019 to 2020 is attributable to an increase in tax credits, favorable changes to certainU.S. tax rules and geographic mix of income in 2020. The Company believes it is reasonably possible that unrecognized tax benefits of approximately$14 million will reverse within 12 months due to anticipated audit settlements. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. The CARES Act provides for various tax relief and tax incentive measures. The payment of the employer share of payroll taxes for the remainder of 2020 was deferred to 2021 and 2022 under the CARES Act, which provided a temporary operating cash flow benefit. The CARES Act also retroactively allowed for the immediate recovery of qualified improvement property (QIP) costs rather than over a 39 year recovery period, resulting in additional tax deductions for 2018 and 2019. Lastly, the CARES Act provided an elective five-year carry back for net operating losses (NOLs) incurred in taxable years starting afterDecember 31, 2017 , and beforeJanuary 1, 2021 . This allowed the Company to carry back the loss it incurred in 2019 to 2018, resulting in a tax refund. CNDT 2020 Annual Report 41
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Table of Contents Operations Review of Segments
Our financial performance is based on Segment Profit/(Loss) and Segment Adjusted EBITDA for the following three segments:
•Commercial Industries, •Government Services, and •Transportation.
Other includes our divestitures and our Student Loan business, which the Company exited in the third quarter of 2018.
Unallocated Costs includes IT infrastructure costs that are shared by multiple reportable segments, enterprise application costs and certain corporate overhead expenses not directly attributable or allocated to our reportable segments. The section below provides a comparative discussion of our financial performance by segment between the year endedDecember 31, 2020 and 2019. As described in Note 3 - Segment Reporting to our Consolidated Financial Statements, in 2020 we realigned our sales organization and certain shared IT and other allocated functions and reallocated certain costs that were previously included in the Shared IT/Infrastructure and Corporate Costs (now referred to as Unallocated Costs) to each of the reportable segments. All prior periods presented have been recast to reflect these changes. We include a discussion of our recast financial performance by segment for the years endedDecember 31, 2019 and 2018 immediately after the discussion of financial performance for the years endedDecember 31, 2020 and 2019 below.
Segment Performance Review - 2020 compared to 2019
Commercial Government
(in millions) Industries Services Transportation Other Unallocated Costs Total
Year Ended Dec 31, 2020 Divestitures Other
Total Revenue $ 2,163 $ 1,281 $ 719 $ - $ - $ - $ 4,163
Segment profit (Loss) $ 150 $ 372 $ 82 $ - $ 9 $ (348) $ 265
Adjusted EBITDA $ 258 $ 397 $ 117 $ -
(294)
% of Total Revenue 52.0 % 30.8 % 17.2 % - % - % - % 100.0 % Adjusted EBITDA Margin 11.9 % 31.0 % 16.3 % - % - %
- % 11.5 %
Year EndedDec 31, 2019 Total Revenue$ 2,385 $ 1,263 $ 781$ 36 $ 2 $ -$ 4,467 Segment profit (Loss)$ 270 $ 279 $ 69 $ 1$ (1) $ (345)$ 273 Adjusted EBITDA$ 376 $ 311
$ 108 $ 1
(301)
% of Total Revenue 53.4 % 28.3 % 17.5 % 0.8 % - % - % 100.0 %
Adjusted EBITDA Margin 15.8 % 24.6 % 13.8 % 2.8 % (50.0) % - % 11.1 %
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Commercial Industries Segment
Revenue
Commercial Industries revenue for 2020 decreased, compared to the prior year, due to an estimated$158 million of negative COVID-19 impacts as well as prior year lost business. This pressure was partially offset by new business ramp. The COVID-19 impact is primarily due to the following year-over-year changes: 1) lower transaction processing volumes for clients within our BOS service offering, 2) reduced workers compensation claims and commercial healthcare claims processing in our Commercial Healthcare Solutions service offering, 3) reduced revenue from our HSA offering "BenefitWallet" (within our HRLS business) as a result of interest rate reductions, 4) slightly reduced call volumes within our CXM service offering across travel and retail clients, and 5) COVID-19 related delays of new business ramp across multiple clients and offerings.
Segment Profit and Adjusted EBITDA
Decreases in theCommercial Industries segment profit and adjusted EBITDA for 2020, compared to the prior year, were mainly driven by overall revenue declines, one-time items, certain employee costs and the adverse effects of the COVID-19 pandemic, partially offset by reductions from the cost savings program. Government Services Segment Revenue Government Services revenue for 2020 increased, compared to the prior year, primarily driven by an estimated$149 million of COVID-19 related benefit. These increases were partially offset by prior year contract losses. The COVID-19 benefit is largely driven by the following year-over-year changes: 1) increases in theSupplemental Nutrition Assistance Program (SNAP) volumes and Pandemic SNAP volumes, 2) an increase in the number of citizens to which we distribute unemployment insurance benefits, and 3) incremental additional unemployment insurance benefit distributions provided by the CARES Act.
Segment Profit and Adjusted EBITDA
Increases in the Government Services segment profit and adjusted EBITDA for 2020, compared to the prior year, were primarily driven by higher margin revenue mix due to COVID-19, the cost savings program and lower IT costs associated with contract losses. Transportation Segment Revenue Transportation revenue for 2020 decreased, compared to the prior year, primarily driven by an estimated$76 million of negative COVID-19 related volume impacts as well as lost business, partially offset by the ramp of new business. The COVID-19 related impacts were primarily driven by volume pressure in the Curbside Management Solutions and Roadway Charging & Management service offerings, as well as volume pressure and project delays in the Transit Solutions service offering.
Segment Profit and Adjusted EBITDA
Transportation segment profit and adjusted EBITDA for 2020 increased, compared to the prior year, primarily driven by the cost savings program and revenue mix.
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Table of Contents Other Revenue
Other revenue for 2020 decreased, compared to the prior year, driven mainly by the divestiture completed in early 2019.
Segment Profit (Loss) and Adjusted EBITDA
Increase in Other segment profit for 2020 compared to the prior year, was primarily due to the adjustment to the remaining California Medicaid Management Information System settlement liability of$7 million as a result of the contract expiration inMarch 2020 . This benefit was removed from adjusted EBITDA for segment reporting purposes due to its non-recurring nature.
Unallocated Costs
Improvements in adjusted EBITDA within our Unallocated Costs for 2020, compared to the prior year, were mainly driven by the efficiencies created by the cost reduction initiative, partially offset by an increase in costs incurred due to the effects of the COVID-19 pandemic and an increase in certain employee costs.
Segment Performance Review - 2019 compared to 2018
Commercial Government
(in millions) Industries Services Transportation Other Unallocated Costs Total
Year Ended December
31, 2019 Divestitures Other
Total Revenue $ 2,385 $ 1,263 $ 781 $ 36 $ 2 $ - $ 4,467
Segment profit (Loss) $ 270 $ 279 $ 69 $ 1 $ (1) $ (345) $ 273
Adjusted EBITDA $ 376 $ 311 $ 108 $ 1 $ (1) $ (301) $ 494
% of Total Revenue 53.4 % 28.3 % 17.4 % 0.8 % - % - % 100.0 %
Adjusted EBITDA
Margin 15.8 % 24.6 % 13.8 % 2.8 % (50.0) % - % 11.1 %
Year Ended December
31, 2018
Total Revenue $ 2,550 $ 1,351 $ 729 $ 752 $ 11 $ - $ 5,393
Segment profit (Loss) $ 346 $ 296 $ 61 $ 98 $ (4) $ (375) $ 422
Adjusted EBITDA $ 454 $ 328 $ 99 $ 105 $ (2) $ (344) $ 640
% of Total Revenue 47.3 % 25.1 % 13.5 % 13.9 % 0.2 % - % 100.0 %
Adjusted EBITDA
Margin 17.8 % 24.3 % 13.6 % 14.0 % (18.2) % - % 11.9 %
Commercial Industries Segment
Revenue
Commercial Industries revenue for 2019 decreased, compared to the prior year, primarily driven by contract losses, volume pressure, price pressure upon renewals, strategic exits and currency fluctuations. These losses were partially offset by revenue from new contracts.
Segment Profit and Adjusted EBITDA
Decreases in theCommercial Industries segment profit and adjusted EBITDA margin for 2019, compared to the prior year, were mainly driven by the overall revenue declines, partially offset by reductions in labor and real estate costs from our efficiency initiatives. CNDT 2020 Annual Report 44
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Table of Contents Government Services Segment Revenue
Government Services revenue for 2019 decreased, compared to the prior year, primarily driven by contract losses and pricing and scope changes associated with a large renewal. These declines were partially offset by ramp of new business.
Segment Profit and Adjusted EBITDA
Decreases in the Government Services segment profit and adjusted EBITDA margin for 2019, compared to the prior year, were mainly driven by lower revenue, partially offset by lower IT and delivery costs.
Transportation Segment
Revenue
Transportation revenue for 2019 increased, compared to the prior year, primarily driven by ramp of new business and volume increases.
Segment Profit and Adjusted EBITDA
Transportation segment profit and adjusted EBITDA margin for 2019 increased, compared to the prior year, mainly driven by increased revenue and reduced labor and real estate costs from our efficiency initiatives.
Other
Revenue
Other revenue for 2019 decreased, compared to the prior year, driven mainly by the divestitures completed in 2018 and 2019 and the run-off of our Student Loan Services business.
Segment Profit (Loss) and Adjusted EBITDA
Decreases in Other segment profit and adjusted EBITDA for 2019, compared to the prior year, were primarily due to divestitures completed in 2019 and 2018 and the run-off of our Student Loan Services business.
Unallocated Costs
Improvements in segment loss and adjusted EBITDA within our Unallocated Costs for 2019, compared to the prior year, were mainly due to reductions in IT and corporate overhead costs. Metrics Signings Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. TCV is the estimated total contractual revenue related to signed contracts, excluding the impact of divested business as required. For the year endedDecember 31, 2020 , the Company signed$1,934 million of new business, representing a 94% increase compared to the prior year. Renewal TCV for the year endedDecember 31, 2020 was$2,809 million , an increase of 26% compared to the prior year. CNDT 2020 Annual Report 45
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The amounts in the following table exclude divestitures.
Year Ended December 31, 2020 vs. 2019
(in millions) 2020 2019 $ Change % Change
New business TCV $ 1,934 $ 996 $ 938 94 %
Renewals TCV 2,809 2,230 579 26 %
Total Signings $ 4,743 $ 3,226 $ 1,517 47 %
New business annual recurring revenue (ARR)
signings(1) $ 353 $ 281 $ 72 26 %
New business non-recurring revenue (NRR)
signings(2) $ 255 $ 166 $ 89 54 %
___________
(1)New business ARR measures the revenue from recurring services provided to the
client for any new business signing. ARR represents the recurring services
provided to a customer with the opportunity for renewal at the end of the
contract term.
(2)New business NRR measures the non-recurring revenue for any new business
signing, including (i) signing value of any contract with term less than 12
months and (ii) signing value of project based revenue, not expected to continue
long term.
Total signings for 2020 increased, compared to the prior year, primarily due to
strong conversion of the pipeline as a result of centralizing the sales
organization, new sales leadership, top-grading and expanding of sales
headcount, new sales bidding processes, and a simplified go-to-market strategy,
among other initiatives.
Capital Resources and Liquidity
As ofDecember 31, 2020 and 2019, total cash and cash equivalents were$450 million (of which approximately$150 million was cash in foreign locations) and$496 million (of which approximately$124 million was cash in foreign locations), respectively. The Company also has a$750 million revolving line of credit for its various cash needs, of which$7 million has been utilized for letters of credit as ofDecember 31, 2020 . As ofDecember 31, 2020 , there were$1.5 billion outstanding borrowings under our Credit Agreement of which$82 million was due within one year. Refer to Note 12 - Debt to the Consolidated Financial Statements for additional debt information. InJanuary 2019 , we acquired Health Solution Plus, a software provider of healthcare payer administration solutions for a total base consideration of$90 million . This acquisition is part of theCommercial Industries segment. Refer to Note 5 - Business Acquisition to the Consolidated Financial Statements for additional information regarding this acquisition. InFebruary 2019 , we reached a settlement agreement and release with theState of Texas ("State") and theTexas Department of Health and Human Services , which was amended inMay 2019 ("Texas Agreement"). Pursuant to the terms of theTexas Agreement, the Company was required to pay the State$236 million , of which$118 million was paid in 2019 and the remaining$118 million paid inJanuary 2020 . Refer to Note 17 - Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding this litigation settlement.
Refer to the Capital Market Activity section below for additional information regarding our capital activity.
Cash Flow Analysis
The following summarizes our cash flows for the two years ended
Year Ended December 31, Change
(in millions) 2020 2019 2020 vs. 2019
Net cash provided by (used in) operating activities $ 161
29
Net cash provided by (used in) investing activities (134) (310) 176
Net cash provided by (used in) financing activities (74) (85) 11
Operating Activities
CNDT 2020 Annual Report
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The net improvement in cash flow from operating activities of
Investing Activities
The decrease in cash used in investing activities of$176 million , compared to the prior year, was primarily due to the HSP acquisition in 2019 and decreased spending for capital expenditures. Spending related to modernizing our IT infrastructure for both customer-facing and internal functions continued but was on a downward trajectory compared to the higher 2019 and 2018 levels.
Financing Activities
The decrease in cash used in financing activities for 2020, compared to the
prior year, was primarily due to lower tax payments related to stock
compensation of
Sales of Accounts Receivable
The net impact from the sales of accounts receivable on net cash provided by (used in) operating activities for the years endedDecember 31, 2020 , 2019 and 2018 was$(22) million ,$51 million and$23 million , respectively. The net impact from the sales of accounts receivable represents the difference between current and prior year fourth quarter accounts receivable sales adjusted for the effects of: (i) collections prior to the end of the year and (ii) currency.
Financial Instruments
Refer to Note 13 - Financial Instruments to the Consolidated Financial Statements for additional information.
Contractual Cash Obligations and Other Commercial Commitments and Contingencies
At
(in millions) 2021 2022 2023 2024 2025 Thereafter Total debt, including finance lease obligations(1)$ 90 $ 598 $ 804 $ 36 $ - $ - Interest on debt(2) 42 41 30 9 5 - Minimum operating lease commitments(3) 95 71 47 37 27 59 Estimated Purchase Commitments(4) 67 24 11 3 - - Total$ 294 $ 734 $ 892 $ 85 $ 32 $ 59 _______________ (1)Total debt represents principal debt and finance leases. Refer to Note 12 - Debt to the Consolidated Financial Statements for additional information regarding debt. (2)Refer to Note 12 - Debt in the Consolidated Financial Statements for additional information. (3)Refer to Note 8 - Leases to the Consolidated Financial Statements for additional information. (4)We enter other purchase commitments with vendors in the ordinary course of business, generally IT-related expenditures. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts. CNDT 2020 Annual Report 47
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Other Contingencies and Commitments
As more fully discussed in Note 17 - Contingencies and Litigation to the Consolidated Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates. Nonperformance under a contract including a guarantee, indemnification or claim could trigger an obligation of the Company. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our 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, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.
Off-Balance Sheet Arrangements
As ofDecember 31, 2020 , we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, refer to the preceding table for the Company's contractual cash obligations and other commercial commitments and Note 17 - Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding contingencies, guarantees and indemnifications. CNDT 2020 Annual Report 48
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