FORWARD-LOOKING STATEMENTS
From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K (Form 10-K), which are deemed to be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should”"aim," “should,” "continue to," and similar expressions, as they relate to us, are intended to identify forward-looking statements. In addition, all statements regarding the anticipated effects of the novel coronavirus, or COVID-19, pandemic and the responses thereto, including the pandemic’s impact on general economic and market conditions, as well as on our business, customers, and markets, results of operations and financial condition and anticipated actions to be taken by management to sustain our business during the economic uncertainty caused by the pandemic and related governmental and business actions, as well as other statements that are not strictly historical in nature, are forward looking. These statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expressed or implied herein as anticipated, believed, estimated, expected or intended or using other similar expressions.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Our actual results may vary materially from those expressed or implied in our forward-looking statements. These forward-looking statements are also subject to the significant continuing impact of the COVID-19 pandemic on our business, operations, financial results and financial condition, which is dependent on developments which are highly uncertain and cannot be predicted.
Important factors and uncertainties that could cause actual results to differ materially from those in our forward-looking statements include, but are not limited to: government appropriations and termination rights contained in our government contracts; our ability to renew commercial and government contracts, including contracts awarded through competitive bidding processes; our ability to recover capital and other investments in connection with our contracts; our ability to attract and retain necessary technical personnel and qualified subcontractors;reliance on third-party providers; our ability to deliver on our contractual obligations properly and on time; competitive pressures; our significant indebtedness; changes in interest in outsourced business process services; risk and impact of geopolitical events, natural disasters and other factors (such as pandemics, including coronavirus) in a particular country or region on our ability to obtain adequate pricing for our servicesworkforce, customers and to improve our cost structure;vendors; claims of infringement of third-party intellectual property rights; our ability to estimate the scope of work or the costs of performance in our contracts; the loss of key senior management and our ability to attract and retain necessary technical personnel and qualified subcontractors; increases in the cost of telephone and data services or significant interruptions in such services; our failure to develop new service offerings and protect our intellectual property rights; our ability to modernize our information technology infrastructure and consolidate data centers; the failure to comply with laws relating to individually identifiable information and personal health information andinformation; the failure to comply with laws relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions; breaches of our information systems or security systems andor any service interruptions; our ability to estimate the scopecomply with data security standards; changes in tax and other laws and regulations; risk and impact of work or the costs of performance inpotential goodwill and other asset impairments; our contracts;significant indebtedness; our ability to obtain adequate pricing for our services and to improve our cost structure; our ability to collect our receivables, including those for unbilled services; a decline in revenues from, or a loss of, or a reduction in business from or failure of significant clients; fluctuations in our non-recurring revenue; our failure to maintain a satisfactory credit rating; our ability to attract and retain key employees; increases in the cost of telephone and data services or significant interruptions in such services; our failure to develop new service offerings; our ability to receive dividends or other payments from our subsidiaries; changesdevelopments in taxvarious contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and other lawsproceedings; conditions abroad, including local economics, political environments, fluctuating foreign currencies and regulations;shifting regulatory schemes; changes in government regulation and economic, strategic, political and social conditions; changes in U.S. GAAP or other applicable accounting policies;the volatility of our stock price and the risk of litigation following a decline in the price of our stock; the impact of the ongoing COVID-19 pandemic; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Any forward-looking statements made by us speak only as of the date on which they are made. We do not intendare under no
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obligation to, and expressly disclaim any obligation to, update theseor alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by law.
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CONDUENT INCORPORATED
FORM 10-K
December 31, 20172020
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS
In this Annual Report on Form 10-K, unless the content otherwise dictates, "Conduent", the "Company", "we" or "our" mean Conduent Inc.Incorporated and its consolidated subsidiaries.
Our Business
As one of the largest business process services companies in the world, we deliver mission-critical services and solutions on behalf of businesses and governments – creating exceptional outcomes for our 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, our 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 us every day to manage their business processes and essential interactions with their end-users.
With roots as one of the original pioneers in global business process outsourcing, we bring deep and diversified expertise across a broad range of industry segments. Our commercial portfolio includes leading solutions in attractive markets such as end-user customer experience management, transaction processing services, healthcare and human resource and learning services. For example, we are a leading provider of medical bill review. In 2020, we administered bill review for 50% of the workers compensation medical claims in the U.S resulting in $16 billion of savings on behalf of our clients.
We serve a vast range of the public sector including market leading transportation and government solutions including payments and eligibility. For example, our systems process over 55% of Supplemental Nutrition Assistance Program (SNAP) payments on behalf of government entities.
We create value for our clients through efficient global service delivery combined with a personalized and seamless experience for the end-user. We apply our expertise, technology and innovation to continually modernize our offerings for improved customer and constituent satisfaction and loyalty, increased process efficiency and rapid response to changing market dynamics.
With approximately 63,000 associates globally as of December 31, 2020, we provide differentiated services to medium and large businesses and governments around the world.
Conduent is a leading provider of business process services with expertiseNew York corporation, organized 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 interactions2016. Our common stock began trading on a massive scale that improve end-user experiences.
Our vision is to become the leading business services partner of choice for businesses and governments globally. Through our dedicated associates, we deliver mission-critical services and solutions on behalf of businesses and governments, creating valuable outcomes for our Commercialclients and Public Sector clients by applying our expertise, technologythe millions of people who count on us. To achieve this mission and innovation to help them drive customerpurpose, we are focused on delivering outcomes simultaneously across three dimensions: Growth, Efficiency and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics.
Quality. Our strategy is to drive portfolio focus, operational discipline, sales and delivery excellence and innovation,
We have identified specific execution strategies across Growth, Efficiency and Quality.
Growth: Our opportunity for growth comes from understanding our clients’ businesses, strengthening our relationships, and driving valuable outcomes for our clients that enable them to reduce costs, improve efficiencies and grow their businesses. To capitalize on the growth opportunities, we are focused on the following strategies:
•Sales Performance Optimization: In 2019, we centralized sales activities under a Chief Revenue Officer and have been making steady investments in sales training and process improvements. We continue to
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improve client responsiveness and increase sales coverage, including in international markets. We are providing our sales team with regular training tailored for their roles, streamlined processes, and implemented systems to equip them with modern tools that enable them to perform their jobs more efficiently and effectively. In 2020, we began efforts to enhance our delivery by bringing standardization in core services, creating efficiencies through automation and optimizing our cost structure by shifting to a shared services model. The dedication and expertise of our employees have resulted in Conduent serving a majority of Fortune 100 companies, including:
•17 of top 20 health plans,
•6 of top 10 pharma companies,
•6 of top 10 automakers, and
•9 of top 10 U.S. banks.
•Cross-Sell and Bundling Opportunities: Our sales organization is seeking to exploit cross-selling opportunities across our roster of clients, leveraging our portfolio of businesses thatmarket-leading services and solutions, including customer care, finance and accounting services and human resources and learning services. Specific sales enablement training, marketing campaigns and sales incentive structures are being created to enable this initiative.
•Offering Development: We have augmented our portfolio of services and solutions with innovative technology capabilities, including data analytics, robotic process automation (RPA) tools and machine learning capabilities, to create differentiated, high-value services for our clients and penetrate attractive market segments.
As we improved our quality and efficiency, our clients have renewed contracts with us and given us more work in adjacent service lines, and we’ve gained new clients who have put their trust in us. We have also had a significant improvement in our client Net Promotor scores for the second year in a row. Driving our clients’ success has fueled our success. We are measuring more immediate success in “Growth” through revenue retention and new business signings, among other metrics. These changes have already started bearing fruit with new business signings increasing by 94% in 2020 compared to 2019.
Efficiency: We continue to find ways to reduce costs and deliver more effectively via increased efficiencies. We have simplified and standardized our operating model by removing redundant management layers and implementing more robust processes to enable faster decision-making and greater transparency. In addition, we aim to unlock further efficiencies through the following strategies:
•Automation: We will continue to invest in embedding automation capabilities into operations, including document processing and intelligent virtual assistant customer care tools. Artificial intelligence and machine learning algorithms will complement RPA tools by improving processes through pattern recognition. Additionally, we are exploiting synergies from sharing and coordinating automation capabilities across our various lines of business.
•Technology Consolidation: We are identifying and rationalizing duplicative technology systems across our lines of business. Centralizing technology systems will drive economies of scale, amplify the impact of investments, and will create consistent, resilient service delivery.
•Delivery Optimization: We are exploring several delivery optimization opportunities such as identifying common activities across our businesses and delivering them via shared service models, exploiting new staffing models including work for home and flexible “gig worker” models, and optimizing our geographic footprint.
We responded with agility to clients’ shifting needs and effectively targeting attractive growth areasreceived positive client feedback for our services and proactivity throughout the COVID-19 pandemic. We are measuring success in a rapidly evolving business process services industry.“Efficiency” by associate retention and improved adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) margin, among other metrics.
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Quality: Our clients count on consistent, high-quality service delivery. We have takenmade significant actionsprogress in reducing incidents, improving operational stability, and significantly boosting client confidence and satisfaction by focusing on the following strategies:
•Proactive, Real time Monitoring of Applications and Service Performance: We are investing in artificial intelligence and machine learning technologies to improve our profitabilityproactively monitor and drive growth withprevent incidents. In 2020, we opened a state-of-the-art global IT command center in Sandy, UT to deliver more focused portfolio of services.
•Data Center Optimization: We believeare standardizing our technology footprint to improve performance and lower costs. As part of this, operating structure will allow uswe have launched a data center optimization program to better integrateconsolidate our multiple data centers into a select few.
•Improve End User Experience: We are improving user interface/user experience across our offerings by introducing self-service tools, launching mobile apps and tailor business solutions for our customers.
leveraging analytics to create deeper insights.Investments Strategy: To achieve our business goals, we will invest in a disciplined manner, focused on allocating capital and investing to meet the needs of our clients and support our pivot to growth. Our balanced investment approach falls into three broad categories:
•Opportunities to optimize, where we have a competitive advantage.
•Opportunities to enhance, where we have strong client relationships and faster processing times.
a long history of servicing the markets we operate in, legacy technology that needs to be refreshed or modernized. Examples such as benefit management services in the government sector for healthcare, unemployment insurance and child support fit into this category.Our Market Opportunity
We estimate our addressable market size in the global business process service industry at approximately $243to be over $200 billion in 2017,2020, according to third partythird-party industry reports, and we arereports. We consider ourselves to be a leader across several segments of this large, diverse and growing market. Providingmarket by providing business process services is complex and multi-faceted with services that spanspanning many industries.
Ongoing competitive pressures and increasing demand for further productivity gains have motivated businesses and government organizations to outsource elements of their day-to-day operations to accelerate performance and innovation. As a result, our clients have become more focused on their core businesses and the range of outsourced activities has expanded greatly.expanded. Increasing globalization has also required many companies to optimize cost structures to retain competitiveness and business process services have become a key component of this strategy.
The ongoing shift to next-generation software and automation technologies is driving greater demand for, and expectation of, efficiency and personalization by the constituents and customers of the businesses and governments we serve. Addressing these business andBusiness process services that streamline operational challenges is necessary for business process
meaningfully enhance productivity for businesses and governments and improve satisfaction for their constituentscustomers and constituents.
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Segments
Commercial Industries: Our Commercial Industries and Public Sector.
Government Services:Our Public SectorGovernment Services segment provides government-centric business process services and subject matter experts to U.S. federal, state, and local and foreign governments.
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. Government Services segment revenue for 2020 was $1.3 billion, representing 31% of our total revenues.We present segment financial information in Note 23 – Segment Reporting to our Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, which is incorporated herein by reference. The discussion below highlights our segment revenues for the year ended December 31, 2017.
Our Service Offerings
Commercial Industries
Our solutions and services include Customer Experience Management (CXM), Business Operations Solutions (BOS), Commercial Industries segment is our largest segment, with $3.5 billion in revenues in 2017, representing 59%Healthcare Solutions and Human Resources & Learning Services (HRLS).
•Customer Experience Management
◦We deliver a full range of total revenues. Across the Commercial Industries segment,customer contact services, including customer care, technical support, loyalty management, and outbound and inbound sales. Through multi-channel communications, automation, and analytics, and labor efficiencies, we deliver end-to-end business-to-business and business-to-customer services that enablehelp our clients to optimize their key processes.reduce costs, enable scale and drive revenue growth and efficiencies. We serve marquee clients across multiple sectors including financial services, health & life sciences, manufacturing & automotive, aerospace & defense, consumer goods, retail, technology & telecom, travel, transportation, and hospitality sectors. In 2020, we handled 196 million contact center interactions. The CXM business generally generates income on a per call, per call center employee, or per percentage of sales made basis.
•Business Operations Solutions
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◦In our BOS business, we help our clients to transform business processes by automating and streamlining mission-critical operations through our deep industry experience and the latest technology solutions, to drive efficiencies, improve security and enable revenue growth, while enhancing the end-user experience. Our multi-industry competencies include Customer Care, Human Resource Management, Worker’s Compensation processsolutions span customer communications, document & data management, payments processing, and finance, accounting, and procurement. We generate revenue in a variety of ways within this business. Within the customer communication solution, our print and mail service fee is a blended rate per impression or itemized as a service and supplies rate. We also charge to create and send electronic forms of communication, or for postage services, hosting web portals, and for data storage for future retrieval for compliance reasons. Within the document & data management solution we generally generate revenue based on number of transactions completed. A transaction can be the handling of an envelope, a document, a page, or a piece of paper or can be billed based on time spent working on behalf of our clients. Within the Finance, Accounting, and Procurement (FAP) solution, we generate revenue by charging clients for Finance, Accounting Workforce Learning Services& Procurement services rendered based on various methods including fixed price per employee, fixed price for all services rendered, variable price based on transactions processed, outcome based pricing based on achieving specific targeted performance and Legal Business Services. Thesea hybrid of these pricing methods.
◦In the BOS business, we also offer a range of Banking Operations solutions including lockbox management, check processing, and loan processing. For these services, are complementedwe generate revenue by innovative industry-specific services such ascollections charges per productive hour of employees time, licensing fees for our Loan Manager platform, charges by the number of loans received on the Blitzdocs platform (mortgage processing) and by charging a fee for each check processed, among others.
•Commercial Healthcare Solutions
◦On behalf of the healthcare industry, we deliver administration, clinical support, and medical management solutions across the health ecosystem to reduce costs, increase compliance and enhance utilization, while improving health outcomes and experience for members and patients. Our solutions span: trials, sales, access, and adherence to pharmaceutical clients; case management, performance management and patient safety for hospital clients; medical bill review, claims processing, care integration, subrogation and payment integrity solutions to clients in the Healthcare payer space,managed care companies; and quality analytics, workflow solutionsworkers compensation medical bill review, mailroom/data capture and software adoptionmedical management services to Healthcare providerclaims payers and third-party administrators. Through our solutions provided to pharmaceutical clients, personalized product information for clients in the Automotive industry, digitized source-to-pay solutions for clients in the Manufacturing industry,we generate revenue generationeither based on a per employee, per transaction basis or a per resource per hour basis. Through our workers compensation and clinicalmedical bill review services, for clients in the Pharmaceuticalwe generate revenue on a per click and Life Sciences industries, customer experience and marketing services for clients in the Retail industry, and mortgage and consumer loan processing for clients in the Financial Services industry.
•Human Resources and Learning Services
◦We provide services to help our clients support their employees at all stages of employment from on-boarding through retirement. Our solutions span Health Savings Account Solutions, Benefits Solutions, HR & Payroll Solutions, and Learning Solutions. On behalf of global organizations and governments, we deliver mission-critical, technology-enabled HR services and solutions that improve business processes across the employee journey to maximize business performance, while increasing employee satisfaction, engagement and overall well-being. These solutions span health, benefits, payroll, onboarding and learning administration, annual enrollment, wealth & retirement, HR, talent, and workforce management. Depending on the solution, we generate revenue in a variety of ways. For our Health Savings Account (HSA) Solutions business, we generate revenue via account fees, interchange fees on debit cards, and interest-related revenues as a result of balance fees from depository banks who hold cash deposited into the Savings Account business.
◦As of December 31, 2020, we managed approximately 1 million active HSAs with $2.7 billion of assets under management. In orderaddition to managing HSAs, we manage Flexible Savings Accounts and other Notional Accounts on behalf of corporations providing incremental benefits to their employees. Within our Benefits Solutions, we principally generate revenue based on the number of employees and retirees we support, as well as, by transaction-based pricing for transactions such as qualified domestic relations orders, Consolidated Omnibus Budget Reconciliation Act (COBRA) and Affordable Care Act
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(ACA) administration. Within our HR & Payroll Solutions, we generate revenue principally per client’s employee per period (month / year) pricing, with banding to address periodic variations in client employee headcount. Within our Learning Solutions, we generate revenue principally by transaction-based pricing per unit of production along with fixed monthly governance fees.
Government Services
Our Government solutions and services include Government Healthcare Solutions and Government Service Solutions.
•Government Healthcare Solutions
◦We provide targetedmedical management and fiscal agent care management services, eligibility and enrollment services and support to ourMedicaid programs and federally funded U.S. government clients, our Public Sector segment is organized into several primary businesses:
•Government Service Solutions
◦We also offer a broad set of child support services predominately to 36State Disbursement Units (SDUs), including processing and distributing payment, child support payment cards, childcare credentialing and case management, among others, to help states comply with federal standards. Within the child support solution, the way we generate revenue varies by state, but it is generally either per financial transaction, per call, fixed price, or for development.
Transportation
On behalf of government agencies and authorities in the US Treasury with a diversified portfolio consisting of 147 differentglobal transportation industry, we deliver fare collection, violation management, notification, mobility and payment programs nationwide.
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.•Roadway Charging and Management Services
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congestion management services to Medicaid programs and federally-funded U.S. government healthcare programs in 24 states, Puerto Rico and the District of Columbia. Our services include a range of innovative solutions such as Medicaid management fiscal agent, pharmacy benefits management and clinical program management. These services help states optimize their costs by streamlining access to care and improve patient health outcomes through population health management and help families in need by improving beneficiary support.
•Transit Solutions
•For today’s train, bus, subway, metro or other transit travelers, we aim to make journeys more personalized and convenient while increasing capacity and profitability for authorities and agencies. We have subject matter experts who are responsiblecombine the latest in fare collection and intelligent mobility so that clients can get the added efficiency of having a single point of contact for implementing eachall their transit solutions. Within transit we primarily generate revenue via implementation of theseend projects (hardware and software, maintenance services, delivering service excellence to clients, ensuring best practices to improve cost competitiveness, innovatingrepair and sale of spare parts), and the building and operation of fare collection systems.
•Curbside Management Solutions
•We deliver intelligent curbside management systems that simplify parking programs and deliver convenient and hassle-free experience for drivers. Our curbside solutions include citation and permit administration, parking enforcement, and curbside demand management. In 2020, we processed over 6.3 million payments and collected over $525 million annually for citations and delinquent revenue collections. We generate revenue based on violations issued, payment processing transactions, collections activities or a fixed fee for our next generation offeringsservice.
•Public Safety Solutions
•Public safety is a priority in every community, especially as budgets shrink and supporting worldwide sales.
◦Although a small part of public sector services includes public assistance program administration, pension administration, records management, disease management and software offerings in
Our Competitive Strengths
We possess a number ofcertain competitive strengths that distinguish us from our competitors, including:
Leadership in attractive growth markets. markets – We are a leaderlarge player in business process services.services delivering exceptional outcomes for our clients at an unparalleled scale. Our clients continue to outsource key business processes to improve efficiencies and to accelerate performance and innovation.digital transformation. Additionally, clients are moving beyond services for back-office functions in order to drive customer satisfaction and loyalty, as well as productivity and efficiency.loyalty. The increase in globalization and cost competition continues to accelerate, forcing companies to seek ways to stay ahead of the competition. These factors, along with clients and their customers demanding more personalized, seamless and secure solutions, are collectively driving the ongoing shift to next-generation softwaresolutions and automation technologies.services. Through our portfolio of services and solutions, we have reached significant scale in our interactions including:
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maintaining strict safety requirements. Electronic toll collection, public transit and parking all represent key growth drivers as governments at all levels increasingly focus on transportation infrastructure. We maintain approximately 54% market share position in electronic toll collection in the United States based on toll revenues collected through our systems in 2017. We are also one of the largest U.S.-based commercial vehicle operations service providers in the United States with approximately 51% market share based on 2017 revenues, and we are an award-winning innovator in parking management.
Global delivery expertise.expertise – Our scale and global delivery network enables us to deliver our proprietary technology, differentiated service offerings and service capabilities expertly to clients around the world. We have operations in 22 countries including India, Philippines, Jamaica, Guatemala, Mexico, Romania, Dominican Republic and several locations within the United States, giving our customers the option for "onshore", "nearshore" or "offshore" outsourced business process services. This global delivery model enables us to leverage lower-cost production locations, consistent methodologies and processes, time zone advantages and business continuity plans. As of December 31, 2017,2020, 51% of our employee location mix was approximately 48%employees were located in North America, 20%high cost countries and 49% were located in Latin America / Caribbean, 22% in Asia Pacific and 10% in Europe / Middle East / Africa.low cost countries.
Differentiated suite of multi-industry service offerings at scale. scale – We manage transaction-intensive processes and work directly with end-users to meet their needs often in real-time. We are unique in our ability to offer our clients these business process services on a large scale and with high quality. Additionally, we are able to leverage our multi-industrycross-industry services to bring the same scale and quality to our portfolio of industry-specific service offerings, such as healthcare claims management, employee benefits management and public transit fare collection.
Competition
Although we encounter competition in all areas of our portfolio, we lead acrossare a leader in many areas of our principal businesses.categories. We compete on the basis of technology, performance, price, quality, reliability, reputation, price, and customer service
and support. In the current political environment in the U.S. and other territories, we alsoWe consider our "onshore", “near shore” and “offshore” delivery capacitycapabilities to be a competitive advantage. We participate in a highly competitive and rapidly evolving market, driven by changes in industry standards and demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. Our competitors include:
•Large multinational service providers such as CGI Group, Accenture, Aon Hewitt, Cognizant, Hewlett-Packard Enterprise, IBM, TeletechTTEC and Teleperformance;
•Traditional Business Process Outsourcingbusiness process outsourcing companies such as Genpact, ELXEXL Services Exela Technologies and WNS Global Services;Exela
•Healthcare-focused IT and service solutions providers such as Cerner, Optum and Maximus;
•HSA administrators such as Health Equity, HSA Bank and WexHealth;
•U.S. Federal focused government services such as CACI International and DXC Technology;
•Transportation multi-nationals such as Roper/Transcore,TransCore, Cubic, Kapsch and Kaptsh;Verra Mobility; and
•Smaller niche business processing service providers and in-house departments that perform functions that could be outsourced to us.outsourced.
Sales and Marketing
We market and sell our business process solutions and services to both potential and existing clients through our worldwideglobal sales force and our business development team.teams. Additionally, we have dedicated “solution architects” who work with clients to better understand their situationbusiness requirements and to develop a custom-tailored solutionsolutions to meet their unique needs. Our clients include commercial businesses of many sizes and industries as well as public sector enterprises.
Our salessolutions help solve clients' business issues and marketing strategy is to go to market by industry to deliver key industry-specific and multi-industry
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extended selling cycles where our deep domain and ourindustry expertise in specific industries is critical to winning new business.
We provide services globally and we have a diversified geographic delivery network, including a significant presence within the U.S. In 2017, approximately 12% of our revenues were generated by clients outside the United States. In 2017, our revenues by geography were as follows: $5,303 million in the United States (88% of total revenues), $538 million in Europe (9% of total revenues) and $181 million from the rest of the world (3% of total revenues). We present geographical information in Note 2 – Segment Reporting to our Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, which is incorporated herein by reference.
Intellectual Property
Our general policy is to seek patent protection for those inventions likely to be incorporated into our products and services or where obtaining such proprietary rights will improve our competitive position. We own approximately 1,0241,020 patents and pending applications. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. These patents expire at various dates, generally 20 years from their original filing dates. While we believe that our portfolio of patents and applications has value, in general, no single patent is essential to our business or any individual segment. In addition, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages.
Our business relies on software provided to an approximately equal extent, by both internal development and external sourcing to deliver our services in our businesses.services. With respect to internally developed software, we claim copyright on all such software, registering works which may be accessible to third parties. In addition, we rely on maintaining source code confidentiality to assure our market competitiveness. With respect to externally sourced software, we rely on contracts assuring our continued access for our business usage.
In the United States, we own 13262 registered trademarks which are either registered or applied for, reflecting the many businesses we participate in. These trademarks may have a perpetual life, subject to renewal every 10 years and may be subject to cancellation or invalidation based on certain use requirements and third-party challenges, or on other grounds. We vigorously enforce and protect our trademarks.
People and Culture
Headcount
We draw on the businessskills, expertise, and technical expertiseexperience of our talented and diverse global workforce to provide our clientsdeliver mission-critical services and solutions that drive exceptional client outcomes. We have approximately 63,000 associates in 22 countries working towards a common vision and purpose, with high-quality services. Our business leaders bring a strong diversity of experience in our industry and a track record of successful performance and execution.
We draw strength from the diversity of our global workforce and Talentwe believe that creating an inclusive culture where all associates can bring their authentic selves to work creates value for all our stakeholders.
Conduent’s diversity and inclusion efforts are central in creating an engaging culture for all associates, providing a competitive advantage in serving our clients, and growing our business. We furthered our commitment to D&I in several ways over the past year including naming a Global Head of Diversity and Inclusion, Walter Frye, reporting directly to our Chief Executive Officer. Mr. Frye, who in partnership with leaders and functions across our global locations, will lead our efforts to launch new strategies that will enhance D&I practices and capabilities. We also relaunched seven Employee Impact Groups to engage our associates, and live our core value of being open and inclusive. As of December 31, 2020, the percentage of females in our global workforce exceeds gender parity.
Employee Learning & Development
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for satisfaction, skill improvement and application of learning on the job. We also ensure that our employees complete regulatory and compliance training on topics required based on their role and geography.
COVID-19
Throughout the Coronavirus (or COVID-19) pandemic, the Conduent team has continued to incorporating learning into day-to-day work.provide critical and best-in-class services to our clients and their end users, while ensuring the health and safety of our greatest asset, our associates.
We have a strong performance management system in place that requires allbeen extremely focused on creating the safest possible working environments for our associates. We demonstrated our resiliency by quickly enabling approximately 75% of our employees to engagework from home through improved digital solutions. We implemented stringent safety protocols at all our operational sites, including frequently and thoroughly cleaning all facilities, modifying our workspaces to allow for physical distancing, mandating face coverings, providing personal protective equipment (PPE) to associates, requiring pre-entry daily health screening, and leveraging Maven, our proprietary platform, for case management and contact tracing. We have continued taking steps to connect our associates with resources that support their managers on goal-settinghealth and performancewell-being. Conduent associates have access to several mental health and well-being resources, including free monthly webinars through our benefits provider. We also revised our time off policies to provide our associates more options to take time off for COVID-19 related sickness or hardships. The feedback enabling personal and professional development. There isfrom our associates throughout the pandemic has been very positive, especially in terms of our efforts to provide a strong emphasis on mentorship and coaching, both formal and informal, to help employees get to the next level in their careers. We enable this by developing management capability for our front line leaders to ensure they are able to coach and mentor their teams and engage in constructive and continuous two-way dialogue.safe work environment.
Corporate Ethics
We operate according to our ethicsEthics and compliance program,Compliance Program (Program), which is focused on sustaining an ethical culture and designed to meet general governance and specific industry, regulatory, and regulatory requirements with a focuslegal requirements. The Program is based on our core values, cultureincluding personal accountability, and performance with integrity. Conduent has a business ethics program, which is overseen by the business ethics office, and a codeConduent’s Ethics Office.
Conduent’s Code of business conductBusiness Conduct (Code), which serves as is the foundation of our business ethics program. The Code makes clear Conduent’s expectations for ethical leadership, performance with integrity and compliance with company policies and the law. In addition, theProgram. Our Code embodies and reinforces Conduent’s commitment to the highest standards of integrity and helps employees resolvesets forth our expectations for ethical leadership, job performance, and compliance with the Code and Company policies. It is designed to help associates recognize ethics and compliance concerns consistentissues before they arise and to deal appropriately with operating principles and legal and policy controls. In addition, as issues that occur.
Conduent employees,Finance Employees are additionally required to act in accordance with our employeessupplemental Finance Code of Conduct. Our associates are required to complete annual business ethics training annually and wetraining. Conduent’s Ethics Office periodically solicit theirsolicits associate input to gauge the state of Conduent’sour ethical culture and help identify areas for improvement.continuing improvements.
Our directors must act in accordance with our Code of Business Conduct and Ethics for Members of the Board; our principal executive officer, principal financial officer and principal accounting officer, among others, must act in accordance with our Finance Code of Conduct; and all of our executives and employees must act in accordance with our Code of Business Conduct. Each of these codes of conduct can be accessed through our website at www.conduent.com/corporate-governance.corporate-governance. They are also available to any shareholder who requests them in writing addressed to Conduent Incorporated, 100 Campus Drive Suite 200, Florham Park, NJ 07932, Attention: Corporate Secretary. We will disclose any future amendments to, or waivers from, provisions of our Code of Business Conduct and Ethics for members of the Board and, our Code of Business Conduct and our Finance Code of Conduct for our officers on our website as promptly as practicable, and consistent with the requirements of applicable SECU.S. Securities and NYSEExchange Commission (SEC) and NASDAQ rules.
Seasonality
Our revenues can be affected by various factors such as our clients’ demand patternpatterns for our services. These factors have historically resulted in higher revenuesservices, which includes peak windows for benefit enrollment, new product launches by clients, and profits in the fourth quarter.busy retail and travel seasons.
www.conduent.com. In the Investor Information section of our Internet website, you will find our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Proxy Statements and any amendments to these reports.reports and statements. We make these documents available free of charge as soon as we can after we have filed them with, or furnished them to, the U.S. SecuritiesSEC.
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The SEC maintains an internet address (www.sec.gov) that contains reports, proxy and Exchange Commission (SEC).information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Form 10-K is not incorporated by reference in this Form 10-K unless expressly noted.
The following is www.conduent.com.a list of the executive officers of Conduent as of February 24, 2021.
Each officer is elected to hold office until the meeting of the Board of Directors held on the day of the next annual meeting of shareholders, subject to the provisions of our by-laws.
| Name | Age | Present Position | Year Appointed to Present Position | Conduent Officer Since | ||||||||||||||||||||||
| Clifford Skelton* | 65 | Chief Executive Officer | 2019 | 2019 | ||||||||||||||||||||||
| Mark Brewer | 56 | Executive Vice President, Transportation & Head of Enterprise Accounts | 2020 | 2019 | ||||||||||||||||||||||
| Louis Keyes | 53 | Executive Vice President, Chief Revenue Officer | 2020 | 2020 | ||||||||||||||||||||||
| Michael Krawitz | 51 | Executive Vice President, General Counsel & Secretary | 2019 | 2019 | ||||||||||||||||||||||
| Mark Prout | 57 | Executive Vice President, Chief Information Officer | 2019 | 2020 | ||||||||||||||||||||||
| Brian J. Webb-Walsh | 45 | Executive Vice President & Chief Financial Officer | 2017 | 2017 | ||||||||||||||||||||||
| Stephen Wood | 54 | Vice President, Corporate Controller | 2020 | 2020 | ||||||||||||||||||||||
_____________________________
*Member of Conduent Board of Directors
Each of the officers named above has been an officer or an executive of Conduent or its subsidiaries for less than five years. As of February 24, 2021, there are no family relationships among any of the executive officers named above and any of our directors.
Mr. Skelton was appointed Chief Operating Officer of Conduent in June 2019 and Chief Executive Officer of Conduent in August 2019. He served as President of Fiserv Output Solutions from March 2017 to June 2019. Prior to that, Mr. Skelton was the Group President and Chief Information Officer at Fiserv from April 2012 until March 2017. Mr. Skelton also held a variety of leadership roles at companies such as Ally Financial (formerly General Motors Acceptance Corporation) and Bank of America. Mr. Skelton is a former Navy fighter pilot and served in the Navy for over 20 years.
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Mr. Brewer joined Conduent as Chief Operating Officer Transportation in June 2019 and was appointed Executive Vice President and Global Head of Public Sector in November 2019. He became Executive Vice President, Transportation & Head of Enterprise Accounts in October 2020. Prior to joining Conduent, he served as Senior Vice President and Managing Director of Diebold Nixdorf from 2018 to 2019. Prior to that Mr. Brewer was Global Vice President for DXC’s Technology, Enterprise Application and Cloud Businesses from 2016 to 2018. He also held a variety of leadership roles at IBM Corporation for over 20 years, in Europe, Asia and the Americas.
Mr. Keyes joined Conduent as Global Head of Sales in September 2019. He was appointed Executive Vice President, Chief Revenue Officer in December 2020. Prior to joining Conduent, he served as Executive Vice President, Chief Sales Officer at York Risk Services from October 2017 to September 2019. Prior to York Risk Services, he was Senior Vice President at Fiserv Inc. between 2009 and 2017 where he led Enterprise Accounts and large sales teams. Mr. Keyes has also held senior executive leadership roles at Hewlett-Packard Enterprise Services and Electronic Data Systems Corporation.
Mr. Michael Krawitz has served as Executive Vice President, General Counsel and Secretary since November 2019. Prior to joining Conduent, from June 2015 to November, 2019, Mr. Krawitz was Executive Vice President, General Counsel and Corporate Secretary of insurance services firm York Risk Services Group, a portfolio company of Onex Corp. From 2014 to 2015, he was Chief Legal Officer of Veriteq Corp., a biotech company. From 1999 to 2014, Mr. Krawitz held leadership roles in public and private companies in the technology and finance sectors. Mr. Krawitz began his career at Fried Frank and was educated at Cornell University and Harvard Law School.
Mr. Prout joined Conduent as Head of Information Technology in June of 2019. He was appointed Executive Vice President, Chief Information Officer in September 2019. Prior to joining Conduent, between 2005 and 2019, Mr. Prout served as Chief Technology Officer and held several IT leadership positions at Fiserv. Prior to Fiserv, he served as CIO of Cendian Corporation. Mr. Prout has also held various leadership positions at United Parcel Service.
Mr. Webb-Walsh has served as the Chief Financial Officer of Conduent since 2017. He served as the Chief Financial Officer of Xerox Services between January 2016 and December 2016. Prior to this, Mr. Webb-Walsh was Senior Vice President of Finance for the Government Healthcare Group and the Platform Development and Systems Integration Group of Xerox Services. Mr. Webb-Walsh joined Xerox Corporation in 1997 and held a variety of leadership positions there.
Mr. Wood has served in his current role as the Company’s Corporate Controller since August 2020 and was designated as its Principal Accounting Officer effective December 2020. Prior to joining the Company, Mr. Wood spent 15 years at Fiserv in finance and accounting leadership positions. From December 2016 to May 2020, Mr. Wood served as Vice President & Chief Financial Officer of Fiserv Output Solutions, from March 2009 to December 2016, Mr. Wood served as Vice President & Controller over a number of different operating groups and from January 2005 to March 2009 Mr. Wood led International Finance & Accounting operations. Mr. Wood is a Chartered Global Management Accountant with an MBA with distinction from Warwick Business School.
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ITEM 1A. RISK FACTORS
Business and Operational Risks
Our government contracts are subject to appropriation of funds, termination rights, audits and investigations, which, if exercised,
could negatively impact our reputation and reduce our ability to compete for new contracts.
A significant portion of our revenues is derived from contracts with U.S. federal, state and local governments and their agencies, and some of our revenues are derived from contracts with foreign governments and their agencies. Government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, failures to enact appropriation legislation (e.g., a government "shut-down"), government spending reductions (e.g., Congressional sequestration of funds under the Budget Control Act of 2011) or other debt or funding constraints, such as those recently experiencedhave resulted in, and in the United States and Europe,future could result in, lower governmental sales and in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination. Additionally, if the government discovers what it considers to be improper or illegal activities or contractual non-compliance (including improper billing)billing or non-compliant performance of contract requirements), we may be subject to various civil and criminal penalties and administrative sanctions, which has occurred in the past and may in the future include termination of contracts, forfeiture of profits, suspension of payments, contractual service penalties, fines and suspensions or debarment from doing business with the government. Any resulting penalties or sanctions could materially adversely affect our results of operations and financial condition. Moreover, government contracts are generally subject to audits and investigations by government agencies. If the government finds that we inappropriately charged any costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government. Further, the negative publicity that could arise from any such penalties, sanctions or findings in such audits or investigations could have an adverse effect on our reputation in the industry and reduce our ability to compete for new contracts and could materially adversely affect our results of operations and financial condition.
We derive significant revenue and profit from commercial and government contracts awarded through competitive bidding processes, including renewals, which can impose substantial costs on us, and we will not achieve revenue and profit objectives if we fail to accurately and effectively bid on such projects.
Many of these contracts are extremely complex and require the investment of significant resources in order to prepare accurate bids and proposals. Competitive bidding imposes substantial costs and presents a number of risks, including: (i) the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us; (ii) the need to estimate accurately the resources and costs that will be required to implement and service any contracts we are awarded, sometimes in advance of the final determination of their full scope and design; (iii) the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding and the risk that such protests or challenges could result in the requirement to resubmit bids and in the termination, reduction or modification of the awarded contracts; and (iv) the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. If our competitors protest or challenge an award made to us on a government contract, the costs to defend such an award may be significant and could involve subsequent litigation that could take years to resolve.
Our ability to recover capital and other investments in connection with our contracts is subject to risk.
In order to attract and retain large outsourcing contracts, we sometimes make significant capital and other investments to enable us to perform our services under those contracts, such as purchases of information technology equipment, facility costs, labor resources and costs incurred to develop and implement software. The net book value of certain assets recorded, including a portion of our intangible assets, could be impaired, and our results of operations and financial condition could be materially adversely affected in the event of the early termination of all or a part of such a contract or a reduction in volumes and services thereunder for reasons such as a customer’s or client’s merger or acquisition, divestiture of assets or businesses, business failure or deterioration or a customer’s or client’s exercise of contract termination rights.
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We rely to a significant extent on third-party providers, such as subcontractors, a relatively small number of primary software vendors, utility providers and network providers; if they cannot deliver or perform as expected or if our relationships with them are terminated or otherwise change, our results of operations and financial condition could be materially adversely affected.
Our ability to service our customers and clients and deliver and implement solutions depends to a large extent on third-party providers such as subcontractors, a relatively small number of primary software vendors, software application developers, utility providers and network providers meeting their obligations to us and our expectations in a timely, quality manner. Our results of operations and financial condition couldhave been and in the future may be materially adversely affected and we might incur significant additional liabilities if any of our third-party providers (1) do not meet thesetheir service level obligations, or(2) do not meet our or our clients’ expectations, or if they(3) terminate or refuse to renew their relationships with us, or were to(4) offer their products to us with less advantageous prices and other terms than we previously had.offered.
Failure to deliver on our contractual obligations properly and on time could materially adversely affect our
results of operations and financial condition.
Our business model depends in large part on our ability to retain existing and attract new work from our base of existing clients, as well as on relationships we develop with our clients so that we can understand our clients’ needs and deliver solutions and services that are tailored to meet those needs. In order for our business to grow, we must successfully manage the provision of services under our contracts. If a client is not satisfied with the quality of work performed by us or a subcontractor, or with the type of services or solutions delivered, or if we or our subcontractors fail to perform in accordance with contract requirements, then we could incur additional costs to address the situation, the profitability of that work might be impaired and the client’s dissatisfaction with our services could damage our ability to obtain additional work from that client or obtain new work from other potential clients. In particular, many of our contracts with non-government clients may be terminated by the client, without cause, upon specified advance notice, sonotice. Accordingly, clients who are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date, which may result in our inability to fully recover our up-front investments. In addition, clients could direct future business to our competitors. We could also trigger contractual credits to clients or a contractual default. Failure to properly transition new clients to our systems, properly budget transition costs or accurately estimate contract operational costs could result in delays in our contract performance, trigger service level penalties, impair fixed or intangible assets or result in contract profit margins that do not meet our expectations or our historical profit margins.
In addition, we incur significant expenditures for the development and construction of system software platforms needed to support our clients’ needs. Our failure to fully understand client requirements or implement the appropriate operating systems or databases or solutions which enable the use of other supporting software may delay the project and result in cost overruns or potential impairment of the related software platforms, which could materially adversely affect our results of operations and financial condition.
Our business is dependent on continued interest in outsourcing.
Our business and growth depend in large part on continued interest in outsourced business process services. Outsourcing means that an entity contracts with a third party,third-party, such as us, to provide business process services rather than perform such services in-house. There can be no assurance that this interest will continue, as organizations may elect to perform such services themselves and/or the business process outsourcing industry could move to an as-a-Service model, thereby eliminating traditional business process outsourcing tasks. A significant change in this interest in outsourcing could materially adversely affect our results of operations and financial condition. Additionally, there can be no assurance that our cross-selling efforts will cause clients to purchase additional services from us or adopt a single-source outsourcing approach.
Our profitability is dependent uponbusiness may be adversely affected by geopolitical events, natural disasters and other factors that could directly impact certain of our ability to obtain adequate pricing for our servicesemployees, customers and to improve our cost structure.vendors in countries or regions effected by such events and factors.
We have a global workforce and global customers. Our success depends on our ability to obtain adequate pricing for our services that will provideemployees and customers in a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our services may decline from previous levels. If we are unable to obtain adequate pricing for our services, it could materially adversely affect our results of operations and financial condition. In addition, our contracts are increasingly requiring tighter timelines for implementation as well as more stringent service level metrics. This makes the bidding process for new contracts much more difficult and requires us to adequately consider these requirementsparticular country or region in the pricingworld may be impacted as a result of our services.
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including pandemics (such as the coronavirus); and significant local, national or global events capturing the attention of legislation and regulations curbing the use of such centers outsidea large part of the United States could materially adversely affect our results of operations and financial condition. These risks could impair our ability to effectively provide services to our customers and keep our costs aligned to our associated revenues and market requirements.
We may be subject to claims of infringement of third-party intellectual property rights which could adversely affect our results of operation and financial condition.
We rely heavily on the use of intellectual property. We do not own a significant portionall of the software that we use to run our business; instead we license this software from a small number of primary vendors. If these vendors assert claims that we or our clients are infringing on their software or related intellectual property, we could incur substantial costs to defend these claims, which could materially adversely affect our results of operations and financial condition. In addition, if any of our vendors’ infringement claims are ultimately successful, our vendors could require us to (i) cease selling or using products or services that incorporate the challenged software or technology, (ii) obtain a license or additional licenses from our vendors or (iii) redesign our services which rely on the challenged software or technology. In addition, we may be exposed to claims for monetary damages. If we are unsuccessful in defending an infringement claim and our vendors require us to initiate any of the above actions, or we are required to pay monetary damages, then such actions could materially adversely affect our results of operations and financial condition.
If we underestimate the scope of work or the costs entailed in performing our contracts, or if we do not fully perform our contracts, our results of operations and financial condition could be materially adversely affected.
In order to stay competitive in our industry, we must keep pace with changing technologies and customer preferences. Many of our contracts require us to design, develop and implement new technological and operating systems for our customers. Many of these systems involve detailed and complex computer source code which must be created and integrated into a working system that meets contract specifications. The accounting for these contracts requires judgment relative to assessing risks, estimating contract revenues and costs and making assumptions for schedule and technical issues. To varying degrees, each contract type involves some risk that we could underestimate the costs and resources necessary to fulfill the contract. In each case, our failure to accurately estimate costs or the resources and technology needed to perform our contracts or to effectively manage and control our costs during the performance of our work could result, and in some instances has resulted, in reduced profits or in losses. In addition, many of our contracts contain complicated performance obligations, including, without limitation, designing and building new integrated computer systems. These contracts carry potential financial penalties or could result in financial damages or exposures if we fail to properly perform those obligations and have in the past resulted in and in the future could result in our results of operations and financial condition being materially adversely affected.
The loss of key senior management or the failure to attract and retain necessary technical personnel and qualified subcontractors could materially adversely affect our results of operations and financial condition.
Our success depends, in part, upon key managerial and technical personnel, including our ability to attract and retain additional qualified personnel, as well as qualified subcontractors. The loss of certain key personnel, such as our Chief Executive Officer (CEO), could materially adversely affect our results of operations and financial condition.There is no assurance that we can retain our key managerial personnel, or that we can attract similar employees, in the future.
In addition, because we operate in intensely competitive markets, our success depends to a significant extent upon our ability to attract, retain and motivate highly skilled and qualified technical personnel and to subcontract with qualified, competent subcontractors. If we fail to attract, train and retain sufficient numbers of qualified engineers, technical staff and sales and marketing representatives, or if we are unable to contract with qualified, competent subcontractors, our results of operations and financial condition could be materially adversely affected. Experienced and capable personnel in the services industry remain in high demand, and there is continual competition for their talents. Our ability to renegotiate certain of our legacy third-party contracts which we view as unfavorable, or to improve the service levels we expect from these contracts and third-party providers, is key to our ability to timely, efficiently and profitably deliver our services to our customers. Additionally, we have increased and expect to continue to increase our hiring in geographic areas outside of the United States, which could subject us to increased geopolitical and exchange rate risk. The loss of any key technical employee, the loss of a key subcontractor
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relationship or our inability to renegotiate or obtain required service levels from legacy and other third-party providers, could materially adversely affect our results of operations and financial condition.
If we fail to successfully develop new service offerings, including new technology components, and protect our intellectual property rights, we may be unable to retain current customers and gain new customers and our revenues would decline.
The process of developing new service offerings, including new technology components, is inherently complex and uncertain. It requires accurate anticipation of customers’ changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in service offerings that achieve customer acceptance and generate the revenues required to provide desired returns. For example, establishing internal automation processes to help us develop new service offerings will require significant up-front costs and resources, which, if not monetized effectively, could materially adversely affect our revenues. In addition, some of our service offerings rely on technologies developed by and licensed from third-parties. We may not be able to obtain or continue to obtain licenses and technologies from these third-parties at all or on reasonable terms, or such third-parties may demand cross-licenses to our intellectual property. It is also possible that our intellectual property rights could be challenged, invalidated or circumvented, allowing others to use our intellectual property to our competitive detriment. We also must ensure that all of our service offerings comply with both existing and newly enacted regulatory requirements in the countries in which they are sold. If we fail to accurately anticipate and meet our customers’ needs through the development of new service offerings (including technology components) or if we fail to adequately protect our intellectual property rights or if our new service offerings are not widely accepted or if our current or future service offerings fail to meet applicable worldwide regulatory requirements, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition.
The Company’s business, operating results and reputation may be negatively impacted by failures or delays in our efforts to modernize our information technology infrastructure and to consolidate to fewer data centers.
We have experienced certain disruptions in our operations and service delivery performance issues as a result of some of our information technology infrastructure that is outdated and that needs to be enhanced and updated, which disruptions have adversely impacted client and delivery performance. As a result, we are investing in modernizing a significant portion of our information technology infrastructure with new systems and processes and consolidating our data centers. This also includes investments in our data centers and networks, enhancement, modernization and consolidation of our IT infrastructure and customer-facing technologies, enhanced cybersecurity and movement to cloud-based technology. We expect that these changes will provide greater strategic and operational flexibility and efficiency and better control of our systems and processes. There is a risk, however, that our modernization efforts and data center consolidations could materially and adversely disrupt our operations and our service delivery to customers, could result in contractual penalties or damage claims from customers, could occur over a period longer than planned, and could require greater than expected investment and other internal and external resources. It may also take longer to realize the intended favorable benefits from an enhanced technology infrastructure than we expected, or that disruptions may continue to occur while we enhance this infrastructure.
The process of consolidating our data center involves inherent risks and may cause disruptions to our operations.In October 2018, we suffered a significant outage as a result of a data center migration, which resulted in unplanned system unavailability and disruption for our customers. We plan to undertake several data center migrations in the future and, in the course of these data migrations, could potentially experience significant service outages. Future service disruptions could hinder our ability to attract new customers, cause us to incur legal liability, contractual penalties or issue service credits to our customers and cause us to lose current customers, each of which could have a material adverse effect on our business, results of operations and financial condition.
Our results of operations and financial condition may be materially adversely affected by conditions abroad, including local economics, political environments, fluctuating foreign currencies and shifting regulatory schemes.
A portion of our revenues is generated from operations outside the United States. In addition, we maintain significant operations outside the United States. Our results of operations and financial condition could be materially adversely affected by changes in foreign currency exchange rates, as well as by a number of other factors,
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including, without limitation, changes in economic conditions from country to country, changes in a country’s political conditions, trade controls and protection measures, financial sanctions, licensing requirements, local tax issues, capitalization and other related legal matters. The withdrawal of the United Kingdom from the European Union, and the resulting impact on cross-border transactions and operations between the United Kingdom and the European Union member states, could materially and adversely affect our operations and financial condition. We generally hedge foreign currency denominated assets, liabilities and anticipated transactions primarily through the use of currency derivative contracts. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations but does not completely eliminate volatility. We do not hedge the translation effect of international revenues and expenses, which are denominated in currencies other than our U.S. parent functional currency, within our Consolidated Financial Statements. If we are unable to effectively hedge these risks, our results of operations and financial condition could be materially adversely affected.
Legal, Compliance and Data Security Risks
We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable information and personal health information, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and negatively impact our operations.
We receive, process, transmit and store information relating to identifiable individuals, both in our role as a service provider and as an employer. As a result, we are subject to numerous laws and regulations in the United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect both individually identifiable information as well asand personal health information, including the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”)(HIPAA), and the HIPAA regulations promulgated under HIPPA governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and the European Union Directive on Data Protection (Directive 95/46/EC). The EU General Data Protection Regulation (GDPR) replaces the Data Protection Directive 95/46/EC (with an enforcement date of(effective May 25, 2018), which imposes stringent data protection requirements and is designed to harmonize data privacy laws across Europe, to protectsignificant penalties for noncompliance and empower all EU citizens data privacy, to reshape the way organizations across the region approach data privacy and will havehas had a significant impact on how we process and handle certain data. Other
Additional laws of the United States (both federal and state) and foreign jurisdiction lawsjurisdictions apply to our processing of individually identifiable information and theseinformation. These laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. For example, the GDPR and the invalidation of the U.S.-EU Safe Harbor regime and the emerging GDPR will requirehave required us to implement alternative mechanisms in order for some of our data flows from Europe to the United States to comply with applicable law. Changes to existing laws, the introduction of new laws in this area or our failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and clients that we have not performed our contractual obligations, any of which could materially adversely affect our results of operations and financial condition.
We are subject to laws of the United States and foreign jurisdictions relating to processing certain financial
transactions, including payment card transactions and debit or credit card transactions, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and materially adversely affect our results of operations and financial condition.
We process, support and execute financial transactions, and disburse funds, on behalf of both government and commercial customers, often in partnership with financial institutions. This activity includes receiving debit and credit card information, processing payments for and due to our customers and disbursing funds on payment or debit cards to payees of our customers. As a result, we are subject to numerous laws and regulations in the United States (both federal and state) and in foreign jurisdiction laws and regulations,jurisdictions, including the Electronic Fund Transfer Act, as amended, the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (including the so-called Durbin Amendment), as amended, the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act of 1999), as amended, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT ACT) Act of 2001,, as amended. Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of certain financial transactions and related support services. These laws are subject to frequent changes, and new statutes and regulations in this area may be enacted at any time. Changes to existing laws, the introduction of new laws in this area or our failure to comply with existing laws that are
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applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and civil and/or criminal prosecution, unfavorable publicity, restrictions on our ability to process and support financial transactions and allegations by our customers, partners and clients that we have not performed our contractual obligations. Any of these could materially adversely affect our results of operations and financial condition.
Our data systems, information systems and network infrastructure may be subject to hacking or other cyber securitycybersecurity threats and other service interruptions, which could expose us to liability, impair our reputation or temporarily render us unable to fulfill our service obligations under our contracts.
We are a leading provider of business processing services concentrated in transaction-intensive processing, analytics and automation. We act as a trusted business partner in both front office and back office platforms, providing interactions on a substantial scale with our customers and other third parties.third-parties. Our customers include global commercial clients and government clients who depend upon our operational efficiency, non-interruption of service, and accuracy and security of information. We also use third partythird-party providers such as subcontractors, software vendors, utility providers and network providers, upon whom we rely for our business processing services, to deliver uninterrupted, secure service. As part of our business processing services we also develop system software platforms necessary to support our customers’ needs, with significant ongoing investment in developing and operating customer-appropriate operating systems, data bases and system software solutions. We also receive, process, transmit and store substantial volumes of information relating to identifiable individuals, both in our role as a service provider and as an employer, and we are subject to numerous laws, rules and regulations in the United States (both federal and state) and foreign jurisdictions designed to protect both individually identifiable information as well as personal health information. We also receive, process and implement financial transactions, and disburse funds, on behalf of both commercial and government customers, which activity includes receiving debit and credit card information to process payments due to our customers as well as disbursing funds to payees of our customers. As a result of these and other business processing services, the integrity, security, accuracy and non-interruption of our systems and information technology and that of our third-party providers and our interfaces with our customers are extremely important to our business, operating results, growth, prospects and reputation.
We have implemented security systems and controls, both directly and with third-party subcontractors and service providers, with the intent of maintaining both the physical security of our facilities and the data security of our customers’, clients’ and suppliers’ confidential information and information related to identifiable individuals (including payment card and debit and credit card information and health information) against unauthorized access through our information systems or by other electronic transmission or through the misdirection, theft or loss of physical media. These include, for example, the appropriate encryption of information. Despite such efforts, we are subjectsusceptible to breach of security systems which may result in unauthorized access to our facilities and those of our customers and/or the information we and our customers are trying to protect. Cyber securityCybersecurity failure might be caused by computer hacking, malware, computer viruses, worms and other destructive software, “cyber-attacks” and other malicious activity, as well as natural disasters, power outages, terrorist attacks and similar events. Operational or business delays may also result from the disruption of network or information systems and subsequent remediation activities.
Because the techniques used to obtain unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we or our third-party service providers may be unable to anticipate these techniques or implement sufficient preventative measures. Hacking, malware, phishing, viruses and other “cyber-attacks” have become more prevalent, have occurred in our systems in the past, and may occur in our systems in the future. Although we have implemented and intend to continue to implement what we believe to be appropriate cyber practices and cyber securitycybersecurity systems, these systems may prove to be inadequate and result in the disruption, failure, misappropriation or corruption of our network and information systems. Notwithstanding the preventative and protective measures we have in place, it may not be possible for us to fully or timely know if or when such incidents arise, or the full business impact of any cybersecurity breach.
Additionally, with advances in computer capabilities and data protection requirements to address ongoing threats, we may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by security breaches. Moreover, employee error or malfeasance, faulty password management or other irregularities may result in a defeat of our or our third-party service providers’ security measures and a breach of our or our third-party service providers’ information systems (whether digital, cloud-based or otherwise).
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If unauthorized parties gain physical access to one of our or one of our third-party service providers’ facilities or gain electronic access to our or one of our third-party service providers’ information systems, or such sensitive or confidential information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such informationaccess could result in, among other things, unfavorable publicity and significant damage to our brand, governmental inquiry, oversight and possible regulatory action, difficulty in marketing our services, loss of existing and potential customers, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for substantial damages related to the theft or misuse of such information, any of which could materially adversely affect our results of operations and financial condition. Similar consequences may arise if sensitive or confidential information is misdirected, lost or stolen during transmission or transport, or is stolen or misused. Moreover, a security breach could require us to devote significant management resources to address the problems created by the security breach and to expend significant additional resources to upgrade further the security measures that we employ to guard such personal information against "cyber attacks""cyber-attacks" and to maintain various systems and data centers for our customers. Often these systems and data centers must be maintained worldwide and on a 24/7 basis. Although we endeavor to ensure that there is adequate backup and maintenance of these systems and centers, we have in the past experienced and in the future could experience service interruptions that could result in curtailed operations and loss of existing and potential customers, which could significantly reduce our revenues and profits in addition to significantly impairing our reputation. If our information systems and our back-up systems are damaged, breached or cease to function properly, we may have to make a significant investment to repair or replace them, and we may suffer interruptions in our operations in the interim, each of which could materially adversely affect our results of operations and financial condition and diminish the value of our shares.condition.
In addition, our and our customers’ systems and networks are subject to continued threats of terrorism, which could disrupt our operations as well as disrupt the utilities and telecommunications infrastructure on which our business depends. To the extent any such disruptions were to occur, our business, operating results and financial condition could be materially adversely affected.
If we fail to meet industry data security standards, our ability to meet contractual obligations may be impaired and result in contractual damage or contract breach claims.
In some of our services lines, we are contractually subject to industry data security standards.These industry data security standards include Card Brand (Visa, Mastercard, American Express, Discover and JCB) operating rules, certification requirements and rules governing electronic funds transfers, including the Payment Card Industry Data Security Standard (PCI DSS), a data security standard applicable to companies that collect, store or transmit payment card data. Another industry standard is the Health Information Trust Alliance (HITRUST) which applies to aspects of the healthcare industry in addition to other industries. While we are taking steps to achieve future compliance and/or certification for our systems, we may not be compliant now, and in the future we may not be able to maintain compliance with PCI DSS, HITRUST and other applicable industry standards. We are taking steps to achieve compliance and/or certification for our systems, but we cannot assure that these efforts will be successful in the time period required or at all. Any failure to comply fully or materially with PCI DSS, HITRUST and other applicable industry standards now or at any point in the future may provide customers the right to terminate contracts with us or to enforce provisions obligating us to reimburse them for any penalties or costs incurred by them as a result of our non-compliance, or subject us to other fines, penalties, damages or civil liability, each of which could have a material adverse effect on our business, financial condition and results of operations. In addition, failure to meet PCI DSS standards could result in the loss of our ability to accept credit card payments and the failure to meet HITRUST standards could impact our ability to service customers in the healthcare and other industries, both of which could have a material adverse impact on our business, results of operations and financial condition.
Our results of operations and financial condition could be materially adversely affected by legal and regulatory matters.
We are potentially subject to various contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities laws; governmental and non-governmental entity contracting, servicing and governmental entity procurement laws; intellectual property laws; environmental laws; employment laws; the Employee Retirement Income Security Act of 1974 (ERISA); and other laws, regulations and contractual undertakings, as discussed under Note 17 – Contingencies and Litigation to our Consolidated Financial Statements. If developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual or materially increase an existing accrual, or if any of these matters result in an adverse judgment
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or are settled for significant amounts above any existing accruals, it could materially adversely affect our results of operations and financial condition in the period or periods in which such change in determination, judgment or settlement occurs. There can be no assurances as to the favorable outcome of any claim, lawsuit, investigation or proceeding. It is possible that a resolution of one or more such proceedings, through judgment, settlement or otherwise, could require us to make substantial payments to satisfy judgments, fines or penalties or settlement amounts, any of which could materially adversely affect our results of operations and financial condition. Additionally, the terms of dismissal, settlement, release or other resolution may permit certain claims to be reopened under certain conditions. Claims, lawsuits investigations and proceedings involving the Company could also result in reputational harm, criminal sanctions, consent decrees or orders preventing us from offering certain services, requiring a change in our business practices in costly ways or requiring development of non-infringing or otherwise altered products or technologies. In addition, it can be very costly to defend litigation and these costs could materially adversely affect our results of operations and financial condition. Refer to Note 17 – Contingencies and Litigation to our Consolidated Financial Statements.
Financial Risks
We have recorded significant goodwill impairment charges and may be required to record additional charges to future earnings if our goodwill or intangible assets become impaired.
We are required under generally accepted accounting principles to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in stock price and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have implications on the profitability of our business or business segments. We may be required to record additional charges to earnings during the period in which any impairment of our goodwill or other intangible assets is determined which could adversely impact our results of operations. As of December 31, 2020, our goodwill balance was $1.5 billion, which represented 35.9% of total consolidated assets. Refer to Note 9 – Goodwill and Intangible Assets, Net to our Consolidated Financial Statements for additional information about our 2019 goodwill impairment.
Our significant indebtedness could materially adversely affect our results of operations and financial condition.
We have and will continue to have a significant amount of debt and other obligations. Our substantial debt and other obligations could have important consequences.
For example, it could (i) increase our vulnerability to general adverse economic and industry conditions; (ii) limit our ability to obtain additional financing for future working capital, capital expenditures, acquisitions and other general corporate requirements; (iii) require us to dedicate a substantial portion of our cash flows from operations to service debt and other obligations thereby reducing the availability of our cash flows from operations for other purposes; (iv) limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; (v) place us at a competitive disadvantage compared to our competitors that have less debt; and (vi) become due and payable upon a change in control. If new debt is added to our current debt levels, these related risks could increase.
Our ability to make payments on and to refinance our indebtedness, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
The terms of our indebtedness may restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.
The terms of our indebtedness include a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. These may restrict our and our subsidiaries’ ability to take some or all of the following actions:
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•incur or guarantee additional indebtedness or sell disqualified or preferred stock;
•pay dividends on, make distributions in respect of, repurchase or redeem capital stock;
•make investments or acquisitions;
•sell, transfer or otherwise dispose of certain assets, including accounts receivable;
•create liens;
•enter into sale/leaseback transactions;
•enter into agreements restricting the ability to pay dividends or make other intercompany transfers;
•consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;
•enter into transactions with affiliates;
•prepay, repurchase or redeem certain kinds of indebtedness;
•issue or sell stock of our subsidiaries; and/or
•significantly change the nature of our business.
As a result of all of these restrictions, we may be:
•limited in how we conduct our business and pursue our strategy;
•unable to raise additional debt financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
A breach of any of the restrictive covenants, if applicable, could result in an event of default under the terms of this indebtedness. If an event of default occurs, the lenders would have the right to accelerate the repayment of such debt and the event of default or acceleration may result in the acceleration of the repayment of any other of our debt to which a cross-default or cross-acceleration provision applies. Furthermore, under this indebtedness we have pledged our assets as collateral as security for our repayment obligations. If we were unable to repay any amount of this indebtedness when due and payable, the lenders could proceed against the collateral that secures this indebtedness. In the event our creditors accelerate the repayment of our borrowings, we may not have sufficient assets to repay such indebtedness, which could materially adversely affect our results of operations and financial condition.
In addition, our credit facility bears interest at a rate that varies depending on the LIBOR. On July 27, 2017, the UK's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, announced replacement of U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities called the Secured Overnight Financing Rate ("SOFR"). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. If LIBOR rates are no longer available, our costs of borrowings under our credit facilities may be negatively impacted, which could have an adverse effect on our results of operations.
Our profitability is dependent upon our ability to obtain adequate pricing for our services and to improve our cost structure.
Our success depends on our ability to obtain adequate pricing for our services that will provide a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our services may decline from previous levels. If we are unable to obtain adequate pricing for our services, it could materially adversely affect our results of operations and financial condition. In addition, our contracts are increasingly requiring tighter timelines for implementation as well as more stringent service level metrics. This makes the bidding process for new contracts much more difficult and requires us to adequately consider these requirements in the pricing of our services.
In order to meet the service requirements of our customers, which often includes 24/7 service, and to optimize our employee cost base, including our back-office support, we often locate our delivery service and back-office support centers in lower-cost locations, including several developing countries. Concentrating our centers in these locations presents a number of operational risks, many of which are beyond our control, including the risks of political instability, natural disasters, safety and security risks, labor disruptions, excessive employee turnover and rising labor rates. Additionally, a change in the political environment in the United States or the adoption and enforcement of legislation and regulations curbing the use of such centers outside of the United States could materially adversely
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affect our results of operations and financial condition. These risks could impair our ability to effectively provide services to our customers and keep our costs aligned to our associated revenues and market requirements.
Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to continue to improve the cost efficiency of our operations through such programs as RPA, to absorb the level of pricing pressures on our services through cost improvements and to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and maintain productivity improvements through restructuring actions or information technology initiatives, our ability to offset labor cost inflation and competitive price pressures would be impaired, each of which could materially adversely affect our results of operations and financial condition.
If we underestimate the scope of workare unable to collect our receivables for billed or the costs of performance in our contracts, or we mis-perform our
The profitability of certain of our large contracts depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. Actual losses on client balances could differ from current estimates and, as a result, may require adjustment of our receivables for unbilled services. Our receivables include long-term contracts and overcontracts. Over the course of a long-term contract, our customers’ financial condition may change such that their ability to pay their obligations, and our ability to collect our fees for services rendered, is adversely affected. Additionally, we may perform work for the federal, state and local governments, with respect to which we must file requests for equitable adjustment or claims with the proper agency to seek recovery in whole or in part, for out-of-scope work directed or caused by the government customer in support of its project, and the amounts of such recoveries may not meet our expectations or cover our costs. Timely collection of client balances also depends on our ability to complete our contractual commitments (for example,(such as our ability to achieve specified milestones in percentage-of-completion contracts) and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flowsfinancial condition could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our results of operations and financial condition could be materially adversely affected.
A decline in revenues from or a loss or failure of significant clients could materially adversely affect our
results of operations and financial condition.
Our results of operations and financial condition could be materially adversely affected by the loss or failure of significant clients.clients or any significant reduction in revenue volumes from our significant clients, which has occurred in the past and could occur in the future. Some of our clients are in business sectors which have experienced significant financial difficulties or consolidation, and/or the reduction of volumes or their inability to make payments to us, as a result of, among other things, their merger or acquisition, divestiture of assets or businesses, contract expiration, nonrenewal or early termination (including termination for convenience) or business or financial failure or deterioration. Economic and political conditions could affect our clients’ businesses and the markets they serve. Competition from other service providers and bringing these services in-house could also be expected to adversely impact our revenues.
We have non-recurring revenue, which subjects us to a risk that our revenues and cash flows from operations may fluctuate from period to period.
Revenue generated from our non-recurring services may fluctuate due to factors both within and outside of our control. Our mix of non-recurring and recurring revenues is impacted by acquisitions as well as growth in our non-recurring lines of business.business, as well as our strategic decisions to exit or reduce our services in particular service areas. There is less predictability and certainty in the timing and amount of revenues generated by our non-recurring services and, accordingly, our results of operations and financial condition could be materially adversely affected by the timing and amount of revenues generated from our non-recurring services.services
The failure to obtain or maintain a satisfactory credit rating could adversely affect our liquidity, capital position, borrowing costs, access to capital markets and ability to post surety or performance bonds to support clients’ contracts.
Any future downgrades to our credit rating could negatively impact our ability to renew contracts with our existing clients, limit our ability to compete for new clients, result in increased premiums for surety or performance bonds to
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support our clients’ contracts and/or result in a requirement that we provide collateral to secure our surety or performance bonds. Further, certain of our commercial outsourcing contracts provide that, in the event our credit ratings are downgraded to specified levels, the client may elect to terminate its contract with us and either pay a reduced termination fee or, in some limited instances, no termination fee. Such a credit rating downgrade could adversely affect these client relationships.
There can be no assurance that we will be able to maintain our credit ratings. Any additional actual or anticipated downgrades of our credit ratings, including any announcement that our ratings are under review for a downgrade, may have a negative impact on our liquidity, capital position and access to capital markets.
Increases in the cost of telephone and data services or significant interruptions in such services could
materially adversely affect our results of operations and financial condition.
Our business is significantly dependent on telephone and data serviceservices provided by various local and long distance telephone and data service providers around the world. Accordingly, any disruption of these services could materially adversely affect our results of operations and financial condition. We have taken steps to mitigate our exposure to service disruptions by investing in redundant circuits, although there is no assurance that the redundant circuits would not also suffer disruption. Any inability to obtain telephone or data services at favorable rates could materially adversely affect our results of operations and financial condition. Where possible, we have entered into long-term contracts with various providers to mitigate short-term rate increases and fluctuations. There is no obligation, however, for the vendors to renew their contracts with us, or to offer the same or lower rates in the future, and such contracts are subject to termination or modification for various reasons outside of our control. A significant increase in the cost of telephone or data services that is not recoverable through an increase in the price of our services could materially adversely affect our results of operations and financial condition. In addition, a number of our facilities are located in jurisdictions outside of the United States where the provision of utility services, including electricity and water, may not be consistently reliable, and while there are backup systems in many of our operating facilities, an extended outage of utility or network services could materially adversely affect our results of operations and financial condition.
We are a holding company and, therefore, may not be able to receive dividends or other payments in
needed amounts from our subsidiaries.
Our principal assets are the shares of capital stock and indebtedness of our subsidiaries. We rely on dividends, interest and other payments from these subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations, paying corporate expenses and, if determined by our Board, paying dividends to shareholders and repurchasing common shares. Certain of our subsidiaries are subject to regulatory requirements of the jurisdictions in which they operate or other restrictions that may limit the amounts that these subsidiaries can pay in dividends or other payments to us. No assurance can be given that there will not be further changes in law, regulatory actions or other circumstances that could restrict the ability of our subsidiaries to pay dividends to us. In addition, due to differences in tax rates, repatriation of funds from certain countries into the United States could have unfavorable tax ramifications for us.
COVID-19 Pandemic Related Risks
Our business has been and will continue to be negatively impacted by the ongoing coronavirus pandemic.
Beginning in late 2019, the outbreak of a novel strain of virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease 2019, or COVID-19, has evolved into a global pandemic and has spread to most regions of the world.
As a result of the COVID-19 pandemic, we have experienced and can be expected to continue to experience disruptions to our business, our operations, the delivery of our services and customer demand for our services and business offerings, including:
•Social distancing, shelter-in-place and stay-at-home requirements and guidance of national, regional, state and local governments have required that substantial services being performed by us for our customers be shifted to work-from-home alternatives, which have created added burdens, risks and costs, including but
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not limited to: the added cost and uncertainty created by a significant change in our delivery model; delays and disruptions resulting from organizing and implementing work-from-home solutions, particularly in our lower cost geographies, such as India and the Philippines, which have not in the past generally permitted or accommodated work-from-home alternatives; customer protocols not allowing, without express customer waiver or permission, work-from-home alternatives, due to sensitivity of Contents
customer data, inclusion of personally identifiable information, cybersecurity and data security concerns, and other factors; delays and disruptions in providing customer services which may adversely affect our reputation and may in the future result in failure to satisfy customer contract requirements and other noncompliance issues; challenges in and cost of equipping work-from-home solutions with appropriate technology equipment and software, with suitable security protections; potential for increased cybersecurity and other data security issues; compliance with legal, regulatory, industry and customer standards and specifications; and increased logistical issues resulting from unexpected shift in service delivery model. As a result of these and other factors related to work-from-home solutions, we have experienced and can be expected to continue to experience delays and disruptions and an adverse impact on our business, operations, costs, satisfaction of customer requirements and operating results and financial condition.•The COVID-19 pandemic has impacted and may be expected to continue to adversely impact customer demand for our services and business offerings. Many of our customers have experienced and will continue to experience substantial disruption in their own operations. In addition, many of our governmental and non-governmental customers have been allocating resources and management attention away from the ordinary conduct of their business and toward responding to COVID-19 related emergent events. Our sales and marketing personnel are also largely required to perform their services via virtual or other telecommunication alternatives, rather than in-person interactions. The COVID-19 pandemic has also resulted in greater customer uncertainty in their short-term and longer-term needs. In addition, under certain contracts we earn revenues based on the number of transactions processed, such as, for example, certain transportation and credit card processing arrangements where the number of transactions has decreased due to the COVID-19 pandemic. These and other pandemic-related factors have and will continue to adversely impact revenues, sales, new business opportunities, pricing and our sales pipeline.
•Further, our management has been focused on mitigating the impact of the COVID-19 pandemic, which has required and will continue to require a substantial investment of time and resources across our enterprise. This has resulted and can be expected to continue to result in a diversion of management attention, resources and previously planned investments away from strategic, operational and technological initiatives which had been intended to improve customer demand, new business opportunities, business retention, service delivery, potential divestitures or acquisitions, and the overall profitability of our business and we cannot predict how long this may continue.
•Our government contracts are often subject to a government entity’s right to change the scope of work or to terminate their project for funding reasons or at their convenience. Due to the COVID-19 pandemic and its current and future impact on governments, budgets and resources, we may experience government contracts’ reductions or terminations.
•We are a leading provider of business processing services concentrated on transaction-intensive processing including financial transactions. If we fail to satisfy a customer’s requirements or specifications, we could incur additional costs to address such dissatisfaction or on account of such deficiency as well as receive notice of termination. The COVID-19 pandemic has had and can be expected to continue to have an impact on compliance and non-interruption of service under certain customer contractual requirements, and certain customer relationships can be expected to be adversely impacted, in addition to our incurring added costs in response to any deficiency.
•The COVID-19 pandemic may have had and may continue to have an adverse impact on the operations, financial results and finances of many of our customers, which could impact customer payment cycles and payments due from customers.
•We rely on third parties to provide technology, other services and products we need to operate our business. Delays or interruption in the operations of third parties on which we rely may result in disruptions in our own operations and financial conditionfulfillment of our customers’ requirements.
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•The economic downturn could be materially adversely affected by legal andalso result in the carrying value of our goodwill or other intangible assets exceeding their fair value, which could require us to recognize further asset impairment.
•We are potentially subject to various contingent liabilities that are not reflectedalso cannot predict the impact of remote working arrangements on our balance sheet, including those arisinginternal systems and normal administrative services.
•To the extent we draw under our credit facility, our debt would increase. Such increase in our level of debt could adversely affect our financial results or ability to incur additional debt and could negatively impact our credit ratings. In addition, as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental and non-governmental entity contracting, servicing and governmental entity procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act of 1974 (ERISA); and other laws, regulations and contractual undertakings, as discussed under Note 13 – Contingencies and Litigation in our Consolidated Financial Statements. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual or materially increase an existing accrual, or should any of these matters result in an adverse judgment or be settled for significant amountsrisks described above, any existing accruals, it could materially adversely affect our results of operations and financial condition in the period or periods in which such change in determination, judgment or settlement occurs. There can be no assurances as to the favorable outcome of any claim, lawsuit, investigation or proceeding. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could materially adversely affect our results of operations and financial condition. These proceedings could also result in reputational harm, criminal sanctions, consent decrees or orders preventing us from offering certain services, requiring a change in our business practices in costly ways or requiring development of non-infringing or otherwise altered products or technologies. In addition, it can be very costly to defend litigation and these costs could materially adversely affect our results of operations and financial condition. See Note 13 – Contingencies and Litigation to our Consolidated Financial Statements.
•The trading prices for our common shares and the benefits that we expected to achieve as an independent companysecurities of other companies in the time we expect, if at all. Furthermore, Xerox used to guarantee our and our subsidiaries’ performance under certain services contracts and real estate leases. Following the spin-off, we expect that Conduent will provide such performance guarantees, and we may be unable to retain or renew contracts or real estate leases or a failure to renew such contracts or leases on favorable terms and conditions could materially adversely affect our results of operations and financial condition. If we fail to achieve some or all of the benefits that we expected to achieve as an independent company, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.
The COVID-19 pandemic continues to rapidly evolve, and additional material impacts and disruptions are likely to occur. These and other factors, which would generally result in (i)may worsen, can be expected to have a taxable dividendmaterial adverse impact on our business, operations, financial results and capital resources. The ultimate impact of the COVID-19 pandemic on us is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, continued emergence of new strains of COVID-19, the availability of an effective vaccine and the speed with which it is administered to the U.S. holderpublic, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19 and the actions taken to contain COVID-19 or address its impact in the short and long-term, among others. We do not yet know and cannot predict the full extent of that U.S. holder’s pro rata share of Xerox’s currentpotential impacts on our business, our services and accumulated earnings and profits; (ii) a reduction in the U.S. holder’s basis (but not below zero) in Xerox common stock to the extent the amount received exceeds the shareholder’s share of Xerox’s earnings and profits; and (iii) a taxable gain from the exchange of Xerox common stock to the extent the amount received exceeds the sum of the U.S. holder’s share of Xerox’s earnings and profits and the U.S. holder’s basis in its Xerox common stock.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
We lease and own numerous facilities worldwide with larger concentrations of space in Kentucky, New Jersey, California, Mexico, Guatemala, India, the Philippines, Jamaica Romania and India.Romania. Our owned and leased facilities house general offices, sales offices, service locations, call centers and distribution centers. The size of our property portfolio as of December 31, 20172020 was approximately 9.75.9 million square feet at an annual operating cost (lease costs and expenses) of approximately $247$158 million and comprised 330was composed of 207 leased properties and 94 owned properties. We believe that our current facilities are suitable and adequate for our current businesses. Because of the interrelation of our business segments, each of the segments uses substantially all of these properties at least in part.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under Note 1317 – Contingencies and Litigation into the Consolidated Financial Statements in Part II, Item 8 which is incorporated hereherein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Exchange Information
The common stock of Conduent Incorporated is listedbegan trading on January 3, 2017, on the New York Stock Exchange, under the ticker symbol "CNDT." Our"CNDT". In December 2019, Conduent changed the listing of its publicly traded common stock began trading January 3, 2017.from the New York Stock Exchange to the NASDAQ, where it remains listed under the ticker "CNDT".
| New York Stock Exchange composite prices* | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| High | $ | 17.44 | $ | 18.15 | $ | 17.20 | $ | 16.39 | ||||||||
| Low | $ | 13.10 | $ | 15.50 | $ | 15.38 | $ | 14.95 | ||||||||
Common Shareholders of Record
Conduent Common Stock Dividends
We did not pay any dividends on our common stock in 2017.2020. We intend to retain future earnings for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends on our common stock for the foreseeable future.
Performance Graph
Sales of Unregistered Securities During the Quarter Ended December 31, 20172020
None
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Information about securities authorized for issuance under existing equity compensation plans is incorporated by reference from Item 12—Securities Authorized for Issuance Under Existing Equity Compensation Plans.
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ITEM 6. SELECTED FINANCIAL DATA
In accordance with amendments to Regulation S-K effective February 10, 2021, we have elected to early apply the guidance allowing for the omission of selected financial data for each of the five prior fiscal years.
| (in millions, except per-share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | |||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 1,051 | $ | 1,016 | $ | 1,041 | $ | 1,055 | $ | 4,163 | ||||||||||||||||||||||
| Costs and Expenses | 1,102 | 1,080 | 1,054 | 1,066 | 4,302 | |||||||||||||||||||||||||||
| Loss before Income Taxes | (51) | (64) | (13) | (11) | (139) | |||||||||||||||||||||||||||
| Income tax (benefit) expense | (2) | (13) | (6) | — | (21) | |||||||||||||||||||||||||||
| Net Loss | $ | (49) | $ | (51) | $ | (7) | $ | (11) | $ | (118) | ||||||||||||||||||||||
Loss per Share(2): | ||||||||||||||||||||||||||||||||
| Basic | $ | (0.24) | $ | (0.25) | $ | (0.04) | $ | (0.07) | $ | (0.61) | ||||||||||||||||||||||
| Diluted | $ | (0.24) | $ | (0.25) | $ | (0.04) | $ | (0.07) | $ | (0.61) | ||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 1,158 | $ | 1,112 | $ | 1,098 | $ | 1,099 | $ | 4,467 | ||||||||||||||||||||||
Costs and Expenses(1) | 1,496 | 2,231 | 1,112 | 1,734 | 6,573 | |||||||||||||||||||||||||||
| Loss before Income Taxes | (338) | (1,119) | (14) | (635) | (2,106) | |||||||||||||||||||||||||||
| Income tax (benefit) expense | (30) | (90) | 2 | (54) | (172) | |||||||||||||||||||||||||||
| Net Loss | $ | (308) | $ | (1,029) | $ | (16) | $ | (581) | $ | (1,934) | ||||||||||||||||||||||
Loss per Share(2): | ||||||||||||||||||||||||||||||||
| Basic | $ | (1.49) | $ | (4.94) | $ | (0.09) | $ | (2.76) | $ | (9.29) | ||||||||||||||||||||||
| Diluted | $ | (1.49) | $ | (4.94) | $ | (0.09) | $ | (2.76) | $ | (9.29) | ||||||||||||||||||||||
_________________
(1)First quarter, second quarter, fourth quarter and full year 2019 include goodwill impairment charge of $284 million, $1.1 billion, $601 million and approximately $2.0 billion, respectively. Refer to Note 9 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements included in millions, except per-share data)Item 8 of this Form 10-K for further discussion.
(2)The sum of quarterly loss per share may differ from the full-year amounts due to rounding.
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Operations | ||||||||||||||||||||
| Revenues | $ | 6,022 | $ | 6,408 | $ | 6,662 | $ | 6,938 | $ | 6,879 | ||||||||||
| Income (loss) income from continuing operations | 177 | (983 | ) | (336 | ) | 34 | 135 | |||||||||||||
| Net income (loss) | 181 | (983 | ) | (414 | ) | (81 | ) | 182 | ||||||||||||
| Per-Share Data | ||||||||||||||||||||
| Income (loss) from continuing operations | ||||||||||||||||||||
| Basic | $ | 0.82 | $ | (4.85 | ) | $ | (1.65 | ) | $ | 0.17 | $ | 0.67 | ||||||||
| Diluted | 0.81 | (4.85 | ) | (1.65 | ) | 0.17 | 0.67 | |||||||||||||
| Net income (loss) attributable to Conduent | ||||||||||||||||||||
| Basic | 0.84 | (4.85 | ) | (2.04 | ) | (0.40 | ) | 0.90 | ||||||||||||
| Diluted | 0.83 | (4.85 | ) | (2.04 | ) | (0.40 | ) | 0.90 | ||||||||||||
| Financial Position | ||||||||||||||||||||
| Working capital | $ | 1,342 | $ | 515 | $ | (867 | ) | $ | (887 | ) | $ | (1,450 | ) | |||||||
| Total Assets | 7,548 | 7,709 | 9,058 | 10,954 | 11,205 | |||||||||||||||
| Consolidated Capitalization | ||||||||||||||||||||
| Short-term debt and current portion of long-term debt | $ | 82 | $ | 28 | $ | 24 | $ | 268 | $ | 42 | ||||||||||
| Long-term debt | 1,979 | 1,913 | 37 | 43 | 310 | |||||||||||||||
Total Debt(2) | 2,061 | 1,941 | 61 | 311 | 352 | |||||||||||||||
| Series A preferred stock | 142 | 142 | n/a | n/a | n/a | |||||||||||||||
| Conduent shareholders' equity/former parent investment | 3,529 | 3,288 | 5,162 | 5,411 | 5,579 | |||||||||||||||
| Total Consolidated Capitalization | $ | 5,732 | $ | 5,371 | $ | 5,223 | $ | 5,722 | $ | 5,931 | ||||||||||
Selected Data and Ratios(3) | ||||||||||||||||||||
Common shareholders of record at year-end(3) | 26,936 | n/a | n/a | n/a | n/a | |||||||||||||||
Book value per common share(3) | $ | 16.77 | n/a | n/a | n/a | n/a | ||||||||||||||
Year-end common stock market price(3) | $ | 16.16 | n/a | n/a | n/a | n/a | ||||||||||||||
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Conduent Incorporated.Conduent. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes.notes in this Form 10-K for the year ended December 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 2017 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 $6.0$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 Florham Park, New Jersey, we have a team of approximately 90,00063,000 people as of December 31, 2017, who serves2020, servicing customers from service centers in 3122 countries. In 2017, 12%2020, 10% of our revenue was generated outside the U.S.
Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate.
•Commercial Industries and Public Sector.
•Government Services –Our multi-industry competencies include transaction processing, customer experience, human resource management, omni-channel communications and finance and accounting services.
•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.
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•Strong new business wheresignings results– A strong year of new business with total contract value (TCV) signings of $1,934 million in 2020, representing an increase of 94% compared to that of the prior year period.
•Draw down on revolver– In March 2020, we are limiting our focus to maintaining systems for our current clients; our Education Business inclusivedrew down $150 million of our Student Loan business, which is$750 million Senior Credit Facility (Revolver) as a precautionary measure in runoff;response to the COVID-19 pandemic. This amount was repaid in December 2020.
•Cost savings initiative – Beginning in the first quarter of 2020, we expanded the focus of our efficiency initiatives to include both permanent and inter-segment eliminations.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 20172019 Actions
•Disposition – In 2017,February 2019, we completed divestitures of: (1)the sale of a portfolio of select standalone customer care contracts for $25 million. The business sold represented $36 million and $439 million of revenues in 2019 and 2018, respectively. Refer to Note 4 – Divestiture to the Consolidated Financial Statements for additional information regarding this sale.
•Litigation settlement– In February 2019, we reached a settlement agreement and release with the State of Texas ("State") and the Texas Department of Health and Human Services, which was amended in May 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 in January 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 Firehouse businessreporting units which resulted in a cumulative impairment charge of $2.0 billion. Refer to Note 9 – Goodwill and suite of emergency records management products used by fire departments acrossIntangible Assets, Net to the countryConsolidated Financial Statements for their incident reportingdetails regarding the facts and Emergency Management System informationcircumstances that led to this impairment charge.
COVID-19 Outbreak
Throughout the COVID-19 pandemic, we have continued to provide critical and records management; (2) our healthcare provider consulting services business, which advises healthcare organizations on IT application optimization; (3) the Breakaway Group business, which provides advisory projectbest-in-class services to assist healthcare organizations optimizeour customers and their end-users, while ensuring the health IT applications; (4)and safety of our associates. To address the mobile device managementpotential impact to our business over the near-term, our Business Continuity team established a proactive plan in the first quarter of Wireless Data Services Limited;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 (5)introducing a hardship leave policy.
•Increased sanitation and social distancing for required on-site essential associates.
At the Global Mobility business. The aggregate proceeds forend 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 divestituresinitiatives or take additional actions to meet the needs of our employees, customers and their end-users as well as the Company's needs and to continue to provide our mission-critical services and solutions.
For the year ended December 31, 2020, we estimated an $85 million unfavorable impact on revenue was $56attributable 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 in cash. The businesses sold represent $60 million and $82 million of 2017 and 2016 revenue, respectively. We recorded a pre-tax gain of $16 million on these divestitures for the year ended December 31, 2017.
Refer to the non-cash chargediscussion of results of operations below for the impairmentadditional discussion of software and $14 million for the write-off of deferred contract set-up and transition costs and otherCOVID-19 pandemic related assets and liabilities.effects.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the 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 throughoutin 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 into 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 various accounting principles in U.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 Recognition into the Consolidated Financial Statements for additional information regarding our revenue recognition policies.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 for impairment 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.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
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 determined that ourcurrently have six reporting units were the same aswhich support our operating segmentsthree reportable segments: Customer Experience Management, Business Operations Solutions, Commercial Healthcare and therefore, our business is comprised of two reporting units. Human Resources and Learning Services (together comprising Commercial Industries), Government Services and Transportation.
Our annual quantitative impairment test of goodwill was performed in the fourth quarteras of 2017.October 1, 2020.
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 a number ofseveral 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 and strategic transformation 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 give appropriate consideration toconsider 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 the Commercial Industries, Government Services and Transportation reportable segments.
Based on our quantitative assessments, we concluded that the fair value of our Commercial Industries and Public Sector reporting units exceeded their respective carrying values by 72% and, 13%, respectively, ataccordingly, we did not record any goodwill impairment charge in the year ended December 31, 2017. The most significant assumptions used2020.
During 2019, we performed interim goodwill impairment assessments for all our reporting units which resulted in the goodwill analysis relate to a 3% long-term organic growth rate for both the Commercial Industries and Public Sector segments as well as a 9.25% and a 8.75% discount rate for the Commercial Industries and Public Sector segments, respectively. The fair valuescumulative impairment charge of the Commercial Industries and Public Sector segments are sensitive to changes in the long-term growth rates and the discount rates. A decrease of 50 basis points to the long-term growth rate or an increase to the discount rate of 50 basis points would result in an approximate reduction of fair value of $200 million and $250 million, respectively, in the Public Sector segment.
$2.0 billion. Refer to Note 69 – Goodwill and Intangible Assets, Net into the Consolidated Financial Statements for additional informationdetails regarding goodwill by reportable segment.the facts and circumstances that led to this impairment charge.
Income Taxes
We are subject to income taxes in the 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 anthe 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 $250$294 million and $360$309 million had valuation allowances of $35$83 million and $24$72 million at December 31, 20172020 and 2016,2019, respectively. As a result of the 2017 tax law changes in the United States, we recorded provisional amounts for a one-time non-cash $210 million income tax benefit related to adjusting our deferred tax liabilities from a 35% Federal tax rate to a 21% Federal tax rate and the transition tax expense of $12 million.
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 $15$23 million, $14$24 million and $24$20 million at December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
Refer to Note 1216 – Income Taxes into the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.
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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 1317 – Contingencies and Litigation into 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
In November 2020, the SEC adopted amendments to modernize, simplify and enhance certain financial disclosures called for by Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide material information to investors. The amendments are also designed to improve the readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information.
The provisions of the rule that have the most significant impact on our disclosures under Regulation S-K and the content of this Form 10-K include: (i) elimination of the requirement to include a five year financial highlights table in the Form 10-K; (ii) amending the requirement to present quarterly financial information for the two most recent years in tabular form to a principals-based approach to discuss material retrospective changes; (iii) elimination of the requirement to present a tabular summary of contractual obligations; (iv) adding a requirement to state the principal objectives of the MD&A; and (v) adding a requirement to present and discuss critical accounting estimates in the MD&A.
We will be required to comply with these amendments for our Form 10-K for the year ended December 31, 2021. Early application is permitted for each amended item. We have elected to apply the guidance to eliminate the disclosure of the five-year highlights for this Form 10-K for the year ended December 31, 2020.
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Financial Information
| Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Total Revenues | $ | 6,022 | $ | 6,408 | $ | 6,662 | $ | (386 | ) | (6 | )% | $ | (254 | ) | (4 | )% | ||||||||||
| Total Cost of services | 4,977 | 5,498 | 5,977 | (521 | ) | (9 | )% | (479 | ) | (8 | )% | |||||||||||||||
| Gross Margin | $ | 1,045 | $ | 910 | $ | 685 | $ | 135 | 15 | % | $ | 225 | 33 | % | ||||||||||||
| Operating Costs and Expenses | ||||||||||||||||||||||||||
| Research and development | $ | 13 | $ | 31 | $ | 52 | $ | (18 | ) | (58 | )% | $ | (21 | ) | (40 | )% | ||||||||||
| Selling, general and administrative | 615 | 686 | 699 | (71 | ) | (10 | )% | (13 | ) | (2 | )% | |||||||||||||||
| Restructuring and related costs | 101 | 101 | 159 | — | — | % | (58 | ) | (36 | )% | ||||||||||||||||
| Amortization of intangible assets | 243 | 280 | 250 | (37 | ) | (13 | )% | 30 | 12 | % | ||||||||||||||||
| Goodwill impairment | — | 935 | — | (935 | ) | (100 | )% | 935 | 100 | % | ||||||||||||||||
| Separation costs | 12 | 44 | — | (32 | ) | (73 | )% | 44 | 100 | % | ||||||||||||||||
| Interest expense | 137 | 14 | 8 | 123 | 879 | % | 6 | 75 | % | |||||||||||||||||
| Related party interest | — | 26 | 61 | (26 | ) | (100 | )% | (35 | ) | (57 | )% | |||||||||||||||
| (Gain) loss on sale of asset and businesses | (42 | ) | 2 | — | (44 | ) | (2,200 | )% | 2 | 100 | % | |||||||||||||||
| Other (income) expenses, net | (18 | ) | 18 | 30 | (36 | ) | (200 | )% | (12 | ) | (40 | )% | ||||||||||||||
| Total Operating Costs and Expenses | $ | 1,061 | $ | 2,137 | $ | 1,259 | $ | (1,076 | ) | (50 | )% | $ | 878 | 70 | % | |||||||||||
| Loss Before Income Taxes | $ | (16 | ) | $ | (1,227 | ) | $ | (574 | ) | $ | 1,211 | (99 | )% | $ | (653 | ) | 114 | % | ||||||||
| Income tax benefit | (193 | ) | (244 | ) | (238 | ) | 51 | (21 | )% | (6 | ) | 3 | % | |||||||||||||
| Income (Loss) From Continuing Operations | $ | 177 | $ | (983 | ) | $ | (336 | ) | $ | 1,160 | (118 | )% | $ | (647 | ) | 193 | % | |||||||||
| 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
We estimated approximately $85 million of the run offrevenue decline for the year was attributable to the net effect of our Student Loan business and overall price declines that were consistent with prior-period trends. Partially offsetting these declines were new contracts in the Public Sector.COVID-19 pandemic or COVID-19 related effects.
Cost of Services (excluding depreciation and amortization)
Cost of services for 20172020 decreased, compared to the prior year, period primarily due to cost transformation,mainly driven by lost business, wind-downour efficiency initiatives and cost actions. Also contributing to the decline were lower costs to support volume loss resulting from the effects of the NY MMIS contract, run-off of our Student Loan business, strategic contract actions taken by management as part of portfolio managementCOVID-19 pandemic.
Selling, General and lower volumes.Administrative (SG&A) (excluding depreciation and amortization)
SG&A for 2016 decreased2020 declined, compared to the prior year, period primarily due to lost business, the NY MMIS contract, run-off of our Student Loan businessmainly driven by reductions in real estate costs, lower corporate overhead costs and lower volumes.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 period was driven primarily by the impact of cost and productivity improvements, including benefits from our strategic transformation program, exiting or remediating certain underperforming contracts and lower costs associated with our Student Loan business. This was partiallydue to D&A on new capital expenditure spend being offset by the run-off of our Student Loan business, contract losses and lower volumes with existing clients.D&A on older assets.
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 dueassociated with certain strategic transformation programs.
(2)Relates to headcount reductions of approximately 3,200 employees worldwide $9 million of costs primarily related to professional support services associated with the implementation of the strategic transformation program and $5 million of asset impairments charges.
Refer to Note 710 – Restructuring Programs and Asset Impairment Charges inRelated 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 the year ended December 31, 2017 increased2020, compared to the prior year, was driven primarily due toby lower interest rates, partially offset by a higher average debt balance that resulted from the issuance of debt with the capitalization of the Company during the spin-off$150 million withdrawn from our Senior Revolving Credit Facility (Revolver) in December 2016 and subsequent borrowing under Term Loan B in January 2017, as well as amounts outstanding at various times throughout the year under the Company's credit facility.
March 2020. Refer to Note 812 – Debt into the Consolidated Financial Statements for additional information.
Goodwill Impairment
reporting units. Refer to Note 189 – Related Party TransactionsGoodwill and Former Parent Company Investment inIntangible Assets, Net to the Consolidated Financial Statements for additional information.
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Loss on SaleDivestitures and Transaction Costs
The costs included in 2020 amount consist of Assetprofessional 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.
Net litigation costs for 2020 primarily consist of reserves for various matters that are subject to litigation and costs related to certain reimbursement matters with our former parent company, Xerox Corporation. Net litigation costs for 2019 consist primarily of the recognition of the $13 million discount on the fair value of the Texas litigation liability established in 2017 with aggregate proceeds2018, due to the 2019 acceleration of $56 million. We recorded a pre-tax gainthe payment terms of $16 million on these divestitures. In addition, in 2017 we sold a property located in Dallas, TX, which was formerly the ACS headquarters,settlement.
Refer to Note 17 – Contingencies and Litigation to the Consolidated Financial Statements for a pre-tax gain of $24 million.additional information.
Other (Income) Expense,Expenses, Net
Other (income) expense,expenses, net primarily includes foreign currency transaction losses (gains), litigationinterest income and other contingent matters and deferred compensation investment results.the Student Loan business shut-down costs.
Income Taxes
The 20172020 effective tax rate was 1,206.3% as15.1%, compared with 19.9%to 8.2% for the prior year.2019. The 2017 rate was higher than the U.S. statutory tax rate of 35% primarily due to the impact of the Tax Reform, which included the reduction of the U.S. statutory rate from 35% to 21% and a one-time tax on undistributed and previously untaxed post-1986 foreign earnings and profits. Excluding primarily the tax impact of the Tax Reform, the termination of the COLI, amortization of intangible assets and gains on U.S divestitures, the adjusted effective tax rate for 2017 was 33.8%. The Tax Reform is the most significant change to U.S. federal income tax legislation in over 30 years and, as a result, has a disproportionate effect on our 2017 effective tax rate. See Note 12 – Income Taxes for further information regarding the impact of the Tax Reform on our Consolidated Financial Statements.
Excluding the impact of amortization, restructuring and discrete tax items the non-deductible Goodwill impairment charge. Excluding primarilynormalized 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, NY MMIS,divestitures, the Texas litigation reserve, amortization of intangible assets, and restructuring costs,restructuring. The decline in the 2016 normalized effective tax rate from 2019 to 2020 is attributable to an increase in tax credits, favorable changes to certain U.S. tax rules and geographic mix of income in 2020.
The Company believes it is reasonably possible that unrecognized tax benefits of approximately $14 million will reverse within 12 months due to anticipated audit settlements.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was 29.0%.signed into law. The CARES Act provides for various tax relief and tax incentive measures. The payment of the employer share of payroll taxes for the remainder of 2020 was deferred to 2021 and 2022 under the CARES Act, which provided a temporary operating cash flow benefit. The CARES Act also retroactively allowed for the immediate recovery of qualified improvement property (QIP) costs rather than over a 39 year recovery period, resulting in additional tax deductions for 2018 and 2019. Lastly, the CARES Act provided an elective five-year carry back for net operating losses(NOLs) incurred in taxable years starting after December 31, 2017, and before January 1, 2021. This allowed the Company to carry back the loss it incurred in 2019 to 2018, resulting in a tax refund.
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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, correspondenterprise application costs and certain corporate overhead expenses not directly attributable or allocated to howour reportable segments.
The section below provides a comparative discussion of our financial performance by segment between the year ended December 31, 2020 and 2019. As described in Note 3 – Segment Reporting to our Consolidated Financial Statements, in 2020 we organizerealigned our sales organization and managecertain shared IT and other allocated functions and reallocated certain costs that were previously included in the businessShared IT/Infrastructure and are alignedCorporate Costs (now referred to as Unallocated Costs) to each of the industries in which our clients operate. Beginning in 2017, in an effort to better reflect how we organize and manage our business, we changed our reporting segments to align the Healthcare business based on customer focus between Commercial Industries and Public Sector.reportable segments. All prior yearsperiods presented have been adjustedrecast to reflect the new reporting segments.
Segment Performance Review - 2020 compared to 2019
| (in millions) | Commercial Industries | Government Services | Transportation | Other | Unallocated Costs | Total | ||||||||||||||||||||||||||||||||||||||
| Year Ended Dec 31, 2020 | Divestitures | Other | ||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 2,163 | $ | 1,281 | $ | 719 | $ | — | $ | — | $ | — | $ | 4,163 | ||||||||||||||||||||||||||||||
| Segment profit (Loss) | $ | 150 | $ | 372 | $ | 82 | $ | — | $ | 9 | $ | (348) | $ | 265 | ||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 258 | $ | 397 | $ | 117 | $ | — | $ | 2 | $ | (294) | $ | 480 | ||||||||||||||||||||||||||||||
| % of Total Revenue | 52.0 | % | 30.8 | % | 17.2 | % | — | % | — | % | — | % | 100.0 | % | ||||||||||||||||||||||||||||||
| Adjusted EBITDA Margin | 11.9 | % | 31.0 | % | 16.3 | % | �� | % | — | % | — | % | 11.5 | % | ||||||||||||||||||||||||||||||
| Year Ended Dec 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 | $ | (1) | $ | (301) | $ | 494 | ||||||||||||||||||||||||||||||
| % 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 | % | ||||||||||||||||||||||||||||||
| (in millions) | Commercial Industries | Public Sector | Other | Total | ||||||||||||
| Year Ended December 31, 2017 | ||||||||||||||||
| Total Revenue | $ | 3,548 | $ | 2,163 | $ | 311 | $ | 6,022 | ||||||||
| Profit (Loss) | $ | 182 | $ | 245 | $ | (10 | ) | $ | 417 | |||||||
EBITDA(1) | $ | 344 | $ | 330 | $ | (3 | ) | $ | 671 | |||||||
| Adjusted EBITDA(1) | $ | 344 | $ | 330 | $ | (2 | ) | $ | 672 | |||||||
| % of Total Revenue | 58.9 | % | 35.9 | % | 5.2 | % | 100.0 | % | ||||||||
EBITDA Margin(1) | 9.7 | % | 15.3 | % | (1.0 | )% | 11.1 | % | ||||||||
Adjusted EBITDA Margin(1) | 9.7 | % | 15.3 | % | (0.6 | )% | 11.2 | % | ||||||||
| Year Ended December 31, 2016 | ||||||||||||||||
| Total Revenue | $ | 3,805 | $ | 2,308 | $ | 295 | $ | 6,408 | ||||||||
Adjusted Revenue(1) | $ | 3,805 | $ | 2,308 | $ | 378 | $ | 6,491 | ||||||||
| Profit (Loss) | $ | 151 | $ | 293 | $ | (248 | ) | $ | 196 | |||||||
EBITDA(1) | $ | 313 | $ | 395 | $ | (182 | ) | $ | 526 | |||||||
Adjusted EBITDA(1) | $ | 313 | $ | 395 | $ | (73 | ) | $ | 635 | |||||||
| % of Total Revenue | 59.4 | % | 36.0 | % | 4.6 | % | 100.0 | % | ||||||||
EBITDA Margin(1) | 8.2 | % | 17.1 | % | (61.7 | )% | 8.2 | % | ||||||||
Adjusted EBITDA Margin(1) | 8.2 | % | 17.1 | % | (19.3 | )% | 9.8 | % | ||||||||
| Year Ended December 31, 2015 | ||||||||||||||||
| Total Revenue | $ | 4,059 | $ | 2,331 | $ | 272 | $ | 6,662 | ||||||||
Adjusted Revenue(1) | $ | 4,059 | $ | 2,331 | $ | 388 | $ | 6,778 | ||||||||
| Profit (Loss) | $ | 148 | $ | 298 | $ | (509 | ) | $ | (63 | ) | ||||||
EBITDA(1) | $ | 308 | $ | 416 | $ | (440 | ) | $ | 284 | |||||||
Adjusted EBITDA(1) | $ | 308 | $ | 416 | $ | (85 | ) | $ | 639 | |||||||
| % of Total Revenue | 60.9 | % | 35.0 | % | 4.1 | % | 100.0 | % | ||||||||
EBITDA Margin(1) | 7.6 | % | 17.8 | % | (161.8 | )% | 4.3 | % | ||||||||
Adjusted EBITDA Margin(1) | 7.6 | % | 17.8 | % | (21.9 | )% | 9.4 | % | ||||||||
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Commercial Industries Segment
Revenue
Commercial Industries revenue 2017 asfor 2020 decreased, compared to the prior year, decreased, primarily driven by strategic contract actions, lower volumes in our customer care offerings anddue to an estimated $158 million of negative COVID-19 impacts as well as prior year lost business,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 new contracts and price increases with existing clients. Commercial Industries revenue for 2016 decreased from the prior year, mainly driven by lost business, lower volumes in our customer care offerings and reduced level of project workHSA offering "BenefitWallet" (within our HRLS business) as a result of fewer large cases ininterest rate reductions, 4) slightly reduced call volumes within our litigation servicesCXM service offering negative impacts from currencyacross travel and strategic contract exits. Partially offsetting the decline wereretail clients, and 5) COVID-19 related delays of new contract signings, primarily in our high-tech business area.ramp across multiple clients and offerings.
Segment Profit and Adjusted EBITDA
Decreases in the Commercial Industries segment profit and adjusted EBITDA for 20172020, 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 the Supplemental Nutrition Assistance Program (SNAP) volumes and Pandemic SNAP volumes, 2) an increase in the number of citizens to which we distribute unemployment insurance benefits, and 3) incremental additional unemployment insurance benefit distributions provided by the CARES Act.
Segment Profit and Adjusted EBITDA
Increases in the Government Services segment profit and adjusted EBITDA for 2020, compared to the prior year, were primarily driven by higher margin revenue mix due to COVID-19, the cost savings program and lower IT costs associated with contract losses.
Transportation Segment
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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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 driven by reduced costsdue to the adjustment to the remaining California Medicaid Management Information System settlement liability of $7 million as a result of the contract expiration in March 2020. This benefit was removed from adjusted EBITDA for segment reporting purposes due to its non-recurring nature.
Unallocated Costs
Improvements in adjusted EBITDA within our strategic transformation initiatives, including contract remediation and strategic contract actions, partially offset by the overall revenue decline. The Commercial Industries segment profitUnallocated Costs for 2016 as2020, compared to the prior year, was largely flat, primarily due to overall benefits from costs and productivity initiatives,were mainly driven by the efficiencies created by the cost reduction initiative, partially offset by margin pressurean increase in our customer care services offeringcosts incurred due to the effects of the COVID-19 pandemic and reduced project workan increase in our litigation services offering.certain employee costs.
| (in millions) | Commercial Industries | Government Services | Transportation | Other | Unallocated Costs | Total | ||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2019 | Divestitures | Other | ||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 2,385 | $ | 1,263 | $ | 781 | $ | 36 | $ | 2 | $ | — | $ | 4,467 | ||||||||||||||||||||||||||||||
| Segment profit (Loss) | $ | 270 | $ | 279 | $ | 69 | $ | 1 | $ | (1) | $ | (345) | $ | 273 | ||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 376 | $ | 311 | $ | 108 | $ | 1 | $ | (1) | $ | (301) | $ | 494 | ||||||||||||||||||||||||||||||
| % of Total Revenue | 53.4 | % | 28.3 | % | 17.4 | % | 0.8 | % | — | % | — | % | 100.0 | % | ||||||||||||||||||||||||||||||
| Adjusted EBITDA Margin | 15.8 | % | 24.6 | % | 13.8 | % | 2.8 | % | (50.0) | % | — | % | 11.1 | % | ||||||||||||||||||||||||||||||
| Year Ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 2,550 | $ | 1,351 | $ | 729 | $ | 752 | $ | 11 | $ | — | $ | 5,393 | ||||||||||||||||||||||||||||||
| Segment profit (Loss) | $ | 346 | $ | 296 | $ | 61 | $ | 98 | $ | (4) | $ | (375) | $ | 422 | ||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 454 | $ | 328 | $ | 99 | $ | 105 | $ | (2) | $ | (344) | $ | 640 | ||||||||||||||||||||||||||||||
| % of Total Revenue | 47.3 | % | 25.1 | % | 13.5 | % | 13.9 | % | 0.2 | % | — | % | 100.0 | % | ||||||||||||||||||||||||||||||
| Adjusted EBITDA Margin | 17.8 | % | 24.3 | % | 13.6 | % | 14.0 | % | (18.2) | % | — | % | 11.9 | % | ||||||||||||||||||||||||||||||
Commercial Industries Segment
Revenue
Commercial Industries revenue for 2017 as compared to prior year2019 decreased, primarily driven by strategic decisions and contract losses in State & Local, Government Healthcare and Payment Services. Public Sector revenue for 2016 decreased as compared to the prior year, primarily due to lower volumesdriven by contract losses, volume pressure, price pressure upon renewals, strategic exits and lost business in State Government Services,currency fluctuations. These losses were partially offset by revenue from new business.contracts.
Segment Profit and Adjusted EBITDA
Decreases in the Public SectorCommercial Industries segment profit and adjusted EBITDA margin for 2017 as2019, compared to the prior year, waswere mainly due to strategic decisions, contract losses in Government Healthcare, as well as losses in our Payment Services business, partially mitigateddriven by our strategic transformation initiative. Decrease in the Public Sector segment profit for 2016 as compared to prior year was primarily due to the impact of lost business in State Government Services,overall revenue declines, partially offset by reductions in labor and real estate costs from our efficiency initiatives.
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Government Services Segment
Revenue
Government Services revenue for 2019 decreased, compared to the prior year, primarily driven by contract losses and productivity initiativespricing and improved performancescope 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 transportation offering.efficiency initiatives.
Other
Revenue
Other revenue for 2017 improved2019 decreased, compared to 2016,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 improved pricingdivestitures completed in 2019 and performance from two large Health Enterprise clients, partially offset by the exit from the NY MMIS contract2018 and the strategic run-off of theour Student Loan Services business. Other revenue
Unallocated Costs
Improvements in segment loss and adjusted EBITDA within our Unallocated Costs for 2016 increased2019, compared to 2015 as a result of the non-recurring $116 million HE charge in 2015, partially offset by the $83 million write-off of NY MMIS in 2016, the continued run-off of the Student Loan business, partially offset by our prior-year decision to not complete the HE implementations in California and Montana.
Metrics
Signings
Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Total Contract Value (TCV)TCV is the estimated total contractual revenue related to signed contracts. contracts, excluding the impact of divested business as required.
For the year ended December 31, 2020, the Company signed $1,934 million of new business, representing a 94% increase compared to the prior year. Renewal TCV for the year ended December 31, 2020 was $2,809 million, an increase of 26% compared to the prior year.
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The amounts in the following table do not reflectexclude 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 impact of our adoptionrevenue 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 newcontract term.
(2)New business NRR measures the non-recurring revenue recognition standard on January 1, 2018. Refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies for further discussion of the estimated impact of the adoption of this standard.
| Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| New business TCV | $ | 2,260 | $ | 2,527 | $ | 4,345 | $ | (267 | ) | (11 | )% | $ | (1,818 | ) | (42 | )% | ||||||||||
| Renewals TCV | 2,692 | 4,325 | 3,637 | (1,633 | ) | (38 | )% | 688 | 19 | % | ||||||||||||||||
| Total Signings | $ | 4,952 | $ | 6,852 | $ | 7,982 | $ | (1,900 | ) | (28 | )% | $ | (1,130 | ) | (14 | )% | ||||||||||
| Annual recurring revenue signings | $ | 533 | $ | 589 | $ | 883 | $ | (56 | ) | (10 | )% | $ | (294 | ) | (33 | )% | ||||||||||
| Non-recurring revenue signings | $ | 383 | $ | 438 | $ | 451 | $ | (55 | ) | (13 | )% | $ | (13 | ) | (3 | )% | ||||||||||
Total signings for 2016 decreased2020 increased, compared to the prior year, primarily reflecting lower contribution from new business, due in part to our decision not to pursue opportunities with lower margins andstrong conversion of the prior year large NY MMIS new business signing.
Capital Resources and Liquidity
As of December 31, 20172020 and 2016,2019, total cash and cash equivalents were $658$450 million (of which approximately $150 million was cash in foreign locations) and $390$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 of December 31, 2020.
As of December 31, 2017,2020, there were $1,574 million$1.5 billion outstanding borrowings under our credit facilityCredit Agreement of which $82 million was due within one year. Refer to Note 12 – Debt to the Consolidated Financial Statements for additional debt information.
In January 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 the Commercial Industries segment. Refer to Note 5 – Business Acquisition to the Consolidated Financial Statements for additional information regarding this acquisition.
In February 2019, we reached a settlement agreement and we utilized $12release with the State of Texas ("State") and the Texas Department of Health and Human Services, which was amended in May 2019 ("Texas Agreement"). Pursuant to the terms of the Texas Agreement, the Company was required to pay the State $236 million, of our revolving credit facility capacitywhich $118 million was paid in 2019 and the remaining $118 million paid in January 2020. Refer to issue letters of credit. In addition, we will make payments in 2018 of $99 millionNote 17 – Contingencies and Litigation to participants of the terminated deferred compensation plans.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 threetwo years ended December 31, 2017,2020, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:
| Year Ended December 31, | Change | Year Ended December 31, | Change | |||||||||||||||||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | 2017 | 2016 | (in millions) | 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 302 | $ | 108 | $ | 493 | $ | 194 | $ | (385 | ) | |||||||||||||||||||||||||
| Net cash provided by investing activities | 74 | 16 | 522 | 58 | (506 | ) | ||||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | 161 | $ | 132 | $ | 29 | |||||||||||||||||||||||||||||
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | (134) | (310) | 176 | ||||||||||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | (109 | ) | 132 | (1,023 | ) | (241 | ) | 1,155 | Net cash provided by (used in) financing activities | (74) | (85) | 11 | ||||||||||||||||||||||||
Operating Activities
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The increasenet improvement in cash generatedflow from operating activities of $29 million, compared to the prior year, was primarily attributable to the deferral of payroll taxes allowed by the CARES Act and other COVID-19 related relief of $57 million, lower income tax payments of $47 million and other working capital changes of $44 million, partially offset by the timing of collection of receivables of $119 million.
Investing Activities
The 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 $10 million for the year ended December 31, 2017 was primarily attributable2020, compared to improvements in working capital and reduced wind-down payments associated with implementations in California, Montana and New York, partially offset by a higher interest payments on our outstanding debt.$21 million for the prior year.
Sales of Accounts Receivable
The decrease innet impact from the sales of accounts receivable on net cash generated fromprovided by (used in) operating activities for the yearyears ended December 31, 20162020, 2019 and 2018 was primarily attributable to reduced factoring, HE settlement payments$(22) million, $51 million and working capital partially offset by lower$23 million, respectively. The net income tax payments due to income tax refunds.
Refer to Note 813 – Debt inFinancial Instruments to the Consolidated Financial Statements for additional information.
Contractual Cash Obligations and Other Commercial Commitments and Contingencies
At December 31, 2017,2020, we had the following contractual cash obligations and other commercial commitments and contingencies:
(in millions) | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | (in millions) | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||||||||
Total debt, including capital lease obligations(1) | $ | 82 | $ | 72 | $ | 85 | $ | 560 | $ | 9 | $ | 1,309 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total debt, including finance lease obligations(1) | Total debt, including finance lease obligations(1) | $ | 90 | $ | 598 | $ | 804 | $ | 36 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Interest on debt(2) | 115 | 113 | 110 | 107 | 91 | 156 | Interest on debt(2) | 42 | 41 | 30 | 9 | 5 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Minimum operating lease commitments(3) | 163 | 119 | 80 | 53 | 31 | 52 | Minimum operating lease commitments(3) | 95 | 71 | 47 | 37 | 27 | 59 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Defined benefit pension plans | 8 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated Purchase Commitments(4) | 116 | 100 | 68 | 38 | 21 | — | Estimated Purchase Commitments(4) | 67 | 24 | 11 | 3 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 484 | $ | 404 | $ | 343 | $ | 758 | $ | 152 | $ | 1,517 | Total | $ | 294 | $ | 734 | $ | 892 | $ | 85 | $ | 32 | $ | 59 | |||||||||||||||||||||||||||||||||||||