UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________ 
FORM 10-K
_________________________________________________ 
(Mark One)
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2017
2020
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________  to: _______
Commission File Number 001-37817



_________________________________________________
CONDUENT INCORPORATED
(Exact Name of Registrant as specified in its charter)
_________________________________________________ 
New York81-2983623
(State or other jurisdiction of incorporation)incorporation or organization)(IRS Employer Identification No.)
100 Campus Drive,Suite 200,
Florham Park,New Jersey 07932(844) 663-263807932
(Address of principal executive offices)(Registrants telephone number, including area code)Zip Code)


(844) 663-2638
(Registrant’s telephone number, including area code)
_________________________________________________  

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueCNDTNew York Stock ExchangeNASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________  _________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o


Table of Contents

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging Growth o
Large accelerated filerAccelerated filerNon-accelerated filerSmall reporting companyEmerging growth company
CNDT 2020 Annual Report

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ý
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
The aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates as of June 30, 20172020 was $3,323,804,990.$499,054,949.
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
ClassOutstanding at January 31, 20182021
Common Stock, $0.01$0.01 par value210,469,177212,149,685


DOCUMENTS INCORPORATED BY REFERENCE

PortionsPart III of this Form 10-K incorporates by reference certain portions of the following document are incorporated hereinRegistrant's Notice of 2021 Annual Meeting of Shareholders and Proxy Statement (to be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than 120 days after the close of the fiscal year covered by reference:this report on Form 10-K).


DocumentPart of Form 10-K in which Incorporated
Conduent Incorporated Notice of 2018CNDT 2020 Annual Meeting of Shareholders and Proxy Statement (to be filed no later than 120 days after the close of the fiscal year covered by this report on Form 10-K)IIIReport




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.
Such
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.

On December 31, 2016, Conduent Incorporated (formerly known as the BPO business) spun-off from Xerox Corporation, pursuant to the Separation and Distribution Agreement between the Company and Xerox Corporation (Separation). As a result of the spin-off, we now operate as an independent, publicly traded companyJanuary 3, 2017, on the New York Stock Exchange, under the ticker "CNDT". In December 2019, Conduent changed the listing of its publicly traded common stock from the New York Stock Exchange to the NASDAQ Global Select Market (NASDAQ), where it remains listed under the ticker "CNDT".


We create valueOur Strategic Focus

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.

Our portfolio includes industry-focused service offerings in attractive growth markets such as Healthcare and Transportation, as well as multi-industry service offerings such as Transaction Processing, Human Resources Solutions and Payment Services.

Quality. Our strategy is to drive portfolio focus, operational discipline, sales and delivery excellence and innovation,
complemented by tightly aligned investments. As a result, we aimdesigned to deliver value by creating profitable growth, expanding operating margins, focusing on process efficiencies, and margin expansion and to deploydeploying a disciplined capital allocation strategy.

With approximately 90,000 employees globally as of December 31, 2017, we provide differentiated services to clients spanning small, medium and large businesses and to governments around the world.

Our Transformation


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.

Key initiatives include:

Realigned Delivery. During 2017 we reorganized the business to better align to our vertical go-to-market strategyseamless and reliable service to our global delivery capabilities.clients.

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.


Divested Non-Core Assets. We divested five businesses in 2017 for aggregate proceeds of $56 million in cash. These sales enabled us to increase ourOur focus on areasquality is leading to improved client confidence and satisfaction. We are measuring success in “Quality” by indicators such as service level agreement performance, technology incident rates, and client satisfaction.

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.

Increased Usesignificant scale and where we believe that with process improvements, automation, and an investment into the current offerings, we can improve the end-user experience, reduce our cost of Automation. We have developeddelivery, expand our margins, and deployed a set of advanced software-based automation toolsfurther capture additional “share”. Examples such as part of our service delivery operations. These tools reduce the amount of repetitive, manual labor required to deliver many of ourhigh-volume outbound print and mail services and improve service quality through lower error ratescontact center services fit in this category.

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.


Real Estate, InfrastructureOpportunities to expand, where we believe we have the permission to play and Selling, Generalwin, and Administrative (SG&A). We have significantly reducedwe see the number of leasedpayback as more significant than the other businesses. These businesses, augmented with new capabilities, perhaps supplemented by modest acquisitions, will address market dynamics, and owned properties from 462 to 339, reduced our information technology infrastructure costs by streamlining our operationsprovide additional growth opportunities. Our Healthcare and reduced our SG&A costs from $686 million in 2016 to $615 million in 2017.
Transportation businesses are expansion opportunities.

Conduent Inc. 2017 Annual Report     1



We continue to execute on our strategic transformation program to deliver cost savings through infrastructure optimization, labor productivity and automation initiatives, restructuring of unprofitable contracts and other efficiencies. This transformation program has and will enable us to better capitalize on our differentiated service offerings, industry expertise and global delivery excellence and position us for long-term shareholder value creation.


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
services companies to capitalize on these trends. In addition, business process servicesprocesses have the potential to
meaningfully enhance productivity for businesses and governments and improve satisfaction for their constituentscustomers and constituents.
customers.


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Segments


OurWe organize, manage and report our business through three reportable segments correspond to how management organizes and manages the business and are aligned to the industries in which our clients operate, which aresegments:

Commercial Industries: Our Commercial Industries and Public Sector.

Our Commercial Industriessegment provides business process services and customized solutions to clients in a variety of industries.
Across the Commercial Industries segment, we operate on our clients’ behalf to deliver mission-critical solutions and services to reduce costs, improve efficiencies and enable revenue growth for our clients and better experiences for their consumers and employees. Our Commercial Industries segment is our largest segment, with segment revenue for 2020 of $2.2 billion, representing 52% of our total revenues.


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.


Other represents our Government Health Enterprise (HE) Medicaid Platform for all current state clientsTransportation: Our Transportation segment provides systems and our Education business, including our Student Loan business,support, as well as inter-segment eliminations.revenue-generating services, to government clients. On behalf of government agencies and authorities in the transportation industry, we deliver mission-critical public safety, 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. Transportation segment revenue for 2020 was $719 million, representing 17% 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.


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Public Sector

Our Public Sector segment generated revenues of $2.2 billion in 2017, representing 36% of the total revenues. This segment provides government-centric business process services to U.S. federal, state and local and foreign governments for transportation, public assistance program administration, transactionoutcome basis. Through our medical bill review, claims processing, and payment services.integrity solutions provided to managed care companies, we generate revenue on a per member per month basis for use of our platform, as a percentage of what we collect for the provider, or a monthly or annual fee.

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:

Transportation: We provide revenue-generating transportationhealthcare programs in 29 states and the District of Columbia. Seven of these states receive eligibility and enrollment services to government clients in 27 countries.only. Our services include support for electronic toll collection, public transit, parking, photo enforcement and commercial vehicle operations. Across these offerings, we manage key processes on behalfa range of our clients including fee collection, compliance and violation management, notifications, statements and reporting. These innovative services significantly improve individual travel experiences, optimize how vehicles and goods move efficiently within cities, digitize integrated modes of transportation and help our government clients to better serve their constituents.

Federal, State and Local Government: We support our government clients with services targeting key civilian agencies within federal, state and local governments, as well as government administrative offices. Our depth of agency-specific expertise combined with our scale allows us to deliver and manage programs at all levels of government. Our broad set of public sector services includes public assistance program administrationsolutions such as child support, pension administration, recordsMedicaid management, electronicprovider services, Medicaid business intelligence, pharmacy benefits management, eligibility and payment cards, unclaimed property,enrollment support, contact center services, application processing, premium billing, disease surveillance and outbreak management, and software offeringscase management solutions. Our case management solutions provide disease surveillance and outbreak management to make it easy to process and access large volumes of digital data. Foreign governments also use our disease surveillance and outbreak case management solution. This can be used to track public health metrics (such as diseases like COVID-19, vitals, and birth defects), perform electronic visit verification, and more. These services help states, counties, and countries optimize their costs by streamlining access to care and improving patient health outcomes through population health management, while helping families in support of federal, state and local government agencies.
need, by improving beneficiary support. Within the Government Healthcare Solutions business, our revenue is primarily fixed fee or variable price based on a per call or per interaction basis.


Government Service Solutions
Payments: With more than $87$110 billion disbursed annually, we are a leader in government payment disbursements for federally sponsored programs like Supplemental NutritionalNutrition Assistance Program (SNAP, a.k.a Food Stamps)(SNAP), commonly known as food stamps and Women, Infant and Children (WIC) as well as government initiatedgovernment-initiated cash disbursements such as child support unemployment and federal social security.Unemployment Insurance (UI). We provide our payment carddeliver electronic payments for government services which include brandedin 33 states, including 107 prepaid debit card (Visa and Mastercard),programs, 26 Electronic Benefit Transfer (EBT(EBT) programs, 13 EBT for SNAPWIC programs and WIC) and7 Electronic Child Care programs. In our SNAP payments solution, we generate revenue based on the number of cases or number of card holders. Within our UI payment solution, we generate revenue based on interchange fees and spending on cards as a percentage of transactions. Given the increased unemployment rates in the U.S. in 2020 as well as the federal stimulus supplemental benefits, this solution saw significantly increased activity in 2020.

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
Government Healthcare: We provide medicalOur electronic tolling, urban congestion management and fiscal agent caremileage-based user solutions help clients keep up with an ever-changing environment and get more travelers where they need to go while generating revenue for much-needed infrastructure improvements. Our solutions include vehicle passenger detection systems, electronic toll collection, automated license plate recognition and

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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.

Other

Other includes our Government HE Medicaid Platform business, where we are limiting our focus to maintaining systems for our current clients, our Education Business inclusive of our Student Loan business, which is in runoff; and inter-segment eliminations. In 2017, Other accounted for $311 million of revenues, representing 5% of total revenues.

Our Service Offerings

Our portfolio of business process services includessolutions. We generate revenue based on a combination of industry-specificfixed fee and multi-industrytransaction-based pricing. The transaction-based component can be per account per month, per notice mailed, per active account, per violations fees received, or per image-based transaction.
services.
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.


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Industry-Specific Services

Commercial Industry-Specific Services
Examples of the services we offer include personalized product information for automotive clients, digitized
source to pay solutions for manufacturing clients, care integration and coordination, member health risk assessments and payment integrity (such as recovering claims from the appropriate payers) for healthcare clients,
mortgage and consumer loan processing for financial institution clients and customized workforce learning solutions for aerospace clients.

Public Sector-Specific Services

Transportation Services: The transportation services we offer include support for electronic toll collection, public transit, parking,populations grow. We provide data analytics, automated photo enforcement and commercial vehicle operations. Across these offerings, we manage key processes on behalfother public safety solutions to make streets and communities safer. Our photo enforcement systems include red light, fixed and mobile speed, school bus, work zone, school zone, bus lane only, high occupancy and other enforcement systems. The majority of our clients includingcontracts within this business are fixed fee collection, compliance and violation management, notifications, statements and reporting.based on the number of enforced locations.


Other Public Sector Services: Our broad setCommercial Vehicles
Although a small part of public sector services includes public assistance program administration, pension administration, records management, disease management and software offerings in
support of federal, state and local government agencies. It also includes fiscal agent administrative services and providing management information systems in support of Medicaid programs or pharmacy benefits management for Government Healthcare clients.

Multi-Industry Services

Transaction Processing Services
We help our clients to improve communications with their customers and constituents, whether it is on paper, on-line or through other communication channels. By supporting our clients’ customer communication processes,transportation business, we help our clients deliver a better experience to their customers and operate with improved efficiency and greater effectiveness.

We offer a broad array of flexible transaction processing services that include data entry, scanning, image processing, enrollment processing, claims processing, high volume offsite print and mail services and file indexing. Our multi-channel communication capabilities (including secure print, email, text and web) enable the delivery of personalized and targeted communications that are designed to elicit the desired response from customers or other end-users (e.g., on-time bill payment and increased marketing response rates). Our service offerings utilize both proprietary and commercially available third-party technologies, combined with our expertise to ensure continued quality and innovation for our clients.

Payment Services
Prepaid Cards: We are an extensive provider of VISA and MasterCard prepaid debit cards, as well as other electronic payment cards in support of U.S. government benefit programs including Social Security, the Supplemental Nutrition Assistance Program (formerly known as food stamps), the Special Supplemental Nutrition Program for Women, Infants and Children and other specialized Electronic Benefits Transfer programs. Our secure payment services reduce fraud and eliminate paper checks by disbursing electronic payments directly to end users, even those without bank accounts. Our proprietary processing platform, significant operational expertise, advanced fraud analytics and adoption of Europay, MasterCard and Visa chip-enabledprovide computer-aided dispatch/automatic vehicle location technology put us in the forefront of the Prepaid Card industry.

Health Savings Accounts (HSA): We provide clients with a simplified approach to help their employeescustomers manage their health care costs and accumulate wealth with tax-advantaged accounts. We consolidate administration of allfleet operations.
health spending accounts onto one common platform, including Health Savings Accounts, Health Reimbursement Arrangements, Flexible Spending Accounts and Health Incentive Accounts. By consolidating and integrating the management of health spending accounts, we help our clients improve benefit enrollment and account opening, consolidate customer service, simplify communications and streamline account funding and management. As of December 31, 2017, we had approximately 1 million active HSA accounts and $2.3 billion of assets under management within our HSA offering.


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Child Support Payments: We are an industry leader of U.S. State Government Disbursement Units for child support payments. We collect payments from non-custodial parents via check, credit card and transfers from employee payroll systems and disburse payments to the beneficiaries.

Customer Care Services
We offer customer care services that help our clients provide their own customers with a superior experience. Our service offerings range from answering simple billing questions to providing complex technical and customer support. We also offer both inbound and outbound sales and cross-selling programs through our contact center operations. We provide these services through multiple channels, including phone, SMS, chat, interactive voice response, social networks and email. We augment our customer care agents’ efficiency and effectiveness with advanced technologies that help them resolve customer needs quickly and with consistent high quality.

Human Resources Services
We help our clients to support their employees at all stages of employment from initial on-boarding through retirement. We offer clients customized advisory, technology and administrative services that help them more
effectively involve employees in their health insurance, retirement plan and compensation programs. We design
and administer employee benefit programs that attract, reward and retain workforce talent through engaging technologies and decision support tools. Our service offerings include; cloud-based HR outsourcing; payroll and benefits administration; health savings and tax efficient account administration; and administration of, and consultation regarding, our proprietary private health care exchange, which allows employees to select from a set of predefined providers and also provides market-leading health and benefit decision support tools and ongoing health and wellness management.

Finance and Accounting Services
We serve clients by managing their critical finance, accounting and procurement processes. Our services include general accounting and reporting, billing and accounts receivable and purchasing, accounts payable and expense management services. We also offer wholesale and retail lockbox services and process auto and mortgage loans in the United States. With a global, dedicated team, we manage the core, end-to-end process areas of finance, accounting and procurement for some of the world’s most recognized brands.

Legal Business Services
We have been providing client support to law firms and corporate legal departments for over 20 years. We work across the litigation lifecycle, with particular focus on the legal discovery and review process. Our offerings include litigation support services, compliance and risk review and managed services support.

Workforce Learning Services
We are a provider of end-to-end learning services, designed to accelerate the productivity and development of our clients’ employees and extended work forces. Our global presence, superior innovation and expertise allow us to deliver performance-based learning services tailored to our clients’ unique strategic business goals. Our offerings include learning strategy and assessment, instructor management and learning administration.

Applied Automation and Analytics Solutions
Many of our service offerings described above incorporate our applied automation and analytics solutions to increase their value and effectiveness to clients across all industries. We deploy these solutions to personalize millions of interactions, optimize service delivery and simplify complex processes. For example, our customer care services harness the power of applied analytics and automation to help our customer service agents work more efficiently across different communication channels. Our applied automation solutions track and learn the most efficient means to address common customer service needs as they occur in real time so that we can solve the same problem faster the next time around. The combination of applied automation and analytics allows us to identify new service demand patterns and opportunities quickly so that we can proactively address them on behalf of our clients.


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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:


Healthcare. Healthcare – U.S. healthcare spending is estimatedexpected to have represented greater than 17.9%rise from 17.7% of GDP in 20162019 to 19.7% of GDP by 2028 and is continuingprojected to grow.grow at an average rate of 5.4% per year for 2019-2028. As one of the most regulated industries, healthcare providers must balance increased utilization with heightened complexity and new financial pressures such as government budget challenges to significantly reduce reimbursements, reimbursement penalties for hospital readmissions and a shift from fee-for-service to “value-based” population health management. We are widely recognized by industry analysts as a leader in healthcare payer operations, serving all 2017 of the top 20 U.S. managed healthcare plans and providing administrative and care management solutions to Medicaid programs and federally funded U.S. government healthcare programs in 2429 states Puerto Rico and the District of Columbia.
Three out of every four U.S. insured patients are touched by Conduent. Conduent’s healthcare capabilities have been recognized by NelsonHall, HfS Research, KLAS and Everest Group.


Transportation. Transportation – Traffic congestion continues to increase as urbanization and changing demographics take hold globally. As a result, optimized transportation systems are becoming critical to increase efficiency while

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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.


Transaction Processing.Business Operations Solutions – We provide high volume print and mail services, enrollment processing and personalized and targeted marketing and communications to large corporations and we believe we are a leading provider in this market.
market with more than 3.3 billion documents captured, indexed and classified annually.


Prepaid Cards: We are the leading provider of prepaid payment card services in support of the U.S. government prepaid card services market.

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.



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Innovation and development. We innovate by developing and acquiring new technologies and capabilities that improve business processes. We are constantly creating the next generation of simple, automated and touchless business processes to drive lower costs, higher quality and increased end-user satisfaction. Analytics allow us to transform big data into useful information that helps identify operational improvements and constituent insights. Additionally, we leverage robotic process automation and predictive analytics and combine this with our deep subject matter expertise to create intelligent services that improve security, increase speed and improve accuracy, quality and regulatory compliance, and uncover insights that support better decision making and outcomes for our clients.

Stable recurringRecurring revenue model supported by a loyal, diverse client base. base – We have a broad and diverse base of clients in 31 countries across geographies and industries, including a majority of the Fortune 1000100, many Fortune 1,000 companies small and midsize businesses and many governmental entities. Our close client relationships and successful client execution support our stable recurring revenue model and high renewal rates. Excluding our strategic decision not to renew certain contracts, the renewal rate for the year ended December 31, 2017 was 94%and above our target range of 85%-90%. Including all contracts, renewal rate would have been approximately 87%.

Our Strategies

Our strategy is to drive leadership in attractive markets by leveraging and building on our competitive strengths. We intend to execute our strategy through increased business portfolio focus and operating discipline, enhanced sales and delivery capabilities and tightly aligned investments. Our strategy is designed to deliver value by delivering profitable growth, expanding operating margins and deploying a disciplined capital allocation strategy.

Specific elements of our strategy include the following:

Expand within attractive industries. The industries in which we operate have attractive revenue growth rates, generally in the mid-single digits. We intend to sharpen our focus and expand our business in industries with strong growth and profitability characteristics. We will employ a disciplined approach to portfolio management to complement our competitive strengths and build depth and breadth in our core businesses. Within the Healthcare industry, we intend to leverage our data analytics, differentiated service offerings and industry know-how to continue to service payer, provider and core government healthcare clients. Within the Transportation industry, we will leverage our global, end-to-end platforms to continue to deliver seamless travel experiences while providing back-end Transaction Processing and Call Center services for government clients globally.

Optimize and strengthen our services capabilities. We plan to optimize our services capabilities and strengthen several core areas, including Transaction Processing, Finance and Accounting and Prepaid Card services by building out our services offerings and continuing to improve our competitive strengths. We have begun to divest non-core assets, refocused our business towards higher margin growing segments and consolidated delivery operations to enable greater productivity. Within Transaction Processing, we intend to continue to build industry-specific service offerings and advance inbound and outbound processing capabilities. Within Customer Experience, we intend to capitalize on our global scale, cost efficiencies and our ability to provide seamless communications between our clients and their end-users through traditional (e.g., voice) and digital (e.g., web, mobile and Internet of Things) channels. In Prepaid Cards, we plan to continue to leverage our scalable platform to help our clients simplify their payment disbursement processes.

Continue to advance next-generation platforms and capabilities. We intend to maintain our focus on innovation to create next-generation solutions aligned with our clients’ future needs and our growth strategies. We plan to advance our current platforms, further automate and personalize business processes and enhance data analytics capabilities to deliver value-added services for our clients.

Engage, develop and support our people. We intend to increasingly develop our employees by investing in training, processes and systems to equip them with modern tools that enable them to perform their jobs more
efficiently. Furthermore, we plan to strengthen our sales teams throughout improved and optimized coverage and effective talent management.


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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
PayrollHuman resource, payroll processing and human capital management providers such as ADP, Paychex, Alight and Paychex;Willis Towers Watson;
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
service offerings to our clients. We focus on developing new prospects through market research and analysis, renewing expiring contracts and leveraging existing client relationships to offer additional services.help them achieve their desired business outcomes. We leverage our broad multi-industry serviceportfolio of offerings and dedicated team of associates to package solutions through enterprise selling,that exactly meet clients’ needs, while maintainingtaking a disciplined approach to pricing and contracting. Our sales efforts typically involve

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extended selling cycles where our deep domain and ourindustry expertise in specific industries is critical to winning new business.

Our Geographies

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.

Innovation and Research and Development

Our innovation and research and development (R&D) capabilities are critical to our client value proposition and competitive positioning. Our investments in innovation align with our growth strategies and are driven by a view of future needs and required competencies developed in close partnershipmaintain strong relationships with our clients from initial engagement to implementation and R&D partners. We are investing in attractive markets, such as healthcare and transportation, and building on proven platforms to create services that distinguish us from our competitors.on-going service delivery.

Our innovation and R&D are focused on three key areas: automation, personalization and analytics.


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Automation—Create simple, automated and touchless business processes to drive lower cost, higher
quality and increased agility. Businesses require agility to quickly respond to market changes and new customer requirements. To enable greater business process agility, our R&D goals are to simplify, automate and enable business processes via flexible platforms that run on robust and scalable infrastructures. Automation of business processes benefits from our strong image, video and robotic processing, as well as our machine learning capabilities. Application of these methods to business processes enables technology to perform tasks that today are performed manually. Examples include providing automation solutions in transportation by aggregating and automatically applying business rules to simplify toll payments, using our state-of-the-art video and image analytics to reduce the need for manual review of license plates in tolling and toll adjustment scenarios, analyzing data on eligibility claims and checking for correctness on applications. The scope of automation is applied across our portfolio of services and is a key element of our ongoing strategy of modern, efficient services.

Personalization—Augment humans by providing secure, real-time and context-aware personalized products and services. Whether business correspondence, personal communication, manufactured items or information service, personalization increases the value to the recipient. Our R&D investments lead to technologies that improve the efficiency, economics and relevance of business services, such as customer care and health and
welfare services. In our current customer care service offerings, the human touch is seamlessly added as our
software automatically takes telephony data and merges it with customer records pulled from multiple sources to
seamlessly create targeted scripts and flows. This allows the agent to have the caller’s data at their fingertips and provide a more personal experience to the customer—whether on the phone or online. In toll systems, our systems automatically pull up a customer’s name, verify their information and prompt them for unpaid tolls. In transit systems, our mobile app aggregates and calculates the time, cost, carbon footprint and health benefits from walking, biking, driving, parking and taking public transit. For health and welfare, our systems provide state of the art personalized delivery to ensure the best utilization of funds for the neediest populations.

Analytics—Transform big data into useful information to support better decision making. Competitive advantage can be achieved by better utilizing available and real-time information. Today, information resides in an ever increasing universe of servers, repositories and formats. The vast majority of information is unstructured, including text, images, voice and videos. We seek to better manage large data systems in order to extract business insights to provide our clients with actionable recommendations and new services. Tailoring these methods to various industry applications leads to new customer value propositions. In hospitals, we mine usage and clinical indicators to improve patient experiences. We also help our healthcare clients identify waste and fraud by identifying networks of providers and patients with suspicious behavior, such as sudden and dramatic increases in a provider’s level of business or unusual or illogical patient treatment sequences. In transportation, we enable transport and parking operators to better understand and predict commuter needs, including adherence to schedules, passenger loading levels, car park utilization rates and the impact of varying factors such as weather and schedule variations. In our card payment services business, we perform geo location analytics to predict potential fraud behaviors to assure monies are being distributed to the intended recipients.


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.

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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.

Conduent established its own diversity and inclusion program post-separation, which is overseen by Conduent's human resources department. Conduent promotes understanding and inclusion through a comprehensive set of diversity initiatives and strategies, including addressing under-representation by identifying shortfalls and developing action plans to close those gaps and through work-life programs that assist employees in certain aspects of their personal lives. Additionally, Conduent informs and educates all employees on diversity programs, policies and achievements. As an independent company, we intend to continue our commitment to diversity and inclusion and implement similar policies and programs.

In the United States, Conduent complies with Equal Employment Opportunity guidelines and all applicable federal, state and local laws that govern the hiring and treatment of its employees.

As of December 31, 2017, we had approximately 90,000 employees globally, with 48%45% located in the United StatesNorth America and the remainder located primarily in India, Philippines, Jamaica, Guatemalaour delivery centers in Asia Pacific, Latin America and Mexico.Caribbean, and Europe. Our three reportable segments, Commercial Industries, Government Services and Transportation house the majority of our associates with approximately 45,000, 6,000 and 3,000 associates, respectively.


TrainingConduent Diversity & Inclusion (D&I)
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
WeAs a services company, we believe our people are our most important asset, which is why we invest in employeeassociate growth and development programs. We are focused on building a workplace where our people can do their best work and have access to the learning tools and resources they need to performexcel in their jobs more effectively.role, stay competitive and grow their skill set. We areoffer our associates modern, digital world-class learning platforms that help them learn anywhere, anytime on a wide range of topics including technology, professional and business-related. As a result, we have been successful in building a culture of continuous learning, with employees taking charge of their learning & development. In addition to our digital platforms, employees are also provided job-specific technical training when they are onboarded and during the course of their professional journey as required. Our learning platforms have shifted from deliveringwide adoption with about 2.47 million learning assets completed in 2020 with strong learning effectiveness scores

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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
Our commitment to business ethics represents more than a declaration to do the right thing. It has become an integral part of the way we do business.
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.


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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.


OtherAvailability of Company Information


Conduent IncorporatedOur internet address is a New York corporation, organized in 2016. Our principal executive offices are located at 100 Campus Drive, Florham Park, New Jersey 07932. Our telephone number is (844) 663-2638.

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.


Our Internet addressInformation about our Executive Officers

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 AgePresent PositionYear Appointed to Present PositionConduent Officer Since
Clifford Skelton*65Chief Executive Officer20192019
Mark Brewer56Executive Vice President, Transportation & Head of Enterprise Accounts20202019
Louis Keyes53Executive Vice President, Chief Revenue Officer20202020
Michael Krawitz51Executive Vice President, General Counsel & Secretary20192019
Mark Prout57Executive Vice President, Chief Information Officer20192020
Brian J. Webb-Walsh45Executive Vice President & Chief Financial Officer20172017
Stephen Wood54Vice President, Corporate Controller20202020
_____________________________
*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.

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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.

We face significant competition and our failure to compete successfully could materially adversely affect our results of operations and financial condition.

To remain competitive, we must develop services and applications; periodically enhance our existing offerings; remain cost efficient; and attract and retain key personnel and management. If we are unable to compete successfully, we could lose market share and important customers to our competitors and that could materially adversely affect our results of operations and financial condition.


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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, including the debt incurred in connection with our spin-off, 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:

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 these 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, the lenders of this indebtedness may require that we pledge 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.

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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.

In order to meeta variety of diversions, including: geopolitical events, such as war, the service requirementsthreat 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,war, or terrorist activity; 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 adoptioneffects of climate change (such as drought, flooding, wildfires, increased storm severity, and enforcementsea level rise); power shortages or outages, major public health issues,

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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.

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 robotic process automation, to absorb the level of pricing pressures on our services through cost improvements and to successfully complete information technology initiatives.population. If any of these, or any other factors, adversely materializedisrupt a country or ifregion where we are unable to achieve and maintain productivity improvements through restructuring actionshave a significant workforce (such as the U.S., India or information technology initiatives,the Philippines) or customers (such as the U.S. or Europe), or vendors, our ability to offset labor cost inflation and competitive price pressures wouldbusiness could be impaired, each of which could materially adversely affect our results of operations and financial condition.affected.


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.


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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
contracts,unbilled services, our results of operations and financial condition could be materially adversely affected.

In order to stay competitive in our industry, we must also 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, in many of our contracts, we have complicated performance obligations, including, without limitation, designing and building new integrated computer systems or doing actuarial work for pension, medical and other plans with beneficiaries that can rely on future projection of obligations to determine appropriate levels of funding. These contracts carry potential financial penalties or could result in financial damages or exposures if we fail to properly perform those obligations and could result in our results of operations and financial condition being materially adversely affected.


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If we are unable to collect our receivables for unbilled services, our results of operations and financial
condition could be materially adversely affected.


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.


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A failure to attract and retain necessary technical personnel and qualified subcontractors could materially
adversely affect our results of operations and financial condition.

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 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. Additionally, we may be required 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 or the loss of a key subcontractor relationship could materially adversely affect our results of operations and financial condition.


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.
regulatory matters.

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.

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, 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. 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.


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If we fail to successfully develop new service offerings, including new technology components, and protect our intellectual property rights, we may be unablerequired to retain current customers and gain new customersraise additional debt or equity financing, and our revenues would decline.

The processaccess to and cost 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 investmentsfinancing 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 relydepend 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.

Risks related to the spin-off:

We may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off.

We believe that, as an independent, publicly traded company, we will be able to, among other things, designglobal economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, our prospects, our credit ratings, and implement corporate strategies and policies that are targeted to our business, better focus our financial and operational resources on our specific business, create effective incentivesthe outlook for our management and employees that are more closely tied to our business performance, provide investors more flexibility and enable us to achieve alignment withindustry as a more natural shareholder base and implement and maintain a capital structure designed to meet our specific needs. However,whole. If, as a result of separating from Xerox, weCOVID-19, credit agencies downgrade our credit ratings, or general market conditions were to ascribe higher risk to our credit rating levels, our access to capital and cost of debt financing may be more susceptiblenegatively impacted and certain of our existing commercial agreements may require us to market fluctuations and other adverse events. As an independent entity, we have an arm’s-length relationshippost collateral; the continuing impact of the COVID-19 pandemic could also negatively impact our compliance with Xerox and we may not be able to obtain supplies from Xerox on terms as favorable to us as those we had as a wholly owned subsidiary of Xerox prior to the spin-off. As a smaller, independent company, Conduent has a narrower business focus and may be more vulnerable to changing market conditions as well as the risk of takeover by third parties.our financial covenants under our credit facilities. In addition, we may be unable to achieve some or allthe terms of future debt agreements could include more restrictive covenants.

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.


Conduent Inc. 2017 Annual Report     21


We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an
independent, publicly traded company, and we may experience increased costs after the spin-off.

We had historically operated as part of Xerox’s corporate organization, and Xerox had provided us with various corporate functions. Following the spin-off, Xerox has no obligation to provide us with assistance other than the transition services described under “Certain Relationships and Related Party Transactions —Transition Services Agreement.” These services do not include every service that weindustry have received from Xerox in the past, and Xerox is only obligated to provide these services for limited periods following completion of the spin-off. Accordingly, following the spin-off, we have needed to provide internally or obtain from unaffiliated third parties the services we had received from Xerox. These services include senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services, the effective and appropriate performance of which are critical to our operations. We may be unable to replace these services on terms and conditions as favorable as those we received from Xerox. Because our business had operated as part of the wider Xerox organization, we may incur additional costs that could adversely affect our business. If we fail to obtain the quality of services necessary to operate effectively or incur greater costs in obtaining these services, our results of operations and financial condition could be materially adversely affected.

We have no recent operating history as an independent, publicly traded company, and our historical and pro forma financial data are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

We derived certain of the historical financial data included in this Annual Report from Xerox’s consolidated financial statements, and this data does not necessarily reflect the results of operations and financial condition we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

Prior to the spin-off, we operated as part of Xerox’s broader corporate organization and Xerox performed various corporate functions for us, including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services. Our historical financial data reflect allocations of corporate expenses from Xerox for these and similar functions. These allocations may not reflect the costs we have incurred and in the future will incur for similar services as an independent, publicly traded company.
We entered into transactions with Xerox that did not exist prior to the spin-off, such as Xerox’s provision of transition services, which will cause us to incur new costs.
Such historical financial data does not and in the future may not reflect changes that we have experienced and expect to experience in the futurebeen highly volatile as a result of our separation from Xerox. As part of Xerox, we enjoyed certain benefits from Xerox’s operating diversity, size, purchasing power, credit rating, borrowing leverage and available capital for investments. Many of our services contracts, particularly those for our transportation service offerings in our Public Sector business, require significant capital investments, and after the spin-off, we may not have access to the capital (from both internal and external sources) necessary to fund these services contracts. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, or access capital markets on terms as favorable to us as those we obtained as part of Xerox prior to the spin-off.

Following the spin-off, we are now responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations and public reporting. For additional information about our past financial performance and the basis of presentation of our financial statements, see “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and the notes thereto included in this annual report on Form 10-K.


Conduent Inc. 2017 Annual Report     22


We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements with Xerox.

We entered into agreements with Xerox related to our separation from Xerox, including the Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and any other agreements, while we were still part of Xerox. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of these agreements relate to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations between Xerox and us. We may have received better terms from third parties. See “Certain Relationships and Related Party Transactions—Agreements with Xerox.”

The spin-off could result in significant tax liability to Xerox and its shareholders.
Completion of the spin-off required Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP to the effect that the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Internal Revenue Code (the "Code") and the receipt and continuing effectiveness and validity of the IRS Ruling.
The opinion of counsel did not address any U.S. state or local or foreign tax consequences of the spin-off. The opinion assumed that the spin-off was completed according to the terms of the Separation and Distribution Agreement and relied on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, the Information Statement included in our registration statement on Form 10COVID-19 pandemic and a number ofrecession, depression or other documents. In addition, the opinion was based on certain representations as to factual matters from, and certain covenants by, Xerox and us. The opinion cannot be relied on if any of the assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material respect.
Xerox received an IRS ruling in connection with the spin-off (the "IRS Ruling"). The IRS Ruling relies on certain facts, assumptions, representations and undertakings from Xerox and us regarding the past and future conduct of Xerox’s and our businesses and other matters. If any of these facts, assumptions, representations or undertakings is incorrect or not otherwise satisfied, Xerox may not be able to rely on the IRS Ruling. In addition, the IRS Ruling is not a comprehensive rulingsustained adverse market event resulting from the IRS regarding all aspects ofCOVID-19 pandemic could materially and adversely affect the U.S. federal income tax consequences offinancial markets, the transactions.
Accordingly, notwithstanding the opinion of counsel and the IRS Ruling, there can be no assurance that the IRS will not assert, or that a court would not sustain, a contrary position.
If the distribution in connection with the spin-off were determined not to qualify for non-recognition of gain and loss for U.S. federal income tax purposes, U.S. holders who received our common stock could be subject to tax. In this case, each U.S. holder who received our common stock in the distribution would generally, for U.S. federal income tax purposes, be treated as having received a distribution in an amount equal to the fair market value of our common stock received,shares and our ability to obtain equity or debt financing on favorable or acceptable terms.

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.

We could have an indemnification obligation to Xerox if the Distribution were determined not to qualify for non-recognition treatment, which could materially adversely affectbusiness offerings or our operating results of operations and financial condition.
If it were determined that the distribution in connection with the spin-off did not qualify for non-recognition of gain and loss under Section 355 of the Code, we could, under certain circumstances, be required to indemnify Xerox for the resulting taxes and related expenses. Any such indemnification obligation could materially adversely affect our results of operations and financial condition.


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Conduent Inc. 2017 Annual Report     23


In addition, Section 355(e) of the Code generally creates a presumption that the distribution would be taxable to Xerox, but not to shareholders, if we or our shareholders were to engage in transactions that result in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the distribution, unless it were established that such transactions and the distribution were not part of a plan or series of related transactions giving effect to such a change in ownership. If the distribution were taxable to Xerox due to such a 50% or greater change in ownership of our stock, Xerox would recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders over Xerox’s tax basis in our common stock and we generally would be required to indemnify Xerox for the tax on such gain and related expenses. Any such indemnification obligation could materially adversely affect our results of operations and financial condition.
We agreed to numerous restrictions to preserve the non-recognition treatment of the Distribution, which may reduce our strategic and operating flexibility.
We agreed in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355 of the Code. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that may otherwise maximize the value of our business, and might discourage or delay a strategic transaction that our shareholders may consider favorable.

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.


In addition to the 9.7 million square feet of our real estate property portfolio, we alsoWe had 2.70.6 million square feet of our leased and owned properties that became surplus in 20172020 due to the implementation of our strategic transformation program as well as various productivityefficiency initiatives to consolidate our real estate footprint. We aggressively managed our surplus properties through early terminations and subleasing of leased properties and the sale of owned properties. As a result, approximately 1.70.8 million square feet of the surplus property portfolio were resolved as ofduring the year ended December 31, 2017.2020. Additional leased and owned properties may become surplus overin the next three yearsfuture as we continue the strategic transformation program.to optimize our workforce location strategy based on existing conditions and leverage enhanced work-from-home capabilities. We are obligated to maintain our leased surplus properties through required contractual lease periods and plan to dispose of or sublease these properties.


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.



Conduent Inc. 2017 Annual Report     24

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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".
Conduent Common Stock Prices for 2017
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
_____
* Price as of close of business.
Common Shareholders of Record


Refer to Item 6. Selected Financial Data—Five Years in Review for commonThere were 24,475 shareholders of record at year-end, which is incorporated here by reference.as of January 31, 2021.

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


cndt-20201231_g1.jpg


Conduent Inc. 2017 Annual Report     25




Sales of Unregistered Securities During the Quarter Ended December 31, 20172020


None


Securities Authorized for Issuance Under Existing Equity Compensation Plans


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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.

FIVE YEARS IN REVIEW(1)
(QUARTERLY RESULTS OF OPERATIONS (Unaudited)

(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 $4,163 
Costs and Expenses1,102 1,080 1,054 1,066 4,302 
Loss before Income Taxes(51)(64)(13)(11)(139)
Income tax (benefit) expense(2)(13)(6)— (21)
Net Loss$(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 $4,467 
Costs and Expenses(1)
1,496 2,231 1,112 1,734 6,573 
Loss before Income Taxes(338)(1,119)(14)(635)(2,106)
Income tax (benefit) expense(30)(90)(54)(172)
Net Loss$(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

__________

(1)On December 31, 2016, Conduent spun-off from Xerox Corporation. See Note 1 – Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Item 8 of this 2017 Form 10-K for a discussion concerning the historical financial statements.CNDT 2020 Annual Report
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(2)Includes capital lease obligations.
(3)Common stock of Conduent Incorporated did not begin trading on the NYSE until January 3, 2017; therefore, selected data and ratios are not available for years prior to 2017.

Conduent Inc. 2017 Annual Report     26


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.


Beginning in 2017, in an effort to better reflect how weWe organize and manage our business, we changed our reporting segments to align the Healthcare business based upon customer focus between businesses through three reportable segments.
Commercial Industries and Public Sector.
Commercial Industries - Our Commercial Industries segment provides business process services and customized solutions to clients in a variety of industries. Across the Commercial Industries segment, we operate on our clients’ behalf to deliver end-to-end business-to-businessmission-critical solutions and business-to-customer services thatto reduce costs, improve efficiencies and enable revenue growth for our clients to optimizeand their key processes. consumers and employees.
Government Services Our multi-industry competencies include transaction processing, customer experience, human resource management, omni-channel communications and finance and accounting services.
Public Sector- Our Public SectorGovernment Services segment provides government-centric business process services to U.S. federal, state and local and foreign governments for transportation, public assistance, health services, program administration, transaction processing and payment services. Our solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations.
Transportation Our Transportation segment provides systems and support, as well as revenue-generating services, to government clients. On behalf of government agencies and authorities in the transportation industry, we deliver mission-critical mobility and payment solutions that improve automation, interoperability and decision-making to streamline operations, increase revenue and reduce congestion while creating safer communities and seamless travel experiences for consumers.



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Other includes our Government HE Medicaid PlatformSignificant 2020 Actions

Strong new business wheresignings resultsA 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 revolverIn 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


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


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 impairmentDuring 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.

Conduent Inc. 2017 Annual Report     27


In addition, in 2017, we sold a property located in Dallas, Texas, which was formerly the Affiliated Computer Services (ACS) headquarters, for a pre-tax gain of $24 million. This was part of our effort to consolidate our real estate footprint.
Health Enterprise Settlement
On November 28, 2017, we entered into a definitive settlement agreement with the State of New York regarding resolution2020. These temporary cost actions were primarily driven by pandemic related furloughs, reduced travel, vendor and facilities spend. The estimated effect of the HE platform project. UnderCOVID-19 pandemic on our pre-tax income, which includes the termsnet revenue impact, incremental costs and benefit from temporary cost savings was a reduction of the settlement: (1) our contract with the State of New York terminated effective December 15, 2017 and we were released from all liabilities and obligations in connection with the contract at such time; and (2) we will pay, or incur costs on behalf of, the State of New York in the amount of approximately $20 million. As we have previously reserved this amount, we will incur no additional charges as a result of the settlement.
Significant 2016 Actions

Separation
On December 31, 2016, Conduent Incorporated spun-off from Xerox Corporation, pursuant to the Separation and Distribution Agreement. The separation was completed by way of a pro rata distribution of Conduent Incorporated shares held by Xerox to Xerox's shareholders. As a result of the spin-off we operate as an independent, publicly traded company on the New York Stock Exchange under the ticker "CNDT".

Goodwill Impairment Charge
Our Commercial Industries reporting units operating results declined in 2016 versus our expectations, including a weak fourth quarter 2016. In performing our annual impairment test during the fourth quarter of 2016, we determined that the carrying value of the Commercial Industries reporting unit exceeded its fair value by 53%, which resulted in a goodwill impairment of $935 million. This has been presented as Goodwill impairment, a separate line item in the Consolidated Statements of Income (Loss). Refer to Note 6 – Goodwill and Intangible Assets, Net, in the Consolidated Financial Statements for additional information.

Health Enterprise Charge
In February 2017, we determined that it was not probable that the New York Medicaid Management Information System (NY MMIS) project would be completed. As a result of this determination, we recorded a pre-tax charge (NY MMIS charge) of $161 million ($98 million after-tax) in the fourth quarter of 2016. The charge included $83$23 million for the write-off of contract receivables which were recorded as a reduction of revenue and $78 million recorded in Cost of services including $36 million for wind-down costs, $28 million relatedyear ended December 31, 2020.

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.
Significant 2015 Actions
Health Enterprise Charge
In 2015, we determined that we would not fully complete the HE platform implementation projects in California and Montana. However, we would continue to process Medicaid claims using existing legacy systems in those states, thus providing uninterrupted service for the states' healthcare providers and constituents.
As a result of this determination, we recorded a pre-tax HE charge of $389 million ($237 million after-tax). The charge included $116 million for the write-off of contract receivables (primarily non-current), $34 million related to the non-cash impairment of the HE software and deferred contract set-up transition costs and $23 million for other related assets and liabilities. The remainder of the charge was primarily related to settlement costs including payments to subcontractors resulting in cash outflows in future periods. Of the $389 million charge, $116 million was recorded as a reduction to revenue and the remaining $273 million recorded to Cost of services.
This development resulted from the Government Healthcare strategy change announced in July 2015, regarding our decision to focus our future HE implementations on current Medicaid customers and to discontinue investment in and sales of our Integrated Eligibility System. This resulted in a pre-tax non-cash software platform impairment charge of $146 million ($89 million after-tax).


Conduent Inc. 2017 Annual Report     28


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.
A significant portion of our revenue is recognized based on objective criteria that do not require significant estimates or uncertainties. For example, transaction volumes, time and material and cost reimbursable arrangements are based on specific, objective criteria under the contracts. Accordingly, revenues recognized under these contracts do not require the use of significant estimates that are susceptible to change. Revenue recognized using the percentage-of completion (POC) accounting method does require the use of estimates and judgment as discussed below.
We recognize revenues when we have persuasive evidence of an arrangement, the services have been provided, the transaction price is fixed or determinable and collectability is reasonably assured. During 2017, approximately 80% of our revenue was recognized based on transaction volumes, approximately 13% was recognized on a fixed fee basis (wherein our revenue is earned as we fulfill our performance obligations under the arrangement), approximately 1% was related to cost reimbursable contracts, approximately 2% recognized using POC accounting and the remaining 4% was related to time and material contracts. Our revenue mix is subject to change due to the impact of changing customer requirements, acquisitions, divestitures, new business and lost business.
Percentage-of-Completion: The POC method requires the use of estimates and judgment. Although not significant to total revenue, the POC methodology is normally applied to certain of our larger and longer term outsourcing contracts involving system development and implementation, primarily in government healthcare and certain government transportation contracts. In addition, we had unbilled receivables totaling $187 million and $279 million at December 31, 2017 and 2016, respectively, representing revenues recognized but not yet billable under the terms of our POC contracts.

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The POC accounting methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed based on a current cumulative cost incurred to estimated total cost basis and a reasonably consistent profit margin over the period. Due to the long-term nature of these arrangements, developing the estimates of cost often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues. Such revisions are reflected in income in the period in which the facts that give rise to that revision become known. We perform ongoing profitability analysis of our POC services contracts in order to determine whether the latest estimates require updating. Key factors reviewed by the Company to estimate the future costs to complete each contract are future labor costs, future product costs, expected productivity efficiencies, achievement of contracted milestones and performance goals, as well as potential penalties for milestone and system implementation delays.
If at any time our estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost of services. This results in the contract being recorded at a zero profit margin going forward with recognition of an equal amount of revenues and costs over the remaining contract term. A zero profit margin may also be applied when it is impractical to estimate specific amounts or ranges of contract revenues and costs; however, we can at least determine that we will not incur a loss on a particular contract.
Capitalization of Outsourcing Contract Costs
In connection with our services arrangements, we incur and capitalize costs to originate these long-term contracts and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of the arrangement. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual service period of the arrangement to cost of services. From time to time, we also provide inducements to customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. We regularly review costs to determine appropriateness for deferral in accordance with the relevant accounting guidance. Key estimates and assumptions that we must make include projecting future cash flows in order to assess the recoverability of deferred costs. To assess recoverability, undiscounted estimated cash flows of the contract are projected over its remaining life and compared to the carrying amount of contract related assets, including the unamortized deferred cost balance. Key factors that are considered in estimating the undiscounted cash flows include projected labor costs and productivity efficiencies. A significant change in an estimate or assumption on one or more contracts could have a material effect on our results of operations.
Capitalization of Software Development Costs
We capitalize certain costs incurred to develop commercial software products to be sold, leased or otherwise marketed after establishing technological feasibility, and we capitalize costs to develop or purchase internal-use software. Significant estimates and assumptions include: determining the appropriate period over which to amortize the capitalized costs based on estimated useful lives, estimating the marketability of the commercial software products and related future revenues and assessing the unamortized cost balances for impairment. For commercial software products, determining the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. For internal-use software, the appropriate amortization period is based on estimates of our ability to utilize the software on an ongoing basis. To assess the recoverability of capitalized software costs, we consider estimates of future revenue, costs and cash flows. Such estimates require assumptions about future cash inflows and outflows, and are primarily based on the historical experience and expectations regarding future revenues. A significant change in an estimate related to one or more software products could result in a material change to our results of operations.
Refer to Note 5 – Land, Buildings, Equipment and Software, Net in the Consolidated Financial Statements for additional information regarding capitalized software costs.

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Held for Sale
We classify assets as held for sale in the period when the following conditions are met: (i) management, having the authority to approve the action, commits to a plan to sell the asset (disposal group); (ii) the asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal group); (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated; (iv) the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal group) beyond one year; (v) the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A long-lived asset (disposal group) that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale.
The fair value of a long-lived asset (disposal group) less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale. Upon determining that a long-lived asset (disposal group) meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group in the line items Assets held for sale and Liabilities held for sale, respectively, in the Consolidated Balance Sheets.
In the fourth quarter of 2017, management approved the disposal through sale of certain assets and businesses, which is a mix of both Commercial Industries and Public Sectors. This action was taken as a result of our evaluation of these businesses as they represent businesses in markets or with services that we did not see as strategic or core. As of December 31, 2017, these businesses qualified as assets held for sale. During the year ended December 31, 2017, we reclassified $757 million to assets held for sale and $169 million to liabilities held for sale, as we have an active program to locate buyers for these businesses and we expect these businesses to be sold within one year.
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.

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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.
Restructuring and Asset Impairments
We have engaged in restructuring actions, which require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction, the fair value of assets made redundant or obsolete and the lease cancellation and other exit costs. We accrue for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements.
For additional information regarding our restructuring actions, refer to the "Restructuring and Related Costs" section in the MD&A and Note 7 – Restructuring Programs and Asset Impairment Charges in the Consolidated Financial Statements.
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.

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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


Financial informationThe section below provides a comparative discussion of our consolidated results of operations for the three yearsyear ended December 31, 2017 was as follows:2020 and 2019. See Item 7. MD&A–Financial Information in our Annual Report on Form 10-K for the year ended December 31, 2019, for a comparative discussion of our consolidated results of operations between 2019 and 2018.

  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)% $(647) 193 %
 Year Ended December 31,2020 vs. 2019
(in millions)20202019$ 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 $(11)(2)%
Research and development (excluding depreciation and amortization)(7)(88)%
Depreciation and amortization459 459 — — %
Restructuring and related costs67 71 (4)(6)%
Interest expense60 78 (18)(23)%
Goodwill impairment— 1,952 (1,952)n/m
Loss on divestitures and transaction costs17 25 (8)(32)%
Litigation costs, net20 17 18 %
Other (income) expenses, net(10)11 (110)%
Total Operating Costs and Expenses4,302 6,573 (2,271)
Loss Before Income Taxes(139)(2,106)1,967 
Income tax expense (benefit)(21)(172)151 
Net Loss$(118)$(1,934)$1,816 

Revenue


Total revenuesRevenue for 2017 decreased mainly due to the impact from strategic decisions by management as part of our portfolio rationalization, including exiting certain unprofitable contracts, the run-off of our Student Loan business and contract losses. Partially offsetting these declines was an increase from the ramping of new business.

Total revenues for 20162020 decreased, compared to the prior year, as a resultmainly driven by lost business and the effects of the NY MMIS charge of $83 million, lower volumes, delayed rampingCOVID-19 pandemic across our Commercial and Transportation segments. These were partially offset by increases from the ramp of new business and contract exits, primarilyincreases in customer care contracts withinCOVID-19 related revenues in our Commercial Industries segment,Government segment.

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)
Cost of services
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.
Gross Margin

Increase in gross margin in 2017
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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.
Increase in gross margin in 2016 compared to the prior year period reflected cost benefits from our strategic transformation initiatives offset by lost business and margin pressures in our customer service offerings and price declines.

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Selling, General and Administrative (SG&A)
Lower SG&A compared to the prior years reflected the impact of our strategic transformation initiatives driving lower wages and benefits, partially offset by the expansion and investment in our sales force.
Restructuring and Related Costs


Restructuring andWe engage in a series of restructuring programs related costs for the year ended December 31, 2017 include $46 million of lease cancellation costs as part ofto downsizing our effort to consolidateemployee base, reducing our real estate footprint, $41 millionexiting certain activities, outsourcing certain internal functions, consolidating our data centers and engaging in other actions designed to reduce our cost structure and improve productivity. The following are the components of severanceour Restructuring and related costs:

Year Ended December 31,
(in millions, except headcount in whole numbers)20202019
Severance and related costs$14 $28 
Data center consolidation23 21 
Termination, asset impairment and other costs22 18 
Total Net Current Period Charges59 67 
Consulting and other costs(1)
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.

RestructuringSeverance and related costs for the year ended December 31, 2016 include $54 million of severance costs due to headcount reductions of approximately 3,600 employees worldwide, $28 million of costs primarily related to professional support services associated with the implementation of the strategic transformation program, $12 million of asset impairment charges and $7 million of lease cancellation costs.


Refer to Note 710 – Restructuring Programs and Asset Impairment Charges inRelated Costs to the Consolidated Financial Statements for additional information regarding our restructuring programs.
Amortization of Intangible Assets

Amortization of intangible asset decreased in 2017 from the prior year primarily due to the acceleration of amortization of certain trade-names in 2016.
Amortization of intangible assets was higher in 2016 as compared to 2015, primarily due to the acceleration of amortization of certain trade-names associated with prior acquisitions.
Refer to Note 6 – Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding our intangible assets.

Goodwill Impairment

Our Commercial Industries reporting unit experienced declining operating results in 2016 versus expectations. As a result, we recorded a goodwill impairment of $935 million. Refer to Note 6 – Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding the Goodwill impairment charge.

Separation Costs

Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs also include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the separation.


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.

In 2017, the Company successfully repriced its Term Loan B in April and October (Amendments No.1 and No. 2, respectively), which overall resulted in lowering the total interest rate on this loan by 250 basis points to LIBOR plus 3.0%.

March 2020. Refer to Note 812 – Debt into the Consolidated Financial Statements for additional information.


Conduent Inc. 2017 Annual Report     35

Goodwill Impairment



Related Party Interest

In January 2017, in connection with the spin-off from Xerox Corporation, we paid Xerox $161 millionThere was no goodwill impairment identified for the final settlement per the Separation and Distribution Agreement.

Related-party interest expense2020. The goodwill impairment for the year ended December 31, 2016 was lower than the prior year primarily due2019 related to the payment of certain related party notes payable in 2015, as a resultwrite-down of the proceeds received from the salecarrying values of all of the ITO business.

reporting units. Refer to Note 189Related Party TransactionsGoodwill and Former Parent Company Investment inIntangible Assets, Net to the Consolidated Financial Statements for additional information.


(Gain)

CNDT 2020 Annual Report
40

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.


As disclosed under Item 7. MD&A— Divestiture, we completed five divestituresLitigation Costs, Net

Net litigation costs for 2020 primarily consist of reserves for various matters that are subject to litigation and costs related to certain reimbursement matters with our former parent company, Xerox Corporation. Net litigation costs for 2019 consist primarily of the recognition of the $13 million discount on the fair value of the Texas litigation liability established in 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

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform) was enacted. The effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. In the case of US federal income taxes, the enactment date is the date the bill becomes law. The income tax effects of the Tax Reform have been initially accounted for on a provisional basis pursuant to the SEC staff guidance on income taxes. Reasonable estimates for all material tax effects of the Tax Reform have been provided and adjustments to provisional amounts will be made in subsequent reporting periods as information becomes available to complete provisional computations.


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.

Deferred tax assets and liabilities are measured and recorded using the enacted tax rates for the periods during which the related temporary differences are expected to reverse or deferred tax attributes are expected to be realized. As a result of the change in future federal statutory tax rate due to the passing of the Tax Reform, the deferred tax assets and liabilities should no longer be valued at a federal statutory rate of 35%, but rather at the rate in which the benefit of the deferred tax liabilities will be realized by the Company. As such, the U.S. federal statutory rate used to value the Company's deferred tax assets and liabilities was 21%, which resulted in a $210 million tax benefit.

The 2016 effective tax2020 rate was lower than the U.S. statutory rate of 21% primarily due to geographic mix of income, tax settlements and valuation allowances partially offset by tax credits. The 2019 rate was lower than the statutory rate, primarily due primarily to the goodwill impairment charge being partially non-deductible for tax and the geographic mix of income, partially offset by U.S. federal tax credits and tax benefits recognized on the sale of a portfolio of select standalone customer care contracts to Skyview Capital LLC.

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.



Conduent Inc. 2017 Annual Report     36

CNDT 2020 Annual Report
41


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.
The following arethese changes. We include a discussion of our results ofrecast financial performance by segment for the three years ended December 31, 2017:2019 and 2018 immediately after the discussion of financial performance for the years ended December 31, 2020 and 2019 below.

Segment Performance Review - 2020 compared to 2019
(in millions)Commercial IndustriesGovernment ServicesTransportationOtherUnallocated CostsTotal
Year Ended Dec 31, 2020DivestituresOther
Total Revenue$2,163 $1,281 $719 $— $— $— $4,163 
Segment profit (Loss)$150 $372 $82 $— $$(348)$265 
Adjusted EBITDA$258 $397 $117 $— $$(294)$480 
% of Total Revenue52.0 %30.8 %17.2 %— %— %— %100.0 %
Adjusted EBITDA Margin11.9 %31.0 %16.3 %�� %— %— %11.5 %
Year Ended Dec 31, 2019
Total Revenue$2,385 $1,263 $781 $36 $$— $4,467 
Segment profit (Loss)$270 $279 $69 $$(1)$(345)$273 
Adjusted EBITDA$376 $311 $108 $$(1)$(301)$494 
% of Total Revenue53.4 %28.3 %17.5 %0.8 %— %— %100.0 %
Adjusted EBITDA Margin15.8 %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%
_______________

(1)Refer to the reconciliations table in the "Non-GAAP Financial Measures" section.CNDT 2020 Annual Report

42


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.

Conduent Inc. 2017 Annual Report     37



Segment Profit and Adjusted EBITDA
Increase
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.


CNDT 2020 Annual Report
43

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.


Public Sector Segment Performance Review - 2019 compared to 2018
(in millions)Commercial IndustriesGovernment ServicesTransportationOtherUnallocated CostsTotal
Year Ended December 31, 2019DivestituresOther
Total Revenue$2,385 $1,263 $781 $36 $$— $4,467 
Segment profit (Loss)$270 $279 $69 $$(1)$(345)$273 
Adjusted EBITDA$376 $311 $108 $$(1)$(301)$494 
% of Total Revenue53.4 %28.3 %17.4 %0.8 %— %— %100.0 %
Adjusted EBITDA Margin15.8 %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 Revenue47.3 %25.1 %13.5 %13.9 %0.2 %— %100.0 %
Adjusted EBITDA Margin17.8 %24.3 %13.6 %14.0 %(18.2)%— %11.9 %

Commercial Industries Segment

Revenue
Public Sector
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
Decrease
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.


CNDT 2020 Annual Report
44

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.
Segment Loss
Other loss for 2017 improved, primarilyprior year, were mainly due to improved profitabilityreductions in the student loan business, improved pricing from a contract extension with a large Health Enterprise clientIT and general operational efficiencies in the HE business. Other loss for 2016 improved as a result of the non-recurring $389 million HE charge in 2015, partially offset by the $161 million write-off of the NY MMIS, partially offset by improvements in HE platform implementation expenses resulting from the decision to not fully complete the HE platform implementation in California and Montana.corporate overhead costs.

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.


CNDT 2020 Annual Report
45

The amounts in the following table do not reflectexclude divestitures.

Year Ended December 31,2020 vs. 2019
(in millions)20202019$ Change% Change
New business TCV$1,934 $996 $938 94 %
Renewals TCV2,809 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.

Conduent Inc. 2017 Annual Report     38


  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)%
Signings for 2017 decreased compared to the prior year mainly due to strategic decisions by management to streamline our portfolio which impacted bothany new business signing, including (i) signing value of any contract with term less than 12 months and renewal volume. Partially offsetting these declines were new business wins in targeted offerings and expansion with certain existing clients.(ii) signing value of project based revenue, not expected to continue long term.
Signings
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.
Renewal Rate
Renewal rate is defined as the annual recurring revenue (ARR) on contracts that are renewed during the periodpipeline as a percentageresult of ARR on all contracts for whichcentralizing the sales organization, new sales leadership, top-grading and expanding of sales headcount, new sales bidding processes, and a renewal decision was made during the period, excluding any contracts that were not renewed and where a strategic action to improve the risk or profitability had been initiated.simplified go-to-market strategy, among other initiatives.
Excluding our strategic decision not to renew certain contracts, renewal rate for 2017 was 94%and above our target range of 85%-90%. Including all contracts, renewals would have been 87%.

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)202020192020 vs. 2019
Net cash provided by operating activities$302
 $108
 $493
 $194
 $(385)
Net cash provided by investing activities74
 16
 522
 58
 (506)
Net cash provided by (used in) operating activitiesNet cash provided by (used in) operating activities$161 $132 $29 
Net cash provided by (used in) investing activitiesNet 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


CNDT 2020 Annual Report
46


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.

Conduent Inc. 2017 Annual Report     39


Investing Activities

The increase in cash provided by investing activitiesaccounts receivable represents the difference between current and prior year fourth quarter accounts receivable sales adjusted for the year ended December 31, 2017 comparedeffects of: (i) collections prior to the year ended December 31, 2016 was primarily related to $117 million in proceeds received on the liquidation of investments related to the terminationend of the deferred compensation plan, $56 million of proceeds from the sale of businessyear and assets as compared to payments of $54 million in 2016, $86 million of lower net additions to land, buildings and equipment, partially offset by non-recurring proceeds of $248 million on related party notes receivable in 2016.(ii) currency.


The decrease in cash provided by investing activities for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily related to $54 million of payments for the sale of business and assets as compared to proceeds of $742 million in 2015, partially offset by proceeds of $248 million from related party notes receivable in 2016.Financial Instruments
Financing Activities

The change to cash used in financing activities for the year ended December 31, 2017 compared to cash provided by for the year ended December 31, 2016 was primarily related to a decrease of $1.7 billion in proceeds from long term debt and an increase in debt payments of $209 million, partially offset by a reduction in payments to former parent of $1.6 billion.

The change to cash provided by financing activities for the year ended December 31, 2016 compared to cash used for the year ended December 31, 2015 was primarily related to an increase of $1.9 billion in proceeds from long term debt and a reduction in payments on debt of $261 million, partially offset by an increase in payments to former parent of $957 million.

Capital Market Activity

In April 2017, we entered into Amendment No. 1 to the Credit Agreement, which reduced the interest rate on our Term Loan B by 1.5% from 5.5% over LIBOR to 4.0% over LIBOR. Subsequently in October 2017, we entered into Amendment No. 2, which reduced the interest rate on our Term Loan B by 1.0% from 4.0% over LIBOR to 3.0% over LIBOR.

In January 2017, we borrowed an additional $100 million on Term Loan B with proceeds used for general corporate purposes.


Refer to Note 813Debt inFinancial Instruments to the Consolidated Financial Statements for additional information.

Financial Instruments

Refer to Note 9 – Financial Instruments in 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)
20212022202320242025Thereafter
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 — 
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 — — 
Total $484
 $404
 $343
 $758
 $152
 $1,517
Total$294 $734 $892 $85 $32 $59 
_______________
(1)Total debt represents principal debt and capital
(1)Total debt represents principal debt and finance leases. Refer to Note 8 – Debt in the Consolidated Financial Statements for additional information regarding debt.
(2)Represents interest on debt. Refer to Note 8 – Debt in the Consolidated Financial Statements for additional information.
(3)Refer to Note 5 – Land, Buildings, Equipment and Software, Net in the Consolidated Financial Statements for additional information.

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(4)Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.
Pension Benefit Plans

We sponsor defined benefit pension plans that require periodic cash contributions. Our 2017 cash contributions for these plans were $8 million. In 2018, based on current actuarial calculations, we expect to make contributions of approximately $8 million to our worldwide defined benefit pension plans.
Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors, including the investment performance of plan assets and discount rates as well as potential legislative and plan changes. At December 31, 2017, the unfunded and underfunded balances of our U.S. and non-U.S. defined benefit pension plans were $40 million and $19 million, respectively.
Refer to Note 1112Employee Benefit Plans inDebt to the Consolidated Financial Statements for additional information regarding contributionsdebt.
(2)Refer to our defined benefit pensionNote 12 – Debt in the Consolidated Financial Statements for additional information.
(3)Refer to Note 8 – Leases to the Consolidated Financial Statements for additional information.
(4)We enter other purchase commitments with vendors in the ordinary course of business, generally IT-related expenditures. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and post-retirement plans.reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.


CNDT 2020 Annual Report
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Other Contingencies and Commitments


As more fully discussed in Note 1317 – Contingencies and Litigation into the Consolidated Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates. Nonperformance under a contract including a guarantee, indemnification or claim could trigger an obligation of the Company.


We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.


Off-Balance Sheet Arrangements


As of December 31, 2017,2020, we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In addition, refer to the preceding table for the Company's contractual cash obligations and other commercial commitments and Note 1317 – Contingencies and Litigation into the Consolidated Financial Statements for additional information regarding contingencies, guarantees indemnifications and warranty liabilities.indemnifications.

Non-GAAP Financial Measures

We have reported our financial results in accordance with U.S. generally accepted accounting principles (GAAP). In addition, we have discussed our results using the non-GAAP measures described below.



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We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related tax effects. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with U.S. GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable U.S. GAAP measures and should be read only in conjunction with our Consolidated Financial Statements prepared in accordance with U.S. GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions and providing such non-GAAP financial measures to investors allows for a further level of transparency as the factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.

A reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are provided in the tables below.

These reconciliations also include the income tax effects of our non-GAAP performance measures in total, to the extent applicable. The income tax effects are calculated under the same accounting principles as applied to our reported pre-tax performance measures under ASC 740, which employs an annual effective tax rate method. The income tax effect for our non-GAAP performance measures is effectively the difference in income taxes for reported and adjusted pre-tax income calculated under the annual effective tax rate method. The tax effect of the non-GAAP adjustments was calculated based upon evaluation of the statutory tax treatment and the applicable statutory tax rate in the jurisdictions in which such charges were incurred.

Adjusted Revenue, Adjusted Operating Income and Adjusted Operating Margin*

We make adjustments to Revenue and Pre-tax income (Loss) for the following items for the purpose of calculating Adjusted Revenue, Adjusted Operating Income and Adjusted Operating Margin.
Goodwill Impairment. Represents Goodwill Impairment charge of $935 million.
Amortization of intangible assets. The amortization of intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period.
NY MMIS. Revenue and costs associated with the Company not fully completing the State of New York Health Enterprise Platform project.
Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program.
HE charge. Revenue and costs associated with not fully completing the Health Enterprise Medical Platform projects in California and Montana.
Separation costs. Separation costs are expenses incurred in connection with separation from Xerox Corporation into a separate, independent, publicly traded company. These costs primarily relate to third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies.
Interest expense. Interest expense includes interest on long-term debt and amortization of debt issuance costs.
Related party interest. Related party interest relates interest on related party Notes payable from Xerox prior to the Separation.
Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net, litigation matters and all other (income) expenses, net.
(Gain) loss on sale of asset and businesses.
 ___________
* Applies to both consolidated and segment disclosures.
We provide our investors with adjusted operating income and adjusted operating margin information, as supplemental information, because we believe it offers added insight, by itself and for comparability between periods, by adjusting for certain non-cash items as well as certain other identified items which we do not believe are indicative of our ongoing business and may also provide added insight on trends in our ongoing business.


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Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate

We made adjustments to Income (Loss) before Income Taxes for the following items for the purpose of calculating Adjusted Net Income (Loss), Adjusted Earnings per Share and Adjusted Effective Tax Rate:
Goodwill Impairment.
Amortization of intangible assets.
NY MMIS.
Restructuring and related costs.
HE charge.
Separation costs.
(Gain) loss on sale of asset and businesses.
Other (income) expenses, net.

The Company provides adjusted net income and adjusted EPS financial measures to assist our investors in evaluating our ongoing operating performance for the current reporting period and, where provided, over different reporting periods, by adjusting for certain items which may be recurring or non-recurring and which in our view do not necessarily reflect ongoing performance. We also internally use these measures to assess our operating performance, both absolutely and in comparison to other companies, and in evaluating or making selected compensation decisions.

Management believes that adjusted effective tax rate, provided as supplemental information, facilitates a comparison by investors of our actual effective tax rate with an adjusted effective tax rate which reflects the impact of the items which are excluded in providing adjusted net income, and may provide added insight into our underlying business results and how effective tax rates impact our ongoing business.

Segment and Consolidated Adjusted EBITDA and EBITDA Margin

We use Adjusted EBITDA and Adjusted EBITDA Margin as additional way of assessing certain aspects of our operations that, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our on-going business. Adjusted EBITDA represents income (loss) before interest, income taxes, depreciation and amortization adjusted for the following items:

Goodwill Impairment.
Restructuring and related costs.
Separation costs.
Other (income) expenses, net.
NY MMIS.
NY MMIS depreciation
HE charge.
HE charge depreciation.
(Gain) loss on sale of asset and businesses.
Business transformation costs (Segment only).

Adjusted EBITDA and Adjusted EBITDA Margin are not intended to represent cash flows from operations, operating income (loss) or net income (loss) as defined by U.S. GAAP as indicators of operating performances. Management cautions that amounts presented in accordance with Conduent's definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate Adjusted EBITDA in the same manner.

Key Financial Ratios

We make adjustments to Gross margin and SG&A as a percentage on Revenue:

NY MMIS.
HE charge.


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The Company provides adjusted gross margin and adjusted SG&A as a percentage of revenue to assist our investors in evaluating our ongoing operating performance for the current reporting period and, where provided, over different reporting periods, by adjusting for certain items which may be recurring or non-recurring and which in our view do not necessarily reflect ongoing performance. We also internally use these measures to assess our operating performance, both absolutely and in comparison to other companies, and in evaluating or making selected compensation decisions.

Non-GAAP Reconciliations
Net Income (Loss) and EPS Reconciliation:
  Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015
(in millions; except per share amounts) Net Income (Loss) EPS Net Income (Loss) EPS Net Income (Loss) EPS
GAAP as Reported from Continuing Operations $177
 $0.81
 $(983) $(4.85) $(336) $(1.65)
Adjustments:            
Goodwill impairment 
   935
   
  
Amortization of intangible assets 243
   280
   250
  
NY MMIS 9
   161
   
  
Restructuring and related costs 101
   101
   159
  
HE charge (8)   
   389
  
Separation costs 12
   44
   
  
(Gain) loss on sale of asset and businesses (42)   2
   
  
Other (income) expenses, net (18)   18
   30
  
Less: Income tax adjustments(1)
 (288)   (335)   (318)  
Adjusted Net Income (Loss) and EPS $186
 $0.85
 $223
 $1.06
 $174
 $0.83
             
(GAAP Shares in thousand)            
Weighted average common shares outstanding   204,007
   202,875
   202,875
Stock options   195
   
   
Restricted stock and performance shares   2,491
   
   
Adjusted Weighted Average Shares Outstanding(2)
   206,693
   202,875
   202,875
(Non-GAAP Shares in thousand)            
Weighted average common shares outstanding   204,007
   202,875
   202,875
Stock options   195
   374
   374
Restricted stock and performance shares   2,491
   2,132
   2,132
8% Convertible preferred stock   
   5,393
   5,393
Adjusted Weighted Average Shares Outstanding(2)
   206,693
   210,774
   210,774
 ___________
(1)Reflects the income tax (expense) benefit of the adjustments. Refer to Effective Tax Rate reconciliation below for details.CNDT 2020 Annual Report
48

(2)Average shares for the 2017 calculation

Effective Tax Reconciliation:
  Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015
(in millions) 
Pre-Tax
Income (loss)
 
Income Tax
(Benefit)Expense
 
Effective
Tax Rate
 
Pre-Tax
Income (loss)
 
Income Tax
(Benefit)Expense
 
Effective
Tax Rate
 
Pre-Tax
Income (loss)
 
Income Tax
(Benefit)Expense
 
Effective
Tax Rate
GAAP as Reported from Continuing Operations $(16) $(193) 1,206.3% $(1,227) $(244) 19.9% $(574) $(238) 41.5%
Non-GAAP adjustments                  
Benefit from tax law changes 
 198
   
 
   
 
  
Termination of COLI plan 
 (19)   
 
   
 
  
Other non-GAAP adjustments 297
 109
   1,541
 335
   828
 318
  
Total non-GAAP adjustments(1)
 297
 288
   1,541
 335
   828
 318
  
Adjusted(2)
 $281
 $95
 33.8% $314
 $91
 29.0% $254
 $80
 31.5%
 __________
(1)Refer to Net Income (Loss) reconciliation for details of non-GAAP adjustments.
(2)The tax impact of Adjusted Pre-tax income (Loss) from continuing operations is calculated under the same accounting principles applied to the 'As Reported' pre-tax income (loss), which employs an annual effective tax rate method to the results.

Conduent Inc. 2017 Annual Report     44




Revenue and Operating Income / Margin Reconciliations:
  Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015
(in millions) Pre-Tax Income (Loss) Revenue Margin Pre-Tax Income (Loss) Revenue Margin Pre-Tax Income (Loss) Revenue Margin
GAAP as Reported from Continuing Operations $(16) $6,022
 (0.3)% $(1,227) $6,408
 (19.1)% $(574) $6,662
 (8.6)%
Adjustments:                  
Goodwill impairment 
     935
     
    
Amortization of intangible assets 243
     280
     250
    
NY MMIS 9
 
   161
 83
   
 
  
Restructuring and related costs 101
     101
     159
    
HE charge (8) 
   
 
   389
 116
  
Separation costs 12
     44
     
    
Interest expense 137
     14
     8
    
Related party interest 
     26
     61
    
(Gain) loss on sale of asset and businesses (42)     2
     
    
Other (income) expenses, net (18)     18
     30
    
Adjusted Revenue / Operating Income / Margin $418
 $6,022
 6.9 % $354
 $6,491
 5.5 % $323
 $6,778
 4.8 %

  Three Months Ended March 31, 2017 Three Months Ended June 30, 2017
(in millions) Pre-Tax Income (Loss) Revenue Margin Pre-Tax Income (Loss) Revenue Margin
GAAP as Reported from Continuing Operations $(22) $1,553
 (1.4)% $(11) $1,496
 (0.7)%
Adjustments:            
Amortization of intangible assets 61
     61
    
NY MMIS 8
     1
    
Restructuring and related costs 18
     36
    
HE charge (5)     
    
Separation costs 5
     1
    
Interest expense 36
     34
    
(Gain) loss on sale of asset and businesses 
     (25)    
Other (income) expenses, net (12)     (9)    
Adjusted Operating Income / Margin $89
 $1,553
 5.7 % $88
 $1,496
 5.9 %

  Three Months Ended September 30, 2017 Three Months Ended December 31, 2017
(in millions) Pre-Tax Income (Loss) Revenue Margin Pre-Tax Income (Loss) Revenue Margin
GAAP as Reported from Continuing Operations $13
 $1,480
 0.9% $4
 $1,493
 0.3%
Adjustments:            
Amortization of intangible assets 60
     61
    
NY MMIS 1
     (1)    
Restructuring and related costs 22
     25
    
HE charge (3)     
    
Separation costs 2
     4
    
Interest expense 35
     32
    
(Gain) loss on sale of asset and businesses (16)     (1)    
Other (income) expenses, net (3)     6
    
Adjusted Operating Income / Margin $111
 $1,480
 7.5% $130
 $1,493
 8.7%


Conduent Inc. 2017 Annual Report     45


Segment and Consolidated Revenue / Profit / Adjusted EBITDA / Adjusted EBITDA Margin Reconciliations:

(in millions) Years Ended December 31
Commercial Industries 2017 2016 2015
Segment revenue $3,548
 $3,805
 $4,059
Segment profit $182
 $151
 $148
Depreciation & amortization 162
 162
 160
Adjusted Segment EBITDA $344
 $313
 $308
Adjusted EBITDA Margin 9.7 % 8.2 % 7.6 %
Public Sector      
Segment revenue $2,163
 $2,308
 $2,331
Segment profit $245
 $293
 $298
Depreciation & amortization 85
 102
 118
Adjusted Segment EBITDA $330
 $395
 $416
Adjusted EBITDA Margin 15.3 % 17.1 % 17.8 %
Other Segment      
Segment revenue $311
 $295
 $272
NY MMIS charge 
 83
 
HE charge 
 
 116
Adjusted Segment Revenue $311
 $378
 $388
Segment (loss) $(10) $(248) $(509)
Business transformation costs 
 (3) (3)
Depreciation & amortization 7
 69
 72
Segment EBITDA (3) (182) (440)
Segment EBITDA Margin (1.0)% (61.7)% (161.8)%
NY MMIS charge 9
 161
 
HE charge (8) 
 389
NY MMIS depreciation 
 (52) 
HE depreciation 
 
 (34)
Adjusted Segment EBITDA $(2) $(73) $(85)
Adjusted EBITDA Margin (0.6)% (19.3)% (21.9)%


Conduent Inc. 2017 Annual Report     46


Segment and Consolidated Revenue / Profit / Adjusted EBITDA / Adjusted EBITDA Margin Reconciliations (Cont.):

(in millions) Years Ended December 31
  2017 2016 2015
Consolidated      
Reconciliation to Adjusted Revenue      
Revenue $6,022
 $6,408
 $6,662
NY MMIS adjustment 
 83
 
HE charge 
 
 116
Adjusted Revenue $6,022
 $6,491
 $6,778
Reconciliation to Adjusted EBITDA      
Net Income (Loss) from Continuing Operations $177
 $(983) $(336)
Goodwill impairment 
 935
 
Restructuring and related costs 101
 101
 159
Separation costs 12
 44
 
Interest Expense 137
 14
 8
Related Party Interest 
 26
 61
Income tax benefits (193) (244) (238)
(Gain) Loss on sale of assets and business (42) 2
 
Other (income) expenses, net (18) 18
 30
Depreciation 125
 128
 126
Amortization 372
 485
 474
EBITDA $671
 $526
 $284
EBITDA Margin 11.1% 8.2% 4.3%
EBITDA $671
 $526
 $284
Adjustments:      
NY MMIS 9
 161
 
NY MMIS depreciation 
 (52) 
HE charge (8) 
 389
HE charge depreciation 
 
 (34)
Adjusted EBITDA $672
 $635
 $639
Adjusted EBITDA Margin 11.2% 9.8% 9.4%

Key Financial Ratios Reconciliation:
  Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015
(in millions) Gross Margin SG&A as % of Revenue Gross Margin SG&A as % of Revenue Gross Margin SG&A as % of Revenue
GAAP As Reported 17.4 % 10.2% 14.2% 10.7 % 10.3% 10.5 %
Adjustments:            
NY MMIS charge 0.1
 
 2.3
 (0.1) 
 
HE charge (0.1) 
 
   5.5
 (0.2)
Adjusted 17.4 % 10.2% 16.5% 10.6 % 15.8% 10.3 %


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market Risk
 
We are exposed to market risk from foreign currency exchange rates, which could affect operating results, financial position and cash flows. We manage our exposure to this market risk through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilized derivative financial instruments to hedge economic exposures, as well as reduce earnings and cash flow volatility resulting from shifts in market rates. We also hedge the cost to fund material non-dollar entities by buying currencies periodically in advance of the funding date. This is accounted for using derivative accounting.


Conduent Inc. 2017 Annual Report     47



Recent market events have not caused us to materially modify or change our financial risk management strategies with respect to our exposures to foreign currency risk. Refer to Note 913 – Financial Instruments into the Consolidated Financial Statements for additional discussion on our financial risk management.

Foreign Exchange Risk Management


Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2017,2020, the potential change in the fair value of foreign currency-denominated assets and liabilities in each entity would not be significant because all material currency asset and liability exposures were economically hedged as of December 31, 2017.2020. A 10% appreciation or depreciation of the U.S. Dollar against all currencies from the quoted foreign currency exchange rates at December 31, 20172020 would have an impact on our cumulative translation adjustment portion of equity of approximately $54$60 million. The net amount invested in foreign subsidiaries and affiliates, primarily in the U.K. and Europe, and translated into U.S. Dollars using the year-end exchange rates, was approximately $542$596 million at December 31, 2017.2020.

Interest Rate Risk Management


The consolidated weighted-average interest rates related to our total debt for 20172020 approximated 3.11%2.34% for Term A Loan due 2021, 6.79%2022, 3.82% for Term B Loan due 2023, 10.91%10.90% for Senior Notes due 2024 and 4.39%5.29% for capitalfinance lease obligations. As of December 31, 2017, $1,6072020, $1,470 million of our total debt of $2,117$1,528 million carried variable interest rates. The fair values of our fixed rate financial instruments are sensitive to changes in interest rates and at December 31, 2017,2020, a 10% increase in market interest rates would decrease the fair values of such financial instruments by approximately $19less than $1 million. A 10% decrease in market interest rates would increase the fair values of such financial instruments by approximately $52less than $1 million.



Conduent Inc. 2017 Annual Report     48

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of Conduent Incorporated


Opinions on the Financial Statements and Internal Control over Financial Reporting


We have audited the accompanying consolidated balance sheets of Conduent Incorporatedand its subsidiaries (the “Company”) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of income (loss), of comprehensive income (loss), shareholders’of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20172020 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016, 2019, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.


Changes in Accounting Principles

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.

Basis for Opinions


The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.



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Definition and Limitations of Internal Control over Financial Reporting


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessment

As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,528 million as of December 31, 2020. The goodwill associated with the Commercial Industries reportable segment, Government Services reportable segment and Transportation reportable segment was $837 million, $623 million and $68 million, respectively. Management tests goodwill for impairment annually or more frequently if an event or change in circumstances indicate the asset may be impaired. As disclosed by management, the annual quantitative impairment test of goodwill was performed as of October 1, 2020. Impairment testing for goodwill is done at the reporting unit level. The fair value of reporting units is determined using a combination of both an income approach and a market approach. The income approach utilizes a discounted cash flow analysis based upon the forecasted future business results of reporting units. The market approach utilizes the guideline public company method. If the fair value of a reporting unit is less than its carrying amount, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. There was no impairment identified for the year ended December 31, 2020. As disclosed by management, the most significant assumptions used in the goodwill analysis relate to the long-term organic growth rates as well as the discount rates.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when determining the fair value measurement of the reporting units; (ii) a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate management’s cash flow projections and significant assumptions related to the long-term organic growth rates and the discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s goodwill impairment assessment, including controls over the determination of the fair value of the Company’s reporting units. These procedures also included, among others, testing management’s process for determining the fair value estimate; evaluating the appropriateness of the discounted cash flow analysis;

CNDT 2020 Annual Report
51

testing the completeness, accuracy and relevance of underlying data used in the estimate; and evaluating the significant assumptions used by management related to the long-term organic growth rates and the discount rates. Evaluating management’s assumptions related to the long-term organic growth rates involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of each reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow analysis and certain significant assumptions, including the discount rates.


/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 1, 2018February 24, 2021


We have served as the Company’s auditor since2016.



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52


REPORTS OF MANAGEMENT
Management's Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company's financial position and results of operations.


The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent registered public accountants, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accountants. The independent registered public accountants and internal auditors have free access to the Audit Committee.
 
/s/    ASHOK VEMURI
CLIFFORD SKELTON
/s/    BRIAN WEBB-WALSH
/s/    ALLAN COHEN      
STEPHEN WOOD
Chief Executive OfficerChief Financial OfficerChiefCorporate Controller & Principal Accounting Officer


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53


CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 Year Ended December 31,
(in millions, except per-share data)202020192018
Revenue$4,163 $4,467 $5,393 
Operating Costs and Expenses
Cost of services (excluding depreciation and amortization)3,209 3,494 4,182 
Selling, general and administrative (excluding depreciation and amortization)468 479 560 
Research and development (excluding depreciation and amortization)11 
Depreciation and amortization459 459 460 
Restructuring and related costs67 71 81 
Interest expense60 78 112 
Loss on extinguishment of debt108 
Goodwill impairment1,952 
Loss on divestitures and transaction costs17 25 42 
Litigation costs, net20 17 227 
Other (income) expenses, net(10)
Total Operating Costs and Expenses4,302 6,573 5,788 
Loss Before Income Taxes(139)(2,106)(395)
Income tax expense (benefit)(21)(172)21 
Net Loss$(118)$(1,934)$(416)
Basic Loss per Share$(0.61)$(9.29)$(2.06)
Diluted Loss per Share$(0.61)$(9.29)$(2.06)
  Year Ended December 31,
(in millions, except per-share data) 2017 2016 2015
Revenue      
Revenue $5,980
 $6,358
 $6,609
Former parent company revenue 42
 50
 53
Total Revenues 6,022
 6,408
 6,662
Cost of Services      
Cost of services 4,945
 5,462
 5,937
Former parent company cost of services 32
 36
 40
Gross Margin 1,045
 910
 685
Operating Costs and Expenses      
Research and development 13
 31
 52
Selling, general and administrative 615
 686
 699
Restructuring and related costs 101
 101
 159
Amortization of intangible assets 243
 280
 250
Goodwill impairment 
 935
 
Separation costs 12
 44
 
Interest expense 137
 14
 8
Related party interest 
 26
 61
(Gain) loss on sale of asset and businesses (42) 2
 
Other (income) expenses, net (18) 18
 30
Total Operating Costs and Expenses 1,061
 2,137
 1,259
Loss Before Income Taxes (16) (1,227) (574)
Income tax benefit (193) (244) (238)
Income (Loss) From Continuing Operations 177
 (983) (336)
Income (loss) from discontinued operations, net of tax 4
 
 (78)
Net Income (Loss) $181
 $(983) $(414)
Basic Earnings (Loss) per Share:      
Continuing operations $0.82
 $(4.85) $(1.65)
Discontinued operations 0.02
 
 (0.39)
Total Basic Earnings (Loss) per Share $0.84
 $(4.85) $(2.04)
Diluted Earnings (Loss) per Share:      
Continuing operations $0.81
 $(4.85) $(1.65)
Discontinued operations 0.02
 
 (0.39)
Total Diluted Earnings (Loss) per Share $0.83
 $(4.85) $(2.04)


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


CNDT 2020 Annual Report
Conduent Inc. 2017 Annual Report     5254


CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


 Year Ended December 31, Year Ended December 31,
(in millions) 2017 2016 2015(in millions)202020192018
Net Income (Loss) $181
 $(983) $(414)
Net LossNet Loss$(118)$(1,934)$(416)
Other Comprehensive Income (Loss), Net(1)
      
Other Comprehensive Income (Loss), Net(1)
Translation adjustments, net 35
 (135) (60)
Unrecognized gains, net 2
 
 1
Currency translation adjustments, netCurrency translation adjustments, net(31)
Reclassification of currency translation adjustments on divestituresReclassification of currency translation adjustments on divestitures15 42 
Reclassification of divested benefit plans and otherReclassification of divested benefit plans and other(1)62 
Unrecognized gains (losses), netUnrecognized gains (losses), net
Changes in benefit plans, net (5) (20) 7
Changes in benefit plans, net
Other Comprehensive Income (Loss), Net 32
 (155) (52)Other Comprehensive Income (Loss), Net18 74 
      
Comprehensive Income (Loss), Net $213
 $(1,138) $(466)
Comprehensive Loss, NetComprehensive Loss, Net$(109)$(1,916)$(342)
__________
(1)Refer to Note 16 – Other Comprehensive Income (Loss) for gross components of Other Comprehensive Income (Loss), reclassification adjustments out of Accumulated other comprehensive loss and related tax effects.

(1)All amounts are net of tax. Tax effects were immaterial. Refer to Note 20 – Other Comprehensive Income (Loss) for information about pre-tax amounts.

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


CNDT 2020 Annual Report
Conduent Inc. 2017 Annual Report     5355


CONDUENT INCORPORATED
CONSOLIDATED BALANCE SHEETS
 December 31,December 31,
(in millions, except share data in thousands) 2017 2016(in millions, except share data in thousands)20202019
Assets    Assets
Cash and cash equivalents $658
 $390
Cash and cash equivalents$450 $496 
Accounts receivable, net 1,104
 1,286
Accounts receivable, net670 652 
Net receivable from former parent company 11
 
Assets held for sale 757
 
Contract assetsContract assets151 155 
Other current assets 180
 241
Other current assets306 283 
Total current assets 2,710
 1,917
Total current assets1,577 1,586 
Land, buildings and equipment, net 257
 283
Land, buildings and equipment, net305 342 
Operating lease right-of-use assetsOperating lease right-of-use assets246 271 
Intangible assets, net 891
 1,144
Intangible assets, net187 426 
Goodwill 3,366
 3,889
Goodwill1,528 1,502 
Long-term receivable from former parent company 11
 
Other long-term assets 313
 476
Other long-term assets413 387 
Total Assets $7,548
 $7,709
Total Assets$4,256 $4,514 
Liabilities and Equity    Liabilities and Equity
Short-term debt and current portion of long-term debt $82
 $28
Current portion of long-term debtCurrent portion of long-term debt$90 $50 
Accounts payable 138
 164
Accounts payable182 198 
Accrued compensation and benefits costs 335
 269
Accrued compensation and benefits costs237 174 
Unearned income 151
 206
Unearned income133 108 
Net payable to former parent company 
 124
Liabilities held for sale 169
 
Other current liabilities 493
 611
Other current liabilities450 647 
Total current liabilities 1,368
 1,402
Total current liabilities1,092 1,177 
Long-term debt 1,979
 1,913
Long-term debt1,420 1,464 
Pension and other benefit liabilities 4
 172
Deferred taxes 384
 619
Deferred taxes97 111 
Operating lease liabilitiesOperating lease liabilities207 229 
Other long-term liabilities 142
 173
Other long-term liabilities108 91 
Total Liabilities 3,877
 4,279
Total Liabilities2,924 3,072 
    
Contingencies (See Note 13) 

 

Contingencies (See Note 17)Contingencies (See Note 17)00
Series A convertible preferred stock 142
 142
Series A convertible preferred stock142 142 
    
Common stock 2
 2
Common stock
Additional paid-in capital 3,850
 3,812
Additional paid-in capital3,899 3,890 
Retained earnings 171
 
Retained earnings (deficit)Retained earnings (deficit)(2,313)(2,185)
Accumulated other comprehensive loss (494) (526)Accumulated other comprehensive loss(398)(407)
Total Equity 3,529
 3,288
Total Equity1,190 1,300 
Total Liabilities and Equity $7,548
 $7,709
Total Liabilities and Equity$4,256 $4,514 
    
Shares of common stock issued and outstanding 210,440
 202,875
Shares of common stock issued and outstanding212,074 211,511 
Shares of series A convertible preferred stock issued and outstanding 120
 120
Shares of series A convertible preferred stock issued and outstanding120 120 


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


CNDT 2020 Annual Report
Conduent Inc. 2017 Annual Report     5456


CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,
(in millions)202020192018
Cash Flows from Operating Activities:
Net income (loss)$(118)$(1,934)$(416)
Adjustments required to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization459 459 460 
Contract inducement amortization
Goodwill impairment1,952 
Deferred income taxes(21)(220)(75)
Loss from investments(3)(4)(2)
Amortization of debt financing costs11 
Loss on extinguishment of debt108 
Loss on divestitures and sales of fixed assets, net
Stock-based compensation20 24 38 
Allowance for doubtful accounts
Changes in operating assets and liabilities:
Accounts receivable(14)107 133 
Other current and long-term assets(36)(14)(111)
Accounts payable and accrued compensation39 (15)(14)
Restructuring liabilities10 
Other current and long-term liabilities(174)(257)161 
Net change in income tax assets and liabilities(8)(17)
Other operating, net(4)
Net cash provided by (used in) operating activities161 132 283 
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment(76)(148)(179)
Proceeds from sale of land, buildings and equipment13 
Cost of additions to internal use software(63)(67)(45)
Payments for acquisitions, net of cash acquired(90)
Proceeds (payments) from divestitures, net of cash(7)675 
Other investing, net(4)
Net cash provided by (used in) investing activities(134)(310)460 
Cash Flows from Financing Activities:
Proceeds from revolving credit facility and other loans155 
Payments on revolving credit facility(150)
Payments on debt(55)(54)(519)
Debt issuance fee payments(3)
Premium on debt redemption(95)
Payment of contingent consideration related to acquisition(4)
Taxes paid for settlement of stock-based compensation(10)(21)(10)
Dividends paid on preferred stock(10)(10)(10)
Net cash provided by (used in) financing activities(74)(85)(637)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(8)
Increase (decrease) in cash, cash equivalents and restricted cash(47)(260)98 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period505 765 667 
Cash, Cash Equivalents and Restricted Cash at End of period(1)
$458 $505 $765 
  Year Ended December 31,
(in millions) 2017 2016 2015
Cash Flows from Operating Activities:      
Net income (loss) $181
 $(983) $(414)
Adjustments required to reconcile net income to cash flows from operating activities:      
Depreciation and amortization 497
 613
 600
Goodwill impairment 
 935
 
Deferred tax benefit (230) (160) (115)
(Gain) loss from investments (10) (7) 
Amortization of debt financing costs 9
 
 
Net (gain) loss on sales of businesses and assets (49) 2
 100
Stock-based compensation 40
 23
 19
Changes in operating assets and liabilities:      
(Increase) decrease in accounts receivable 31
 (23) 243
(Increase) decrease in other current and long-term assets (30) (83) (86)
Increase (decrease) in accounts payable and accrued compensation (49) (60) 22
Increase (decrease) in restructuring liabilities 34
 27
 140
Increase (decrease) in other current and long-term liabilities (125) (210) 228
Net change in income tax assets and liabilities 11
 39
 (236)
Other operating, net (8) (5) (8)
Net cash provided by operating activities 302
 108
 493
Cash Flows from Investing Activities:      
Cost of additions to land, buildings and equipment (96) (149) (159)
Proceeds from sales of land, buildings and equipment 33
 
 1
Cost of additions to internal use software (36) (39) (27)
Proceeds (payments) from sale (purchase) of businesses 56
 (54) 742
Proceeds from investments 117
 11
 
Net proceeds (payments) on former parent company notes receivable 
 248
 (37)
Other investing, net 
 (1) 2
Net cash provided by investing activities 74
 16
 522
Cash Flows from Financing Activities:      
Proceeds on long term debt 306
 1,969
 28
Debt issuance fee payments (8) (67) 
Payments on debt (241) (32) (293)
Net payments to former parent company (161) (1,720) (763)
Issuance of common stock related to employee stock plans (5) 
 
Dividends paid on preferred stock (10) 
 
Restricted cash - former parent company 15
 (18) 
Other financing (5) 
 5
Net cash (used in) provided by financing activities (109) 132
 (1,023)
Effect of exchange rate changes on cash and cash equivalents 1
 (6) (11)
Increase (decrease) in cash and cash equivalents 268
 250
 (19)
Cash and cash equivalents at beginning of Year 390
 140
 159
Cash and Cash Equivalents at End of Year $658
 $390
 $140
 ___________

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

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


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CONDUENT INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


(in millions)Common StockAdditional
Paid-in
Capital
Retained
Earnings
AOCL(1)
Conduent
Shareholders’
Equity
Balance at December 31, 2017$$3,850 $171 $(494)$3,529 
Dividend - preferred stock, $80/per share— — (10)— (10)
Cumulative effect of accounting change - revenue standard— — 17 — 17 
Reclassification of amounts impacted by Tax Reform— — (5)
Stock option and incentive plans, net— 28 — — 28 
Comprehensive Income (Loss):
Net Loss— — (416)— (416)
Other comprehensive income (loss), net— — — 74 74 
Total Comprehensive Income (Loss), Net(416)74 (342)
Balance at December 31, 2018$$3,878 $(233)$(425)$3,222 
Dividend - preferred stock, $80/per share— — (10)— (10)
Cumulative effect of accounting change - lease standard— — (8)— (8)
Stock option and incentive plans, net— 12 — — 12 
Comprehensive Income (Loss):
Net Loss— — (1,934)— (1,934)
Other comprehensive income (loss), net— — — 18 18 
Total Comprehensive Income (Loss), Net(1,934)18 (1,916)
Balance at December 31, 2019$$3,890 $(2,185)$(407)$1,300 
Dividend - preferred stock, $80/per share— — (10)— (10)
Stock option and incentive plans, net— — — 
Comprehensive Income (Loss):
Net Loss— — (118)— (118)
Other comprehensive income (loss), net— — — 
Total Comprehensive Income (Loss), Net(118)(109)
Balance at December 31, 2020$$3,899 $(2,313)$(398)$1,190 
(in millions)Common Stock 
Additional
Paid-in
Capital
 
Retained
Earnings
 
AOCL(1)
 Former Parent Company Investment 
Conduent
Shareholders’
Equity
Balance at December 31, 2014$
 $
 $
 $(129) $5,540
 $5,411
Comprehensive loss, net
 
 
 (52) (414) (466)
Net transfers to former parent
 
 
 
 217
 217
Balance at December 31, 2015$
 $
 $
 $(181) $5,343
 $5,162
Comprehensive loss, net
 
 
 (155) (983) (1,138)
Series A Preferred stock transfer
 
 
 
 (142) (142)
Capitalization of Company2
 3,812
 
 
 (3,814) 
Net transfers from former parent
 
 
 (190) (404) (594)
Balance at December 31, 2016$2
 $3,812
 $
 $(526) $
 $3,288
Comprehensive income, net
 
 181
 32
 
 213
Cash dividends declared-preferred(2)

 
 (10) 
 
 (10)
Stock option and incentive plans, net
 38
 
 
 
 38
Balance at December 31, 2017$2
 $3,850
 $171
 $(494) $
 $3,529
 ___________
__________
(1)AOCL - Accumulated other comprehensive loss.
(2)Cash dividend on preferred stock of $20.00 per share for each quarter of 2017.

(1)AOCL - Accumulated other comprehensive loss.


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


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CONDUENT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 – Basis of Presentation and Summary of Significant Accounting Policies

References herein to “we,” “us,” “our,” the “Company” and “Conduent” refer to Conduent Incorporated and its consolidated subsidiaries unless the context suggests otherwise.

Description of Business
We are a global enterprise and leading provider
As one of the largest business process services withcompanies in the world, Conduent delivers mission-critical services and solutions on behalf of businesses and governments – creating exceptional outcomes for its clients and the millions of people who count on them. Through people, process, expertise in transaction-intensive processing and technology such as analytics and automation. We serve as a trusted business partner in both the front officeautomation, Conduent's services and back office, enabling personalized, seamless interactions on a massive scale that improve end user experience. Wesolutions create value for our commercialby improving efficiencies, reducing costs and enabling revenue growth. A majority of Fortune 100 companies and over 500 government clients by applying our expertise, technologyentities depend on Conduent every day to manage their business processes and innovation to help them drive customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics. Ouressential interactions with their end-users. The Company's portfolio includes industry-focused service offeringssolutions in attractive growth markets such as healthcare and transportation, as well as multi-industry service offeringssolutions that serve multiple industries such as transaction processing, customer care, human resource solutions and payment services.


Basis of Presentation


OurThe Company's Consolidated Financial Statements included the historical basis of assets, liabilities, revenues and expenses of the individual businesses of the Company, including joint ventures and partnerships over which the Company has a controlling financial interest. We haveThe Company has prepared the Consolidated Financial Statements pursuant to the rules and regulations of the SEC. Certain reclassifications have been made to prior yearsyears' amounts to conform to the current year presentation. All intercompany transactions and balances have been eliminated.


We have also considered the impact ofThe Company has evaluated subsequent events through February 24, 2021 and no material subsequent events were identified.

Conduent Incorporated is a New York corporation, organized in 2016. Our common stock began trading on these consolidated financial statements.

Separation from Xerox Corporation

On December 31, 2016, Conduent spun-off from Xerox Corporation (Xerox), pursuant to the Separation and Distribution Agreement (Separation). The Separation was completed by way of a pro rata distribution of Conduent shares held by Xerox to Xerox’s shareholders. As a result, we operate as an independent, publicly traded companyJanuary 3, 2017, on the New York Stock Exchange, under the ticker "CNDT".

Prior to In December 31, 2016,2019, Conduent changed the Financial Statementslisting of the Company were derivedits publicly traded common stock from the financial statements and accounting records of Xerox as if the Conduent operated on a standalone basis. Historically, the Company consisted of the Business Process Outsourcing Operating segment within Xerox’s reportable Services segment and did not operate as a separate, standalone company. Accordingly, Xerox performed certain corporate overhead functions for the Company. Therefore, certain corporate costs, including compensation costs for corporate employees supporting the Company, were allocated from Xerox. It is not practicable to estimate actual costs that would have been incurred had the Company been a separate standalone company during the periods presented. Allocations for management costs and corporate support services providedNew York Stock Exchange to the Company totaled $165 million and $170 million for years ended December 31, 2016 and December 31, 2015, respectively. Management ofNASDAQ Global Select Market (NASDAQ), where it remains listed under the Company believes the assumptions regarding the allocated expenses reasonably reflect the utilization of services provided to or the benefit received by the Company during the periods prior to the Separation. The Consolidated Financial Statements for the periods prior to the Separation do not necessarily include all the expenses that would have been incurred or held by the Company had it been a separate, standalone company.ticker "CNDT".


Conduent Inc. 2017 Annual Report     57



Use of Estimates
We
The Company prepared the Consolidated Financial Statements using financial information available at the time of preparation, which requires usit to make estimates and assumptions that affect the amounts reported. OurThe Company's most significant estimates pertain to the recognition of revenue for contracts based on the percentage of completion method of accounting, intangible and long-lived assets, valuation of goodwill, contingencies and litigation and income taxes and corporate allocations (for years ended December 31, 2016 and 2015). Ourtaxes. These estimates are based on management's best knowledge of current events, historical experience, and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.


As of December 31, 2020, the impact of the outbreak of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in the future.


CNDT 2020 Annual Report
59

New Accounting Standards
Revenue Recognition:
Income Taxes: In May 2014,December 2019, the Financial Accounting Standards Board (FASB) updatedissued final guidance that simplifies the accounting guidance relatedfor income taxes by eliminating some exceptions to revenue recognition to clarify the principles for recognizing revenue and replaced all existing revenue recognition guidancegeneral approach in U.S. GAAP with one accounting model.Accounting Standards Codification (ASC) 740, Income Taxes. The core principle ofCompany has analyzed the guidance and this guidance is that an entity should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that isnot expected to have a material impact on the Company's income tax provision. The Company is not early adopting the guidance; as such, the guidance will be received for those goods or services. Theeffective beginning in tax year 2021.

Reference Rate Reform: In March 2020, the FASB issued updated guidance also requires additional qualitative and quantitative disclosures relating to the nature, amount, timingaccounting for the discontinuation of the London Inter-bank Offered Rate (LIBOR), referred to as the reference rate reform. This guidance provides practical expedients and uncertainty of revenueexceptions for applying U.S. GAAP to contracts, hedging relationships and cash flows arising from contracts with customers largely onother transactions affected by the reference rate reform if certain criteria are met. This guidance is applicable to contract modifications that replace a disaggregated basis. We have evaluatedreference LIBOR rate affected by reference rate reform. The amendments may be applied through December 31, 2022. The Company is currently evaluating the adoption impact of the updated accountingnew guidance on our its
consolidated financial statements and continue to evaluate the impact on disclosures and internal controls. The new guidance will impact: (1) revenue associated with postage, which will be recognized on a net basis versus the current gross treatment; (2) the timing of revenue recognition associated with fixed fees for certain contracts with more than one performance obligation; and (3) the timing of recognition of certain pricing discounts. We adopted this updated accounting guidance beginning January 1, 2018 using the modified retrospective method under which we will recognize a cumulative-effect adjustment of approximately $20 million at the date of adoption (the expected impact to 2018 revenues is approximately $15 million), which excludes changes to our revenue associated with the reimbursement of postage.statements.

Recently Adopted Accounting Standards

Credit Losses: In addition, we recognized approximately $150 million of postage revenue in 2017 that will be recognized on a net basis (for all future periods) in Cost of services.
Leases: In FebruaryJune 2016, the FASB updated the accounting guidance related to leases requiring lesseesmeasurement of credit losses on financial instruments, which requires financial assets measured at amortized cost to recognize a right-of-use asset and a lease liability onbe presented at the balance sheet for all leases except short term leases (lease term of 12 months or less)net amount expected to be collected. The guidance replaces the incurred loss model with an expected loss model referred to as current expected credit loss (CECL). The accountingCECL model requires us to measure lifetime expected credit losses for lessors is largely unchanged. This updatedfinancial instruments held at the reporting date using historical experience, current conditions and reasonable supportable forecasts. The Company adopted the new guidance is effective for us beginningas of January 1, 2019. This guidance must be adopted using a modified retrospective approach through a cumulative-effect adjustment for leases that exist or are entered into after2020 and the beginningadoption of the earliest comparative period in the financial statements. While we are currently evaluating the impact of the updated accountingnew guidance on our consolidated financial statements; we do expectdid not have a material impact to the Company'son its Consolidated Balance Sheets.Financial Statements.
Cash Flows: In November 2016 the FASB issued updated accounting guidance regarding the presentation of restricted cash in the statement of cash flows. Specifically, this update requires that restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. At December 31, 2017 and 2016, we had $9 millionand $22 million of restricted cash, respectively, reported in other current assets. This update is effective for us beginning January 1, 2018.
Business Combinations: In January 2017, the FASB issued clarifying accounting guidance related to the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for us beginning January 1, 2018, with early adoption permitted. The amendment in this update will be applied prospectively. There will be no material impact from the adoption of this clarifying accounting guidance on our consolidated financial statements.


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Recently Adopted Accounting Standards
Goodwill: In January 2017, the FASB issued updated accounting guidance for simplifying the goodwill impairment test. Under the new guidance, an entity does not have to calculate the implied fair value of goodwill at the impairment testing date of its assets and liabilities as if those assets and liabilities had been acquired in a business combination. Instead the goodwill impairment test will compare the fair value of a reporting unit with its carrying amount and recognize as an impairment charge any amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We have elected to early adopt this new guidance for our goodwill impairment tests performed after January 1, 2017. Adoption did not have any effect on our financial condition, results of operations or cash flows.
Summary of Accounting Policies
Revenue Recognition
We primarily generate revenue through services. Revenue is recognized when it is realized or realizable and earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, delivery has occurred, the transaction price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until services have been provided to the customer, risk of loss has transferred to the customer, and either customer acceptance has been obtained, customer acceptance provisions have lapsed or the company has objective evidence that the criteria specified in the customer acceptance provisions have been satisfied. The transaction price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.
Outsourcing Services: Revenues associated with outsourcing services are generally recognized as services are rendered, which is generally on the basis of the number of accounts or transactions processed. In service arrangements where final acceptance of a system or solution by the customer is required, revenue is deferred until all acceptance criteria have been met. Revenues on cost reimbursable contracts are recognized by applying an estimated factor to costs as incurred, determined by the contract provisions and prior experience. Revenues on unit-price contracts are recognized at the contractual selling prices as work is completed and accepted by the customer. Revenues on time and material contracts are recognized at the contractual rates as the labor hours and direct expenses are incurred.
Revenues on certain fixed price contracts where we provide system development and implementation services are recognized over the contract term based on the percentage of development and implementation services that are provided during the period compared with the total estimated development and implementation services to be provided over the entire contract using the percentage-of-completion accounting methodology. These services require that we perform significant, extensive and complex design, development, modification or implementation of our customers' systems. Performance will often extend over long periods, and our right to receive future payment depends on our future performance in accordance with the agreement.
The percentage-of-completion methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed, on a current cumulative cost to an estimated total cost basis, using a reasonably consistent profit margin over the period.
Revenues earned in excess of related billings are accrued, whereas billings in excess of revenues earned are deferred until the related services are provided. We recognize revenues for non-refundable, upfront implementation fees on a straight-line basis over the period between the initiation of the services through the end of the contract term.
In connection with our services arrangements, we incur and capitalize costs to originate these long-term contracts and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of the arrangement. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual service period of the arrangement to cost of services. From time to time, we also provide inducements to customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract.
Spending associated with customer-related deferred set-up/transition and inducement costs were as follows:
  Year Ended December 31,
(in millions) 2017 2016 2015
Set-up/transition and inducement expenditures $55
 $63
 $65

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The capitalized amount of customer contract costs were as follows:
  Year Ended December 31,
(in millions) 2017 2016
Capitalized customer contract costs (1)
 126
 137
__________
(1) The balance at December 31, 2017 and 2016 are expected to be amortized over a weighted average period of approximately nine and eight years, respectively.
Amortization expense for the next five years and thereafter is expected to be as follows (in millions):
2018 2019 2020 2021 2022 Thereafter
$54
 $22
 $13
 $9
 $6
 $22
Long-lived assets used in the fulfillment of the arrangements are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific.
Multiple Element Arrangements:As described above, we enter into the following revenue arrangements that may consist of multiple deliverables including contracts for multiple types of outsourcing services, as well as professional and value-added services. For instance, we may contract for an implementation or development project and also provide services to operate the system which we implement or develop over a period of time; or we may contract to scan, manage and store customer documents.
In substantially all of our multiple element arrangements, we are able to separate the deliverables since we normally will meet both of the following criteria:
The delivered item(s) has value to the customer on a stand-alone basis; and
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.
Consideration in a multiple-element arrangement is allocated at the inception of the arrangement to all deliverables on the basis of the relative selling price. When applying the relative selling price method, the selling price for each deliverable is primarily determined based on vendor-specific objective evidence (VSOE), third-party evidence (TPE), or our best estimate of the selling price. The above noted revenue policies are then applied to each separated deliverable, as applicable.

Revenue Reporting:Revenue from sales of third-party vendor products or services is recorded net of costs when the Company is acting as an agent between the customer and the vendor or supplier, or gross when the Company is a principal to the transaction. Postage is generally recognized on a gross basis. Several factors are considered to determine whether the company is an agent or principal, most notably whether the Company is the primary obligor to the customer, or has inventory risk. Consideration is also given to whether the Company adds meaningful value to the vendor’s product or service, was involved in the selection of the vendor’s product or service, has latitude in establishing the sales price or has credit risk.
Revenue-based Taxes: We report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The primary revenue-based taxes are sales tax and value-added tax (VAT).
Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, including money market funds and investments with original maturities of three months or less.

Receivable Sales
We had transferred
In 2020, 2019 and 2018, the Company sold certain portions of ouraccounts receivable portfolios in 2016 and 2015 and accounted for those transfers as sales based on meetingderecognized the criteria for derecognition. Losses on the sale of receivables depend, in part, on both (a) the cash proceeds and (b) the net non-cash proceeds received or paid. When we have sold receivables, we normally received beneficial interests in the transferred receivables from the purchasers as part of the proceeds.corresponding receivable balance. Refer to Note 46 – Accounts Receivable, Net for more details on ourthe Company's receivable sales.sales.

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Assets/Liabilities Held for Sale
We classify assets as held for sale in the period when the following conditions are met: (i) management, having the authority to approve the action, commits to a plan to sell the asset (disposal group); (ii) the asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal group); (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated; (iv) the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal group) beyond one year; (v) the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A long-lived asset (disposal group) that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale.
The fair value of a long-lived asset (disposal group) less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.
In the fourth quarter of 2017, Management approved for disposal through sale of certain assets and businesses. This action was taken as a result of our strategic evaluation of these businesses. As of December 31, 2017, these businesses qualified as assets held for sale. During the year ended December 31, 2017, we reclassified $757 million to assets held for sale and $169 million to liabilities held for sale, as we have an active program to locate buyers for these businesses and we expect these businesses to be sold within one year.
Refer to Note 3 – Assets/Liabilities Held for Sale for further discussion.
Land, Buildings and Equipment

Land, buildings and equipment are recorded at cost. Buildings and equipment are depreciated over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life. Significant improvements are capitalized and maintenance and repairs are expensed when incurred.

Refer to Note 57 – Land, Buildings, Equipment and Software, Net for further discussion.
Software -
Internal Use and Product Software

Internal Use: We capitalizeUse Software: The Company capitalizes direct costs associated with developing, purchasing or otherwise acquiring software for internal use and amortizeamortizes these costs on a straight-line basis over the expected useful life of the software, beginning when the software is implemented (Internal Use Software).implemented. Costs incurred for upgrades and enhancements that will not result in additional functionality are expensed as incurred. Amounts expendedincurred for Internal Use Software are included in Cash Flows from Investing.Investing Activities.
Product: We

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Product Software: The Company also capitalizecapitalizes certain costs related to the development of software solutions to be sold to ourits customers upon reaching technological feasibility (Product Software).feasibility. These costs are amortized on a straight-line basis over the estimated economic life of the software. Amounts expendedincurred for Product Software are included in Cash Flows from Operations. We perform periodicThe Company performs annual reviews to ensure that unamortized Product Software costs remain recoverable from estimated future operating profits (net realizable value or NRV). Costs to support or service licensed software are charged to Costs of outsourcingservices as incurred.

Internal use and Product software are included in Other long-term assets on the Company's Consolidated Balance Sheets. Refer to Note 57 – Land, Buildings, Equipment and Software, Net for further information.

Cloud Computing Arrangements

The Company incurs costs to implement cloud computing arrangements that are hosted by third party vendors. Implementation costs associated with cloud computing arrangements are capitalized when incurred during the application development phase. Amortization is calculated on a straight-line basis over the contractual term of the cloud computing arrangement, which includes renewal options that are reasonably certain to be exercised. Capitalized amounts related to such arrangements are recorded within Other current assets and Other long-term assets in the Consolidated Balance Sheets. The amortization expense and the associated hosting fees are included in Cost of services and Selling, general and administrative expenses, depending on the nature of the underlying use of the cloud computing arrangement, in the Company’s Consolidated Statements of Income (Loss).

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

Leases
The Company adopted the new lease guidance as of January 1, 2019, using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company determines if an arrangement is a lease at the inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. The Company has operating and finance leases for real estate and equipment. Operating leases are included in Operating lease ROU assets, Other current liabilities, and Operating lease liabilities in our Consolidated Balance Sheets. Finance leases are included in Land, buildings and equipment, net, Current portion of long-term debt, and Long-term debt in the Company's Consolidated Balance Sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the net present value of lease payments over the lease term using the Company’s incremental borrowing rates or implicit rates. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option based on economic factors. The Company recognizes operating fixed lease expense and finance lease depreciation on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. The Company accounts for lease and non-lease components separately for its equipment leases, based on the estimated standalone price of each component, and combines lease and non-lease components for its real estate leases.

Refer to Note 8 – Leases for further information.

Goodwill

For acquired businesses, the Company records the acquired assets and assumed liabilities based on their relative fair values at the date of acquisitions (commonly referred to as the purchase price allocation). Goodwill represents the excess of the purchase price paid in excess of the fair value of net tangible and intangible assets acquired. For the Company’s business acquisitions, the purchase price is allocated to identifiable intangible assets separate from goodwill if they are from contractual or other legal rights, or if they could be separated from the acquired business and sold, transferred, licensed, rented or exchanged.


Conduent Inc. 2017 Annual Report    

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We testThe Company tests goodwill for impairment annually or more frequentfrequently if an event or change in circumstances indicate the asset may be impaired. Impairment testing for goodwill is done at the reporting unit level. WeThe Company determined the fair value of ourits reporting units utilizing a combination of both an Income Approach and a Market Approach. The Income Approach utilizes a discounted cash flow analysis based upon the forecasted future business results of ourits reporting units. The Market Approach utilizes the guideline public company method. If the fair value of a reporting unit is less than its carrying amount, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.unit

Refer to Note 69 – Goodwill and Intangible Assets, Net for further information.

Other Intangible Assets

Other intangible assets primarily consist of assets acquired through business combinations, includingprimarily installed customer base and distribution network relationships, patents and trademarks.base. Other intangible assets are amortized on a straight-line basis over their estimated economic lives unless impairment is identified.

Refer to Note 69 – Goodwill and Intangible Assets, Net for further information.

Impairment of Long-Lived Assets
We review
The Company reviews the recoverability of ourits long-lived assets, including buildings, equipment, internal use software, product software, right-of-use assets and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on ourthe Company's ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. OurThe Company's primary measure of fair value is based on forecasted cash flows.
Pension Obligations
We sponsor various forms of defined benefit pension plans in several countries covering employees who meet eligibility requirements.
Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our pension plans. These factors include assumptions we make about the discount rate, expected return on plan assets, the rate of future compensation increases and mortality rates.
The discount rate is used to present value our future anticipated benefit obligations. The discount rate reflects the current rate at which benefit liabilities could be effectively settled considering the timing of expected payments for plan participants. In estimating our discount rate, we consider rates of return on high-quality fixed-income investments adjusted to eliminate the effects of call provisions, as well as the expected timing of pension and other benefit payments.
The expected rate of return on plan assets is the long-term rate of return we expect to earn on plan assets. When estimating the expected rate of return, in addition to assessing recent performance, we consider the historical returns earned on plan assets, the rates of return expected in the future, and our investment strategy and asset mix with respect to the plans’ funds. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in financial markets and our investment strategy.
Each year, the difference between the actual return on plan assets and the expected return on plan assets, as well as increases or decreases in the benefit obligation as a result of changes in the discount rate and other actuarial assumptions, are added to or subtracted from any cumulative actuarial gain or loss from prior years. This amount is the net actuarial gain or loss recognized in Accumulated other comprehensive loss. We amortize net actuarial gains and losses as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss (excluding asset gains or losses that have not been recognized in market-related value) exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets (the "corridor" method). This determination is made on a plan-by-plan basis. If amortization is required for a particular plan, we amortize the applicable net gain or loss in excess of the 10% threshold on a straight-line basis in net periodic pension cost over the remaining service period of the employees participating in that pension plan. In plans where substantially all participants are inactive, the amortization period for the excess is the average remaining life expectancy of the plan participants.
All changes are ultimately recognized as components of net periodic benefit cost, except to the extent they may be offset by subsequent changes. At any point, changes that have been identified and quantified but not recognized as components of net periodic benefit cost, are recognized in Accumulated other comprehensive loss, net of tax.

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Refer to Note 11 – Employee Benefit Plans for further information regarding our Pension Benefit Obligations.
Income Taxes
We account
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are based on differences between U.S. GAAP reporting and tax bases of assets or liabilities and based on current tax laws, regulations and rates.

The recognition of deferred tax assets requires an assessment to determine the realization of such assets. Management establishes valuation allowances on deferred tax assets when it is determined “more-likely-than-not” that some portion or all of the deferred tax assets may not be realized. Management considers positive and negative evidence in evaluating the ability of the Company to realize its deferred tax assets, including its historical results and forecasts of future ability to realize its deferred tax assets, including projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.
We are
The Company is subject to ongoing tax examinations and assessments in various jurisdictions. We haveThe Company has unrecognized tax benefits for uncertain tax positions. We followThe Company follows U.S. GAAP which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. OurThe Company's ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease ourits effective tax rate, as well as impact ourits operating results.



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On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Reform). The Tax Reform includes a tax on global intangible low-taxed income (“GILTI”), which imposes a U.S. tax on certain income earned by the Company’s foreign subsidiaries. The Company elected to treat the tax on GILTI as a period cost when incurred and therefore, no deferred taxes for GILTI were recognized for the year ended December 31, 2020.

On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, which provides for coronavirus related tax relief as well as an omnibus appropriations package that extends various expiring tax provisions. The work opportunity tax credit has been extended through December 31, 2025, and a 100% deduction for the cost of business meals is allowed for 2021 and 2022, which will provide a permanent benefit. The Consolidated Appropriations Act is not expected to have a material impact on the Company's income tax provision.

Refer to Note 1216 – Income Taxes for further discussion.

Foreign Currency Translation and Re-measurement

The functional currency for most foreign operations is the local currency. Net assets are translated at current rates of exchange and income, expense and cash flow items are translated at average exchange rates for the applicable period. The translation adjustments are recorded in Accumulated other comprehensive loss.

The U.S. Dollar is used as the functional currency for certain foreign subsidiaries that conduct their business in U.S. Dollars. A combination of current and historical exchange rates is used in re-measuring the local currency transactions of these subsidiaries and the resulting exchange adjustments are recorded in Currency (gains) and losses within other expenses, net together with other foreign currency re-measurements.


Revenue Recognition

The Company adopted the new revenue standard as of January 1, 2018, using the modified retrospective method. The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

The Company's contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately, versus together, may require judgment. Typically, the Company’s contracts include performance obligation(s) to stand-ready on a daily or monthly basis to provide services to the customers. Under a stand-ready obligation, the evaluation of the nature of our performance obligation is focused on each time increment rather than the underlying activities. Accordingly, the promise to stand-ready is accounted for as a single-series performance obligation.

Once the Company determines the performance obligations, the Company determines the transaction price, which is based on fixed and variable consideration. Typical forms of variable consideration include variable pricing based on the number of transactions processed or usage-based pricing arrangements. Variable consideration is also present in the form of volume discounts, tiered and declining pricing, penalties for service level agreements, performance bonuses and credits. In circumstances where the Company meets certain requirements to allocate variable consideration to a distinct service within a series of related services, it allocates variable consideration to each distinct period of service within the series. In limited circumstances, if the Company does not meet those requirements, it includes an estimate of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty is resolved. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company generally determines standalone selling prices based on the prices charged to customers or by using expected cost plus margin.

The Company typically satisfies its performance obligations over time as the services are provided. A time-elapsed output method is used to measure progress because the nature of the Company’s promise is a stand-ready service and efforts are expended evenly throughout the period. In limited circumstances, such as contracts for implementation or development projects, the Company also uses a cost-to-cost based input method. The Company has determined that the above methods provide a faithful depiction of the transfer of services to the customer.


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Estimates of revenue expected to be recognized in future periods exclude unexercised customer options to purchase additional services that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for when the customer exercises its option to purchase additional goods or services. The Company recognizes revenue for non-refundable upfront implementation fees on a straight-line basis over the period between the initiation of the services through the end of the contract term.

When more than one party is involved in providing services to a customer, the Company evaluates whether it is the principal, and reports revenue on a gross basis, or an agent, and reports revenue on a net basis. In this assessment, the Company considers the following: if it obtains control of the specified services before they are transferred to the customer; is primarily responsible for fulfillment and inventory risk; and has discretion in establishing price.

The Company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The primary revenue-based taxes are sales tax and value-added tax (VAT).

The Company's payment terms vary by type of services offered. The time between invoicing and when payment is due is not significant. For certain services and customer types, the Company requires payment before services are rendered.

From time to time, the Company's contracts are modified to account for additions or changes to existing performance obligations. The Company's contract modifications related to stand-ready performance obligations are generally accounted for prospectively.

Refer to Note 2 – Revenue for further discussion.

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Note 2 – Revenue

Disaggregation of Revenue

During the first quarter of 2020, the Company changed how it presents its disaggregated revenue by major service offering. This change had no impact on disaggregated revenue by reportable segments or the timing of revenue recognition. All prior periods presented have been revised to reflect this change.

The following table provides information about disaggregated revenue by major service offering, the timing of revenue recognition and a reconciliation of the disaggregated revenue by reportable segments. Refer to Note 3 – Segment Reporting for additional information on the Company's reportable segments.

Year Ended December 31,
(in millions)202020192018
Commercial Industries:
Customer experience management$648 $669 $710 
Business operations solutions566 632 716 
Commercial healthcare solutions431 482 445 
Human resource and learning services518 602 679 
Total Commercial Industries2,163 2,385 2,550 
Government Services:
Government healthcare solutions603 675 727 
Government services solutions678 588 624 
Total Government Services1,281 1,263 1,351 
Transportation:
Roadway charging & management services318 327 300 
Transit solutions248 254 226 
Curbside management solutions72 107 109 
Public safety solutions73 83 79 
Commercial vehicles10 15 
Total Transportation719 781 729 
Other:
Divestitures36 752 
Education11 
Total Other38 763 
Total Consolidated Revenue$4,163 $4,467 $5,393 
Timing of Revenue Recognition:
Point in time$110 $144 $142 
Over time4,053 4,323 5,251 
Total Revenue$4,163 $4,467 $5,393 

The Company's contracts with customers are broadly similar in nature throughout the Company's major service offerings. The following is a description of the major service offerings:

Customer Experience Management:The Company offers a range of services that help its clients support their end-users. This includes in-bound and out-bound call support for both simple and complex transactions, technical support and patient assistance. The Company also provides multi-channel communication support (both print and digital) across a range of industries.

Business Operations Solutions: The Company helps its clients improve communications with their customers and constituents, whether it is on paper, on-line or through other communication channels. The Company also offers a broad array of flexible transaction processing services that include data entry, scanning, image processing, enrollment processing, claims processing, high volume offsite print and mail services and file indexing. The

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Company serves clients by managing their critical finance, accounting and procurement processes. These services include general accounting and reporting, billing and accounts receivable and purchasing, accounts payable and expense management services. The Company also offers wholesale and retail lockbox services and process auto and mortgage loans in the United States.

Commercial Healthcare Solutions: The Company delivers administration, clinical support and medical management solutions across the health ecosystem to reduce costs, increase compliance and enhance utilization, while improving health outcomes and experience for members and patients. The Company's solutions span: trials, sales, access, and adherence to pharmaceutical clients; case management, performance management and patient safety for hospital clients; medical bill review, claim processing, care integration, subrogation and payment integrity solutions to managed care companies; and workers compensation medical bill review, mailroom/data capture and medical management services to claims payers and third-party administrators.

Human Resource and Learning Services: The Company helps its clients support their employees at all stages of employment from initial on-boarding through retirement. The Company delivers mission-critical, technology-enabled HR services and solutions that improve business processes across the employee journey to maximize business performance, while increasing employee satisfaction, engagement and overall well-being. These solutions span health, benefits, payroll, onboarding and learning administration, annual enrollment, wealth & retirement, HR, talent, and workforce management.

Government Healthcare Solutions: The Company provides medical management and fiscal agent care management services, eligibility and enrollment services and support to Medicaid programs and federally funded U.S. government healthcare programs. The Company's services include a range of innovative solutions such as Medicaid management, provider services, Medicaid business intelligence, pharmacy benefits management, eligibility and enrollment support, contract center services, application processing, premium billing, disease surveillance and outbreak management and case management solutions.

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

Roadway Charging & Management Services: The Company's electronic tolling, urban congestion management and mileage-based user solutions help clients keep up with an ever-changing environment and get more travelers where they need to go while generating revenue for much-needed infrastructure improvements. The Company's solutions include vehicle passenger detection systems, electronic toll collection, automated license plate recognition and congestion management solutions.

Transit Solutions: The Company aims to make journeys more personalized and convenient while increasing capacity and profitability for authorities and agencies. The Company combines the latest in fare collection and intelligent mobility so that clients can get the added efficiency of having a single point of contact for all their transit solutions.

Curbside Management Solutions: The Company delivers intelligent curbside management systems that simplify parking programs and deliver convenient and hassle-free experience for drivers. The Company's curbside solutions include citation and permit administration, parking enforcement and curbside demand management.

Public Safety Solutions: The company provides data analytics, automated photo enforcement and other public safety solutions to make streets and communities safer. Photo enforcement systems include red light, fixed and mobile speed, school bus, work zone, school zone, bus lane only, high occupancy and other forms of photo enforcement systems.

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

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Contract Balances

The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are the Company’s rights to consideration for services provided when the right is conditioned on something other than passage of time (for example, meeting a milestone for the right to bill under the cost-to-cost measure of progress). Contract assets are transferred to Accounts receivable, net when the rights to consideration become unconditional. Unearned income includes payments received in advance of performance under the contract, which are realized when the associated revenue is recognized under the contract.

The following table provides information about the balances of the Company's contract assets, unearned income and receivables from contracts with customers:

(in millions)December 31, 2020December 31, 2019
Contract Assets (Unearned Income)
Current contract assets$151 $155 
Long-term contract assets(1)
13 10 
Current unearned income(133)(108)
Long-term unearned income(2)
(29)(21)
Net Contract Assets (Unearned Income)$$36 
Accounts receivable, net$670 $652 
__________
(1)Presented in Other long-term assets in the Consolidated Balance Sheets
(2)Presented in Other long-term liabilities in the Consolidated Balance Sheets

Revenues of $101 million and $101 million were recognized during the years ended December 31, 2020 and 2019, respectively, related to the Company's unearned income at December 31, 2019 and January 1, 2019. The Company had no material asset impairment charges related to contract assets for the year ended December 31, 2020.

Transaction Price Allocated to the Remaining Performance Obligations

Estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially satisfied at December 31, 2020, was approximately $1.2 billion. The Company expects to recognize approximately 82% of this revenue over the next 2 years and the remainder thereafter.

Costs to Obtain and Fulfill a Contract

The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining customer contracts. The net book value of these costs, which was $23 million and $18 million as of December 31, 2020 and 2019, respectively, are included in Other long-term assets. The judgments made in determining the amount of costs incurred include whether the commissions are incremental and directly related to a successful acquisition of a customer contract. These costs are amortized in Depreciation and amortization over the term of the contract or the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission. The Company expenses sales commissions when incurred if the amortization period of the sales commission is one year or less.

In addition, the Company may provide inducement payments to secure customer contracts. These inducement payments are capitalized and amortized as a reduction of revenue over the term of the customer contract. The net book value of these costs totaled $21 million and $21 million as of December 31, 2020 and 2019, respectively, and are included in Other long-term assets.

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

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these costs, which comprise set-up/transition activities, was $32 million and $45 million as of December 31, 2020 and 2019, respectively, and are classified in Other long-term assets on the Consolidated Balance Sheets. Contract fulfillment costs are expensed to Depreciation and amortization as the Company satisfies its performance obligations by transferring the service to the customer. These costs are amortized on a systematic basis over the expected period of benefit.

These costs are periodically reviewed for impairment.

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

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

20212022202320242025Thereafter
$36 $$$$$24 

Note 23 – Segment Reporting
Our
The Company's reportable segments correspond to how we organizeit organizes and managemanages the business, as defined by our CEOthe Company's Chief Executive Officer, who is also ourits Chief Operating Decision Maker (CODM), and are aligned to the industries in which ourthe Company's clients operate. OurThe Company's segments involve the delivery of business process services and include service arrangements where we manageit manages a customer's business activity or process. We report our

In 2020, the Company realigned its sales organization and certain shared IT and other allocated functions and reallocated certain costs that were previously included in the Shared IT/Infrastructure and Corporate Costs (now referred to as Unallocated Costs) to each of the reportable segments. All prior periods presented have been recast to reflect these changes.

The Company's financial performance is based on the twoSegment Profit/(Loss) and Segment Adjusted EBITDA for its three reportable segments: Commercialsegments (Commercial Industries, Government Services and Public Sector.Transportation), Other and Unallocated Costs. The Company's CODM does not evaluate operating segments using discrete asset information.

Commercial Industries: Our The Commercial Industries segment provides business process services and customized solutions to clients in a variety of industries (other than healthcare).industries. Across the Commercial Industries segment, wethe Company operates on its clients’ behalf to deliver end-to-end business-to-businessmission-critical solutions and business-to-customer services thatto reduce costs, improve efficiencies and enable our clients to optimize their key processes. Our multi-industry competencies include customer care, human resource management and finance and accounting services. These services are complemented by innovative industry-specific services such as personalized product informationrevenue growth for the automotive industry; digitized source-to-pay solutions forCompany's clients in the manufacturing industry; customer experience and marketing services for clients in the retail industry; mortgagetheir consumers and consumer loan processing for clients in the financial services industry; and customized workforce learning solutions for clients in the aerospace industry.
employees.

Public Sector: Our Public SectorGovernment Services: The Government Services segment provides government-centric business process services to U.S. federal, state and local and foreign governments for transportation, public assistance program administration, transaction processing and payment services. The solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations.

Transportation:The Transportation segment provides systems and support, as well as revenue-generating services, to government clients. On behalf of government agencies and authorities in the transportation industry, the Company delivers mission-critical mobility and payment solutions that improve automation, interoperability and decision-making to streamline operations, increase revenue and reduce congestion while creating safer communities and seamless travel experiences for consumers.

Other includes our Government Health Enterprise Medicaid Platform business, where we are limiting our focus to maintaining systems for our current clients; our Education Business inclusive of ourthe Company's divestitures and the Student Loan business, which isthe Company exited in runoff;the third quarter of 2018.

Unallocated Costs includes IT infrastructure costs that are shared by multiple reportable segments, enterprise application costs and inter-segment eliminations.certain corporate overhead expenses not directly attributable or allocated to the reportable segments.


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Selected financial information for our reportable segments was as follows:

  Year Ended December 31,
(in millions) Commercial Industries Public Sector Other Total
2017        
Revenue $3,486
 $2,160
 $334
 $5,980
Former parent company revenue 42
 
 
 42
Inter-segment revenue 20
 3
 (23) 
Total Segment Revenue $3,548
 $2,163
 $311
 $6,022
Depreciation and amortization $162
 $85
 $7
 $254
Segment profit (loss) 182
 245
 (10) 417
         
2016        
Revenue $3,729
 $2,300
 $329
 $6,358
Former parent company revenue 50
 1
 (1) 50
Inter-segment revenue 26
 7
 (33) 
Total Segment Revenue $3,805
 $2,308
 $295
 $6,408
Depreciation and amortization $162
 $102
 $69
 $333
Segment profit (loss) 151
 293
 (248) 196
         
2015        
Revenue $3,970
 $2,324
 $315
 $6,609
Former parent company revenue 54
 
 (1) 53
Inter-segment revenue 35
 7
 (42) 
Total Segment Revenue $4,059
 $2,331
 $272
 $6,662
Depreciation and amortization $160
 $118
 $72
 $350
Segment profit (loss) 148
 298
 (509) (63)
Year Ended December 31,
(in millions)Commercial IndustriesGovernment ServicesTransportationOtherUnallocated CostsTotal
2020DivestituresOther
Revenue$2,163 $1,281 $719 $$$$4,163 
Segment profit (loss)$150 $372 $82 $$$(348)$265 
Segment depreciation and amortization$108 $25 $35 $$$54 $222 
Adjusted EBITDA$258 $397 $117 $$$(294)$480 
2019
Revenue$2,385 $1,263 $781 $36 $$$4,467 
Segment profit (loss)$270 $279 $69 $$(1)$(345)$273 
Segment depreciation and amortization$106 $31 $35 $$$44 $216 
Adjusted EBITDA$376 $311 $108 $$(1)$(301)$494 
2018
Revenue$2,550 $1,351 $729 $752 $11 $$5,393 
Segment profit (loss)$346 $296 $61 $98 $(4)$(375)$422 
Segment depreciation and amortization$108 $35 $38 $$$31 $221 
Adjusted EBITDA$454 $328 $99 $105 $(2)$(344)$640 


The following is a reconciliation of segment profit (loss) profit/adjusted EBITDA to pre-taxincome (loss) income:
before income taxes:
(in millions) Year Ended December 31,
Segment Profit (Loss) Reconciliation to Pre-tax Loss 2017 2016 2015
Pre-tax Loss $(16) $(1,227) $(574)
Reconciling items:      
Goodwill impairment 
 935
 
Amortization of intangible assets 243
 280
 250
Restructuring and related costs 101
 101
 159
Interest expense 137
 14
 8
Related party interest 
 26
 61
Separation costs 12
 44
 
(Gain) Loss on sale of asset and businesses (42) 2
 
Business transformation costs 
 3
 3
Other (income) expenses, net (18) 18
 30
Total Segment Profit (Loss) $417
 $196
 $(63)


(in millions)Year Ended December 31,
Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss)202020192018
Loss Before Income Taxes$(139)$(2,106)$(395)
Reconciling items:
Amortization of acquired intangible assets239 246 242 
Restructuring and related costs67 71 81 
Interest expense60 78 112 
Loss on extinguishment of debt108 
Goodwill impairment1,952 
Loss on divestitures and transaction costs17 25 42 
Litigation costs, net20 17 227 
Other (income) expenses, net(10)
Segment Pre-Tax Income (Loss)$265 $273 $422 
Segment depreciation and amortization222 216 221 
NY MMIS/HE charge (credit)(3)
CA MMIS charge (credit)(7)
Other adjustments$$$
Adjusted EBITDA$480 $494 $640 


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Geographic area data is based upon the location of the subsidiary reporting the revenue or long-lived assets and is as follows for each of the years ended December 31:

 Revenues 
Long-Lived Assets (1)
Revenues
Long-Lived Assets (1)
(in millions) 2017 2016 2015 2017 2016(in millions)20202019201820202019
United States $5,303
 $5,686
 $5,849
 $289
 $325
United States$3,748 $4,000 $4,748 $628 $612 
Europe 538
 547
 616
 42
 47
Europe357 386 497 44 53 
Other areas 181
 175
 197
 54
 64
Other areas58 81 148 114 137 
Total Revenues and Long-Lived Assets $6,022
 $6,408
 $6,662
 $385
 $436
Total Revenues and Long-Lived Assets$4,163 $4,467 $5,393 $786 $802 
________________
(1)Long-lived assets are comprised of (i) Land, buildings and equipment, net, (ii) Internal use software, net and (iii) Product software, net.
In 2016, our methodology to disclose revenue on a geographic basis changed to reflect where the work is contracted. All prior years have been adjusted to reflect this change in methodology.__________

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

Note 34Assets/Liabilities Held for SaleDivestiture
As of December 31, 2017, there were certain businesses that qualified as assets/liabilities held for sale due to plans for disposal through sale. These assets/liabilities held for sale include a mix of both Commercial Industries and Public Sector that represent businesses in markets or with services that we did not see as strategic or core. The following is a summary of the major categories of assets and liabilities that have been reclassified to held for sale.
(in millions) Year Ended December 31, 2017
Accounts Receivable, net $160
Other current assets 41
Land, building and equipment, net 6
Product Software, net 3
Intangible assets, net 7
Goodwill 537
Other long-term assets 3
   Total Assets held for sale $757
   
Accounts payable $9
Accrued compensation 20
Unearned revenue 30
Other current liabilities 53
Pension and other benefit obligations 50
Other long-term liabilities 7
  Total Liabilities held for sale $169
Information Technology Outsourcing (ITO)
In 2015 weFebruary 2019, the Company completed the sale of our ITOa portfolio of select standalone customer care contracts to Skyview Capital LLC. During 2019, the Company recorded additional losses and transaction costs of $17 million on the sale of this portfolio, reflecting certain changes in estimates that were made when recording the initial charge in 2018. The revenue generated from this business to Atos, which represented a discontinued operation.was $36 million for the three months ended March 31, 2019 and $439 million for the year ended December 31, 2018.

Note 5 – Business Acquisition

In February 2016, we reached an agreement with Atos onJanuary 2019, the final adjustments toCompany completed the closing balanceacquisition of net assets sold as well as the settlementHealth Solutions Plus (HSP), a software provider of certain indemnifications and recorded an additional pre-tax loss on the disposal in 2015healthcare payer administration solutions, for a total base consideration of $24$90 million ($14 million after-tax). The additional loss was recorded in 2015 as the financial statements had not yet been issued when the agreement was reached with Atos. We made a payment in 2016 to Atos of approximately $52 million, representing a $28 million adjustment to the final sales price as a result of this agreement and a maximum contingent consideration payment of $24$8 million due from closing. based on a cumulative achievement over 2 years. Revenue recorded for the year ended December 31, 2019, was $20 million. Pre-tax income for the year ended December 31, 2019, was $6 million.

The payment is reflected in Investing cash flowsCompany’s final purchase price allocation for HSP as an adjustment of the sales proceeds.acquisition date was as follows:


(in millions)
Fair Value of Consideration Transferred:
Cash paid$90 
Contingent consideration payable
Total Consideration$97 
Allocation of Purchase Price:
Net tangible assets$10 
Developed technology19 
Costs Assigned to Intangible Assets
Customer relationships18 
Trademarks and trade names
Goodwill49 
Total Intangible Assets68 
Total Assets$97 

The weighted average amortization periods are 7 years, 15 years and 1.5 years for Developed technology, Customer relationships and Trademarks and trade names, respectively. The acquired goodwill is associated with the Company's Commercial Industries segment. This acquired goodwill, while tax deductible, includes $7 million related to contingent consideration payable that was not tax deductible until it was earned and paid. During the third quarter of 2020, the contingent consideration payable was settled. The goodwill recognized is attributable primarily to
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expected synergies and the assembled workforce of Contents
HSP. The Developed technology is classified as Product Software within Other long-term assets on the Consolidated Balance Sheets.

Summarized financial information for our Discontinued Operations is as follows:
(in millions) Year Ended December 31, 2015
Revenues $619
Income (loss) from operations $104
Loss on disposal (101)
Net income (loss) before income taxes $3
Income tax expense (81)
Loss from discontinued operations, net of tax $(78)


The following is a summaryCompany has not presented separate results of selectedoperations or combined pro forma financial information of the ITO business:Company and the acquired business because the results of operations of the acquired business are considered immaterial.

(in millions) Year Ended December 31, 2015
Expenses:  
Operating lease rent expense $130
Defined contribution plans 4
Interest expense 2
Expenditures:  
Cost of additions to land, buildings and equipment $41
Cost of additions to internal use software 1
Customer-related deferred set-up/transition and inducement costs 10

Note 46 – Accounts Receivable, Net

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

The Company enters into factoring agreements in the normal course of business as follows:
  December 31,
(in millions) 2017 2016
Amounts billed or billable $919
 $1,014
Unbilled amounts 187
 279
Allowance for doubtful accounts (2) (7)
Accounts Receivable, Net $1,104
 $1,286
Unbilled amounts include amounts associated with percentage-of-completion accountingpart of our cash and other earned revenues not currently billable dueliquidity management, to contractual provisions. Amountssell certain accounts receivable without recourse to be invoicedthird-party financial institutions. These transactions are treated as a sale and are accounted for as a reduction in subsequent months for current services providedaccounts receivable because the agreements transfer effective control over, and risk related to, the receivables to the buyers. Cash proceeds from these arrangements are included in amounts billable, and at December 31, 2017 and 2016 were approximately $364 million and $429 million, respectively.cash flow from operating activities in the Consolidated Statements of Cash Flows.
Accounts Receivable Sales Arrangements
Prior to 2017, we sold accounts receivables with payment due dates of less than 60 days.
Under most of the agreements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.
Accounts receivable sales for the years ended December 31, 2020 and 2019 were as follows:

 Year Ended December 31,
(in millions)20202019
Accounts receivable sales$529 $204 

  Year Ended December 31,
(in millions) 2017 2016 2015
Accounts receivable sales $
 $250
 $325
Estimated increase (decrease) to operating cash flows(1)
 
 (136) 58
__________
(1)Represents the difference between current and prior year fourth quarter receivable sales adjusted for the effects of: (i) deferred proceeds, (ii) collections prior to the end of the year and (iii) currency.


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Table of Contents

Note 57 - Land, Buildings, Equipment and Software, Net


Land, buildings and equipment, net werewas as follows:
Estimated Useful LivesDecember 31,
(in millions except as noted)(Years)20202019
Land$$
Building and building equipment25 to 50
Leasehold improvementsVaries268 267 
IT, other equipment and office furniture3 to 15869 964 
Other4 to 20
Construction in progress35 50 
Subtotal1,182 1,292 
Accumulated depreciation(877)(950)
Land, Buildings and Equipment, Net$305 $342 
  Estimated Useful Lives December 31,
(in millions except as noted) (Years) 2017 2016
Land   $3
 $10
Building and building equipment 25 to 50 17
 20
Leasehold improvements Varies 247
 236
Office furniture and equipment 3 to 15 784
 719
Other 4 to 20 1
 1
Construction in progress   24
 54
Subtotal   1,076
 1,040
Accumulated depreciation   (819) (757)
Land, Buildings and Equipment, Net   $257
 $283


Depreciation expense for the years ended December 31, 2020, 2019 and operating lease rent expense were as follows:
  Year Ended December 31,
(in millions) 2017 2016 2015
Depreciation expense $125
 $130
 $126
Operating lease rent expense $375
 $378
 $389

We lease buildings and equipment, substantially all of which are accounted for as operating leases. Certain leases were accounted for as capital leases and the remaining net book value of those assets, included in Land, Buildings and Equipment, net were approximately $322018 was $125 million, $123 million and $42$121 million, at December 31, 2017 and 2016, respectively.

Future minimum operating lease commitments that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2017 were as follows (in millions):

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2018 2019 2020 2021 2022 Thereafter
$163
 $119
 $80
 $53
 $31
 $52


Internal Use and Product Software


Internal use and Product software are included in Other long-term assets on the Company's Consolidated Balance Sheets. Additions to Internal Use and Product Software as well as year-end balances for these assets were as follows:

(in millions) Year Ended December 31,(in millions)Year Ended December 31,
Additions to: 2017 2016 2015Additions to:202020192018
Internal use software $36
 $39
 $27
Internal use software$63 $70 $47 
Product software 10
 10
 19
Product software36 


December 31,
(in millions)20202019
Internal use software, at cost$524 $508 
Accumulated amortization(361)(358)
Internal use software, net(1)
$163 $150 
Product software, at cost$144 $104 
Accumulated amortization(72)(64)
Product software, net(1)
$72 $40 
(in millions) December 31,
Capitalized Costs, Net 2017 2016
Internal use software $106
 $115
Product software 22
 38


Useful lives of our internalInternal use and productProduct software generally vary from one to seven years.


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Table of Contents

Included within product Amortization expense for Internal use and Product software atfor the years ended December 31, 20172020, 2019 and 20162018 was $54 million, $48 million and $46 million, respectively.

Cloud Computing Arrangements

Cloud computing implementation costs are included in Other current assets and Other long-term assets on the Company's Consolidated Balance Sheets. Additions to Cloud computing implementation costs as well as year-end balances for these assets were as follows:
(in millions)Year Ended December 31,
Additions to:202020192018
Cloud computing implementation costs$$39 $

(in millions)December 31,
Capitalized Costs, Net20202019
Cloud computing implementation costs, at cost$47 $44 
Accumulated amortization(6)(2)
Cloud computing implementation costs, net(1)
$41 $42 
__________
(1)Refer to Note 11 – Supplementary Financial Information for additional information on the current and long-term portions of this asset.

Useful lives of Cloud computing implementation costs are three to five years. Amortization expense for Cloud computing implementation costs for the years ended December 31, 2020, 2019 and 2018 were $4 million, $2 million and $3$0 million, respectively,respectively.

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Note 8 - Leases

The Company adopted the new lease guidance as of capitalizedJanuary 1, 2019, using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are, or contain, leases, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs associatedfor any existing leases as of the adoption date. The Company did not elect to apply the hindsight practical expedient. Additionally, the Company has elected not to include short-term leases, with software system platforms developed for use in certaina term of our government services businesses.12 months or less, on its Consolidated Balance Sheets.


During 2016 we determined that it was probable that we would not fully complete our NY MMIS project in its current form. As a resultThe components of this decision an impairment charge of approximately $28 million was recorded in Cost of services. We also recorded an additional impairment charge in 2016lease costs were as follows:

Year Ended December 31,
(in millions)20202019
Finance Lease Costs:
Amortization of right of use assets$$10 
Interest on lease liabilities
Total Finance Lease Costs$$11 
Operating lease costs:
Base rent$95 $112 
Short-term lease costs12 
Variable lease costs(1)
26 30 
Sublease income(3)(7)
Total Operating Lease Costs$123 $147 
__________
(1)Primarily related to taxes, insurance and common area and other maintenance costs for real estate leases.

Supplemental cash flow information related to leases was as follows:

Year Ended December 31,
(in millions)20202019
Cash paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$117 $137 
Operating cash flows from finance leases
Total Cash Flow from Operating Activities$118 $138 
Financing cash flow from finance leases$11 $11 
Supplemental non-cash information on right of use assets obtained in exchange for new lease obligations:
Operating leases$73 $32 
Finance leases$14 $

Supplemental balance sheet information related to leases was as follows:


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December 31,
(in millions)20202019
Operating lease assets:
Operating lease right-of-use assets$246 $271 
Operating lease liabilities:
Other current liabilities$81 $91 
Operating lease liabilities207 229 
Total Operating Lease Liabilities$288 $320 
Finance lease assets:
Land, buildings and equipment, net$19 $14 
Finance lease liabilities:
Current portion of long-term debt$$
Long-term debt12 10 
Total Finance Lease Liabilities$20 $17 

The Company's leases generally do not provide an implicit rate; therefore, the 2015 HE chargeCompany uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of approximately $9 million in Restructuringthe interest rate that the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment.

The weighted average discount rates and asset impairment. In 2015 we decided to discontinue certain future implementationsweighted average remaining lease terms for operating and finance leases as of these software system platforms,December 31, 2020 and recorded an impairment charge2019 were as follows:

December 31, 2020December 31, 2019
Operating LeasesFinance LeasesOperating LeasesFinance Leases
Weighted average discount rates6.1 %5.3 %5.5 %4.8 %
Weighted average remaining lease term (in years)5353

Maturities of $160 million ($14 million in Costoperating and finance lease liabilities as of services and $146 million in Restructuring and asset impairments).December 31, 2020 were as follows:


December 31, 2020
(in millions)Operating Lease PaymentsFinance Lease Payments
2021$95 $
202271 
202347 
202437 
202527 
Thereafter59 
Total undiscounted lease payments336 21 
Less imputed interest48 
Present value of lease liabilities$288 $20 



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Note 69 - Goodwill and Intangible Assets, Net

Goodwill


The following table presents the changes in the carrying amount of goodwill, by reportable segment:
 (in millions) Commercial Industries Public Sector Total 
Balance at December 31, 2015 $2,467
 $2,405
 $4,872
Foreign currency translation (24) (20) (44)
Acquisitions (2) 
 (2)
Disposition (2) 
 (2)
Impairment (935) 
 (935)
Balance at December 31, 2016 $1,504
 $2,385
 $3,889
Foreign currency translation 19
 28
 47
Dispositions (19) (14) (33)
Assets held for sale (105) (432) (537)
Balance at December 31, 2017 $1,399
 $1,967
 $3,366


 (in millions)Commercial IndustriesGovernment ServicesTransportationTotal
Balance at December 31, 2018$1,391 $1,376 $641 $3,408 
Foreign currency translation(1)(1)(2)
Acquisitions49 49 
Impairment(618)(754)(580)(1,952)
Other(1)(1)
Balance at December 31, 2019$821 $621 $60 $1,502 
Foreign currency translation16 26 
Balance at December 31, 2020$837 $623 $68 $1,528 
Gross goodwill$2,390 $1,377 $648 $4,415 
Accumulated impairment(1,553)(754)(580)(2,887)
Balance at December 31, 2020$837 $623 $68 $1,528 
Impairment Charge

There was noThe Company performed its annual goodwill impairment identifiedtest for the yearsyear ended December 31, 20172020 as of October 1, 2020. This testing did not identify any goodwill impairment and, 2015. In 2016, dueaccordingly, no impairment charge was recorded.

To the extent the COVID-19 pandemic continues to disrupt the declining trends and projectionseconomic environment, such as a decline in the Commercial Industriesperformance of the reporting unit, we concluded thatunits or loss of a significant contract or multiple significant contracts, the fair value of our Commercial Industriesone or more of the reporting units could fall below their carrying value, resulting in a goodwill impairment charge.

2019 Goodwill Impairment Charge

In the first quarter of 2019, the Transportation reporting unit was lessexperienced unanticipated losses of certain customer contracts, lower than expected new customer contracts and higher costs of delivery, and as a result, the growth of this reporting unit decreased resulting in its fair value being below its carrying value.value by an estimated $284 million. Accordingly, wethe Company recorded a pre-tax goodwill impairment charge of $935$284 million duringfor the three months ended March 31, 2019.

In the second quarter of 2019, there were further unanticipated losses of certain customer contracts, lower potential future volumes and lower than expected new customer contracts. This led to actual results being below budget and a further downward revision of the long-term forecast across all the Company's reporting units. As a consequence of the business performance and the strategy pivot due to changes in management that occurred in the second quarter of 2019, the Company performed an interim goodwill impairment assessment for all its reporting units which resulted in a pre-tax impairment charge of $1.1 billion for the three months ended June 30, 2019.

As of December 31, 2019, the Company performed an interim impairment assessment due to a triggering event caused by further unanticipated contract losses within the Government Services reporting unit, and as result, management performed a goodwill impairment assessment for this reporting unit as of December 31, 2019, which resulted in a pre-tax impairment charge of $512 million.

In addition, in the fourth quarter of 2016, which is separately presented2019, the Company recorded an immaterial correction to the impairment charges recorded in the Consolidated Statementsfirst and second quarters to properly reflect the impact of Income (Loss). There was no impairment identified fortax-deductible goodwill on the Public Sector in 2016.
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, at December 31, 2017. The most significant assumptions used in the goodwill analysis relate to a 3% long-term organic growth rate for both the Commercial Industries and Public Sector segmentsprevious impairments as well as a 9.25% and a 8.75% discount ratethe related income tax benefit. The cumulative impairment charge for the Commercial Industries and Public Sector segments, respectively.year ended December 31, 2019 was approximately $2.0 billion.


CNDT 2020 Annual Report
75

Intangible Assets, Net


Net intangible assets were $891$187 million at December 31, 20172020 of which $492$176 million, $8 million and $399$3 million relate to our Commercial Industries, Government Services and Public SectorTransportation segments, respectively. Intangible assets were comprised of the following:

 December 31, 2017 December 31, 2016 December 31, 2020December 31, 2019
(in millions except years) 
Weighted Average
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amount
(in millions except years)Weighted Average
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Customer relationships 12 years $2,907
 $2,022
 $885
 $2,924
 $1,788
 $1,136
Customer relationships12 years$2,890 $2,703 $187 $2,920 $2,494 $426 
Technology, patents and non-compete 4 years 11
 5
 6
 11
 3
 8
Technology, patents and non-compete0 years
Total Intangible Assets   $2,918
 $2,027
 $891
 $2,935
 $1,791
 $1,144
Total Intangible Assets $2,890 $2,703 $187 $2,921 $2,495 $426 


Conduent Inc. 2017 Annual Report     68

Table of Contents

Amortization expense related to intangible assets was $243$239 million, $280$246 million and $250$242 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. Amortization expense is expected to approximate $241 million in 2018, $241 million in 2019, $238 million in 2020, $134 million in 2021, and $12$13 million in 2022.2022, $7 million in 2023, $6 million in 2024 and $4 million in 2025.



CNDT 2020 Annual Report
76

Note 710 – Restructuring Programs and Asset Impairment ChargesRelated Costs
We engage
The Company engages in a series of restructuring programs related to downsizing ourits employee base, exiting certain activities, outsourcing certain internal functions and engaging in other actions designed to reduce ourits cost structure and improve productivity. Prior to 2017, these initiatives primarily consist of severance actions that impacted all major geographies and segments. In 2017, theThe implementation of our strategic transformation program as well as various productivitythe Company's operational efficiency improvement initiatives have reduced ourthe Company's real estate footprint across all geographies and segments resulting in increased lease cancellationright-of-use asset impairments and other related costs. Also included in Restructuring and Related Costs are incremental, non-recurring costs related to the consolidation of the Company's data centers, which totaled $23 million, $21 million and $4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Management continues to evaluate ourthe Company's business therefore,and, in the future, years, there may be additional provisions for new plan initiatives as well asand/or changes in previously recorded estimates as payments are made, or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these programs.

Costs associated with restructuring, including employee severance and lease termination costs, are generally recognized when it has been determined that a liability has been incurred, which is generally upon communication to the affected employees or exit from the leased facility. In those geographies where we have either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, we recognize employee severance costs when they are both probable and reasonably estimable. Asset impairment costs related to the reduction of our real estate footprint include impairment of operating lease right-of-use (ROU) assets and associated leasehold improvements.

A summary of ourthe Company's restructuring program activity during the two years ended December 31, 20172020 is as follows:

(in millions) 
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 Asset Impairments Total
Balance at December 31, 2015 4
 
 
 4
Restructuring provision 67
 7
 12
 86
Reversals of prior accruals (13) 
 
 (13)
Total Net Current Period Charges 54
 7
 12
 73
Charges against reserve and currency (43) (2) (11) (56)
Balance at December 31, 2016 15
 5
 1
 21
Restructuring provision 49
 49
 5
 103
Reversals of prior accruals (8) (3) 
 (11)
Total Net Current Period Charges 41
 46
 5
 92
Charges against reserve and currency (42) (17) (6) (65)
Liabilities held for sale 
 (4) 
 (4)
Balance at December 31, 2017 $14
 $30
 $
 $44
(in millions)Severance and Related CostsTermination and Other CostsAsset ImpairmentsTotal
Balance at December 31, 2018$13 $36 $$49 
Provision33 30 15 78 
Changes in estimates(5)(6)(11)
Total Net Current Period Charges(1)
28 24 15 67 
Charges against reserve and currency(26)(32)(15)(73)
Reclassification to operating lease ROU assets(2)
(22)(22)
Balance at December 31, 2019$15 $$$21 
Provision13 27 15 55 
Changes in estimates
Total Net Current Period Charges(1)
14 30 15 59 
Charges against reserve and currency(26)(33)(15)(74)
Balance at December 31, 2020$$$$

__________
(1)Represents amounts recognized within the Consolidated Statements of Income (Loss) for the years shown.
(2)Relates to the adoption of the new lease guidance.

We also recorded costs related to professional support services associated with the implementation of thecertain strategic transformation programprograms of $9$8 million, $4 million and $28$3 million during the years ended December 31, 20172020, 2019 and 2016,2018, respectively.

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


  Year Ended December 31,
(in millions) 2017 2016 2015
Commercial Industries $60
 $57
 $11
Public Sector 28
 12
 2
Other(1)
 4
 4
 146
Total Net Restructuring Charges $92
 $73
 $159
 ________________
(1)Refer to Note 5 – Land, Buildings, Equipment and Software, Net for additional information regarding the asset impairment in 2016 and 2015.CNDT 2020 Annual Report


77
Conduent Inc. 2017 Annual Report     69

 Year Ended December 31,
(in millions)202020192018
Commercial Industries$11 $24 $26 
Government Services
Transportation
Other
Unallocated Costs45 40 42 
Total Net Restructuring Charges$59 $67 $78 
Table of Contents

CNDT 2020 Annual Report
78


Note 811 – Supplementary Financial Information

The components of Other assets and liabilities were as follows:

December 31,
(in millions)20202019
Other Current Assets
Prepaid expenses$73 $70 
Income taxes receivable48 38 
Value-added tax (VAT) receivable21 20 
Restricted cash
Current portion of capitalized cloud computing implementation costs, net
Net receivable from buyers of divested businesses53 52 
Other95 89 
Total Other Current Assets$306 $283 
Other Current Liabilities
Accrued liabilities$229 $309 
Litigation related accruals73 178 
Current operating lease liabilities81 91 
Restructure reserves15 
Income tax payable16 11 
Other taxes payable16 16 
Other34 27 
Total Other Current Liabilities$450 $647 
Other Long-term Assets
Internal use software, net$163 $150 
Deferred contract costs, net(2)
76 84 
Product software, net72 40 
Cloud computing implementation costs, net33 37 
Other69 76 
Total Other Long-term Assets$413 $387 
Other Long-term Liabilities
Deferred payroll tax related to the CARES Act(1)
$24 $
Income tax liabilities15 20 
Unearned income29 21 
Restructuring reserves
Other35 44 
Total Other Long-term Liabilities$108 $91 
__________
(1)The CARES Act allows for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with 50% due on December 31, 2021 and the remainder due on December 31, 2022. The current portion of this liability is included in Accrued compensation and benefits costs.
(2)Represents capitalized costs associated with obtaining or fulfilling a contract with a customer. The balances at December 31, 2020 and 2019 are expected to be amortized over a weighted average remaining life of approximately 11 and 12 years, respectively. See Note 2 – Revenue for more information.


CNDT 2020 Annual Report
79

Note 12 – Debt


We classify ourThe Company classifies its debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest put date available to the debt holders. We deferThe Company defers costs associated with debt issuance over the applicable term. These costs are amortized as interest expense in ourthe Consolidated Statements of Income (Loss).
 
Long-term debt was as follows:

   December 31,December 31,
(in millions) 
Weighted Average Interest Rates at December 31, 2017(1) 
 2017 2016(in millions)
Weighted Average Interest Rates at December 31, 2020(1) 
20202019
      
   
Term loan A due 2021 3.11% $732
 $694
Term loan A due 2022Term loan A due 20222.34 %$654 $664 
Term loan B due 2023 6.79% 842
 750
Term loan B due 20233.82 %816 824 
Senior notes due 2024 10.91% 510
 510
Senior notes due 202410.90 %34 34 
Capital lease obligations 4.39% 33
 43
Finance lease obligationsFinance lease obligations5.29 %20 17 
Other loansOther loans— 
Principal Debt Balance   $2,117
 $1,997
Principal Debt Balance $1,528 $1,539 
Debt issuance costs and unamortized discounts   (56) (56)Debt issuance costs and unamortized discounts(18)(25)
Less: current maturities   (82) (28)Less: current maturities (90)(50)
Total Long-term Debt   $1,979
 $1,913
Total Long-term Debt$1,420 $1,464 
 ____________
(1)Represents weighted average effective interest rate which includes the effect of discounts and premiums on issued debt.

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

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

2018(1)
 2019
 2020
 2021
 2022
 Thereafter
 Total 
202120212022202320242025Total 
$82
 $72
 $85
 $560
 $9
 $1,309
 $2,117
90 $598 $804 $36 $$1,528 
 _____________

(1)Quarterly long-term debt maturities for 2018 are $21 million, $21 million, $21 million and $19 million for the first, second, third and fourth quarters, respectively.


Credit Facility
On December 7, 2016, wethe Company entered into a senior secured credit agreement (Credit Agreement) among the Company, its subsidiaries: Conduent Business Services, LLC (CBS), Affiliated Computer Services International B.V. and Conduent Finance, Inc. (CFI), the lenders party thereto and JP Morgan Chase Bank, N.A., as the administrative agent. The Credit Agreement contains senior secured credit facilities (Senior Credit Facilities) consisting of:


(i)
(i)    Senior Secured Term Loan A (Term Loan A) due 2021 with an aggregate principal amount of $700 million;
(ii)Senior Secured Term Loan B (Term Loan B) due 2023 with an aggregate principal amount of $850 million;
(iii)Senior Revolving Credit Facility (Revolving Credit Facility) due 2021 with an aggregate available amount of $750 million including a sub-limit for up to $300 million available for the issuance of letters of credit.

Borrowings under the Term Loan A Facility and the(Term Loan A) with an aggregate principal amount of $700 million;
(ii)    Senior Secured Term Loan B (Term Loan B) with an aggregate principal amount of $850 million;
(iii)    Senior Revolving Credit Facility bears interest at(Revolving Credit Facility) with an aggregate available amount of $750 million including a rate equalsub-limit for up to either$300 million available for the sumissuance of a base rate plus a margin ranging from 1.00% and 1.50% orletters of credit.

During the sumfirst quarter of a Eurocurrency rate plus an applicable rate ranging from 2.00% to 2.50%, with either such margin varying according to2020, the total net leverage ratioCompany borrowed $150 million of CBS. Borrowing under Term Loan B Facility bears interest at a rate equal to the sum of a base rate plus 2.0%, or the sum of a Eurocurrency rate plus 3.0%. CBS is required to pay a quarterly commitment fee under theits $750 million Revolving Credit Facility, at a rate ranging from 0.35%which was subsequently fully repaid in December 2020. As of December 31, 2020, the Company has utilized $7 million of its revolving credit facility capacity to 0.40% per annum, with such rate varying according to the total net leverage ratio of CBS and the actual daily unused portion of the commitments during the applicable quarter. CBS is also required to pay a fee equal to the adjusted LIBOR on the aggregate face amount of outstandingissue letters of creditcredit. The net amount available to be drawn upon under the Revolving Credit Facility.Agreement as of December 31, 2020 was $743 million.


The Credit Agreement permits usthe Company to incur incremental term loan borrowings and /or increase commitments under the Revolving Credit Facility,revolving credit facility, subject to certain limitations and satisfaction of certain conditions, in an aggregate amount notconditions. Currently additional term loans of up to exceed (i) $200$300 million plus, (ii) if the senior secured net leverage ratio of CBS and its subsidiaries does not exceed 2.25 to 1.00 on a pro forma basis (without giving effect to any incurrence under clause (i) that is incurred substantially simultaneously with amounts incurred under clause (ii)), an unlimited amount.are permitted.



Conduent Inc. 2017 Annual Report     70

CNDT 2020 Annual Report
80


All obligations under the Senior Credit FacilitiesAgreement are unconditionally guaranteed by the Company, CBS, CFIConduent Finance, Inc. (CFI) and the existing and future direct and indirect wholly owned domestic subsidiaries of CBS (subject to certain exceptions). All obligations under the Senior Credit Facilities,Agreement, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of CBS and the guarantors under the Senior Credit FacilitiesAgreement (other than the Company and CFI), including a first-priority pledge of all the capital stock of CBS and the subsidiaries of CBS directly held by CBS or the guarantors (other than the Company and CFI) under the Senior Credit FacilitiesAgreement (which pledge,pledges, in the case of any foreign subsidiary, will be limited to 65% of the capital stock of any first-tier foreign subsidiary).


The Credit FacilityAgreement contains certain customary affirmative and negative covenants, restrictions and events of default. CBS is required to maintain aThe Credit Agreement requires the total net leverage ratio for December 31, 2020 and thereafter not to exceed 4.25 to 1.00 (a quarterly test) for each quarter through September 30, 2018 and 3.75 to 1.00 for each quarter thereafter.1.00.

The net proceeds of the borrowings under the Term Loan A of $700 million (approximately $278 million borrowed in Euros) and Term Loan B of $850 million, were used to purchase our international subsidiaries from Xerox Corporation, to pay a distribution to Xerox Corporation and for working capital and other general corporate purposes. At December 31, 2017 we had $1,574 million in outstanding borrowings under our Credit Agreement and had utilized $12 million of our Revolving Credit Facility capacity to issue letters of credit. Discounts and debt issuance costs of $47 million were deferred.
Senior Notes
On December 7, 2016, CBS
The Senior Notes are jointly and CFI,severally guaranteed on a senior unsecured basis by the Company and each a wholly owned subsidiary of the Company, issued $510 millionexisting and future domestic subsidiaries of CFI or CBS that guarantee the obligations under the Senior Unsecured Notes due 2024 bearing interest at 10.5% (the "Senior Notes"). Credit Facilities.

Interest is payable semi-annually, beginning on June 15, 2017. Discounts and debt issuance costs of $17 million were deferred.
At the option of the Issuers, the Senior Notes are redeemable in whole or in part, at any time prior to December 15, 2020, at a price equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus a “make-whole” premium.semi-annually. The Issuers may also redeem the Senior Notes, in whole or in part, at any time on or after December 15, 2020, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to but excluding the redemption date. Additionally, at any time prior toNo Senior Notes were redeemed between December 15, 2019, the Issuers may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds from certain equity offerings at a price equal to 110.50% of the principal amount of the Senior Notes, plus accrued2020 and unpaid interest, if any, to, but excluding, the redemption date.December 31, 2020.
The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by the Company and each of the existing and future domestic subsidiaries of CFI or CBS that guarantee the obligations under the Senior Credit Facilities.
Proceeds from the issuance were used to fund a portion of the transfer of cash to Xerox Corporation in connection with the spin-off.


Interest

Interest paid on our short-term and long-term debt amounted to $129$51 million, $5$69 million, and $9$100 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.


Interest expense and interest income waswere as follows:

Year Ended December 31,
(in millions)202020192018
Interest expense
$60 $78 $112 
Interest income(1)
 ____________
(1)Included in Other (income) expenses, net on the Consolidated Statements of Income (Loss).


CNDT 2020 Annual Report
81
  Year Ended December 31,
(in millions) 2017 2016 2015
Interest expense 
 $137
 $14
 $8
Interest income 3
 3
 3



Conduent Inc. 2017 Annual Report     71


Note 913 – Financial Instruments
We are
The Company is exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage ourThe Company manages its exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enterThe Company enters into limited types of derivative contracts to manage foreign currency exposures that we hedge. Ourit hedges. The primary foreign currency market exposures include the Philippine Peso and Indian Rupee and Mexican Peso.Rupee. The fair market values of all ourthe Company's derivative contracts change with fluctuations in interest rates or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.
We do
The Company does not believe there is significant risk of loss in the event of non-performance by the counterparty associated with ourits derivative instruments because these transactions are executed with a major financial institution. Further, ourthe Company's policy is to deal only with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.

Summary of Foreign Exchange Hedging Positions

At December 31, 2017, we2020 and 2019, the Company had outstanding forward exchange with gross notional values of $160$180 million which is typical of the amounts that are normally outstanding at any point during the year. The impact of our hedging program is not material to our balance sheet or income statement.
Approximately 68%and $207 million, respectively. At December 31, 2020, approximately 77% of these contracts mature within three months, 12%9% in three to six months, 15%11% in six to twelve months and 5%3% in greater than 12 months.
 
The following is a summary of the primary hedging positions and corresponding fair values as of December 31, 2017:values:

December 31, 2020December 31, 2019
(in millions) 
Gross
Notional
Value
 
Fair  Value
Asset
(Liability)(1)
(in millions)Gross
Notional
Value
Fair Value
Asset
(Liability)(1)
Gross
Notional
Value
Fair Value
Asset
(Liability)(1)
Currencies Hedged (Buy/Sell)    Currencies Hedged (Buy/Sell)
Philippine Peso/U.S. Dollar $62
 $
Philippine Peso/U.S. Dollar$53 $$57 $
Indian Rupee/U.S. Dollar 68
 1
Indian Rupee/U.S. Dollar52 85 
Euro/U.S. DollarEuro/U.S. Dollar17 
Mexican Peso/U.S. Dollar 9
 
Mexican Peso/U.S. Dollar
All Other 21
 
All Other56 65 
Total Foreign Exchange Hedging $160
 $1
Total Foreign Exchange Hedging$180 $$207 $
____________
(1)Represents the net receivable (payable) amount included in the Consolidated Balance Sheet.


(1)Represents the net receivable (payable) amount included in the Consolidated Balance Sheet at December 31, 2017.CNDT 2020 Annual Report

82

Note 1014 – Fair Value of Financial Assets and Liabilities

Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. US.U.S. GAAP establishes a framework for measuring that includesestablished a hierarchy usedframework to classify the fair value based on the observability of significant inputs used in measuring fair value.to the measurement. The levels of the fair value hierarchy are as follows:

Level 1: Fair value is determined using an unadjusted quoted price in an active market for identical assets or liabilities. As at December 31, 2017 and 2016, the Company did not have any asset or liability that was measured using Level 1 inputs.

Level 2: Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. All the Company's assets and liabilities that were measured at fair value on a recurring basis as at December 31, 2017 and 2016, were valued using Level 2 inputs.

Level 3: Fair value is estimated using unobservable inputs that are significant to the fair value of the assets. Asassets or liabilities.

Summary of Financial Assets and Liabilities Accounted for at December 31, 2017 and 2016, the Company did not have any asset or liability that was measured using Level 3 inputs.Fair Value on a Recurring Basis

Conduent Inc. 2017 Annual Report     72



The following table represents assets and liabilities measured at fair value measured on a recurring basis. The basis for the measurement at fair value in all cases iswas Level 2 – Significant Other Observable Inputs.2. 

  As of December 31,
(in millions) 2017 2016
Assets:    
Foreign exchange contracts - forwards $2
 $1
Deferred compensation investments in cash surrender life insurance(1)
 
 99
Deferred compensation investments in mutual funds(1)
 
 10
Total $2
 $110
Liabilities:    
Foreign exchange contracts - forwards $1
 $3
Deferred compensation plan liabilities(1)
 99
 113
Total $100
 $116
(in millions)December 31, 2020December 31, 2019
Assets:
Foreign exchange contract - forward$$
Total Assets$$
Liabilities:
Foreign exchange contracts - forward$$
Total Liabilities$$
(1)In September 2017, the Company terminated the legacy deferred compensation plans (Plans) and the Company Owned Life Insurance (COLI), which held the Plans’ investments. The Company will make payments to Plan participants of approximately $100 million in the fourth quarter 2018.
Fair value for our deferred compensation plan investments in company-owned life insurance is reflected at cash surrender value. Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for actively traded investments similar to those held by the plan. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections, based on quoted prices for similar assets in actively traded markets.
Summary of Other Financial Assets and Liabilities Fair Value Measured on a Nonrecurring Basis

The estimated fair values of our other financial assets and liabilities fair value measured on a nonrecurring basis were as follows:

 December 31, 2017 December 31, 2016
(in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents$658
 $658
 $390
 $390
Restricted cash9
 9
 22
 22
Accounts receivable, net1,104
 1,104
 1,286
 1,286
Short-term debt82
 82
 28
 28
Long-term debt1,979
 2,070
 1,913
 1,933
 December 31, 2020December 31, 2019
(in millions)Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Liabilities:
Long-term debt$1,420 $1,378 $1,464 $1,449 
Contingent consideration payable$$$$

The fair value amounts for Cash and cash equivalents, Restricted cash, and Accounts receivable, net and Short-term debt approximate carrying amounts due to the shortshort-term maturities of these instruments.

The fair value of Shortthe contingent consideration payable related to the HSP acquisition was measured using a Monte Carlo simulation model and calibrated to management’s financial projections of the acquired business. The value of the contingent consideration payable was then estimated to be the arithmetic average of all simulation paths, discounted to the valuation date (Level 3). During the third quarter of 2020, the contingent consideration payable was settled.

The fair value of Long-term debt was estimated based on the current rates offered to usthe Company for debt of similar maturities (Level 2). The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date.
The fair value of the Goodwill impairment charge of $935 million recorded in 2016, was estimated based on a determination of the implied fair value of goodwill, leveraging discounted cash flows (level 3). Refer to Note 6 – Goodwill and Intangible Assets, Net for additional information regarding this impairment.



Conduent Inc. 2017 Annual Report     73

CNDT 2020 Annual Report
83


Note 1115 – Employee Benefit Plans
Our defined benefit pension plans are primarily associated with certain employees in our Human Resources
Defined Benefit Plans

In 2018, all the U.S. and Consultingthe majority of the international plan assets and obligations were sold as part of the divestiture of the U.S. human resource consulting and actuarial business and the human resource consulting and outsourcing business located in the U.S., Canada and the United Kingdom (U.K.). Prior to an amendment to freeze future service benefits, these defined benefit pension plans had provided benefits for participating employees based on years of service and average compensation for a specified period before retirement (see Plan Amendment below for further information).

Certain of our employees participate in post-employment medical plans. These plans are not material to our results of operations or financial position and are not included in the disclosures below.

December 31 is the measurement date for all of our defined benefit pension plans.
  Pension Benefits 
  U.S. Plans Non-U.S. Plans
 (in millions) 2017 2016 2017 2016
Change in Benefit Obligation:        
Benefit obligation, January 1 $89
 $74
 $164
 $157
Service cost 
 
 2
 2
Interest cost 4
 3
 5
 5
Actuarial loss 10
 13
 5
 27
Currency exchange rate changes 
 
 14
 (19)
Benefits paid/settlements (1) (1) (12) (8)
Benefit Obligation, December 31 $102
 $89
 $178
 $164
Change in Plan Assets:        
Fair value of plan assets, January 1 $52
 $47
 $140
 $150
Actual return on plan assets 8
 2
 13
 15
Employer contribution 3
 4
 5
 2
Currency exchange rate changes 
 
 14
 (19)
Benefits paid/settlements (1) (1) (12) (8)
Fair Value of Plan Assets, December 31 $62
 $52
 $160
 $140
Net Funded Status at December 31(1)
 $(40) $(37) $(18) $(24)
Amounts Recognized in the Consolidated Balance Sheets:  
    
  
Asset held for sale $
 $
 $1
 $
Accrued compensation and benefit costs 
 
 
 (2)
Liabilities held for sale (40) 
 (11) 
Pension and other benefit liabilities 
 (37) (8) (22)
Net Amounts Recognized $(40) $(37) $(18) $(24)
_______________
(1)Includes under-funded and un-funded plans.

Benefit plans pre-tax amounts recognized in Accumulated other comprehensive loss (AOCL) at December 31:
  Pension Benefits 
  U.S. Plans Non-U.S. Plans
 (in millions) 2017 2016 2017 2016
Net actuarial loss $38
 $31
 $42
 $42

Conduent Inc. 2017 Annual Report     74

Table of Contents


Aggregate information for pension plans with an Accumulated benefit obligation in excess of plan assets is presented below:
  December 31, 2017 December 31, 2016
 (in millions) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Projected benefit obligation Accumulated benefit obligation Fair value of plan assets
Underfunded Plans:            
U.S. $102
 $102
 $62
 $89
 $89
 $52
Non U.S. 60
 55
 46
 162
 156
 140
             
Unfunded Plans:            
Non U.S. 5
 3
 
 2
 1
 
             
Total Underfunded and Unfunded Plans:            
U.S. $102
 $102
 $62
 $89
 $89
 $52
Non U.S. 65
 58
 46
 164
 157
 140
Total $167
 $160
 $108
 $253
 $246
 $192

Our pension plan assets and benefit obligations at December 31, 2017 were as follows:
 (in millions) Fair Value of Pension Plan Assets Pension Benefit Obligations Net Funded Status Accumulated Benefit Obligation
U.S. $62
 $102
 $(40) $102
U.K. 114
 113
 1
 114
Canada 44
 55
 (11) 53
Other 2
 10
 (8) 5
Total $222
 $280
 $(58) $274
The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:
  Year Ended December 31,
  U.S. Plans Non-U.S. Plans
 (in millions) 2017 2016 2015 2017 2016 2015
Components of Net Periodic Benefit Costs:            
Service cost $
 $
 $
 $2
 $2
 $3
Interest cost 4
 3
 3
 5
 5
 6
Expected return on plan assets (5) (4) (4) (8) (8) (9)
Recognized net actuarial loss 1
 
 
 1
 1
 2
Net Periodic Benefit Cost 
 (1) (1) 
 
 2
Other changes in plan assets and benefit obligations recognized in Other Comprehensive Income:            
Net actuarial loss (gain) 7
 13
 4
 (2) 18
 (9)
Amortization of net actuarial loss (1) 
 
 (1) (1) (2)
Total Recognized in Other Comprehensive Income 6
 13
 4
 (3) 17
 (11)
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income $6
 $12
 $3
 $(3) $17
 $(9)
The net actuarial loss for the defined benefit pension plans that will be amortized from AOCL into net periodic benefit cost over the next fiscal year is $2 million.

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Plan Amendments
Pension Plan Freezes
In 2015, we amended several of our major defined benefit pension plans to freeze current benefits and eliminate benefits accruals for future service, including our plans in the U.S., Canada and the U.K. The freeze of current benefits is the primary driver of the reduction in pension service costs since 2015. In certain non-U.S. plans, we are required to continue to consider salary increasesCompany's remaining benefit obligations and inflation in determining the benefit obligation related to prior service.
Plan Assets
Current Allocation
As of the 2017 and 2016 measurement dates, the global pension plan assets at December 31, 2020 were $222$13 million and $192$2 million, respectively. These assets were invested among several asset classes.

The following tables presents the definedCompany's remaining benefit plans assets measured at fair valueobligations and the basis for that measurement:
  December 31, 2017
 (in millions) U.S. Plans Non-U.S. Plans
Asset Class  Level 1 Level 2 Level 3 Total % Level 1 Level 2 Level 3 Total %
Cash and cash equivalents $1
 $
 $
 $1
 2% $3
 $
 $
 $3
 2%
Equity Securities 12
 31
 
 43
 69% 
 47
 
 47
 29%
Fixed Income Securities 18
 
 
 18
 29% 
 46
 
 46
 29%
Other 
 
 
 
 % 
 55
 9
 64
 40%
Total Fair Value of Plan Assets $31
 $31
 $
 $62
 100% $3
 $148
 $9
 $160
 100%

  December 31, 2016
 (in millions) U.S. Plans   Non-U.S. Plans  
Asset Class  Level 1 Level 2 Level 3 Total % Level 1 Level 2 Level 3 Total %
Cash and cash equivalents $3
 $
 $
 $3
 6% $
 $
 $
 $
 %
Equity Securities 9
 24
 
 33
 63% 
 61
 
 61
 44%
Fixed Income Securities 10
 6
 
 16
 31% 
 60
 
 60
 43%
Other 
 
 
 
 % 
 11
 8
 19
 13%
Total Fair Value of Plan Assets $22
 $30
 $
 $52
 100% $
 $132
 $8
 $140
 100%
Valuation Method
Our primary Level 3 assets are Real Estate and Guaranteed Investment Contract investments which are individually immaterial. The fair value of our real estate investment funds are based on the Net Asset Value (NAV) of our ownership interest in the funds. NAV information is received from the investment advisers and is primarily derived from third-party real estate appraisals for the properties owned. The fair value for our Guaranteed Investment Contract investments have been determined based on the higher of the surrender value of the contract or the present value of the cash flow of the related pension obligations. The valuation techniques and inputs for our Level 3 assets have been consistently applied for all periods presented.
Investment Strategy
The target asset allocations for our worldwide defined benefit pension plans were:
  2017 2016
  U.S. Non-U.S. U.S. Non-U.S.
Equity investments 55% 28% 55% 41%
Fixed income investments 23% 43% 25% 45%
Real estate —% 4% —% 4%
Other 22% 25% 20% 10%
Total Investment Strategy 100% 100% 100% 100%


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We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by exceeding the interest growth in long-term plan liabilities. Risk tolerance is established through careful consideration of plan liabilities, plan funded statusat December 31, 2019 were $14 million and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Other assets such as real estate, are used to improve portfolio diversification. Derivatives may be used to hedge market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risks and returns are measured and monitored on an ongoing basis through annual liability measurements and quarterly investment portfolio reviews.$2 million, respectively.
Contributions
In 2017, we made cash contributions of $8 million ($3 million U.S. and $5 million non-U.S.) to our defined benefit pension plans.
In 2018, based on current actuarial calculations, we expect to make contributions of approximately $8 million ($8 million non-U.S. and none for U.S.) to our defined benefit pension plans.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years:
  Pension Benefits
 (in millions) U.S. Non-U.S. Total
2018 $2
 $4
 $6
2019 2
 5
 7
2020 2
 5
 7
2021 3
 5
 8
2022 3
 5
 8
Years 2023-2026 19
 30
 49
Assumptions
Weighted-average assumptions used to determine benefit obligations at the plan measurement dates:
  Pension Benefits 
  2017 2016 2015
  U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.
Discount rate 3.8% 2.9% 4.2% 3.2% 4.3% 3.9%
Rate of compensation increase n/a
 0.8% n/a
 1.0% n/a
 1.0%
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31:
  Pension Benefits 
  2018 2017 2016 2015
  U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.
Discount rate 3.8% 3.1% 4.2% 3.1% 4.3% 3.9% 4.0% 3.4%
Expected return on plan assets 7.8% 4.8% 7.8% 4.8% 7.8% 5.7% 7.8% 5.8%
Rate of compensation increase n/a
 0.8% n/a
 0.8% n/a
 1.0% n/a
 1.1%

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Defined Contribution Plans
We have
The Company has post-retirement savings and investment plans in several countries, including the U.S., U.K. and Canada. In many instances, employees from those defined benefit pension plans that have been amended to freeze future service accruals (see "Plan Amendments" for additional information) were transitioned to an enhanced defined contribution plan. In these plans employees are allowed to contribute a portion of their salaries and bonuses to the plans, and we matchthe Company matches a portion of the employee contributions. WeBeginning in 2019, the Company suspended its match to the 401(k) plan for all U.S. salaried employees and extended the suspension to all U.S. hourly employees in the second quarter of 2020. However, the match was reinstated for all U.S. employees in November of 2020.

The Company recorded charges related to ourits defined contribution plans of $35$6 million in 2017, $352020, $9 million in 20162019 and $34$28 million in 2015.2018.


Note 1216 - Income Taxes
Prior to the spin-off from Xerox Corporation, Conduent’s operating results were included in various Xerox consolidated U.S. federal and state income tax returns, as well as non-U.S. tax filings. For the purposes of the Company’s Consolidated and Combined Financial Statements for periods prior to the spin-off, income tax expense and deferred tax balances have been recorded as if the Company filed tax returns on a standalone basis, separate from Xerox. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise for fiscal 2016 and prior.

On December 22, 2017, the Tax Reform was enacted. The effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. In the case of US federal income taxes, the enactment date is the date the bill becomes law. The income tax effects of the Tax Reform have been initially accounted for on a provisional basis pursuant to the SEC staff guidance on income taxes. Reasonable estimates for all material tax effects of the Tax Reform (other than amounts related to accounting policy elections) have been provided and adjustments to provisional amounts will be made in subsequent reporting periods as information becomes available to complete provisional computations. With respect to this legislation, we recorded a provisional tax benefit of $198 million, which included a $210 million tax benefit due to the re-measurement of deferred tax assets and liabilities resulting from the decrease in the corporate U.S. federal income tax rate from 35% to 21%, and $12 million as a one-time-charge on the transition tax for Post-1986 undistributed and not previously taxed foreign earnings and profits. The impacts of Tax Reform on our 2017 Consolidated Financial Statements are provisional, and could change during 2018 as we further evaluate the impacts of the Tax Reform. The Company has provisionally adopted the policy of treating the Global Intangible Low Taxed Income (GILTI) regime as a period cost. The GILTI regime enacted as part of Tax Reform subjects certain post 2017 foreign earnings (i.e. amounts in excess of deemed return on net tangible assets of non-US subsidiaries) to US tax. In January 2018, the FASB released guidance on the accounting for tax on GILTI. The guidance indicates that either accounting for deferred taxes on GILTI or treating GILTI as a period cost are both acceptable accounting elections.

(Loss) incomeLoss before income taxes (pre-tax income (loss) income)) was as follows:

 Year Ended December 31,Year Ended December 31,
(in millions) 2017 2016 2015(in millions)202020192018
Domestic loss $(91) $(1,329) $(654)Domestic loss$(186)$(2,177)$(411)
Foreign income 75
 102
 80
Foreign income47 71 16 
Loss Before Income Taxes $(16) $(1,227) $(574)Loss Before Income Taxes$(139)$(2,106)$(395)

 

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(Benefit) provisionProvision (benefit) for income taxes were as follows:

Year Ended December 31,
(in millions)202020192018
Federal Income Taxes
Current$(22)$(3)$35 
Deferred(17)(170)(62)
Foreign Income Taxes
Current18 47 41 
Deferred(4)(8)(6)
State Income Taxes
Current20 
Deferred(1)(43)(7)
Total Provision (Benefit)$(21)$(172)$21 


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  Year Ended December 31,
(in millions) 2017 2016 2015
Federal Income Taxes      
Current $4
 $(116) $(130)
Deferred (233) (132) (99)
Foreign Income Taxes      
Current 25
 31
 24
Deferred (3) (3) 6
State Income Taxes      
Current 8
 1
 (17)
Deferred 6
 (25) (22)
Total Benefit $(193) $(244) $(238)
A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate iswas as follows:

 Year Ended December 31,Year Ended December 31,
 2017 2016 2015 202020192018
U.S. federal statutory income tax rate 35.0 % 35.0 % 35.0 %U.S. federal statutory income tax rate21.0 %21.0 %21.0 %
Nondeductible expenses(1)
 (155.9)% (19.0)% (1.3)%
Effect of tax law changes 1,282.4 %  % 0.9 %
Nondeductible expensesNondeductible expenses(2.1)%(0.2)%(3.7)%
Change in valuation allowance for deferred tax assets (39.5)% 0.1 % (1.0)%Change in valuation allowance for deferred tax assets0.6 %(1.2)%(1.7)%
State taxes, net of federal benefit 1.2 % 1.8 % 4.2 %State taxes, net of federal benefit(2.1)%1.8 %(2.3)%
Tax-exempt income, credits and incentivesTax-exempt income, credits and incentives5.1 %0.3 %2.2 %
Foreign rate differential adjusted for U.S. taxation of foreign profits(1)
Foreign rate differential adjusted for U.S. taxation of foreign profits(1)
(0.9)%(0.2)%1.6 %
Divestitures(2)
Divestitures(2)
%0.2 %(20.3)%
Goodwill impairment(3)
Goodwill impairment(3)
%(14.1)%%
Unrecognized tax benefitsUnrecognized tax benefits(1.2)%(0.3)%(1.9)%
Audit and other tax return adjustments  % 1.4 % 0.1 %Audit and other tax return adjustments(5.3)%0.1 %0.2 %
Tax-exempt income, credits and incentives 38.9 % 0.7 % 0.7 %
Foreign rate differential adjusted for U.S. taxation of foreign profits(2)
 47.7 % 0.7 % 2.4 %
Other (3.5)% (0.8)% 0.5 %Other%0.8 %(0.4)%
Effective Income Tax Rate 1,206.3 % 19.9 % 41.5 %Effective Income Tax Rate15.1 %8.2 %(5.3)%
 ___________________________
(1)In 2017, nondeductible expenses primarily related to the nondeductible portion of the goodwill and officers life insurance.
(2)The “U.S. taxation of foreign profits” represents the U.S. tax, net of foreign tax credits, associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries, except for transition tax, which is reported on the line Effect of tax law changes.

(1)    The “Foreign rate differential adjusted for U.S. taxation of foreign profits” includes the U.S. tax, net of foreign tax credits, associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries.
(2)    2018 divestitures include nondeductible goodwill allocated to divested businesses.
(3)    Goodwill impairment represents adjustments for impairment of non-deductible component of goodwill.

On a consolidated basis, we paid/(received)the Company received a refund of $(1) million and paid a total of $29 million, $(123)$46 million and $194$108 million in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.


Total income tax expense (benefit) was allocated as follows:
  Year Ended December 31,
(in millions) 2017 2016 2015
Pre-tax income $(193) $(244) $(238)
Discontinued operations(1)
 3
 
 81
Common shareholders' equity: 

 

 
Changes in defined benefit plans 
 8
 2
Stock option and incentive plans, net 
 
 (6)
Total Income Tax Benefit $(190) $(236) $(161)
_____________
(1)Refer to Note 3 – Assets/Liabilities Held for Sale for additional information regarding discontinued operations.

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Unrecognized Tax Benefits and Audit Resolutions


We recognizeThe Company recognizes tax liabilities when, despite ourits belief that ourits tax return positions are supportable, we believethe Company believes that certain positions may not be fully sustained upon review by tax authorities. Each period we assessthe Company assesses uncertain tax positions for recognition, measurement and effective settlement. Benefits from uncertain tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Where we havethe Company has determined that ourits tax return filing position does not satisfy the more-likely-than-not recognition threshold, we havethe Company has recorded no tax benefits.
We are
The Company is also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope of ourits operations. Our ongoingOngoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease ourthe Company's effective tax rate, as well as impact ourits operating results. The specific timing of when the resolution of each tax position will be reached is uncertain.

As of December 31, 2017, we do not believe that there are any positions for which it is reasonably possible that2020, the total amountCompany had $23 million of unrecognized tax benefits, of which $21 million, if recognized, would impact the Company's effective tax rate. Due to expected settlements, the Company estimates that $14 million of the total unrecognized tax benefits will significantly increase or decreasereverse within the next 12twelve months.



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

(in millions) 2017 2016 2015(in millions)202020192018
Balance at January 1 $14
 $24
 $32
Balance at January 1$24 $20 $15 
Additions related to current year 
 1
 3
Additions related to current year
Additions related to prior years positions 
 
 
Additions related to prior years positions
Reductions related to prior years positions 
 (5) (10)Reductions related to prior years positions(3)
Settlements with taxing authorities(1)
 
 (5) 
Settlements with taxing authorities(1)
(4)(1)(1)
Currency 1
 (1) (1)Currency(2)
Balance at December 31 $15
 $14
 $24
Balance at December 31$23 $24 $20 
_______________

(1)
2016 settlement results in $5 million cash paid.


Included(1)2020 and 2019 settlement resulted in the balances at December 31, 2017, 2016$4 million and 2015 are $0, $0 and $8$1 million respectively, of tax positions that are highly certain of realization but for which there is uncertainty about the timing. Because of the impact of deferred tax accounting, other than for the possible incurrence of interest and penalties, the disallowance of these positions would not affect the annual effective tax rate. In addition, for other uncertain tax positions, we maintaincash paid, respectively.

The Company maintains offsetting benefits from other jurisdictions of $16$15 million, $16 million and $14$15 million, at December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
We The Company recognized interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable settlements within income tax expense. WeThe Company had $6$13 million, $4$14 million and $14$10 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
In the U.S., we arethe Company is no longer subject to U.S. federal income tax examinations for years before 2005.2015. With respect to our major foreign jurisdictions, the years generally remain open back to 2006.2003.


Deferred Income Taxes
 
The Company is indefinitely reinvested in the position of having tax basis in excess of book basis in its U.S. investment in foreign subsidiaries. Nonetheless, the Company is indefinitely reinvesting its foreign subsidiaries' undistributed earnings of $253 million.its foreign subsidiaries with respect to the U.S. These foreign subsidiaries have aggregate cumulative undistributed earnings of $280 million as of December 31, 2020. For years after 2017, the Tax Reform does allow for certain earnings to be repatriated free from USU.S. Federal taxes. However, the repatriation of earnings could give rise to additional tax liabilities. The Company has also not provided for deferred taxes on outside basis differences in its investments in its foreign subsidiaries. A determination of the unrecognized deferred taxes related to these other components of our outside basis differences is not practicable. The Company has provided for deferred taxes with respect to certain unremitted earnings of foreign subsidiaries that are not indefinitely reinvested between foreign subsidiaries outside of the U.S.


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

 December 31,December 31,
(in millions) 2017 2016(in millions)20202019
Deferred Tax Assets    Deferred Tax Assets  
Net operating losses $41
 $42
Net operating losses and capital loss carryforwardNet operating losses and capital loss carryforward$96 $122 
Operating reserves, accruals and deferrals 90
 155
Operating reserves, accruals and deferrals57 33 
Deferred compensation 59
 101
Deferred compensation11 
Pension 15
 18
Settlement reservesSettlement reserves17 44 
Operating lease liabilitiesOperating lease liabilities68 78 
Tax creditsTax credits42 14 
Other 45
 44
Other
Subtotal 250
 360
Subtotal294 309 
Valuation allowance (35) (24)Valuation allowance(83)(72)
Total $215
 $336
Total$211 $237 
    
Deferred Tax Liabilities    Deferred Tax Liabilities
Unearned income $134
 $217
Unearned income$27 $53 
Intangibles and goodwill 413
 680
Intangibles and goodwill100 143 
Depreciation 10
 15
Depreciation75 47 
Operating lease right-of-use assetsOperating lease right-of-use assets57 65 
Other 25
 29
Other26 23 
Total $582
 $941
Total$285 $331 
    
Total Deferred Taxes, Net $(367) $(605)Total Deferred Taxes, Net$(74)$(94)


The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. The net change in the total valuation allowance for the years ended December 31, 20172020 and 20162019 was an increase of $11 million and a decreasean increase of $14$28 million, respectively. The valuation allowance relates primarily to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will not be realized in the ordinary course of operations.


Although realization is not assured, we have concluded that it is more-likely-than-not that the deferred tax assets, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence, including scheduling of deferred tax liabilities and projected income from operating activities. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future income or income tax rates are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.


At December 31, 2017,2020, we had tax credit carryforwards of $27$42 million available to offset future income taxes which will expire between 20182027 and 20372040 if not utilized. We also had net operating loss carryforwards for income tax purposes of $422$634 million that will expire between 20182021 and 2037,2040, if not utilized; and $43$189 million available to offset future taxable income indefinitely. We had $8 million of capital loss carryforwards for income tax purposes that will expire in 2024, if not utilized, and $11 million available to offset future capital gains income indefinitely.



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Note 1317 – Contingencies and Litigation

As more fully discussed below, we arethe Company is involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law;concerning a variety of matters, including: governmental entity contracting, servicing and procurement law; intellectual property law; environmentalemployment law; employmentcommercial and contracts law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. We determineThe Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess ourThe Company assesses its potential liability by analyzing ourits litigation and regulatory matters using available information. We develop our viewsThe Company develops its view on estimated losses in consultation with outside counsel handling ourits defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in ourthe Company's determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts in excess of any accrual for such matter or matters, this could have a material adverse effect on ourthe Company's results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. We believe that we haveThe Company believes it has recorded adequate provisions for any such matters as of December 31, 2017.2020. Litigation is inherently unpredictable, and it is not possible to predict the ultimate outcome of these matters and such outcome in any such mattermatters could be in excess of any amounts accrued and could be material to ourthe Company's results of operations, cash flows or financial position in any reporting period.

Additionally, guarantees, indemnifications and claims arise during the ordinary course of business from relationships with suppliers, customers and nonconsolidatednon-consolidated affiliates when we undertakethe Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, real estate, intellectual property such as patents, environmental matters and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the consolidated financial position or liquidity. As of December 31, 2017, we have2020, the Company had accrued ourits estimate of liability incurred under ourits indemnification arrangements and guarantees.


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Litigation Against the Company

State of Texas v. Xerox Corporation, Conduent Business Services, LLC (f/k/a Xerox Business Services, LLC), Conduent State Healthcare, LLC (f/k/a Xerox State Healthcare, LLC, andf/k/a ACS State Healthcare, LLC:LLC) and Conduent Incorporated:On May 9, 2014, the State of Texas, via the Texas Office of Attorney General (the “State”), filed a lawsuit in the 53rd Judicial District Court of Travis County, Texas. The lawsuit allegesalleged that Xerox Corporation,Conduent State Healthcare LLC (f/k/a Xerox State Healthcare, LLC and ACS State HealthcareHealthcare) (“CSH”), Conduent Business Services LLC (“CBS”) and Conduent Incorporated (“CI”) (collectively, CSH, CBS and CI are referred to herein as the "Xerox"Conduent Defendants") and Xerox Corporation (together with the Conduent Defendants, the “Defendants”) violated the Texas Medicaid Fraud Prevention Act in the administration of its contract with the Texas Department of Health and Human Services (“HHSC”). TheIn February 2019 a settlement agreement and release was reached among the Defendants, the State alleges thatand HHSC which was amended in May 2019 ("Texas Agreement"). Pursuant to the Xerox Defendants made false representationsterms of material facts regarding the processes, procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks recovery of amounts paid for orthodontic treatment under the Texas Medicaid programAgreement, the Conduent Defendants were required to pay the State of Texas $236 million, of which $118 million was paid in 2019 and the remaining $118 million paid in January 2020. The case has been dismissed with prejudice with a full release and discharge of the Defendants.

Employees’ Retirement System of the Puerto Rico Electric Power Authority et al v. Conduent Inc. et al.: On March 8, 2019, a putative class action lawsuit alleging violations of certain federal securities laws in connection with our statements and alleged omissions regarding our financial guidance and business and operations was filed against us, our former Chief Executive Officer, and our Chief Financial Officer in the United States District Court for the periodDistrict of New Jersey. The complaint seeks certification of a class of all persons who purchased or otherwise acquired our securities from approximately 2004 to 2012, three times the amount of the payments made as a result of the alleged unlawful acts, civil penalties, pre-February 21, 2018 through November 6, 2018, and post-judgment interest and allalso seeks unspecified monetary damages, costs, and attorneys’ fees. The Xerox Defendants filed their AnswerWe moved to dismiss the class action complaint in its entirety. In June 2014 denying all allegations. A trial date is scheduled for November, 2018. During2020, the first quarter of 2018,court denied the State notifiedmotion to dismiss and allowed the Xerox Defendants inclaims to proceed. We intend to defend the litigation discovery processvigorously. The Company maintains insurance that its claimmay cover any costs arising out of this litigation up to the insurance limits, and subject to meeting certain deductibles and to other terms and conditions thereof. The Company is in excess of two billion dollars based primarily on the assertion of treble damages and civil penalties per illegal act for almost two hundred thousand purported illegal acts. The Xerox Defendants will forcefully contest this assertion and continue to vigorously defend themselves in this matter. We are not able to determine or predict the ultimate outcome of this proceeding or toreasonably provide an estimate any reasonably possible loss or range of losses,estimate of the possible outcome or loss, if any, in excess of currently recorded reserves.

Skyview Capital LLC and Continuum Global Solutions, LLC v. Conduent Business Services, LLC: On February 3, 2020, plaintiffs filed a lawsuit in the thirty-eightSuperior Court of New York County, New York. The lawsuit relates to the sale of a portion of Conduent Business Service, LLC’s (“CBS”) select standalone customer care call center business (the “Business”) to plaintiffs, which sale closed in February 2019. Under the terms of the sale agreement, CBS received approximately $23 million dollars we have already accrued. In the course of litigation, we periodically engagenotes from plaintiffs (the “Notes”). The lawsuit alleges various causes of action in discussionsconnection with the State's counselacquisition, including: indemnification for possible resolutionbreach of representation and warranty, indemnification for breach of contract and fraud. Plaintiffs allege that their obligation to mitigate damages and their contractual right of set-off permits them to withhold and deduct from any amounts that are owed to CBS under the Notes, and plaintiffs seek a judgement that they have no obligation to pay the Notes. On August 20, 2020 Conduent filed a Counterclaim against Skyview seeking the outstanding balance on the notes, the amounts owed for the Jamaica deferred closing, and other Transition Services Agreement and late rent payment obligations. Conduent denies all of the matter. Should developments cause a change in our determination asplaintiffs' allegations, believes that it has strong defenses to all of plaintiffs’ claims and will vigorously defend itself against these claims. The Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an unfavorableestimate or range of estimate of the possible outcome or resultloss, if any, in a final adverse judgment or settlement for a significant amount, there could be a material adverse effect on our resultsexcess of operations, cash flows and financial position in the period in which such change in determination, judgment or settlement occurs.currently recorded reserves.


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Dennis Nasrawi v. Buck Consultants et al.:On October 8, 2009, plaintiffs filed a lawsuit in the Superior Court of California, Stanislaus County, and on November 24, 2009, the case was removed to the U.S. Court for the Eastern District of California, Fresno Division. Plaintiffs allege actuarial negligence against Buck Consultants, LLC (“Buck”), which was a wholly-owned subsidiary of Conduent, for the use of faulty actuarial assumptions in connection with the 2007 actuarial valuation for the Stanislaus County Employees Retirement Association (“StanCERA”). Plaintiffs allege that the employer contribution rate adopted by StanCERA based on Buck’s valuation was insufficient to fund the benefits promised by the County. On July 13, 2012, the Court entered its ruling that the plaintiffs lacked standing to sue in a representative capacity on behalf of all plan participants. The Court also ruled that plaintiffs had adequately pleaded their claim that Buck allegedly aided and abetted StanCERA in breaching its fiduciary duty. Plaintiffs then filed their Fifth Amended Complaint and added StanCERA to the litigation. Buck and StanCERA filed demurrers to the amended complaint. On September 13, 2012, the Court sustained both demurrers with prejudice, completely dismissing the matter and barring plaintiffs from refiling their claims. Plaintiffs appealed, and ultimately the California Court of Appeals (Sixth District) reversed the trial court’s ruling and remanded the case back to the trial court.court as to Buck only, and only with respect to Plaintiff’s claim of aiding and abetting StanCERA in breaching its fiduciary duty. This case has been stayed pending the outcome of parallel litigation the plaintiffs are pursuing against StanCERA. The parallel litigation was tried before the bench in June 2018, and on January 24, 2019, the court found in favor of StanCERA, holding that it had not breached its fiduciary duty to plaintiffs. On April 26, 2019, Plaintiffs in the parallel litigation filed an appeal. Nasrawi remains stayed until the parallel litigation is finally concluded. Absent the court finding that StanCERA breached its fiduciary duty, plaintiffs’ claim against Buck for aiding and abetting said breach would not appear viable. Buck will continue to aggressively defend these lawsuits. We areIn August 2018, Conduent sold Buck Consultants, LLC; however, the Company retained this liability after the sale. The Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome or loss, if any.any, in excess of currently recorded reserves.

Conduent Business Services, LLC v. Cognizant Business Services, LLC:On April 12, 2017, Conduent Business Services LLC (“Conduent”) filed a lawsuit against Cognizant Business Services Corporation (“Cognizant”) in the Supreme Court of New York County, New York. The lawsuit relates to the Amended and Restated Master Outsourcing Services Agreement effective as of October 24, 2012, and the service delivery contracts and work orders thereunder, between Conduent and Cognizant, as amended and supplemented (the “Contract”). The Contract contains certain minimum purchase obligations by Conduent through the date of expiration. The lawsuit alleges that Cognizant committed multiple breaches of the Contract, including Cognizant’s failure to properly perform its obligations as subcontractor to Conduent under Conduent’s contract with the New York Department of Health to provide a Medicaid Management Information Systems (the “NY MMIS Contract”).Systems. In the lawsuit, Conduent seeks damages in excess of one hundred fifty million dollars.$150 million. During the first quarter of 2018, Conduent provided notice to Cognizant that it was terminating the Contract for cause and will be recordingrecorded in thatthe same period certain charges associated with the termination. Conduent also alleges that it terminated the Contract for cause, because, among other things, Cognizant hasviolated the Foreign Corrupt Practices Act. In its answer, Cognizant asserted 2 counterclaims against Conduent in the lawsuitfor breach of contract seeking recovery of damages in excess of twenty-two$47 million, dollars. Conduent has respondedwhich includes amounts alleged not paid to Cognizant’s counterclaims by denyingCognizant under the allegations.contract and an alleged $25 million termination fee. Cognizant's second amended counterclaim increased its damages to $89 million. Conduent will continue to vigorously defend itself against the counterclaims but we arethe Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome.outcome or loss, if any, in excess of currently recorded reserves.


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Other Matters:
On January 5, 2016,
Since 2014, Xerox Education Services, Inc. ("XES") has cooperated with several federal and state agencies regarding a variety of matters, including XES' self-disclosure to the U.S. Department of Education (the "Department") and the Consumer Financial Protection Bureau (the "CFPB"("CFPB") notified Xerox Education Services, Inc. (XES) that in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (NORA) process, the CFPB’s Office of Enforcement is considering recommending that the CFPB take legal action against XES, alleging that XES violated the Consumer Financial Protection Act’s prohibition of unfair practices. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief or other corrective action. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action is recommended or commenced. This notice stems from an inquiry that commenced in 2014 when XES received and responded to a Civil Investigative Demand containing a broad request for information. During this process, XES self-disclosed to the Department of Education and the CFPB certain adjustments of which it had become aware that had not been timely made relating to its servicing of a small percentage ofsome third-party student loans under outsourcing arrangements for various financial institutions. Theinstitutions required adjustments. With the exception of an inquiry the Illinois Attorney General's Office recently commenced, the Company has resolved the investigations the CFPB and the Department of Education, as well as certain states' attorney general offices and other regulatoryseveral state agencies began similar reviews. XES has cooperatedcommenced and continues to fully cooperatework with the Department and the U.S. Department of Justice to resolve all regulatory agencies,outstanding issues, including a number of operational projects that XES discovered and XES has submitted its NORA response.  Wedisclosed since 2014. The Company cannot provide assurance that the CFPB, another regulator, a financial institution on behalf of which the Company serviced third-party student loans, or another party will not ultimately commence a legal action against XES in this matter norwhich fines, penalties or other liabilities are wesought from XES. Nor is the Company able to predict the likely outcome of the investigations into thisthese matters, should any such matter be commenced, or reasonably provide an estimate or range of estimateestimates of possible outcome orany loss if any. Wein excess of currently recorded reserves. The Company could, in future periods, incur judgments or enter into settlements to resolve these potential matters for amounts in connection with this matterexcess of current reserves and there could be a material adverse effect on ourthe Company's results of operations, cash flows and financial position in the period in which such change in judgment or settlement occurs.

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Guarantees Indemnifications and Warranty LiabilitiesIndemnifications

Indemnifications Provided as Part of Contracts and Agreements

Acquisitions/Divestitures:
We have
The Company has indemnified, subject to certain deductibles and limits, the purchasers of businesses or divested assets for the occurrence of specified events under certain of ourits divestiture agreements. In addition, wethe Company customarily agreeagrees to hold the other party harmless against losses arising from a breach of representations and covenants, including such matters as adequate title to assets sold, intellectual property rights specified environmental matters and certain income taxes arising prior to the date of acquisition. Where appropriate, an obligation for such indemnifications is recorded as a liability at the time of the acquisition or divestiture. Since the obligated amounts of these types of indemnifications are often not explicitly stated or are contingent on the occurrence of future events, the overall maximum amount, or range of amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we havethe Company has not historically made significant payments for these indemnifications. Additionally, under certain of ourthe Company's acquisition agreements, we haveit has provided for additional consideration to be paid to the sellers if established financial targets are achieved within specific timeframes post-closing. We haveThe Company has recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition. Contingent obligations related to indemnifications arising from our divestitures and contingent consideration provided for by our acquisitions are not expected to be material to ourthe Company's financial position, results of operations or cash flows.

Other Agreements:
We are
The Company is also party to the following types of agreements pursuant to which weit may be obligated to indemnify the other party with respect to certain matters:
Guarantees on behalf of ourthe Company's subsidiaries with respect to real estate leases. These lease guarantees may remain in effect subsequent to the sale of the subsidiary.
Agreements to indemnify various service providers, trustees and bank agents from any third-party claims related to their performance on ourthe Company's behalf, with the exception of claims that result from the third-party's own willful misconduct or gross negligence.
Guarantees of ourthe Company's performance in certain services contracts to ourits customers and indirectly the performance of third parties with whom we havethe Company has subcontracted for their services. This includes indemnifications to customers for losses that may be sustained as a result of ourthe Company's performance of services at a customer's location.



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In each of these circumstances, our payment is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract and such procedures also typically allow usthe Company to challenge the other party's claims. In the case of lease guarantees, wethe Company may contest the liabilities asserted under the lease. Further, our obligations under these agreements and guarantees may be limited in terms of time and/or amount, and in some instances, wethe Company may have recourse against third parties for certain payments weit made.

Also in December 2017, a customer released our former parent company from a performance guarantee for a service contract resulting in a release of escrow funds of $15 million to the Company.
Intellectual Property Indemnifications
We do
The Company does not own mostall of the software that we useit uses to run ourits business. Instead, we licensethe Company licenses this software from a small number of primary vendors. We indemnifyThe Company indemnifies certain software providers against claims that may arise as a result of ourthe Company's use or ourits subsidiaries', customers' or resellers' use of their software in ourthe Company's services and solutions. These indemnities usually do not include limits on the claims, provided the claim is made pursuant to the procedures required in the services contract.

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Indemnification of Officers and Directors
Our
The Company's corporate by-laws require that, except to the extent expressly prohibited by law, wethe Company must indemnify ourits officers and directors against judgments, fines, penalties and amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with civil or criminal action or proceedings or any appeal, as it relates to their services to ourthe Company and ourits subsidiaries. Although the by-laws provide no limit on the amount of indemnification, wethe Company may have recourse against ourits insurance carriers for certain payments made by us.the Company. However, certain indemnification payments (such as those related to "clawback" provisions in certain compensation arrangements) may not be covered under ourthe Company's directors' and officers' insurance coverage. WeThe Company also indemnifyindemnifies certain fiduciaries of ourits employee benefit plans for liabilities incurred in their service as fiduciary whether or not they are officers of the Company. Finally, in connection with ourthe Company's acquisition of businesses, weit may become contractually obligated to indemnify certain former and current directors, officers and employees of those businesses in accordance with pre-acquisition by-laws or indemnification agreements or applicable state law.

Other Contingencies

Certain contracts, primarily in our Public Sector segment,the Company's Government Services and Transportation segments, require usthe Company to provide a surety bond or a letter of credit as a guarantee of performance. As of December 31, 2017, we2020, the Company had $576$610 million forof outstanding surety and bid bonds used to secure ourits performance of contractual obligations with ourits clients and we had $256$98 million of outstanding letters of credit issued to secure ourthe Company's performance of contractual obligations to ourits clients as well as other corporate obligations.
In general, wethe Company would only be liable for the amount of these guarantees in the event of default in ourthe Company's performance of ourits obligations under each contract. We believe we haveThe Company believes it has sufficient capacity in the surety markets and liquidity from ourits cash flow and ourits various credit arrangements (including ourits Credit Facility) to allow usit to respond to future requests for proposals that require such credit support.
We have service arrangements where we service third-party student loans in the Federal Family Education Loan program (FFEL) on behalf of various financial institutions. We service these loans for investors under outsourcing arrangements and do not acquire any servicing rights that are transferable by us to a third-party. At December 31, 2017, we serviced a FFEL portfolio of loans with an outstanding principal balance of approximately $5.2 billion. Some servicing agreements contain provisions that, under certain circumstances, require us to purchase the loans from the investor if the loan guaranty has been permanently terminated as a result of a loan default caused by our servicing error. If defaults caused by us are cured during an initial period, any obligation we may have to purchase these loans expires. Loans that we purchase may be subsequently cured, the guaranty reinstated and the loans repackaged for sale to third parties. We evaluate our exposure under our purchase obligations on defaulted loans and establish a reserve for potential losses. The reserve is evaluated periodically and adjusted based upon management’s analysis of the historical performance of the defaulted loans. As of December 31, 2017, other current liabilities include reserves of approximately $1 million, which we believe to be adequate. In addition to potential purchase obligations arising from servicing errors, various laws and regulations applicable to student loan borrowers could give rise to fines, penalties and other liabilities associated with loan servicing errors.


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Note 1418 - Preferred Stock

Series A Preferred Stock


In connection with the December 31, 2016 spin-offseparation from Xerox Corporation, wethe Company's former parent company (Separation), the Company issued 120 thousand120,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $120 million and an initial fair value of $142 million. The Series A convertible preferred stock pays quarterly cash dividends at a rate of 8% per year ($9.6 million per year). Each share of the Series A convertible preferred stock is convertible at any time, at the option of the holder, into 44.9438 shares of common stock for a total of 5,393 thousand5,393,000 shares (reflecting an initial conversion price of approximately $22.250$22.25 per share of common stock), subject to customary anti-dilution adjustments.

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If the closing price of ourthe Company's common stock exceeds 137% of the initial conversion price for 20 out of 30 trading days, we havethe Company has the right to cause any or all of the Series A convertible preferred stock to be converted into shares of common stock at the then applicable conversion rate. The Series A convertible preferred stock is also convertible, at the option of the holder, upon a change in control, at the applicable conversion rate plus an additional number of shares determined by reference to the price paid for ourthe Company's common stock upon such change in control. In addition, upon the occurrence of certain fundamental change events, including a change in control or the delisting of Conduent's common stock, the holder of Series A convertible preferred stock has the right to require usthe Company to redeem any or all of the Series A convertible preferred stock in cash at a redemption price per share equal to the liquidation preference and any accrued and unpaid dividends to, but not including, the redemption date. As a result of the contingent redemption feature, the Series A convertible preferred stock is classified as temporary equity and reflected separately from permanent equity in the Consolidated Balance Sheets.


Note 1519 – Shareholders’ Equity


Preferred Stock


As of December 31, 2017, we2020, the Company had one class of preferred stock outstanding. SeeRefer to Note 1418 – Preferred Stock for further information. We areThe Company is authorized to issue approximately 100 million shares of cumulativeconvertible preferred stock at $0.01 par value per share.


Common Stock


We haveThe Company has 1 billion authorized shares of common stock at $0.01 par value per share. At December 31, 2017, 152020, 17 million shares were reserved for issuance under ourthe Company's incentive compensation plans and 5.4 million shares were reserved for conversion of the Series A convertible preferred stock.

Stock Compensation Plans

Certain of ourthe Company's employees participate in a long-term incentive plan. OurThe Company's long-term incentive plan authorizes the issuance of restricted stock units / shares (RSU), performance stock units / share (PSU) and non-qualified stock options to employees. All awards for these plans prior to 2017, were made in Xerox stock and therefore converted into Conduent stock effective upon the Separation. Using a formula designed to preserve the value of the award immediately prior to the Separation, all of these awards will be settled and are reflected in Conduent's Consolidated Statements of Stockholders' Equity. Stock-based compensation expense includes expense based on the awards and terms previously granted to the employees.

Stock-based compensation expense was as follows:

 Year Ended December 31,Year Ended December 31,
(in millions) 2017 2016 2015(in millions)202020192018
Stock-based compensation expense, pre-tax $42
 $23
 $19
Stock-based compensation expense, pre-tax$20 $24 $38 
Income tax benefit recognized in earnings 17
 9
 7
Income tax benefit recognized in earnings

Restricted Stock Units / SharesCompensation expense is based upon the grant date market price. The compensation expense is recorded over the vesting period which is normally three years from the date of grant, based on management's estimate of the number of shares expected to vest. The Company’s RSU awards typically vest in three separate and equal tranches over a three-year period. Each tranche vests annually, at December 31, following the date of grant.


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In 2020, the Company issued 389 thousand Deferred Stock Units (DSU) to non-employee members of the Board of Directors. DSU awards typically vest in accordance with certain service conditions.

Performance Stock Units / Shares:The Company has granted PSUs under various scenarios including:

PSUs that vest contingent upon its achievement of certain specified financial performance criteria over a three-yearthree-year period. If the three-yearthree-year actual results exceed the stated targets, then the plan participants have the potential to earn additional shares of common stock, which cannot exceed 100% of the original grant.
The fair value of these PSUs is based upon the market price of Conduent's common stock on the date of the grant and then converted to Conduent's common stock upon the Separation.grant. Compensation expense is recognized over the vesting period, which is normally threetwo years and nine months from the date of grant, based on management's estimate of the number of shares expected to vest. If the stated targets are not met, any recognized compensation cost would be reversed.
PSUs that vest contingent upon the increase of Conduent’s stock price to certain levels over a two year and nine-month period from the date of grant. These PSUs also have a service requirement that must be met in order for them to vest.The fair value of these PSUs is based upon a Monte Carlo simulation. Compensation expense is recognized over the vesting period based on management's estimate of the number of shares expected to vest.

Employee Stock Options:Stock options were issued by a former parent company and were converted to Conduent's common stock upon the Separation. TheseAs of December 31, 2020, these options generally expire within the next two years. Other than these options,have expired. Conduent has not issued any new stock options.

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Summary of Stock-based Compensation Activity

 2017 2016 2015 202020192018
(shares in thousands) Shares 
Weighted
Average Grant
Date Fair
Value
 Shares 
Weighted
Average Grant
Date Fair
Value
 Shares 
Weighted
Average Grant
Date Fair
Value
(shares in thousands)SharesWeighted
Average Grant
Date Fair
Value
SharesWeighted
Average Grant
Date Fair
Value
SharesWeighted
Average Grant
Date Fair
Value
Restricted Stock Units / Shares            Restricted Stock Units / Shares
Outstanding at January 1 1,961
 $13.99
 782
 $11.70
 3,422
 $8.47
Outstanding at January 11,741 $13.07 2,399 $16.90 3,125 $16.29 
Granted 1,988
 16.75
 2,602
 9.61
 260
 11.86
Granted7,778 2.25 2,503 12.57 1,246 18.82 
Vested (215) 19.98
 (119) 9.43
 (2,768) 7.83
Vested(2,816)4.99 (2,135)15.54 (1,501)17.30 
Canceled (609) 15.88
 (121) 10.55
 (132) 9.52
Canceled(1,083)6.11 (1,026)15.68 (471)16.62 
Impact of spin-off(1)
 
 n/a
 (1,183) n/a
 
 n/a
Outstanding at December 31 3,125
 16.29
 1,961
 13.99
 782
 11.70
Outstanding at December 315,620 3.49 1,741 13.07 2,399 16.90 
            
Performance Stock Units / Shares            Performance Stock Units / Shares
Outstanding at January 1 4,926
 $13.99
 7,522
 $11.57
 5,771
 $11.68
Outstanding at January 13,597 $16.17 4,557 $16.76 5,429 $16.55 
Granted 3,933
 16.76
 1,850
 9.35
 3,583
 10.68
Granted7,010 1.37 1,229 13.35 730 18.64 
Vested (1,696) 19.67
 
 
 (610) 7.88
Vested(3,163)7.33 (1,069)15.64 (980)17.12 
Canceled (1,734) 17.46
 (1,478) 11.96
 (1,222) 11.36
Canceled(1,991)11.91 (1,120)16.00 (622)16.59 
Impact of spin-off(1)
 
 n/a
 (2,968) n/a
 
 n/a
Outstanding at December 31 5,429
 16.55
 4,926
 13.99
 7,522
 11.57
Outstanding at December 315,453 3.83 3,597 16.17 4,557 16.76 
_____________________________
(1)Stock-based compensation was converted from former parent stock into Conduent common stock at spin-off.


The Company issued 77 thousand Deferred Stock Units (DSU) to non-employee members of the Board of Directors. These DSUs are fully vested and will be issued when the directors leave the Board.

The Company has 348 thousand stock options outstanding as of December 31, 2017 at strike prices ranging from $10.15 to $11.38. These stock options are fully vested and exercisable.

The total unrecognized compensation cost related to non-vested stock-based awards at December 31, 20172020 was as follows (in(in millions):

AwardsUnrecognized CompensationRemaining Weighted-Average Expense Period (Years)
Restricted Stock Units / Shares$13 1.7
Performance Stock Units / Shares1.5
Total$16 


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Awards Unrecognized Compensation Remaining Weighted-Average Vesting Period (Years)
Restricted Stock Units / Shares $27
 1.9
Performance Stock Units / Shares 30
 1.6
Total $57
  
The aggregate intrinsic value of outstanding RSUs and PSsPSUs awards waswere as follows (in(in millions):

Awards December 31, 2017
Restricted Stock Units / Shares $50
Performance Stock Units / Shares 88
AwardsDecember 31, 2020
Restricted Stock Units / Shares$27 
Performance Stock Units / Shares26 
Information related to stock options outstanding and exercisable at December 31, 2017 was as follows:
(in millions) Options
  Outstanding Exercisable
Aggregate intrinsic value $6
 $6
Weighted-average remaining contractual life (years) 1.3
 1.3

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The total intrinsic value and actual tax benefit realized for vested and exercised stock-based awards were as follows:

(in millions) December 31, 2017 December 31, 2016 December 31, 2015(in millions)December 31, 2020December 31, 2019December 31, 2018
Awards Total Intrinsic Value Cash Received Tax Benefit Total Intrinsic Value Cash Received Tax Benefit Total Intrinsic Value Cash Received Tax BenefitAwardsTotal Intrinsic ValueCash ReceivedTax BenefitTotal Intrinsic ValueCash ReceivedTax BenefitTotal Intrinsic ValueCash ReceivedTax Benefit
Restricted Stock Units / Shares $3
 $
 $1
 $1
 $
 $
 $30
 $
 $11
Restricted Stock Units / Shares$13 $$$17 $$$20 $$
Performance Stock Units / Shares 25
 
 10
 
 
 
 7
 
 2
Performance Stock Units / Shares14 11 18 
Stock Options 3
 6
 1
 3
 9
 1
 14
 19
 5
Stock Options


Note 1620 – Other Comprehensive Income (Loss)

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

Year Ended December 31,
 202020192018
(in millions)Pre-taxNet of TaxPre-taxNet of TaxPre-taxNet of Tax
Currency Translation
Currency translation adjustments, net$$$$$(31)$(31)
Reclassification of currency translation adjustments on divestitures15 15 42 42 
Translation adjustments gains(losses)$$$18 $18 $11 $11 
Unrealized Gains (Losses)
Changes in fair value of cash flow hedges gains (losses)$$$$$$
Changes in cash flow hedges reclassed to earnings(1)
(1)(1)
Net Unrealized Gains (Losses)$$$$$$
Defined Benefit Plans Gains (Losses)
Reclassification of divested benefit plans and other$$$$(1)$65 $62 
Net actuarial/prior service gains (losses)
Changes in Defined Benefit Plans Gains (Losses)$$$$(1)$65 $62 
Other Comprehensive Income (Loss)$$$19 $18 $77 $74 
____________________________

(1)Reclassified to Cost of services - refer to Note 13 – Financial Instruments for additional information regarding our cash flow hedges.
  Year Ended December 31,
  2017 2016 2015
(in millions) Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax
Translation Adjustments Gains (Losses) $35
 $35
 $(135) $(135) $(60) $(60)
Unrealized Gains (Losses):            
Changes in fair value of cash flow hedges gains (losses) 1
 1
 (2) (1) (4) (2)
Changes in cash flow hedges reclassed to earnings(1)
 2
 1
 2
 1
 5
 3
Net Unrealized Gains (Losses) 3
 2
 
 
 1
 1
             
Defined Benefit Plans Gains (Losses)            
Net actuarial/prior service gains (losses) (5) (4) (31) (23) 5
 4
Actuarial loss amortization/settlement(2)
 2
 2
 1
 1
 2
 2
Other gains (losses)(3)
 (4) (3) 3
 2
 2
 1
Changes in Defined Benefit Plans Gains (Losses) (7) (5) (27) (20) 9
 7
             
Other Comprehensive Income (Loss) $31
 $32
 $(162) $(155) $(50) $(52)
_____________________________
(1)Reclassified to Cost of sales - refer to Note 9 – Financial Instruments for additional information regarding our cash flow hedges.
(2)Reclassified to Total Net Periodic Benefit Cost - refer to Note 11 – Employee Benefit Plans for additional information.
(3)Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL.
Accumulated Other Comprehensive Loss (AOCL)
AOCL is comprised of
Below are the following:
balances and changes in AOCL(1):
  December 31,
(in millions) 2017 2016 2015
Cumulative translation adjustments(1)
 $(437) $(472) $(147)
Other unrealized losses, net 1
 (1) (1)
Benefit plans net actuarial losses and prior service credits (58) (53) (33)
Total Accumulated Other Comprehensive Loss $(494) $(526) $(181)

_____________________________

(1)2016 includes $190 million of AOCL transferred from former parent as part of the spin-off.CNDT 2020 Annual Report


95
Conduent Inc. 2017 Annual Report     88

(in millions)Currency Translation AdjustmentsGains (Losses) on Cash Flow HedgesDefined Benefit Pension ItemsTotal
Balance at December 31, 2017$(437)$$(58)$(494)
Reclassification of amounts impacted by Tax Reform(5)(5)
Other comprehensive income (loss) before reclassifications(31)(30)
Amounts reclassified from accumulated other comprehensive loss42 62 104 
Net current period other comprehensive income (loss)11 62 74 
Balance at December 31, 2018$(426)$$(1)$(425)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive loss15 (1)14 
Net current period other comprehensive income (loss)18 (1)18 
Balance at December 31, 2019$(408)$$(2)$(407)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive income (loss)
Balance at December 31, 2020$(400)$$(1)$(398)
__________
(1)All amounts are net of tax. Tax effects were immaterial.

Table of Contents

CNDT 2020 Annual Report
96


Note 1721 – Earnings (Loss) per Share
We did not declare any common stock dividends in the periods presented.
The following table sets forth the computation of basic and diluted earningsloss per share of common stock:
 Year Ended December 31,
(in millions, except per share data. Shares in thousands)202020192018
Net Loss per Share:
Net loss$(118)$(1,934)$(416)
Dividend - preferred stock(10)(10)(10)
Adjusted Net Loss Available to Common Shareholders$(128)$(1,944)$(426)
Weighted average common shares outstanding210,018 209,318 206,056 
Basic Loss per Share$(0.61)$(9.29)$(2.06)
Diluted Loss per Share:
Net loss from continuing operations$(118)$(1,934)$(416)
Dividend - preferred stock(10)(10)(10)
Adjusted Net Loss Available to Common Shareholders$(128)$(1,944)$(426)
Weighted average common shares outstanding210,018 209,318 206,056 
Diluted Loss per Share$(0.61)$(9.29)$(2.06)
  Year Ended December 31,
(in millions, shares in thousands) 2017 2016 2015
Basic Earnings (Loss) per Share:      
Net income (loss) from continuing operations attributable to Conduent $177
 $(983) $(336)
Accrued dividends on preferred stock (10) 
 
Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders 167
 (983) (336)
Net income (loss) from discontinued operations attributable to Conduent 4
 
 (78)
Adjusted Net Income (Loss) Available to Common Shareholders $171
 $(983) $(414)
       
Weighted-average common shares outstanding 204,007
 202,875
 202,875
Basic Earnings (Loss) per Share:      
Continuing operations $0.82
 $(4.85) $(1.65)
Discontinued operations 0.02
 
 (0.39)
Basic Earnings (Loss) per Share $0.84
 $(4.85) $(2.04)
       
Diluted Earnings (Loss) per Share:      
Net income (loss) from continuing operations attributable to Conduent $177
 $(983) $(336)
Accrued dividends on preferred stock (10) 
 
Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders 167
 (983) (336)
Net income (loss) from discontinued operations attributable to Conduent 4
 
 (78)
Adjusted Net Income (Loss) Available to Common Shareholders $171
 $(983) $(414)
       
Weighted-average common shares outstanding 204,007
 202,875
 202,875
Common shares issuable with respect to:      
Stock options 195
 
 
Restricted stock and performance units / shares 2,491
 
 
Convertible preferred stock 
 
 
Adjusted Weighted Average Common Shares Outstanding 206,693
 202,875
 202,875
       
Diluted Earnings (Loss) per Share:      
Continuing operations $0.81
 $(4.85) $(1.65)
Discontinued operations 0.02
 
 (0.39)
Diluted Earnings (Loss) per Share $0.83
 $(4.85) $(2.04)
       
The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive (shares in thousands):
Stock Options 
 857
 
Restricted stock and performance shares 2,568
 5,719
 
Convertible preferred stock 5,393
 5,393
 
Total Securities 7,961
 11,969
 



Conduent Inc. 2017 Annual Report     89


Note 18 – Related Party Transactions and Former Parent Company Investment

Allocationdiluted earnings per share for being either contingently issuable shares or shares that if included would have been anti-dilutive for any of Corporate Expenses

The Consolidated Statements of Income (Loss), Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Cash Flows for the years ended December 31, 20162020, 2019 or 2018.












CNDT 2020 Annual Report
97

Note 22 – Related Party Transactions

During the third quarter of 2019, Carl C. Icahn and 2015 include an allocationhis affiliates (shareholders) increased their ownership interest in the Company. In the normal course of general corporate expensesbusiness, the Company provides services to, and purchases from, Xerox,certain related parties with the Company's former parent.same shareholders. The financial information in these Consolidated Financial Statements does not necessarily include all the expenses that would have been incurred or held had we been a separate, standalone company and it is not practicable to estimate actual costs that would have been incurred had we been a separate, standalone company during the periods presented. Management considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided. Allocations for management costs and corporate support services provided totaled $165 million and $170 million for the years ended December 31, 2016 and 2015, respectively. These amounts include costs for corporate functions including, but not limited to senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services. Where possible, these costs were allocated based on direct usage, with the remainder allocated on a basis of costs, headcount and/or other measures we have determined as reasonable.
  Year Ended December 31,
(in millions) 2016 2015
Research and development $25
 $43
Selling, general and administrative 140
 127
Total Allocated Corporate Expenses $165
 $170

Final Cash Allocation To Former Parent

In January 2017, in connection with the Separation, we paid Xerox $161 million for settlement of the management and support services received.

The components of Net transfers to former parent and the reconciliation to the corresponding amount presented on the Consolidated Statements of Cash Flows are as follows:
(in millions) Year Ended December 31,
  2016 2015
Cash pooling and general financing activities $(466) $(396)
Corporate cost allocations 165
 170
Income taxes (157) 168
Divestitures and acquisitions, net 54
 (742)
Capitalization of related party notes payable 
 1,017
Total net transfers (to) from former parent (404) 217
Stock-based compensation (23) (19)
Capitalization of related party notes payable 
 (1,017)
Net payments on notes payable with former parent company (1,132) (91)
Other, net (161) 147
Total Net payments to former parent company per Consolidated Statements of Cash Flows $(1,720) $(763)

Related Party Notes Receivable/Payable

Certain operating units of the Company had various interest bearing notes under contractual agreements to and from Xerox Corporation and other related parties. The purpose of these notes was to provide funds for certain working capital or other capital and operating requirements of the business. Net interest expense on these notes with related party companies was recorded net in Related Party Interest in the Consolidated Statements of Income (Loss) and was $26 million and $61 million for the years ended December 31, 2016 and 2015, respectively. These notes had fixed interest rates that ranged from 1% to 8%. The balances were settled as part of the Separation transaction.


Conduent Inc. 2017 Annual Report     90


Related Party Revenue and Purchases

We provide various services to Xerox Corporation, includingentities included those related to human resources, accountingend-user support and financeother services and customer care, which are reported as Related party revenuesolutions. The purchases from these entities included office equipment and related services and supplies. Revenue and purchases from these entities were included in the Consolidated Statements of Income (Loss). The costs related to these services are reported as Related party costRevenue and Costs of services inor Selling, general and administrative, respectively, on the Company's Consolidated Statements of Income (Loss).


We also leased equipmentTransactions with related parties were as follows:

Year Ended December 31,
 (in millions)202020192018
Revenue from related parties$24 $33 $45 
Purchases from related parties$36 $46 $41 

The Company's receivable and receivedpayable balances with related services, supplies and parts, from Xerox and Xerox subsidiaries in the amountparty entities were not material as of $21 million and $24 million, for the years ended December 31, 20162020 and 2015, respectively. The costs related to these services, supplies and parts are reported in Cost of services and Selling, administrative and general expenses in the Consolidated Statements of Income (Loss).2019.

Note 19 – Subsequent Events

In the first quarter of 2018, the Company will be moving the Health Enterprise business from the Other segment into the Public Sector segment. In addition, the Company plans to move the divested businesses' historical results to Other segment from both the Commercial Industries and the Public Sector segments.

See Note 13 – Contingencies and Litigation as it relates to the termination of the Cognizant agreement.



Conduent Inc. 2017 Annual Report     91



QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(in millions, except per-share data) 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year 
2017          
Revenues $1,553
 $1,496
 $1,480
 $1,493
 $6,022
Costs and Expenses 1,575
 1,507
 1,467
 1,489
 6,038
(Loss) Income before Income Taxes (22) (11) 13
 4
 (16)
Income tax (benefit) expense (12) (7) 30
 (204) (193)
(Loss) Income from Continuing Operations (10) (4) (17) 208
 177
Income from discontinued operations, net of tax 4
 
 
 
 4
Net (Loss) Income $(6) $(4) $(17) $208
 $181
           
Basic Earnings (Loss) per Share(1):
          
Continuing operations $(0.06) $(0.03) $(0.09) $1.00
 $0.82
Discontinued operations 0.02
 
 
 
 0.02
Total Basic (Loss) Earnings per Share: $(0.04) $(0.03) $(0.09) $1.00
 $0.84
           
Diluted Earnings (Loss) per Share(1):
          
Continuing operations $(0.06) $(0.03) $(0.09) $0.98
 $0.81
Discontinued operations 0.02
 
 
 
 0.02
Total Diluted (Loss) Earnings per Share $(0.04) $(0.03) $(0.09) $0.98
 $0.83
2016  
Revenues $1,685
 $1,613
 $1,596
 $1,514
 $6,408
Costs and Expenses 1,739
 1,647
 1,594
 2,655
 7,635
(Loss) Income before Income Taxes (54) (34) 2
 (1,141) (1,227)
Income tax (benefit) expense (31) (24) 1
 (190) (244)
(Loss) Income from Continuing Operations (23) (10) 1
 (951) (983)
Income (loss) from discontinued operations, net of tax 
 
 
 
 
Net (Loss) Income $(23) $(10) $1
 $(951) $(983)
           
Basic Earnings (Loss) per Share(1):
          
Continuing operations $(0.12) $(0.05) $0.01
 $(4.69) $(4.85)
Total Basic (Loss) Earnings per Share: $(0.12) $(0.05) $0.01
 $(4.69) $(4.85)
           
Diluted Earnings (Loss) per Share(1):
          
Continuing operations $(0.12) $(0.05) $0.01
 $(4.69) $(4.85)
Total Diluted (Loss) Earnings per Share $(0.12) $(0.05) $0.01
 $(4.69) $(4.85)
_________________
(1)The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that are anti-dilutive in certain quarters may not be anti-dilutive on a full-year basis. CNDT 2020 Annual Report

98

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NoneNone.

Conduent Inc. 2017 Annual Report     92


ITEM 9A. CONTROLS AND PROCEDURES


Management's Responsibility for Financial Statements
Our managementManagement is responsible for the integrity and objectivity of all information presented in this annual report.Annual Report on Form 10-K. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company's financial position and results of operations.


The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent registered public accountants, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accountants. The independent registered public accountants and internal auditors have access to the Audit Committee.
Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of our principal executive officer and principal
financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2017,2020, the end of the period covered by this report.Annual Report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report,Annual Report on Form 10-K, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to Conduent Incorporated, including our consolidated subsidiaries, and was accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


Management's Report on Internal Control over Financial Reporting


Our managementManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officers,officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control - Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.


Based on the above evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.2020.


The effectiveness of our internal control over financial reporting as of December 31, 20172020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8 of this Form 10-K.



CNDT 2020 Annual Report
99

Changes in Internal Control over Financial Reporting


In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter ended December 31, 20172020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


ITEM 9B. OTHER INFORMATION
None

On February 23, 2021, the Company further modified the compensation arrangement of the Company’s Chief Executive Officer, Clifford Skelton, as reflected in that letter agreement entered into between the Company and Mr. Skelton (the “2021 Letter Agreement”). In connection with such modification, the Compensation Committee of the Board of Directors set the salary of Mr. Skelton at $775,000 per annum. Mr. Skelton is eligible to participate in the Company’s Annual Performance Incentive Plan at a target level of 135% of his salary with a potential payout range between zero and 200% of target. Mr. Skelton will also be eligible to participate in the Company’s Long Term Incentive Plan (“LTIP”), which is payable in equity. His LTIP target annual award increased from $3,000,000 to $4,000,000.


Conduent Inc. 2017The foregoing description of the 2021 Letter Agreement is a summary of its material terms, does not purport to be complete and is qualified in its entirety by reference to the 2021 Letter Agreement which is filed as Exhibit 10.6(d)(iii) to this Annual Report 93

on Form 10-K and incorporated herein by reference. Other than the terms set forth in the 2021 Letter Agreement, Mr. Skelton’s employment terms remain the same as set forth in Mr. Skeltons existing letter agreements as previously disclosed by the Company.


PART III


ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information regarding our executive officers required by Item 10 of Part III is set forth in Item 1 of Part I "Business–Information About Our Executive Officers." The information regarding directors is incorporated herein by reference to the section entitled “Proposal 1 - Election of Directors” in our definitive Proxy Statement (2018 Proxy Statement) to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for our 20182021 Annual Meeting of Stockholders.Stockholders (the 2021 Proxy Statement). The 2021 Proxy Statement willis expected to be filed within 120 days after the end of our fiscal year ended December 31, 2017.2020.

The information regarding compliance with Section 16(a) of the Securities and Exchange Act of 1934 is incorporated herein by reference to the section entitled “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Report" of our 20182021 Proxy Statement.

The information required by this Item regarding the Audit Committee, its members and the Audit Committee financial experts is incorporated by reference herein from the subsection entitled “Committee Functions, Membership and Meetings” in the section entitled “Proposal 1 - Election of Directors” in our 20182021 Proxy Statement.

We have adopted a code of ethics applicable to our principal executive officer, principal financial officer and principal accounting officer.officer (Finance Code of Conduct). The Finance Code of Conduct can be found on our website at: http:https://www.conduent.com/investor and then clicking on Corporate Governance.corporate-governance/ethics-and-compliance/. Information concerning our Finance Code of Conduct can be found under "Corporate Governance" in our 20182021 Proxy Statement and is incorporated here by reference.
Executive Officers The reference to our website address does not constitute incorporation by reference of Conduent
The following is a listany of the executive officers of Conduent, their current ages, their present positions and the year appointed to their present positions.
Each officer is elected to hold office until the meeting of the Board of Directors heldinformation contained on the daywebsite, and such information is not a part of the next annual meeting of shareholders, subject to the provisions of the By-Laws.
this Annual Report.
Name  Age Present Position Year Appointed to Present Position   Conduent Officer Since
Ashok Vemuri* 49 Chief Executive Officer 2017 2017
David Amoriell 61 Executive Vice President & President, Public Sector 2017 2017
Allan Cohen 48 Vice President & Chief Accounting Officer 2017 2017
Jeffrey Friedel 56 Executive Vice President & Chief People Officer 2017 2017
James Michael Peffer 56 Executive Vice President, General Counsel & Secretary 2017 2017
Brian J. Webb-Walsh 42 Executive Vice President & Chief Financial Officer 2017 2017


*Member of Conduent Board of DirectorsCNDT 2020 Annual Report
Each of the officers named above has been an officer or an executive of Conduent or its subsidiaries for less than five years.

100
Mr. Vemuri served as Chief Executive Officer of Xerox Business Services, LLC and an Executive Vice President of Xerox Corporation since July 2016. Mr. Vemuri previously was President, Chief Executive Officer and a member of the Board of Directors of IGATE Corporation. Prior to IGATE, Mr. Vemuri spent 14 years at Infosys Limited, a multinational consulting and IT services company, in a variety of leadership and business development roles.
Mr. Amoriell served as the chief operating officer of the Public Sector Business Group for Xerox Services. He was named to that position in June 2014 and appointed a corporate vice president of Xerox in February 2012. Prior to that, Mr. Amoriell was the chief operating officer for the Government & Transportation Sector of Xerox Services.

Prior to joining Conduent, Mr. Cohen served as Senior Vice President and Controller of NBC Universal since 2011. Mr Cohen also previously served as Vice President, Assistant Controller at Time Warner, Professional Accounting Fellow in the Division of Corporate Finance at the Securities and Exchange Commission and Senior Manager at PriceWaterhouseCoopers.


Conduent Inc. 2017 Annual Report     94


Prior to joining Conduent, Mr. Friedel served as Vice President and Head of the Office of Integrity and Compliance at Infosys Limited from January 2016 to September 2016, a global leader in technology services and consulting, where he oversaw SEC compliance, internal investigations, code of conduct, whistleblower, and anti-bribery and export regulations. Mr. Friedel has also previously served as Senior Vice President and General Counsel at IGATE Corporation from June 2014 to December 2015, an IT services and business process outsourcing company which was acquired by CapGemini. Prior to June 2014, Mr. Friedel held a variety of leadership roles at Infosys Limited.
Mr. Peffer served as Vice President, General Counsel and Secretary for Xerox Corporation from August 2016 to December 2016. Prior to this, Mr. Peffer served as Associate General Counsel of Xerox Corporation and Executive Vice President of Xerox Business Services, LLC. since 2010. Prior to 2010, Mr. Peffer was Senior Vice President and Deputy General Counsel of ACS from May 2009.
Mr. Webb-Walsh served as the Chief Financial Officer of Xerox Services since January 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 has held a variety of leadership positions.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item included under the following captions under “Proposal 1 - Election of Directors” in our 20182021 Proxy Statement is incorporated herein by reference: “Compensation Discussion and Analysis”, “Summary Compensation Table”, “Grants of Plan-Based Awards in 2017”2020”, “Outstanding Equity Awards at 20172020 Fiscal Year-End”, “Option Exercises and Stock Vested in 2017”, “Pension Benefits for the 2017 Fiscal Year”, “Nonqualified Deferred Compensation for the 2017 Fiscal Year”2020”, “Potential Payments upon Termination or Change in Control”, “Summary of“Annual Director AnnualCompensation", "Equity Compensation Plan Information", "Compensation Committee Interlocks and Insider Participation” and “Compensation Committee”. The information included under the heading “Compensation Committee Report” in our 20182021 Proxy Statement is incorporated herein by reference; however, this information shall not be deemed to be “soliciting material” or to be “filed” with the CommissionSEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.Act.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plansrequired by this Item is incorporated herein by reference to the subsections entitled “Ownership of Company Securities,”"Securities Ownership," and “Equity Compensation Plan Information” under “Proposal 1 - Election of Directors” in our 20182021 Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information regarding certain relationships and related transactionsrequired by this Item is incorporated herein by reference to the subsection entitled “Certain Relationships and Related Person Transactions” under “Proposal 1 - Election of Directors” in our 20182021 Proxy Statement. The information regarding director independence is incorporated herein by reference to the subsections entitled “Corporate Governance” and “Director Independence” in the section entitled “Proposal 1 - Election of Directors” in our 20182021 Proxy Statement.
ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES

The information regarding principal auditor fees and servicesrequired by this Item is incorporated herein by reference to the section entitled “Proposal 2 - Ratification of ElectionAppointment of Independent Registered Public Accounting Firm” in our 20182021 Proxy Statement.



Conduent Inc. 2017 Annual Report     95


PART IV


ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)        
1.Index to Financial Statements filed as part of this report:

Report of Independent Registered Public Accounting Firm;
Consolidated Statements of Income (Loss) for each of the years in the three-year period ended December 31, 2020;
Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2020;
Consolidated Balance Sheets as of December 31, 2020 and 2019;
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2020;
Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 2020;
Notes to the Consolidated Financial Statements; and
All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto.

2.Financial Statement Schedules:

(a)(1)    Index to Financial Statements and Financial Statement Schedule, incorporated by reference or filed as part of this report:CNDT 2020 Annual Report
101

Report of Independent Registered Public Accounting Firm including Report on Financial Statement Schedule;
Consolidated Statements of Income (Loss)

Schedule II–Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2017;
Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2017;
Consolidated Balance Sheets as of December 31, 2017 and 2016;
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2017;
Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 2017;
Notes to the Consolidated Financial Statements;
Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 2017; and
All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto.
(2)    Supplementary Data:
Quarterly Results of Operations (unaudited).
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the three years in the period ended December 31, 2017
2020.
(in millions)  
Balance
at beginning
of period 
 
Additions
charged to
expense(1)
 
Amounts
(credited)
charged to
other income
statement
accounts (2) 
 
Deductions
and other, net
of recoveries (3)(4) 
 
Balance
at end
of period 
Allowance for Losses:          
2017Accounts Receivable $7
 $(1) $
 $(4) $2
2016Accounts Receivable 6
 4
 
 (3) 7
2015Accounts Receivable 6
 4
 
 (4) 6
            
Tax Valuation Allowance:          
2017Tax Valuation 24
 11
 
 
 35
2016Tax Valuation 38
 
 
 (14) 24
2015Tax Valuation 35
 
 5
 (2) 38

 __________
(1)Account Receivables: additions charged to expense represent bad debt provisions relate to estimated losses due to credit and similar collectibility issues.
(2)Account Receivables: Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(3)Account Receivables: Deductions and other, net of recoveries primarily relates to receivable write-offs, but also includes the impact of foreign currency translation adjustments and recoveries of previously written off receivables.
(4)Tax Valuation: Reductions to tax valuation allowance are primarily related to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will not be realized in the ordinary course of operations.

Conduent Inc. 2017 Annual Report     96


(3)    3.The exhibits listed belowfiled herewith are filed or incorporated by reference are part of this Form 10-K.set forth in the exhibit Index included herein.

(b)    Management contracts or compensatory plans or arrangements listed that are applicable to the executive officers named in the Summary Compensation Table which appears in the Registrant's 20182021 Proxy Statement or to our directors are preceded by an asterisk (*).

SCHEDULE II

Valuation and Qualifying Accounts

For the three years ended December 31, 2020

(in millions) Balance
at beginning
of period 
Additions
charged to
expense(1)(4)
Amounts (credited) charged to other income statement accounts (2) 
Deductions and other, net of recoveries (3)(4) 
Balance
at end
of period 
Allowance for Losses:     
2020Accounts Receivable$$$$(1)$
2019Accounts Receivable(2)
2018Accounts Receivable(1)
Tax Valuation Allowance:
2020Tax Valuation72 17 (6)83 
2019Tax Valuation44 38 (10)72 
2018Tax Valuation35 17 (8)44 
 __________
(1)Account Receivables/Contract Assets: additions charged to expense represent bad debt provisions relate to estimated losses due to credit and similar collectability issues.
(2)Account Receivables: Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(3)Account Receivables/Contract Assets: Deductions and other, net of recoveries primarily relates to receivable and contract asset write-offs, but also includes reclassification to other balance sheet accounts, the impact of foreign currency translation adjustments and recoveries of previously written off receivables and contract assets.
(4)Tax Valuation: tax valuation allowance are primarily related to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will not be realized in the ordinary course of operations.


ITEM 16. FORM 10-K SUMMARY

None


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EXHIBIT INDEX

Document and Location

Exhibit No.
2.1
Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated January 3, 2017. (See SEC File Number 001-37817).
3.1
Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated December 23, 2016. (See SEC File Number 001-37817).
3.2
Incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K dated December 23, 2016. (See SEC File Number 001-37817).
4.14.1(a)
Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated December 9, 2016. (See SEC File Number 001-37817).
10.1(a)4.1(b)
Incorporated by reference to Exhibit 4.1(a) to the Registrant's Quarterly Report on Form 10-Q dated August 8, 2018. (See SEC File Number 001-37817).
4.1(c)
Incorporated by reference to Exhibit 4.1(b) to the Registrant's Quarterly Report on Form 10-Q dated August 8, 2018. (See SEC File Number 001-37817).
4.1(d)
Incorporated by reference to Exhibit 4.1(c) to the Registrant's Quarterly Report on Form 10-Q dated August 8, 2018. (See SEC File Number 001-37817).
4.1(e)
Incorporated by reference to Exhibit 4.1(d) to the Registrant's Quarterly Report on Form 10-Q dated August 8, 2018. (See SEC File Number 001-37817).
4.1(f)
Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated July 12, 2018. (See SEC File Number 001-37817).
4.2
Incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K dated February 26, 2020. (See SEC File Number 001-37817)
10.1(a)
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 9, 2016. (See SEC File Number 001-37817).

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10.1(b)
Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated April 11, 2017. (See SEC File Number 001-37817).
10.1(c)
Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated October 10, 2017. (See SEC File Number 001-37817).
10.1(d)
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated June 28, 2018. (See SEC File Number 001-37817).
10.1(e)
Incorporated by reference to Exhibit 10.1(b) to the Registrant's Annual Report on Form 10-K dated March 10, 2017, (See SEC File Number 001-37817).
10.3(a)
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated January 3, 2017. (See SEC File Number 001-37817).
10.3(b)10.4(a)
Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated January 3, 2017. (See SEC File Number 001-37817).
10.3(c)
Incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated January 3, 2017. (See SEC File Number 001-37817).
10.3(d)

Conduent Inc. 2017 Annual Report     97


Incorporated by reference to Exhibit 10.4 to Registrant’s Current Report on Form 8-K dated January 3, 2017. (See SEC File Number 001-37817).
10.3(e)
Incorporated by reference to Exhibit 10.5 to Registrant’s Current Report on Form 8-K dated January 3, 2017. (See SEC File Number 001-37817).
10.4(a)
Incorporated by reference to Exhibit 10.6 to Registrant’s Current Report on Form 8-K dated January 3, 2017. (See SEC File Number 001-37817).
10.4(b)
Incorporated by reference to Exhibit 10.6 to Registrant’s Amendment No. 1 to Form 10 dated August 15, 2016. (See SEC File Number 001-37817).
10.510.5(a)
Incorporated by reference to Exhibit 10.14 to Registrant’s Amendment No. 5 to Form 10 dated October 28, 2016. (See SEC File Number 001-37817).
10.5(b)
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 18, 2018. (See SEC File Number 001-37817).
The management contracts or compensatory plans or arrangements listed below that are applicable to the executive officers named in the Summary Compensation Table which will appear in the Registrant’s 20182020 Proxy Statement or to our directors are preceded by an asterisk (*).
*10.6(a)(i)
Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-215361 dated December 29, 2016. (See SEC File Number 001-37817).
*10.6(a)(ii)
Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 29, 2017. (See SEC File Number 001-37817).
*10.6(a)(iii)
Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated March 29, 2017. (See SEC File Number 001-37817).
*10.6(a)(iv)
*10.6(a)(v)
Incorporated by reference to Exhibit 10.6(a)(vii) to the Registrant's Quarterly Report on Form 10-Q dated May 9, 2018. (See SEC File Number 001-37817).
*10.6(a)(vi)(iii)
Incorporated by reference to Exhibit 10.310.6(a)(viii) to the Registrant's CurrentQuarterly Report on Form 8-K10-Q dated March 29, 2017.May 9, 2018. (See SEC File Number 001-37817).

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*10.6(a)(iv)
Incorporated by reference to Exhibit 10.6(a)(ix) to the Registrant's Annual Report on Form 10-K dated February 28, 2019. (See SEC File Number 001-37817).
*10.6(a)(v)
Incorporated by reference to Exhibit 10.6(a)(x) to the Registrant's Annual Report on Form 10-K dated February 28, 2019. (See SEC File Number 001-37817).
*10.6(b)(i)
Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-215361 dated December 29, 2016. (See SEC File Number 001-37817).
*10.6(b)(ii)
Incorporated by reference to Exhibit 10.6(b)(ii) to the Registrant's Annual Report on FromForm 10-K dated March 10, 2017. (See SEC File Number 001-37817).
*10.6(a)(vi)
Incorporated by reference to Exhibit 10 6(a)(vi) to the Registrant’s Quarterly Report on form 10-Q dated May 8, 2020. (See SEC File Number 001-37817).
*10.6(a)(vii)
Incorporated by reference to Exhibit 10 6(a)(vii) to the Registrant’s Quarterly Report on form 10-Q dated May 8, 2020. (See SEC File Number 001-37817).
*10.6.(c)
Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated August 28, 2017. (See SEC File Number 001-37817).

Conduent Inc. 2017 Annual Report     98


*10.6(d)
Incorporated by reference to Exhibit 99.210.6(h) to Xerox Corporation’sthe Registrant’s Current Report on Form 8-K dated June 14, 2016.May 28, 2019. (See SEC File Number 001-04471)001-37817).
*10.6(e)10.6(d)(i)
Incorporated by reference to Exhibit 10.1210.6(j) to the Registrant’s Amendment No. 4 toCurrent Report on Form 108-K dated October 21, 2016.August 7, 2019. (See SEC File Number 001-37817).
*10.6(f)10.6(d)(ii)
Incorporated by reference to Exhibit 10.6(e)(ii) to the Registrant’s Annual Report on Form 10-K dated February 26, 2020. (See SEC File Number 001-37817).
*10.6(d)(iii)
*10.6(e)
Incorporated by reference to Exhibit 10.13 to Registrant’s Amendment No. 4 to Form 10 dated October 21, 2016. (See SEC File Number 001-37817).
*10.6(g)10.6(f)
21.1Incorporated by reference to Exhibit 10.6(h) to the Registrant’s Annual Report on Form 10-K dated February 26, 2020. (See SEC File Number 001-37817).
*10.6(g)
Incorporated by reference to Exhibit 10.6(i) to the Registrant’s Annual Report on Form 10-K dated February 26, 2020. (See SEC File Number 001-37817).
21.1
23
31(a)

CNDT 2020 Annual Report
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31(b)
32
101.CAL101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase.
101.INS101.LABXBRL Instance Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase.
101.SCHInline XBRL Taxonomy Extension Schema Linkbase.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).



Conduent Inc. 2017 Annual Report     99

CNDT 2020 Annual Report
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
CONDUENT INCORPORATED
/s/  ASHOK VEMURICLIFFORD SKELTON
Ashok Vemuri
Clifford Skelton
Chief Executive Officer
March 1, 2018
February 24, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
March 1, 2018
February 24, 2021
 
Signature
 
Title
 
Principal Executive Officer:
/S/    ASHOK VEMURIS/    CLIFFORD SKELTON
Chief Executive Officer and Director
Ashok VemuriClifford Skelton
Principal Financial Officer:
/S/    BRIAN WEBB-WALSHS/    BRIAN WEBB-WALSH
Executive Vice President and Chief Financial Officer
Brian Webb-Walsh
Principal Accounting Officer:
/S/    ALLAN COHENS/    STEPHEN WOOD
Vice President, Corporate Controller and ChiefPrincipal Accounting Officer
Allan CohenStephen Wood
/S/    PAUL S. GALANTS/    HUNTER GARY
Director
Paul S. GalantHunter Gary
/S/    JOIE A. GREGORS/   KATHY HIGGINS VICTOR
Director
Joie A. GregorKathy Higgins Victor
/s/    VINCENT J. INTRIERISCOTT LETIER
Director
Vincent J. Intrieri
/S/    COURTNEY MATHER
Director
Courtney Mather
/S/   MICHAEL NEVIN
Director
Michael Nevin
/S/    MICHAEL A. NUTTER
Director
Michael A. Nutter
/s/    WILLIAM G. PARRETT
Director and Chairman of the Board
William G. ParrettScott Letier
/s/ JESSE LYNNDirector
Jesse Lynn
/s/ STEVEN MILLERDirector
Steven Miller
/S/    VIRGINIA M. WILSONS/    MICHAEL MONTELONGO
Director
Virginia M. WilsonMichael Montelongo
/S/   MARGARITA PALÁU-HERNÁNDEZ
Director
Margarita Paláu-Hernández





Conduent Inc. 2017 Annual Report     100

CNDT 2020 Annual Report
107