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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

_______________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~September~~June 30, ~~2017~~2018



o	TRANSITION 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 York		81-2983623
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
100 Campus Drive, Suite ~~200E~~200 Florham Park, New Jersey		07932
(Address of principal executive offices)		(Zip Code)

(844) 663-2638

(Registrant’s telephone number, including area code)

_________________________________________________

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 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 the 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~~ o ~~Accelerated filer~~ o ~~Non-accelerated filer~~ x ~~Smaller reporting company~~ o ~~Emerging Growth company~~ o



Large accelerated filer	x		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Small reporting company	o
			Emerging growth company	o

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 a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý



Class		Outstanding at ~~October~~July 31, ~~2017~~2018
Common Stock, $0.01 par value		~~210,377,257~~211,173,496

~~Conduent Form 10-Q~~

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect Management's current beliefs, assumptions and expectations and are subject to a number of factors that ~~may~~could cause actual results to differ materially. Such factors include, but are not limited to: termination rights contained in our government contracts; our ability to renew commercial and government 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; 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; our ability to obtain adequate pricing for our services and to improve our cost structure; claims of infringement of third-party intellectual property rights; the failure to comply with laws relating to individually identifiable information, and personal health information and 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 ~~and~~or any service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our ability to collect our receivables for unbilled services; a decline in revenues from or a loss 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; changes in tax and other laws and regulations; changes in government regulation and economic, strategic, political and social conditions; changes in U.S. GAAP or other applicable accounting policies; 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 Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the ~~quarters~~quarter ended March 31, ~~2017 and June 30, 2017 and~~2018, as well as in our ~~2016~~2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Any forward-looking statements made by us in this Quarterly Report on Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

~~Conduent Form 10-Q~~

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CONDUENT INCORPORATED

FORM 10-Q

~~September~~June 30, ~~2017~~2018

TABLE OF CONTENTS



		Page
Part I — Financial Information
Item 1.	Financial Statements (Unaudited)
	~~Condensed Consolidated Statements of Income (Loss)~~	3
	Condensed Consolidated Statements of Income (Loss)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to the Condensed Consolidated Financial Statements	7
	Note 1 – Basis of Presentation	7
	Note 2 – Recent Accounting Pronouncements	8
	Note 3 – Segment Reporting	13
	Note 4 – Assets/Liabilities Held for Sale	15
	Note 5 – Restructuring Programs and Related Costs	16
	Note 6 – Debt	17
	Note 7 – Financial Instruments	17
	Note 8 – Fair Value of Financial Assets and Liabilities	17
	Note 9 – Employee Benefit Plans	18
	Note 10 – Accumulated Other Comprehensive Loss (AOCL)	18
	Note 11 – Contingencies and Litigation	19
	Note 12 – Preferred Stock	22
	Note 13 – Shareholders’ Equity	22
	Note 14 – Earnings per Share	23
	Note 15 – Subsequent Events	24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1825
	Capital Resources and Liquidity	2331
	Market Risk Management	2432
	Non-GAAP Financial Measures	2432
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2835
Item 4.	Controls and Procedures	2835

Part II — Other Information

Item 1.	Legal Proceedings	2935
Item 1A.	Risk Factors	2935
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2935
Item 6.	Exhibits	2936
Signatures		3037

For additional information about Conduent Incorporated and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at ~~www.conduent.com/investor.~~https://investor.conduent.com/. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.

~~Conduent Form 10-Q~~

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED)

CONDUENT INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(in millions, except per-share data)	2017			2016			2017			2016
Revenues
(in millions, except per share data)													2018			2017			2018			2017
Revenue	$	1,470		$	1,585		$	4,497		$	4,856		$	1,387		$	1,496		$	2,807		$	3,049
Related party	10			11			32			38
Total Revenues	1,480			1,596			4,529			4,894

Cost of services	1,210			1,319			3,742			4,079
Related party cost of services	9			9			24			28
Cost of Services													1,125			1,253			2,293			2,547
Gross Margin	261			268			763			787			262			243			514			502

Operating Costs and Expenses
Research and development	4			7			11			25			3			3			5			7
Selling, general and administrative	144			164			466			517			149			153			294			322
Restructuring and related costs	22			8			76			57			17			36			37			54
Amortization of intangible assets	60			63			182			200
Amortization of acquired intangible assets													60			61			121			122
Interest expense	35			1			105			3			37			34			70			70
Related party interest	—			10			—			30
Separation costs	2			15			8			34			—			1			—			6
(Gain) loss on sale of asset and businesses	(16		)	—			(41		)	1
(Gain) loss on divestitures and transaction costs													(60		)	(25		)	(45		)	(25		)
Litigation costs (recoveries), net													4			(9		)	35			(20		)
Other (income) expenses, net	(3		)	(2		)	(24		)	6			(2		)	—			(3		)	(1		)
Total Operating Costs and Expenses	248			266			783			873			208			254			514			535

Income (Loss) before Income Taxes	13			2			(20		)	(86		)
Income (Loss) Before Income Taxes													54			(11		)	—			(33		)

Income tax expense (benefit)	30			1			11			(54		)	43			(7		)	39			(19		)
(Loss) Income from Continuing Operations	(17		)	1			(31		)	(32		)
Income from discontinued operations, net of tax	—			—			4			—
Net (Loss) Income	$	(17	)	$	1		$	(27	)	$	(32	)
Income (Loss) From Continuing Operations													11			(4		)	(39		)	(14		)

Income (loss) from discontinued operations, net of tax													—			—			—			4
Net Income (Loss)													$	11		$	(4	)	$	(39	)	$	(10	)

Basic Earnings (Loss) per Share:
Continuing operations	$	(0.09	)	$	0.01		$	(0.19	)	$	(0.16	)	$	0.05		$	(0.03	)	$	(0.21	)	$	(0.09	)
Discontinued operations	—			—			0.02			—			—			—			—			0.02
Total Basic (Loss) Income per Share	$	(0.09	)	$	0.01		$	(0.17	)	$	(0.16	)
Total Basic Earnings (Loss) per Share													$	0.05		$	(0.03	)	$	(0.21	)	$	(0.07	)

Diluted Earnings (Loss) per Share:
Continuing operations	$	(0.09	)	$	0.01		$	(0.19	)	$	(0.16	)	$	0.04		$	(0.03	)	$	(0.21	)	$	(0.09	)
Discontinued operations	—			—			0.02			—			—			—			—			0.02
Total Diluted (Loss) Income per Share	$	(0.09	)	$	0.01		$	(0.17	)	$	(0.16	)
Total Diluted Earnings (Loss) per Share													$	0.04		$	(0.03	)	$	(0.21	)	$	(0.07	)

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

~~Conduent Form 10-Q~~

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CONDUENT INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2017 2016 2017 2016
Net (Loss) Income $ (17 ) $ 1
$ (27 ) $ (32 )

Other Comprehensive Income (Loss), Net⁽¹⁾:

Translation adjustments, net 8
(10 ) 34
(25 )
Unrealized gains, net —
—
2
1
Changes in defined benefit plans, net —
1
—
2
Other Comprehensive Income (Loss), Net 8
(9 ) 36
(22 )

Comprehensive (Loss) Income, Net $ (9 ) $ (8 ) $ 9
$ (54 )



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2018			2017			2018			2017
Net Income (Loss)	$	11		$	(4	)	$	(39	)	$	(10	)
Other Comprehensive Income (Loss), Net
Currency translation adjustments, net	(32		)	14			(23		)	26
Reclassification of currency translation adjustments on divestitures	—			—			5			—
Unrecognized gains (loss), net	(2		)	—			(3		)	2
Changes in benefit plans, net	3			(1		)	3			—
Other Comprehensive Income (Loss), Net	(31		)	13			(18		)	28

Comprehensive Income (Loss), Net	$	(20	)	$	9		$	(57	)	$	18

~~(1) Refer to Note 10 - Other Comprehensive Income (Loss) for gross components~~The accompanying notes are an integral part of ~~Other Comprehensive Income (Loss), reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects.~~these Condensed Consolidated Financial Statements.

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CONDUENT INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in millions, except share data in thousands)	June 30, 2018			December 31, 2017
Assets
Cash and cash equivalents	$	993		$	658
Accounts receivable, net	930			1,114
Assets held for sale	316			757
Contract assets	193			—
Other current assets	229			181
Total current assets	2,661			2,710
Land, buildings and equipment, net	276			257
Intangible assets, net	771			891
Goodwill	3,424			3,366
Other long-term assets	304			324
Total Assets	$	7,436		$	7,548
Liabilities and Equity
Short-term debt and current portion of long-term debt	$	43		$	82
Accounts payable	158			138
Accrued compensation and benefits costs	297			335
Unearned income	129			151
Liabilities held for sale	119			169
Other current liabilities	567			493
Total current liabilities	1,313			1,368
Long-term debt	2,001			1,979
Deferred taxes	346			384
Other long-term liabilities	135			146
Total Liabilities	3,795			3,877

Contingencies (See Note 11)
Series A convertible preferred stock	142			142

Common stock	2			2
Additional paid-in capital	3,865			3,850
Retained earnings (deficit)	144			171
Accumulated other comprehensive loss	(512		)	(494		)
Total Equity	3,499			3,529
Total Liabilities and Equity	$	7,436		$	7,548

Shares of common stock issued and outstanding	210,528			210,440
Shares of series A convertible preferred stock issued and outstanding	120			120

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

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CONDUENT INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2018			2017			2018			2017
Cash Flows from Operating Activities:
Net income (loss)	$	11		$	(4	)	$	(39	)	$	(10	)
Adjustments required to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization	117			130			234			255
Deferred income taxes	(39		)	(25		)	(47		)	(31		)
(Gain) loss from investments	—			(4		)	(1		)	(7		)
Amortization of debt financing costs	6			2			8			4
(Gain) loss on divestitures and transaction costs	(60		)	(25		)	(45		)	(32		)
Stock-based compensation	12			12			19			18
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	89			40			14			(70		)
(Increase) decrease in other current and long-term assets	(46		)	(13		)	(95		)	(47		)
Increase (decrease) in accounts payable and accrued compensation	15			(36		)	(25		)	(85		)
Increase (decrease) in restructuring liabilities	(3		)	21			4			24
Increase (decrease) in other current and long-term liabilities	(54		)	(37		)	(11		)	(54		)
Net change in income tax assets and liabilities	53			7			48			(2		)
Other operating, net	(3		)	(1		)	(4		)	(3		)
Net cash provided by (used in) operating activities	98			67			60			(40		)
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment	(43		)	(20		)	(76		)	(37		)
Proceeds from sale of land, buildings and equipment	12			33			12			33
Cost of additions to internal use software	(8		)	(7		)	(14		)	(15		)
Proceeds (payments) from sale (purchase) of businesses	400			—			400			—
Net cash provided by (used in) investing activities	361			6			322			(19		)
Cash Flows from Financing Activities:
Proceeds on long-term debt	—			—			—			306
Debt issuance fee payments	(3		)	(8		)	(3		)	(9		)
Payments on debt	(8		)	(9		)	(29		)	(153		)
Net (payments to) transfer from former parent company	—			—			—			(161		)
Issuance of common stock related to employee stock plans	1			—			(3		)	(2		)
Dividends paid on preferred stock	(3		)	(3		)	(5		)	(5		)
Other financing	—			1			—			(1		)
Net cash provided by (used in) financing activities	(13		)	(19		)	(40		)	(25		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(6		)	—			(6		)	2
Increase (decrease) in cash, cash equivalents and restricted cash	440			54			336			(82		)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period⁽¹⁾	563			280			667			416
Cash, Cash Equivalents and Restricted Cash at End of period⁽¹⁾	$	1,003		$	334		$	1,003		$	334

___________


(1)	Includes approximately $10 million and $25 million of restricted cash as of June 30, 2018 and 2017, respectively, that were included in Other current assets on the Condensed Consolidated Balance Sheets.

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

~~Conduent Form 10-Q~~

~~CONDUENT INCORPORATED~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)~~

(in millions, except share data in thousands) September 30,
2017 December 31,
2016
Assets
Cash and cash equivalents $ 468
$ 390
Accounts receivable, net 1,380
1,286
Net receivable from former parent company 31
—
Other current assets 233
241
Total current assets 2,112
1,917
Land, buildings and equipment, net 249
283
Intangible assets, net 959
1,144
Goodwill 3,899
3,889
Other long-term assets 328
476
Total Assets $ 7,547
$ 7,709

Liabilities and Equity
Short-term debt and current portion of long-term debt $ 71
$ 28
Accounts payable 147
164
Accrued compensation and benefits costs 221
269
Unearned income 184
206
Net payable to former parent company —
124
Other current liabilities 591
611
Total current liabilities 1,214
1,402
Long-term debt 1,991
1,913
Pension and other benefit liabilities 151
172
Deferred taxes 605
619
Other long-term liabilities 132
173
Total Liabilities 4,093
4,279

Contingencies (See Note 11)

Series A Convertible Preferred Stock 142
142

Common Stock 2
2
Additional paid-in-capital 3,834
3,812
Retained deficit (34 ) —
Accumulated other comprehensive loss (490 ) (526 )
Total Equity 3,312
3,288
Total Liabilities and Equity $ 7,547
$ 7,709

Shares of common stock issued and outstanding 210,372
202,875
Shares of Series A convertible preferred stock issued and outstanding 120
120

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

~~Conduent Form 10-Q~~

Contents

~~CONDUENT INCORPORATED~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2017 2016 2017 2016
Cash Flows from Operating Activities:
Net (loss) income $ (17 ) $ 1
$ (27 ) $ (32 )
Adjustments required to reconcile net loss to cash flows from operating activities:
Depreciation and amortization 123
135
378
417
Deferred tax expense (benefit) 24
(35 ) (7 ) (11 )
Gain on investments (3 ) (3 ) (10 ) (6 )
Amortization of debt financing costs 3
—
7
—
Net (gain) loss on sale of asset and businesses (16 ) —
(48 ) 1
Stock-based compensation 8
8
26
18
Changes in operating assets and liabilities:
Increase in accounts receivable, net (6 ) (27 ) (76 ) (137 )
Decrease (increase) in other current and long-term assets 12
2
(34 ) (64 )
Decrease in accounts payable and accrued compensation (1 ) (15 ) (86 ) (154 )
Increase (decrease) in restructuring liabilities 1
(17 ) 25
8
Decrease in other current and long-term liabilities (26 ) (74 ) (80 ) (164 )
Net change in income tax assets and liabilities 5
167
3
91
Other operating, net (3 ) (2 ) (6 ) (5 )
Net cash provided by (used in) operating activities 104
140
65
(38 )
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment (20 ) (31 ) (57 ) (86 )
Proceeds from sales of land, buildings and equipment —
—
33
—
Cost of additions to internal use software (11 ) (11 ) (26 ) (31 )
Proceeds (payments) from sale (purchase) of businesses 56
(1 ) 56
(54 )
Proceeds from investments 117
—
117
—
Net payments on related party notes receivable —
43
—
43
Other investing (1 ) (1 ) (1 ) (1 )
Net cash provided by (used in) investing activities 141
(1 ) 122
(129 )
Cash Flows from Financing Activities:
Proceeds on long term debt —
2
306
6
Debt issuance fee payments —
��
(9 ) —
Payments on debt (79 ) (6 ) (232 ) (18 )
Net (payments to) transfer from former parent —
(145 ) (161 ) 190
Employee stock plans (tax) / proceeds, net (3 ) —
(5 ) —
Dividends paid on preferred stock (2 ) —
(7 ) —
Other financing (2 ) —
(3 ) (1 )
Net cash (used in) provided by financing activities (86 ) (149 ) (111 ) 177
Effect of exchange rate changes on cash and cash equivalents —
(2 ) 2
(2 )
Increase (decrease) in cash and cash equivalents 159
(12 ) 78
8
Cash and cash equivalents at beginning of period 309
160
390
140
Cash and Cash Equivalents at End of Period $ 468
$ 148
$ 468
$ 148

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

~~Conduent Form 10-Q~~

CONDUENT INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Basis of Presentation

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

Description of Business

The ~~condensed balance sheet as~~Company is a global enterprise and leading provider of ~~December 31, 2016 has been derived~~business process services with expertise in managing operations involving high volume, repeatable and individualized interactions. The Company's portfolio covers both front office and back office operations; however, the majority of its revenue and differentiation derives from ~~audited financial statements~~engagements where it serves on behalf of its clients to manage end-user interactions across a wide-range of domains. Examples include payments, collections, benefit administration and end-user communication services. The Company creates value for its commercial and government clients through more efficient service delivery combined with a personalized and seamless experience for the end-user. The Company applies its expertise, technology and innovation to continually modernize its offering for improved customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics.

Basis of Presentation

The unaudited interim ~~condensed financial statements~~Condensed Consolidated Financial Statements have been ~~prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in our annual financial statements~~ prepared in accordance with accounting principles generally accepted in the United States of America ~~have been condensed or omitted pursuant~~(U.S. GAAP) on a basis consistent with reporting interim financial information in accordance with instructions to ~~those rules~~Form 10-Q and ~~regulations, although~~Article 10 of Regulation S-X of the ~~Company believes that the disclosures made are adequate to make the information not misleading. You should read these~~Securities and Exchange Commission (SEC). The year-end Condensed Consolidated ~~Financial Statements, and notes thereto, in conjunction with~~Balance Sheet was derived from the audited Consolidated Financial Statements included in ~~our 2016~~the Company's Annual ~~Report.~~Report on Form 10-K for the year ended December 31, 2017. Certain reclassifications have been made to prior year information to conform to current year presentation. Intercompany balances and transactions have been eliminated.

In ~~our~~the opinion of management, all adjustments ~~which are~~ necessary for a fair statement of the financial position, ~~operating~~ results of operations and cash flows ~~for the interim periods presented~~ have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year. ~~For convenience and ease of reference, we refer to~~These financial statements should be read in conjunction with the ~~financial statement caption “Income (Loss) before Income Taxes ” as “pre-tax income (loss)”.~~

~~Separation from Xerox Corporation~~

On December 31, 2016, Conduent Incorporated spun-off from Xerox Corporation (Xerox), 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 now operate as an independent, publicly traded company on the New York Stock Exchange, under the ticker "CNDT".

~~Prior to December 31, 2016, the Financial Statements of the Company were derived from the~~Company’s Consolidated Financial Statements ~~and accounting records~~included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Table of Xerox as if the Company operated on a standalone basis and were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and pursuant to the rules and regulations of the SEC. 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 had reported the financial position and the related results of operations, cash flows and changes in equity of the Company in Xerox’s Consolidated Financial Statements.Contents

Note 2 – Recent Accounting Pronouncements

The Company's significant accounting policies are described in Note 1–Basis of Presentation and Summary of Significant Accounting Policies in the Company’s 2017 Annual Report on Form 10-K. Summarized below are the accounting pronouncements adopted subsequent to December 31, 2017 that were applicable and material to the Company.

New Accounting Standards ~~To Be~~ Adopted

Revenue Recognition: In May 2014, the Financial Accounting Standards Board (FASB) updated the accounting guidance related to revenue recognition, which is also referred to herein as "new revenue standard" to clarify the principles for recognizing revenue and ~~replaces~~replaced all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize revenue when the promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated guidance also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers largely on a disaggregated basis. ~~We continue~~The Company adopted the new revenue standard as of January 1, 2018, using the modified retrospective method. The Company is applying the new revenue standard only to ~~evaluate the adoption impact~~contracts not completed as of the ~~updated accounting guidance on our financial statements, disclosures and internal controls. However, we do expect that~~date of initial application. The adoption has primarily impacted the ~~new guidance could impact~~following: (1) ~~the timing of revenue recognition associated with certain contract modifications; (2)~~ revenue associated with postage recognized on a net basis versus previously being recognized on a gross basis; (2) the ~~current gross treatment,~~timing of revenue recognition associated with fixed fees for certain contracts with more than one performance obligation; and (3) the timing of recognition of certain pricing discounts and credits.

The Company recorded a net increase to opening retained earnings of $17 million as of January 1, 2018, due to the cumulative impact of adopting this new guidance. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented.

The impact of the new revenue standard for the three and six months ended June 30, 2018, was a decrease in Revenue of $32 million and $76 million, respectively, primarily as a result of recognizing postage receipts on a net basis, in the Company’s Condensed Consolidated Statements of Income (Loss). The impact of the new revenue standard, as of and for the periods ended June 30, 2018, on the Company’s pre-tax income, Condensed Consolidated Balance Sheets and Statements of Cash Flows was not material.

Summary of Accounting Policy

Revenue recognition

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 significant judgment. For instance, the Company may contract for an implementation or development project and also provide services to operate the system which the Company implements or develops over a period of time; or the Company may contract to scan, manage and store customer documents. For these contracts, the Company accounts for individual performance obligations separately, if they are distinct. 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 using expected cost plus margin.

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Once the Company determines the performance obligations, the Company estimates the amount of variable consideration, if any, to be included in determining the transaction price. The majority of the Company's contracts consist of fixed consideration, variable consideration or both. Typical forms of variable consideration include variable pricing such as volume discounts, tiered and ~~(4)~~declining pricing, penalties for service level agreements, performance bonuses and credits. The Company includes variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty is resolved. In order to determine the transaction price, the Company estimates the amount of variable consideration at the inception of the contract, either utilizing the expected value or the most likely amount method, depending on the facts and circumstances relative to the contract. The Company estimates variable consideration and performs a constraint analysis for these contracts on the basis of both historical information and current trends.

The Company’s performance obligations are generally transferred to customers over time. Typically, the Company’s contracts include performance obligation(s) to stand-ready on a daily or monthly basis to provide services to the customers. A time-elapsed output method is used to measure progress because the Company transfers control evenly by providing a stand-ready service. In limited circumstances, 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.

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, in accordance with the new revenue standard, 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 terms.

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 are generally accounted for prospectively.

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Disaggregation of Revenue

During the second quarter, the Company changed how it presents the disaggregated revenue by major service line to reflect the core businesses separate from the non-core businesses. This change had no impact on disaggregated revenue by reportable segment or the timing of revenue recognition.

The following table provides information about disaggregated revenue by major service line, 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.



(in millions)	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Commercial Industries:
Omni-channel communications	$	199	$	418
Human resource services	186		373
Industry services	240		490
Non-core	183		381
Total Commercial Industries	808		1,662
Public Sector:
Government services and health	338		670
Transportation services	181		357
Non-core	55		105
Total Public Sector	574		1,132
Other:
Education	5		13
Total Other	5		13
Total Consolidated Revenue	$	1,387	$	2,807

Timing of Revenue Recognition:
Point in time	$	34	$	70
Over time	1,353		2,737
Total Revenue	$	1,387	$	2,807

The Company's contracts with customers are broadly similar in nature throughout the Company's major service lines. The following is a description of the Company's major service lines from which the Company generates revenue.

Omni-Channel Communications: 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.

Human Resource Services: The Company helps its clients support their employees at all stages of employment from initial on-boarding through retirement as well as health savings account (HSA) administration. The Company offers clients a range of customized advisory, technology and administrative services that improve the ability of employees to manage their benefits, professional development and retirement planning. Also, the Company assists its clients with workers' compensation claims management.

Industry Services: The Company leverages technology to assist its clients with transaction processing as well as providing platform solutions. This includes offerings such as finance and accounting, transaction processing, learnings, legal and payment integrity services, among others.

Non-Core Commercial: This represents certain human resource services and customer experience businesses that are considered non-core and therefore are expected to be sold to allow management to increase its focus on the businesses for which we believe we have a competitive advantage. Certain of these businesses are included in Assets/liabilities held for sale.

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Government Services and Health: The Company's services include public assistance program administration such as child support, pension administration, records management, electronic benefits, eligibility and payment cards, unclaimed property, disease management and software offerings in support of federal, state and local government agencies. The Company also provides payment services, which include prepaid cards, child support disbursements and other government support programs, disbursement of electronic payments directly to end users, collections and transfer of payments.

Transportation Services: The Company's services include support for electronic toll collection, public transit, parking and photo enforcement.

Non-Core Public: This represents certain transportation and state and local businesses that are considered non-core and therefore are expected to be sold to allow management to increase its focus on the businesses for which we believe we have a competitive advantage.

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 when the rights 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)	June 30, 2018			January 1, 2018
Contract Assets (Unearned Income)
Current contract assets⁽¹⁾	$	193		$	191
Long-term contract assets⁽²⁾	13			2
Current unearned income	(129		)	(128		)
Long-term unearned income⁽³⁾	(39		)	(46		)
Net Contract Assets (Unearned Income)	$	38		$	19
Accounts receivable, net	$	930		$	908

__________


(1)	Prior to the adoption of the new revenue standard, these amounts were recorded in Accounts receivable, net and represented unbilled amounts.


(2)	Presented in Other long-term assets in the Condensed Consolidated Balance Sheets


(3)	Presented in Other long-term liabilities in the Condensed Consolidated Balance Sheets

Revenues of $98 million and $181 million were recognized during the three and six months ended June 30, 2018, respectively, related to the Company's unearned income at January 1, 2018. The Company had no asset impairment charges related to contract assets for the three and six months ended June 30, 2018.

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 June 30, 2018, was approximately $2.4 billion. The Company expects to recognize approximately 66% of the revenues over the next two years and the remainder thereafter.

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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 $28 million as of June 30, 2018, are included in Other current assets or 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 Selling, general and administrative costs over the term of the contract or the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission. These costs are periodically reviewed for impairment. The Company expenses sales commissions when incurred if the amortization period of the sales commission is one year or less.

Also, the Company capitalizes costs incurred to fulfill its contracts that (i) relate directly to the contract ~~acquisition costs. We~~(ii) are expected to generate resources that will ~~adopt~~be used to satisfy the Company’s performance obligation under the contract and (iii) are expected to be recovered through revenue generated under the contract. The net book value of these costs, which comprise set-up/transition activities, was $58 million as of June 30, 2018, and are classified in Other current assets or Other long-term assets on the Condensed Consolidated Balance Sheets. Contract fulfillment costs are expensed to Cost of services as the Company satisfies its performance obligations by transferring the service to the customer. These costs are amortized on a systematic basis over the expected period of benefit.

The amounts of amortization of cost incurred to obtain and fulfill a contract for the three and six months ended June 30, 2018, were $13 million and $27 million, respectively.

Cash Flows: In November 2016, the FASB issued updated accounting guidance regarding the presentation of restricted cash in the Condensed Consolidated Statements 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 Condensed Consolidated Statements of Cash Flows. The Company adopted this updated accounting guidance ~~beginning~~on January 1, 2018 using the ~~modified~~ retrospective ~~method under which we will recognize~~method. The revision to prior year Condensed Consolidated Statements of Cash Flows from the adoption of this guidance was a ~~cumulative-effect adjustment at~~reclassification in the ~~date~~Condensed Consolidated Statements of ~~adoption supplemented with disclosures.~~Cash Flows of $25 million of restricted cash to cash, cash equivalents and restricted cash.

~~Conduent Form 10-Q~~

New Accounting Standards To Be Adopted

Leases: In February 2016, the FASB updated the accounting guidance related to leases requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except short term leases (lease term of 12 months or less). The accounting for lessors is largely unchanged. This updated guidance is effective for us beginning January 1, ~~2019~~, ~~with early adoption permitted.~~2019. This guidance must be adopted using a modified retrospective approach through a cumulative-effect adjustment for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. While we are currently evaluating the impact on the Company's Consolidated Financial Statements, we do expect a material impact to the Consolidated Balance Sheets.

Credit Losses: In June 2016, the FASB updated the accounting guidance related to measurement of credit losses on financial instruments, which requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. This updated guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact ~~of the updated accounting guidance on our consolidated 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~~Company's Consolidated Financial Statements.

Table of cash flows. At September 30, 2017 and December 31, 2016, we had $25 million and $22 million of restricted cash, respectively, reported in other current assets. This update is effective for us beginning January 1, 2018.Contents

~~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. We are currently evaluating the impact of the adoption of this clarifying accounting guidance on our consolidated financial statements.

~~Accounting Standards Implemented~~

~~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.

Note 3 – Segment Reporting

~~Our~~

The Company's 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~~2018, the Company moved the Health Enterprise business from the Other segment into the Public Sector segment. In addition, the Company moved the historical results of the divested businesses to ~~better reflect how we manage our business, we changed our reporting segments to align~~ the ~~Healthcare business based upon customer focus between~~Other segment from both the Commercial Industries and the Public ~~Sector.~~Sector segments. The prior periods presented have been revised to reflect these changes.

Our financial performance is based on ~~"Segment~~Segment Profit / (Loss)~~" which is defined as income before amortization of intangibles, restructuring~~ and ~~related costs, interest, gain on sale of an asset, separation costs, other (income) expense, net and income taxes~~Segment Adjusted EBITDA for the following ~~three~~two segments:

Commercial Industries

Public Sector

~~Other~~

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 deliver end-to-end business-to-business and business-to-customer services that enable our clients to optimize their key processes. Our multi-industry competencies include ~~customer care,~~omni-channel communications, human resource management and finance and accounting services.

Public Sector: Our Public Sector 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, Medicaid platform and payment services.

~~Other:~~

Other segment includes ~~our Government Health Enterprise Medicaid Platform business, where we are limiting our focus to our current Health Enterprise clients~~businesses divested in 2017 and our Student Loan business, which is in run-off mode. The Company expects to exit the Student Loan business in the third quarter of 2018. In the third quarter of 2018 and beyond, any remaining costs for Student Loans will be reflected in Other ~~also includes non-allocated corporate~~(income) expenses, ~~as well as inter-segment eliminations.~~

net.

~~Conduent Form 10-Q~~

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Selected financial information for our reportable segments is as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions)
Segment
Revenue
Segment Profit (Loss)
Segment
Revenue
Segment Profit (Loss)
2017
Commercial Industries $ 864
$ 53
$ 2,663
$ 114
Public Sector 540
59
1,629
179
Other 76
1
237
(7 )
Total $ 1,480
$ 113
$ 4,529
$ 286
2016
Commercial Industries $ 923
$ 42
$ 2,869
$ 103
Public Sector 584
78
1,734
217
Other 89
(23 ) 291
(75 )
Total $ 1,596
$ 97
$ 4,894
$ 245



	Three Months Ended June 30,
(in millions)	Commercial Industries		Public Sector		Other			Total
2018
Revenue	$	808	$	574	$	5		$	1,387
Segment profit (loss)	$	47	$	68	$	(5	)	$	110
Segment depreciation and amortization	$	33	$	24	$	—		$	57
Adjusted EBITDA⁽¹⁾	$	80	$	91	$	(5	)	$	166

2017
Revenue	$	856	$	598	$	42		$	1,496
Segment profit (loss)	$	33	$	52	$	2		$	87
Segment depreciation and amortization	$	38	$	29	$	2		$	69
Adjusted EBITDA⁽²⁾	$	71	$	82	$	4		$	157

(in millions) Three Months Ended
September 30, Nine Months Ended
September 30,
Reconciliation to Pre-tax Income (Loss) 2017 2016 2017 2016
Segment Profit $ 113
$ 97
$ 286
$ 245
Reconciling items:
Amortization of intangible assets (60 ) (63 ) (182 ) (200 )
Restructuring and related costs (22 ) (8 ) (76 ) (57 )
Interest Expense (35 ) (1 ) (105 ) (3 )
(Gains) loss on sale of asset and businesses 16
—
41
(1 )
Related party interest —
(10 ) —
(30 )
Separation costs⁽¹⁾
(2 ) (15 ) (8 ) (34 )
Other income (expense), net 3
2
24
(6 )
Pre-tax Income (Loss) $ 13
$ 2
$ (20 ) $ (86 )



	Six Months Ended June 30,
(in millions)	Commercial Industries		Public Sector		Other			Total
2018
Revenue	$	1,662	$	1,132	$	13		$	2,807
Segment profit (loss)	$	91	$	133	$	(9	)	$	215
Segment depreciation and amortization	$	67	$	46	$	—		$	113
Adjusted EBITDA⁽¹⁾	$	158	$	178	$	(9	)	$	327

2017
Revenue	$	1,751	$	1,207	$	91		$	3,049
Segment profit (loss)	$	59	$	109	$	5		$	173
Segment depreciation and amortization	$	74	$	56	$	3		$	133
Adjusted EBITDA⁽²⁾	$	133	$	169	$	8		$	310

~~__________________________~~__________


(1)	~~Separation costs are expenses incurred in connection with~~2018 Adjusted EBITDA for Public Sector does not include $1 million of NY MMIS settlement for the ~~separation into an independent, publicly-traded company. These costs are primarily~~three and six months, respectively.

(2)

2017 Adjusted EBITDA for ~~third-party investment banking, accounting, legal, consulting~~Public Sector does not include $1 million and ~~other similar types~~$4 million of ~~services related to~~net NY MMIS and HE charge for 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~~three and ~~information management to the extent not capitalized.~~six months, respectively.

~~Goodwill~~

~~Due to the first quarter 2017 change in segments, we were required to test Goodwill for impairment. As a result~~

Table of the impairment test, the fair value of both the Commercial Industries and Public Sector reporting units exceeded their carrying values. To the extent the assumptions underlying the goodwill impairment test change, there could be additional impairments in the future.Contents

~~No interim goodwill impairment trigger was identified as there was no significant change in the assumptions underlying the impairment test, including profitability in each of the reporting units.~~



(in millions)	Three Months Ended June 30,						Six Months Ended June 30,
Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss)	2018			2017			2018			2017
Income (Loss) Before Income Taxes	$	54		$	(11	)	$	—		$	(33	)
Reconciling items:
Restructuring and related costs	17			36			37			54
Amortization of acquired intangible assets	60			61			121			122
Separation costs	—			1			—			6
Interest expense	37			34			70			70
(Gain) loss on divestitures and transaction costs	(60		)	(25		)	(45		)	(25		)
Litigation costs (recoveries), net	4			(9		)	35			(20		)
Other (income) expenses, net	(2		)	—			(3		)	(1		)
Segment Pre-tax Income (Loss)	$	110		$	87		$	215		$	173
Segment depreciation and amortization	$	57		$	69		$	113		$	133
NY MMIS	(1		)	1			(1		)	9
HE charge	—			—			—			(5		)
Adjusted EBITDA	$	166		$	157		$	327		$	310

Note 4 – ~~Accounts Receivable, Net~~Assets/Liabilities Held for Sale

~~Accounts receivable, net was~~

As of June 30, 2018 and December 31, 2017, there were certain businesses that qualified as ~~follows:~~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 the Company 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) September 30, 2017 December 31, 2016
Amounts billed or billable $ 1,115
$ 1,014
Unbilled amounts 267
279
Allowance for doubtful accounts (2 ) (7 )
Accounts Receivable, Net $ 1,380
$ 1,286



(in millions)	June 30, 2018		December 31, 2017
Accounts Receivable, net	$	89	$	160
Other current assets	12		41
Contract assets	4		—
Land, building and equipment, net	4		6
Product Software, net	5		3
Intangible assets, net	6		7
Goodwill	186		537
Other long-term assets	10		3
Total Assets held for sale	$	316	$	757

Accounts payable	$	3	$	9
Accrued compensation	16		20
Unearned revenue	25		30
Other current liabilities	21		53
Pension and other benefit obligations	49		50
Other long-term liabilities	5		7
Total Liabilities held for sale	$	119	$	169

~~Conduent Form 10-Q~~In June 2018, the Company completed the sale of its Commercial Vehicle Operations business to Alinda Capital Partners. The aggregate proceeds from this divestiture was $400 million in cash and the transaction generated a pre-tax gain of $74 million. The revenue generated from this business was $33 million for the six months ended June 30, 2018 and $66 million for the year ended December 31, 2017.

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Unbilled amounts include amounts associated with percentage-of-completion accounting and other earned revenues not currently billable due to contractual provisions. Amounts to be invoiced in the subsequent months for current services provided are included in amounts billable, and at September 30, 2017 and December 31, 2016 were approximately $418 million and $429 million, respectively.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivables is determined principally on the basis of past collection experience, as well as consideration of current economic conditions and changes in our customer collection trends.

In the first quarter 2017 we settled a customer dispute over an aged accounts receivable balance for $19 million. We applied $5 million of the proceeds to net accounts receivable and a $14 million gain was recorded as follows:

~~$7 million to discontinued operations as a portion of the receivable was related to a business that was part of our Information Technology Outsourcing (ITO) discontinued operation; and~~

$7 million to continuing operations as the remainder of the receivable was related to our continuing Healthcare Provider business; the majority of the $7 million is reflected in legal settlements in Other (income) expense, net.

Note 5 – Restructuring Programs and Related Costs

~~During the nine months ended September 30, 2017, we recorded net~~

The Company engages in a series of restructuring ~~and asset impairment charges of $68 million, which included approximately $38 million of severance costs~~programs related to ~~headcount reductions of approximately 3,200 employees worldwide, $33 million of lease cancellation costs~~downsizing its employee base, exiting certain activities, outsourcing certain internal functions and ~~$4 million of asset impairments. These costs were offset by $7 million of net reversals, primarily resulting from changes~~engaging in ~~estimated reserves from prior period initiatives.~~other actions designed to reduce its cost structure and improve productivity. The ~~restructuring reserve balance as of September 30, 2017, for all programs was $40 million, of which approximately $28 million is expected to be spent over the next twelve months.~~

~~We also recorded $8 million of costs during the nine months ended September 30, 2017, primarily related to professional support services associated with the~~ implementation of the Company's strategic transformation ~~program.~~program and various productivity initiatives have reduced the Company's real estate footprint across all geographies and segments resulting in increased lease cancellation and other related costs. Management continues to evaluate the Company's business; therefore, in future years, there may be additional provisions for new plan initiatives, as well as changes in previously recorded estimates, as payments are made or actions are completed.

~~Information related~~

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.

A summary of the Company's restructuring program activity during the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017 ~~is outlined below:~~was as follows:

(in millions)
Severance and
Related Costs

Lease Cancellation
and Other Costs
Asset Impairments Total
Accrued Balance at December 31, 2016 $ 15
$ 5
$ 1
$ 21
Restructuring provision 38
33
4
75
Reversals of prior accruals (5 ) (2 ) —
(7 )
Net Current Period Charges 33
31
4
68
Payments and asset impairments (34 ) (9 ) (6 ) (49 )
Accrued Balance at September 30, 2017 $ 14
$ 27
$ (1 ) $ 40



(in millions)	Severance and Related Costs			Lease Cancellation and Other Costs			Total
Accrued Balance at December 31, 2017	$	14		$	30		$	44
Restructuring provision	21			17			38
Adjustments to prior accruals	(2		)	—			(2		)
Total Net Current Period Charges	19			17			36
Payments against reserve and currency	(19		)	(16		)	(35		)
Liabilities held for sale	—			3			3
Accrued Balance at June 30, 2018	$	14		$	34		$	48



(in millions)	Severance and Related Costs			Lease Cancellation and Other Costs			Total
Accrued Balance at December 31, 2016	$	15		$	6		$	21
Restructuring provision	28			17			45
Adjustments to prior accruals	1			—			1
Total Net Current Period Charges	29			17			46
Payments against reserve and currency	(19		)	(6		)	(25		)
Accrued Balance at June 30, 2017	$	25		$	17		$	42

In addition, the Company recorded professional support costs associated with the strategic transformation program in Restructuring and related costs of $1 million and $8 million for the six months ended June 30, 2018 and 2017, respectively.

The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2017		2016		2017		2016		2018		2017		2018		2017
Commercial Industries	$	13	$	—	$	44	$	36	$	12	$	22	$	27	$	31
Public Sector	7		—		21		5		5		11		8		14
Other	2		—		3		4		—		1		1		1
Total Net Restructuring and Asset Impairment Charges	$	22	$	—	$	68	$	45
Total Net Restructuring Charges									$	17	$	34	$	36	$	46

~~Conduent Form 10-Q~~

Table of Contents

Note 6 -– Debt

~~Long term~~Long-term debt was as follows:

(in millions) September 30, 2017 December 31, 2016
Term loan A due 2021⁽¹⁾
$ 727
$ 694
Term loan B due 2023 844
750
Senior notes due 2024 510
510
Capital lease obligations 39
43
Principal Debt Balance $ 2,120
$ 1,997
Debt issuance costs and unamortized discounts (58 ) (56 )
Less: current maturities (71 ) (28 )
Total Long-term Debt $ 1,991
$ 1,913

~~_______~~


~~(1)~~	~~The aggregate principal debt for Term Loan A includes borrowings in both U.S Dollars and Euros.~~



(in millions)	June 30, 2018			December 31, 2017
Term loan A due 2022	$	709		$	732
Term loan B due 2023	837			842
Senior notes due 2024	510			510
Capital lease obligations	36			33
Principal debt balance	2,092			2,117
Debt issuance costs and unamortized discounts	(48		)	(56		)
Less: current maturities	(43		)	(82		)
Total Long-term Debt	$	2,001		$	1,979

~~Term Loan B~~Loans Repricing

On ~~April 7, 2017, we~~June 28, 2018, the Company entered into Amendment No. ~~1 (Repricing Amendment)~~3 (Amendment) to the December 7, 2016 Credit Agreement, ~~dated~~which (i) extended the revolving credit maturity from December 7, ~~2016. As a result~~2021 to December 7, 2022 and reduced the interest rate on the revolving credit by 0.5% from 2.25% over LIBOR to 1.75% over LIBOR; (ii) extended the maturity date of the ~~Repricing Amendment, we were required~~Term A Loans from December 7, 2021 to ~~pay~~December 7, 2022 and reduced the interest rate by 0.5% from 2.25% over LIBOR to 1.75% over LIBOR, and (iii) reduced the interest rate on the Term B ~~Lenders a 1% principal prepayment fee on approximately $848 million principal balance in the amount of approximately $8 million, and the Term B Loan interest rate was reduced~~Loans by ~~1.5%,~~0.5% from ~~5.5%~~3.0% over LIBOR to ~~4.0%~~2.5% over LIBOR. ~~Transaction fees~~These transactions resulted in a write-off of ~~$1 million were expensed.~~unamortized discount and issuance costs of $3 million.

Note 7 – Financial Instruments

~~We are~~The Company is a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of ~~our~~its business. As a part of ~~our~~the Company's foreign exchange risk management strategy, ~~we use~~the Company uses derivative instruments, primarily forward contracts, to hedge the funding of foreign entities which have a non-dollar functional currency, thereby reducing volatility of earnings or protecting fair values of assets and liabilities.

At ~~September~~June 30, 2018 and December 31, 2017, wethe Company had outstanding forward exchange contracts with gross notional values of approximately $136 million and $160 million, ~~which is typical of the amounts that are normally outstanding at any point during the year.~~respectively. Approximately ~~68%~~60% of these contracts mature within three months, ~~12%~~15% in three to six months, ~~15%~~19% in six to 12twelve months and 5%6% in greater than 12twelve months. The majority of these foreign currency derivative contracts are designated as cash flow hedges and did not have a material impact on ~~our~~the Company's balance sheet, income statement or cash flows for the periods presented.

~~Conduent Form 10-Q~~

Note 8 – Fair Value of Financial Assets and Liabilities

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

Level 1: Fair value is determined using an unadjusted quoted price in an active market for identical assets or liabilities.

Level 2: Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.

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

Table of Contents

The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level ~~1 for cash and cash equivalents, restricted cash and accounts receivable,net and Level 2 – Significant Other Observable Inputs for all other instruments.~~2.

(in millions) September 30, 2017 December 31, 2016
Assets:
Cash and cash equivalents $ 468
$ 390
Restricted cash 25
22
Accounts receivable, net 1,380
1,286
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 $ 1,875
$ 1,808
Liabilities:
Foreign exchange contracts - forwards $ 1
$ 3
Deferred compensation plan liabilities 116
113
Total $ 117
$ 116



(in millions)	June 30, 2018		December 31, 2017
Assets:
Foreign exchange contract - forward	$	—	$	2
Total Assets	$	—	$	2
Liabilities:
Foreign exchange contracts - forwards	$	3	$	1
Deferred compensation plan liabilities⁽¹⁾	90		99
Total Liabilities	$	93	$	100

~~_______~~___________

(1)

In September 2017, the Company terminated the legacy deferred compensation plans ~~(“Plans”)~~(Plans) and the Company Owned Life Insurance (COLI), which held the Plans’ investments. As a result, the Company sold the Plans’ investments and has approximately $141 million of cash, of which $25 million is overfunded. The only impact to the income statement is a $19 million tax expense that resulted from the fair market value of the sold investments exceeding the Plans’ tax basis. The Company will make payments to Plan participants during the remainder of ~~approximately $15 million and $101 million in the fourth quarters of 2017 and 2018, respectively.~~2018.

We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices.

Summary of Other Financial Assets and Liabilities Accounted at Fair Value on a Nonrecurring Basis

The estimated fair values of our other financial assets and liabilities not measured at fair value on a recurring basis were as follows:


	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
(in millions)	Carrying Amount	Fair Value	Carrying Amount	Fair Value	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Short-term debt	71	71	28	28
Long-term debt	1,991	2,085	1,913	1,933	2,001	2,100	1,979	2,070

The fair value amounts for Cash and cash equivalents, ~~and~~Restricted cash, Accounts receivable, net and Short-term debt approximate carrying amounts due to the ~~short~~short-term maturities of these instruments. The fair value of ~~Short and~~ Long-term debt was estimated based on the current rates offered to usthe Company for debt of similar maturities (Level 2).

Note 9 – Employee Benefit Plans

The Company recognized an expense related to ~~our~~its defined contribution plans of $8$7 million and ~~$10~~$9 million for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$27~~$16 million and ~~$28~~$19 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

Note 10 ~~- Other Comprehensive Income (Loss)~~

Other comprehensive income for the three and nine months ended September 30 2017, increased $16 million ($17 million net of tax) and $57 million ($58 million net of tax), respectively, from the prior year periods. The increase primarily reflects gains from translation adjustments.

~~Conduent Form 10-Q~~

– Accumulated Other Comprehensive Loss (AOCL)

AOCL is comprised of the following:


(in millions)	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Cumulative translation adjustments	$	(438	)	$	(472	)
Cumulative currency translation adjustments							$	(455	)	$	(437	)
Other unrealized gains (losses), net	1			(1		)	(2		)	1
Benefit plans net actuarial losses and prior service credits	(53		)	(53		)	(55		)	(58		)
Total Accumulated Other Comprehensive Loss	$	(490	)	$	(526	)	$	(512	)	$	(494	)

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Note 11 – Contingencies and Litigation

As more fully discussed below, ~~we are~~the Company is 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; commercial and contracts law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. ~~We determine~~The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. ~~We assess our~~The Company assesses its potential liability by analyzing ~~our~~its litigation and regulatory matters using available information. ~~We develop our views~~The Company develops its view on estimated losses in consultation with outside counsel handling ~~our~~its defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in ~~our~~the Company's determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, ~~they~~in excess of any accrual for such matter or matters, this could have a material adverse effect on ~~our~~the Company's results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. The Company believes it has recorded adequate provisions for any such matters ~~and,~~ as of ~~September~~June 30, ~~2017,~~2018. Litigation is inherently unpredictable, and it ~~was~~is not ~~reasonably~~ possible ~~that a material loss had been incurred~~to predict the ultimate outcome of these matters and such outcome in ~~connection with~~any such matters could be in excess of any amounts accrued and could be material to the ~~amounts recognized~~Company's results of operations, cash flows or financial position in ~~its financial statements.~~any reporting period.

Additionally, guarantees, indemnifications and claims arise during the ordinary course of business from relationships with suppliers, customers and ~~nonconsolidated~~non-consolidated affiliates when ~~we undertake~~the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, real estate, intellectual property such as patents, environmental matters and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the 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 condensed consolidated financial position or liquidity. As of ~~September~~June 30, ~~2017, we have~~2018, the Company had accrued ~~our~~its estimate of liability incurred under ~~our~~its indemnification arrangements and guarantees.

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, ~~and~~f/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 alleges that Xerox Corporation, Xerox State Healthcare, LLC and ACS State Healthcare (collectively, the "Xerox Defendants") violated the Texas Medicaid Fraud Prevention Act in the administration of its contract with the Texas Department of Health and Human Services (“HHSC”). The State alleges that the Xerox Defendants made false representations of material facts regarding the processes, procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks recovery of ~~actual damages, two~~amounts paid for orthodontic treatment under the Texas Medicaid program for the period from approximately 2004 to 2012, three times the amount of ~~any overpayments~~the payments made as a result of the alleged unlawful acts, civil penalties, pre- and post-judgment interest and all costs and attorneys’ fees. The ~~State references the amount in controversy as exceeding hundreds of millions of dollars. The~~ Xerox Defendants filed their Answer in June, 2014 denying all allegations. A trial date is schedule for November, 2018. During the first quarter of 2018, the State notified the Xerox Defendants in the litigation discovery process that its claim 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. During the second quarter of 2018, the trial date was rescheduled for May, 2019. We doare not ~~believe it is probable that we will incur a material~~able to determine or predict the ultimate outcome of this proceeding or to estimate any reasonably possible loss or range of losses, if any, in excess of the ~~amount accrued for this matter.~~thirty-eight million dollars the Company has already accrued. In the course of litigation, wethe Company periodically ~~engage~~engages in discussions with ~~plaintiff’s~~the State's counsel for possible resolution of the matter. Should developments cause a change in ~~our~~the Company's determination as to an unfavorable outcome, or result in a final adverse judgment or settlement for a significant amount, there could be a material adverse effect on ~~our~~the Company's results of operations, cash flows and financial position in the period in which such change in determination, judgment or settlement occurs.

~~Conduent Form 10-Q~~

Table of Contents

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”), 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. This case has been stayed pending the outcome of parallel litigation the plaintiffs are pursuing against StanCERA. Buck will continue to aggressively defend these lawsuits. 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.

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”). In the lawsuit, Conduent seeks damages in excess of one hundred fifty million dollars. During the first quarter of 2018, Conduent provided notice to Cognizant that it was terminating the Contract for cause and recorded in the same period certain charges associated with the termination. Cognizant has asserted counterclaims against Conduent in the lawsuit seeking damages in excess of twenty-two million dollars. Conduent has responded to Cognizant’s counterclaims by denying the allegations. Conduent will continue to vigorously defend itself against the counterclaims but the Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome.

Table of Contents

Other Matters

On January 5, 2016, the Consumer Financial Protection Bureau (the "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~~XES submitted its response to the NORA. The CFPB’s NORA stems from an inquiry that commenced in 2014 when XES received and responded to a CFPB Civil Investigative Demand containing a broad request for information. During this process, XES self-disclosed to the U.S. Department of Education (the "Department") 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 of third-party student loans under outsourcing arrangements for various financial institutions. The CFPB, ~~and~~ the U.S. Department of Education, ~~as well as certain states' attorney general offices~~the U.S. Department of Justice, the New York Office of the Attorney General, the New York Department of Financial Services and ~~other regulatory agencies,~~the Massachusetts Office of the Attorney General began similar reviews. XES has cooperated and continues to fully cooperate with all regulatory agencies and resolved the Massachusetts Office of the Attorney General investigation in November 2016. Both as a result of these inquiries, its own reviews of operations and work performed by external auditors, XES has ~~submitted~~identified certain other operational issues requiring remediation, and this remediation work has commenced. XES continues to review its ~~NORA response. We~~operations to determine whether any additional remediation work is necessary. XES disclosed these additional operational projects to the Department at the end of the second quarter of 2018 and is working with the Department to develop plans to complete these projects while XES exits the business. The Company cannot provide assurance that the CFPB or another regulator or party will not ultimately commence a legal action against XES in ~~this matter~~which fines, penalties or other liabilities are sought from XES, nor ~~are we~~is the Company able to predict the likely outcome of ~~the investigations into this matter. We~~these investigations. The Company could in future periods incur judgments or enter into settlements to resolve these investigations for amounts in ~~connection with this matter~~excess of current reserves and there could be a material adverse effect on ~~our~~the Company's results of operations, cash flows and financial position in the period in which such change in judgment or settlement occurs.

Other Contingencies

Certain contracts, primarily in ~~our~~the Company's Public Sector segment, require usthe Company to provide a surety bond or a letter of credit as a guarantee of performance. As of ~~September~~June 30, ~~2017, we~~2018, the Company had ~~$570~~$635 million of outstanding surety bonds used to secure ~~our~~its performance of contractual obligations with ~~our~~its clients and ~~we had $238~~$339 million of outstanding letters of credit ~~and bank guarantees used~~issued to secure ~~our~~the Company's performance of contractual obligations to ~~our~~its 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 ~~our~~the Company's performance of ~~our~~its obligations under each ~~contract; the probability of which we believe is remote. We believe we have~~contract. The Company believes it has sufficient capacity in the surety markets and liquidity from ~~our~~its cash flow and ~~our~~its various credit arrangements ~~including those with our former parent,~~(including its Credit Facility) to allow usit to respond to future requests for proposals that require such credit support.

~~Conduent Form 10-Q~~

~~We have~~The Company has service arrangements where ~~we service~~the Company services 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 ~~September 30, 2017, we~~July 31 2018, the Company serviced a FFEL portfolio of approximately ~~0.8 million loans with an outstanding principal balance of approximately $12.8 billion.~~14,500 loans. Some servicing agreements contain provisions that, under certain circumstances, require usthe Company 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~~the Company's servicing error. If defaults caused by usthe Company are cured during an initial period, any obligation wethe Company may have to purchase these loans expires. Loans that ~~we purchase~~the Company purchases may be subsequently cured, the guaranty reinstated and the loans repackaged for sale to third parties. ~~We evaluate our~~The Company evaluates its exposure under ~~our~~its purchase obligations on defaulted loans and ~~establish~~establishes a reserve for potential ~~losses, or default liability reserve, through a charge to the provision for loss on defaulted loans purchased.~~losses. The reserve is evaluated periodically and adjusted based upon management’s analysis of the historical performance of the defaulted loans. As of ~~September~~June 30, ~~2017, other~~2018, Other current liabilities ~~include~~included reserves of approximately $1$0.3 million, ~~for losses on defaulted loans purchased~~ which ~~we believe~~the Company believes 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.

Note 12 -– Preferred Stock

Series A Preferred Stock

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

Note 13 – Shareholders’ Equity

(in millions)
Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

AOCL⁽¹⁾
Former Parent Company Investment
Conduent Shareholders'
Equity
Balance at December 31, 2016 $ 2
$ 3,812
$ —
$ (526 ) $ —
$ 3,288
Comprehensive (loss) income, net —
—
(27 ) 36
—
9
Cash dividends paid - preferred stock⁽²⁾
—
—
(7 ) —
—
(7 )
Stock option and incentive plans, net —
22
—
—
—
22
Balance at September 30, 2017 $ 2
$ 3,834
$ (34 ) $ (490 ) $ —
$ 3,312

(in millions)
Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

AOCL⁽¹⁾
Former Parent Company Investment
Conduent Shareholders'
Equity
Balance at December 31, 2015 $ —
$ —
$ —
$ (181 ) $ 5,343
$ 5,162
Comprehensive loss, net —
—
—
(22 ) (32 ) (54 )
Net transfers from former parent —
—
—
—
382
382
Balance at September 30, 2016 $ —
$ —
$ —
$ (203 ) $ 5,693
$ 5,490

~~_____________________________~~


~~(1)~~	~~AOCL - Accumulated other comprehensive loss.~~


~~(2)~~	~~Cash dividends on preferred stock of~~ ~~$20.00~~ ~~per share for the first, second and third quarters of 2017.~~



(in millions)	Common Stock		Additional Paid-in Capital		Retained Earnings			AOCL			Conduent Shareholders' Equity
Balance at December 31, 2017	$	2	$	3,850	$	171		$	(494	)	$	3,529
Comprehensive income (loss), net	—		—		(39		)	(18		)	(57		)
Cash dividends paid - preferred stock	—		—		(5		)	—			(5		)
Cumulative impact of adopting the new revenue standard	—		—		17			—			17
Stock option and incentive plans, net	—		15		—			—			15
Balance at June 30, 2018	$	2	$	3,865	$	144		$	(512	)	$	3,499

~~Conduent Form 10-Q~~



(in millions)	Common Stock		Additional Paid-in Capital		Retained Earnings			AOCL			Conduent Shareholders' Equity
Balance at December 31, 2016	$	2	$	3,812	$	—		$	(526	)	$	3,288
Comprehensive income (loss), net	—		—		(10		)	28			18
Cash dividends paid - preferred stock	—		—		(5		)	—			(5		)
Stock option and incentive plans, net	—		16		—			—			16
Balance at June 30, 2017	$	2	$	3,828	$	(15	)	$	(498	)	$	3,317

Table of Contents

Note 14 – Earnings per Share

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

The following table sets forth the computation of basic and diluted earnings per share of common ~~stock (shares in thousands):~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions, except per-share data) 2017 2016 2017 2016
Basic Earnings (Loss) per Share:
Net (loss) income from continuing operations $ (17 ) $ 1
$ (31 ) $ (32 )
Accrued dividends on preferred stock (2 ) —
(7 ) —
Adjusted Net (Loss) Income From Continuing Operations Available to Common Shareholders (19 ) 1
(38 ) (32 )
Income from discontinued operations, net of tax —
—
4
—
Adjusted Net (Loss) Income Available to Common Shareholders $ (19 ) $ 1
$ (34 ) $ (32 )
Weighted average common shares outstanding 204,356
202,875
203,838
202,875

Basic Earnings (Loss) per Share:
Continuing operations $ (0.09 ) $ 0.01
$ (0.19 ) $ (0.16 )
Discontinued operations —
—
0.02
—
Basic (Loss) Income per Share $ (0.09 ) $ 0.01
$ (0.17 ) $ (0.16 )

Diluted Earnings (Loss) per Share:
Net (loss) income from continuing operations $ (17 ) $ 1
$ (31 ) $ (32 )
Accrued dividends on preferred stock (2 ) —
(7 ) —
Adjusted Net (Loss) Income from Continuing Operations Available to Common Shareholders (19 ) 1
(38 ) (32 )
Net income from discontinued operations —
—
4
—
Adjusted Net (Loss) Income Available to Common Shareholders $ (19 ) $ 1
$ (34 ) $ (32 )
Weighted average common shares outstanding⁽¹⁾
204,356
202,875
203,838
202,875

Diluted Earnings (Loss) per Share:
Continuing operations $ (0.09 ) $ 0.01
$ (0.19 ) $ (0.16 )
Discontinued operations —
—
0.02
—
Diluted (Loss) Income per Share: $ (0.09 ) $ 0.01
$ (0.17 ) $ (0.16 )

(1) With the exception of the third quarter 2016, the computation of weighted average shares is the same for basic and diluted earnings per share due to the net loss from continuing operations. For third quarter 2016, there were no Conduent options outstanding.

~~Note 15 – Related Party Transaction~~

~~In January 2017, in connection with the Separation and Distribution Agreement, we paid Xerox $161 million for final settlement.~~

The Condensed Consolidated Statements of Income (Loss), Condensed Consolidated Statements of Comprehensive Loss and Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2016 included an allocation of general corporate expenses from Xerox, the Company's former parent. Management considered these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided, by Xerox. Allocations for management costs and corporate support services provided totaled $41 million and $125 million for the three and nine months ended September 30, 2016, respectively. These amounts included 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 or other measures we have determined as reasonable.

stock:

~~Conduent Form 10-Q~~



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions, except per share data. Shares in thousands)	2018			2017			2018			2017
Basic Earnings (Loss) per Share:
Net income (loss) from continuing operations	$	11		$	(4	)	$	(39	)	$	(14	)
Accrued dividends on preferred stock	(3		)	(3		)	(5		)	(5		)
Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders	8			(7		)	(44		)	(19		)
Net income (loss) from discontinued operations	—			—			—			4
Adjusted Net Income (Loss) Available to Common Shareholders	$	8		$	(7	)	$	(44	)	$	(15	)
Weighted average common shares outstanding	205,296			203,673			205,184			203,522

Basic Earnings (Loss) per Share:
Continuing operations	$	0.05		$	(0.03	)	$	(0.21	)	$	(0.09	)
Discontinued operations	—			—			—			0.02
Basic Earnings (Loss) per Share	$	0.05		$	(0.03	)	$	(0.21	)	$	(0.07	)

Diluted Earnings (Loss) per Share:
Net income (loss) from continuing operations	$	11		$	(4	)	$	(39	)	$	(14	)
Accrued dividends on preferred stock	(3		)	(3		)	(5		)	(5		)
Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders	8			(7		)	(44		)	(19		)
Net income (loss) from discontinued operations	—			—			—			4
Adjusted Net Income (Loss) Available to Common Shareholders	$	8		$	(7	)	$	(44	)	$	(15	)
Weighted average common shares outstanding	205,296			203,673			205,184			203,522
Common shares issuable with respect to:
Stock options	146			—			—			—
Restricted stock and performance units / shares	3,447			—			—			—
Adjusted Weighted Average Common Shares Outstanding	208,889			203,673			205,184			203,522
Diluted Earnings (Loss) per Share:
Continuing operations	$	0.04		$	(0.03	)	$	(0.21	)	$	(0.09	)
Discontinued operations	—			—			—			0.02
Diluted Earnings (Loss) per Share	$	0.04		$	(0.03	)	$	(0.21	)	$	(0.07	)

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	—			628			295			628
Restricted stock and performance shares/units	201			8,538			6,329			8,538
Convertible preferred stock	5,393			5,393			5,393			5,393
Total Anti-Dilutive Securities	5,594			14,559			12,017			14,559

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Note 1615 – Subsequent ~~Event~~Events

~~On October 10, 2017, we~~

In August 2018, the Company announced that it has entered into ~~Amendment No. 2 (Repricing Amendment)~~an agreement (subject to regulatory approval) to sell its local and municipal constituent government software solutions business to Avenu Insights & Analytics. The revenue generated from this business was $55 million for the ~~Credit Agreement, dated~~six months ended June 30, 2018 and $113 million for the year ended December ~~7, 2016, as amended by Amendment No. 1 dated April 7,~~31, 2017. ~~This Repricing Amendment~~

In July 2018, the Company completed the sale of ~~Term B Loan reduced~~its off-street parking business, including the ~~interest rate 1.0%~~Multipark System in France and the United Kingdom (U.K.), along with its U.S. Airport Parking business to Andera Partners. The proceeds from ~~4.0% over LIBOR to 3.0% over LIBOR.~~this divestiture was $24 million in cash. The revenue generated from this business was $18 million for the six months ended June 30, 2018 and $42 million for the year ended December 31, 2017.

In July 2018, the Company redeemed $476 million of its outstanding $510 million 10.5% Senior Notes due 2024. As part of the redemption, the Company paid a premium of $95 million and will write off the associated unamortized discount and issuance costs of $13 million.

~~Conduent Form 10-Q~~

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ITEM 2 — 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 and its consolidated subsidiaries. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying ~~notes.~~Notes.

~~Separation from Xerox Corporation~~Overview

~~On December 31, 2016, Conduent Incorporated completed its spin-off from Xerox Corporation. As~~

We are a ~~result~~leading provider of digital business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the ~~spin-off,~~front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experience. Our strategy is to drive portfolio focus, operational discipline sales and delivery excellence and innovation, complemented by tightly aligned investments. Headquartered in Florham Park, New Jersey, we ~~now operate~~have a team of approximately 84,000 people as ~~an independent, publicly traded company on the New York Stock Exchange, under the ticker "CNDT". Refer to Note 1 - Basis~~ of ~~Presentation,~~June 30, 2018, who serves customers in ~~the Condensed Consolidated Financial Statements for additional information regarding the separation.~~

~~Currency Impact~~

To understand the trends in our business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as “currency impact” or “the impact from currency” or "constant currency" and is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate.26 countries.

Financial Review of Operations


	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended June 30,						2018 vs. 2017
(in millions)	2017			2016			$ Change			2017			2016			$ Change
Total Revenues	$	1,480		$	1,596		(116		)	$	4,529		$	4,894		(365		)
Total Cost of services	1,219			1,328			(109		)	3,766			4,107			(341		)
($ in millions)																			2018			2017			$ Change			% Change
Revenue																			$	1,387		$	1,496		$	(109	)	(7	)%
Cost of Services																			1,125			1,253			(128		)	(10	)%
Gross Margin	261			268			(7		)	763			787			(24		)	262			243			19			8	%

Operating Costs and Expenses
Research and development	4			7			(3		)	11			25			(14		)	3			3			—			—	%
Selling, general and administrative	144			164			(20		)	466			517			(51		)	149			153			(4		)	(3	)%
Restructuring and related costs	22			8			14			76			57			19			17			36			(19		)	(53	)%
Amortization of intangible assets	60			63			(3		)	182			200			(18		)
Amortization of acquired intangible assets																			60			61			(1		)	(2	)%
Separation costs																			—			1			(1		)	(100	)%
Interest expense	35			1			34			105			3			102			37			34			3			9	%
Related party interest	—			10			(10		)	—			30			(30		)
Separation costs	2			15			(13		)	8			34			(26		)
(Gain) loss on sale of asset and businesses	(16		)	—			(16		)	(41		)	1			(42		)
(Gain) loss on divestitures and transaction costs																			(60		)	(25		)	(35		)	140	%
Litigation costs (recoveries), net																			4			(9		)	13			(144	)%
Other (income) expenses, net	(3		)	(2		)	(1		)	(24		)	6			(30		)	(2		)	—			(2		)
Total Operating Costs and Expenses	$	248		$	266		(18		)	$	783		$	873		(90		)	208			254			(46		)	(18	)%

Income (Loss) before Income Taxes	$	13		$	2		$	11		$	(20	)	$	(86	)	$	66
Income (Loss) Before Income Taxes																			54			(11		)	65
Income tax expense (benefit)	30			1			29			11			(54		)	65			43			(7		)	50
(Loss) Income from Continuing Operations	$	(17	)	$	1		(18		)	$	(31	)	$	(32	)	1
Income (Loss) From Continuing Operations																			$	11		$	(4	)	$	15

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	Six Months Ended June 30,						2018 vs. 2017
($ in millions)	2018			2017			$ Change			% Change
Revenue	$	2,807		$	3,049		$	(242	)	(8	)%
Cost of Services	2,293			2,547			(254		)	(10	)%
Gross Margin	514			502			12			2	%

Operating Costs and Expenses
Research and development	5			7			(2		)	(29	)%
Selling, general and administrative	294			322			(28		)	(9	)%
Restructuring and related costs	37			54			(17		)	(31	)%
Amortization of acquired intangible assets	121			122			(1		)	(1	)%
Separation costs	—			6			(6		)	(100	)%
Interest expense	70			70			—			—	%
(Gain) loss on divestitures and transaction costs	(45		)	(25		)	(20		)	80	%
Litigation costs (recoveries), net	35			(20		)	55			(275	)%
Other (income) expenses, net	(3		)	(1		)	(2		)	200	%
Total Operating Costs and Expenses	514			535			(21		)	(4	)%

Income (Loss) Before Income Taxes	—			(33		)	33
Income tax expense (benefit)	39			(19		)	58
Income (Loss) From Continuing Operations	$	(39	)	$	(14	)	$	(25	)

Revenue

~~Total revenues~~

Revenue for the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, 2018 decreased, compared to the prior year periods, mainly due to the impact from adopting the accounting guidance related to revenue recognition, which is also referred to herein as "new revenue standard", divestitures completed in 2017, ~~declined across all segments due primarily to lost business, the wind-down of the New York Medicaid Management Information System (NY MMIS) contract, the run-off of our Student Loan business,~~ strategic ~~contract actions taken~~decisions by management as part of our portfolio rationalization, ~~lower volumes~~including exiting certain unprofitable contracts and ~~overall price declines that were consistent with prior-period trends.~~contract losses. Partially offsetting ~~the decline was~~these declines were increases from the ramp ~~up in~~of new ~~contracts in the Commercial Industries and Public Sector businesses.~~

~~Conduent Form 10-Q~~

business.

Cost of Services

Cost of services for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 decreased, compared to the prior year periods, ~~due primarily to~~mainly driven by reductions in real estate, information technology and labor costs from our strategic transformation initiatives, lost ~~business, the wind-down of the NY MMIS contract, the run-off of our Student Loan~~ business, strategic contract actions taken by management as part of portfolio management, lower volumes and ~~lower volumes.~~divestitures completed in 2017.

Gross Margin

~~Declines~~

Increase in gross margin for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018, compared to the prior year periods, ~~reflect lost business and margin pressures in our customer experience service offerings, price declines and to a lesser degree~~was driven primarily by the impact of ~~the hurricanes.~~cost and productivity improvements, including reductions in real estate, information technology and labor costs from our strategic transformation initiatives and exiting or remediating certain underperforming contracts. These were partially offset by contract losses.

~~Research and Development~~

~~Research and development for the three and nine months ended September 30, 2017, decreased compared to the prior year periods due to cost savings initiatives.~~

Selling, General and Administrative (SG&A)

Lower SG&A for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was lower than~~2018, compared to the prior year periods, ~~reflecting~~was reflective of the impact of our strategic transformation initiatives, ~~that drove lower wages and benefits.~~primarily due to reductions in labor costs.

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Restructuring and Related Costs

~~Net restructuring~~

Restructuring and related costs for the three months ended ~~September~~June 30, ~~2017 includes approximately $7~~2018, include $5 million of severance costs due to headcount reductions of approximately ~~700~~600 employees worldwide and $12 million of lease cancellation and other costs as part of our effort to consolidate our real estate footprint.

Restructuring and related costs for the six months ended June 30, 2018, include $19 million of severance costs due to headcount reductions of approximately 1,400 employees worldwide and $17 million of lease cancellation and other costs ~~and $2 million~~as part of ~~asset impairments. These costs were offset by $4 million of net reversals primarily resulting from changes in estimated reserves from prior-period initiatives.~~our effort to consolidate our real estate footprint.

Net restructuring and related costs for the nine months ended September 30, 2017 includes strategic transformation costs of $8 million and approximately $38 million of severance costs related to headcount reductions of approximately 3,200 employees worldwide, $33 million of lease cancellation costs and $4 million of asset impairments. These costs were offset by $7 million of net reversals, primarily resulting from changes in estimated reserves from prior-period initiatives.

~~Net restructuring~~Restructuring and related costs for the three months ended ~~September~~June 30, ~~2016 relates to the strategic transformation program. Severance~~2017, include $19 million of severance costs ~~of $4 million related~~due to headcount reductions of approximately 1,800 employees worldwide and ~~were offset by $4~~$15 million of ~~net reversals for changes in estimated reserves from prior-period initiatives.~~lease cancellation and other costs as part of our effort to consolidate our real estate footprint.

~~Net restructuring~~

Restructuring and related costs for the ~~nine~~six months ended ~~September~~June 30, ~~2016 includes approximately $52~~2017, include $29 million of severance costs ~~related~~due to headcount reductions of approximately ~~3,300~~2,500 employees worldwide ~~$12 million~~ of ~~professional support services associated with the implementation of our strategic transformation program, $2~~and $17 million of lease cancellation and other costs as part of our effort to consolidate our real estate footprint and $2$8 million of ~~asset impairments. These costs were partially offset by $11 million of net reversals for changes in estimated reserves from prior-period initiatives.~~strategic transformation costs.

~~The restructuring reserve balance as of September 30, 2017, for all programs was $40 million, of which approximately $28 million is expected to be spent over the next twelve months.~~

Refer to Note 5 -– Restructuring Programs and Related Costs into the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.

~~Amortization of Intangible Assets~~

Amortization of intangible assets for the three and nine months ended September 30, 2017 decreased compared to the prior year periods as the nine months ended September 30, 2016 included the accelerated amortization related to the loss of a large customer contract.

Interest Expense

Interest expense represents interest on long-term ~~debt~~debts and the amortization of debt issuance costs. Increase in Interest expense for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017 increased~~2018, compared to the prior year ~~periods~~period, was driven primarily ~~due to the issuance~~by write-off of debt issuance costs to certain loans that were refinanced in connection with the capitalization of the company during the spin-off in December 2016, the subsequent additional borrowing under the Term Loan B in January 2017 and amounts outstanding under the Company’s $750 million committed credit facility (Credit Facility).

~~Conduent Form 10-Q~~

June 2018. Refer to Note 6 -– Debt in the Condensed Consolidated Financial Statements for additional information.

~~Separation~~

(Gain) Loss on Divestitures and Transaction 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 from Xerox Corporation, 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 related to separation.

~~Gain on Sale of Asset and Businesses~~

~~We sold a property in June 2017 for a pre-tax gain of $24 million.~~

Additionally, we completed the divestiture of: (1) our Firehouse business and suite of emergency records management products used by fire departments across the country for their incident reporting and Emergency Management System information 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 project services to assist healthcare organizations optimize their health IT applications; (4) the mobile device management business of Wireless Data Services Limited; and (5) the Global Mobility business. The aggregate proceeds for these divestitures was $56 millionIncrease in ~~cash. The businesses sold represents $82 million of 2016 revenue and $60 million for the nine months ended September 30, 2017. We recorded a pre-tax~~ gain ~~of $16 million on these divestitures.~~

~~Other (Income) Expenses, Net~~

~~Other (income) expenses, net primarily includes foreign currency transaction (gains) losses, litigation and other contingent matters and deferred compensation investment results.~~

The increase in Other income for the three months ended September 30, 2017 is primarily related to an adjustment to contingent consideration on a previous acquisition. The increase in Other income for the nine months ended September 30, 2017 is primarily related to income received as a result of several customer dispute settlements and an adjustment to contingent consideration on a previous acquisition.

~~Pre-tax Income (Loss)~~

~~Improvement in Pre-tax income (loss)~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 as~~2018, compared to the prior year periods, was driven primarily ~~driven~~ by ~~improvements in our Commercial and Other segments, benefits~~the gain from ~~our strategic transformation program, gain on~~the sale of ~~asset and businesses and lower separation costs,~~the Commercial Vehicle Operations (CVO) business, partially offset by ~~higher interest expense, higher restructuring~~transaction costs.

Litigation Costs (Recoveries), Net

Increase in net litigation costs for the three months ended June 30, 2018, compared to the prior year period, was primarily due to income received in 2017 from several customer dispute settlements and ~~related~~increase in reserves for certain Student Loan services remediation in 2018.

Increase in net litigation costs for the six months ended June 30, 2018, compared to the prior year period, was primarily due to income received in 2017 from several customer dispute settlements, reserves for certain terminated contracts that are subject to litigation and ~~dis-synergies.~~increase in reserves for certain Student Loan services remediation in 2018.

Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform) was enacted. 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.

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The effective tax rate for the three months ended ~~September~~June 30, ~~2017,~~2018 was ~~230.8% as~~79.6%, compared with ~~50.0%~~63.6% for the three months ended ~~September~~June 30, ~~2016.~~2017. The ~~September~~June 30, ~~2017~~2018 rate iswas higher than the U.S. statutory ~~tax~~ rate of ~~35%~~21%, primarily due to ~~a taxable gain on~~ the ~~termination~~impacts of the ~~Company Owned Life Insurance plan (COLI) and gains on U.S. divestitures.~~

~~Excluding primarily the tax on the termination~~divestiture of the ~~COLI, gains on~~CVO business and the geographic mix of income, partially offset by U.S. ~~divestitures~~foreign tax credits and ~~amortization,~~related valuation allowance release. As a result of higher projected U.S. Federal taxable income caused by the ~~normalized~~divestiture, the Company is not expected to be subject to Base Erosion Anti-Abuse Tax (BEAT) in 2018. The effective tax rate for the three months ended ~~September~~June 30, 2017 was ~~36.8%. Primarily excluding~~higher than the statutory tax rate of 35%, primarily due to U.S. losses from amortization and restructuring that were taxed at a higher rate than our pre-tax income from foreign operations.

Excluding the gain from the sale of the CVO business, charges for amortization of intangible assets, restructuring and divestiture related costs, the normalized effective tax rate ~~was 39.5%~~without a BEAT tax for the three months ended ~~September~~June 30, ~~2016.~~2018 was 11.1%. The normalized effective tax rate was 33.3% for the three months ended June 30, 2017, predominantly impacted by the exclusion of amortization of intangible assets and restructuring costs.

The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, 2018 was anomalous, compared with 57.6% for the six months ended June 30, 2017. The June 30, 2018 rate was anomalous, primarily due to goodwill allocated to the divested CVO business that is not deductible for U.S. tax purposes and the geographic mix of income, partially offset by U.S. foreign tax credits and related valuation allowance release. As a result of higher projected U.S. Federal taxable income caused by the divestiture, the Company is not expected to be subject to BEAT in 2018. The effective tax rate for the six months ended June 30, 2017 was ~~(55.0)% as compared with 62.8% for the nine months ended September 30, 2016. The September 30, 2017 negative rate is lower~~higher than the ~~U.S.~~ statutory tax rate of 35%, primarily due to ~~pre-tax loss~~U.S. losses from amortization and tax from taxable gain on the termination of the COLI and gains on U.S. divestitures. The September 30, 2016 effective tax rate was higher than the U.S. statutory tax rate due primarily to U.S. pre-tax lossesrestructuring that ~~are~~were taxed at a higher rate than ~~foreign~~our pre-tax income ~~which has the effect of increasing the overall effective tax rate.~~

~~Conduent Form 10-Q~~

from foreign operations.

Excluding ~~primarily~~ the ~~tax on~~gain from the ~~termination~~sale of the ~~COLI, gain on U.S. divestitures~~CVO business, charges for amortization of intangible assets, restructuring and ~~amortization,~~divestiture related costs, the normalized effective tax rate without a BEAT tax for the ~~nine~~six months ended ~~September~~June 30, 2018 was 22.9%. The normalized effective tax rate was 33.6% for the six months ended June 30, 2017, ~~was 35.0%. Primarily excluding~~predominantly impacted by the exclusion of amortization of intangible assets and restructuring ~~costs, the normalized effective rate was 23.6% for the nine months ended September 30, 2016.~~

~~Worldwide Employment~~

Worldwide employment was approximately 90,000 as of September 30, 2017 and decreased by 6,000 from December 31, 2016, due primarily to the impact of restructuring and productivity reductions as well as seasonal reductions and divestitures.costs.

Operations Review of Segment Revenue and Profit

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 2018, the Company moved the Health Enterprise business from Other segment into Public Sector segment. In addition, the Company moved the historical results of the businesses that were divested during the third quarter of 2017 ~~in an effort~~ to ~~better reflect how we manage our business, we changed our reporting segments to align~~Other segment from both the ~~Healthcare business based on customer focus between~~ Commercial Industries and the Public ~~Sector.~~Sector segments.

Commercial Industries, and

Public ~~Sector, and~~Sector.

Other segment includes businesses divested in 2017 and our Student Loan business, which is in run-off mode. The Company expects to exit the Student Loan business in the third quarter of 2018. In the third quarter of 2018, any remaining costs for Student Loans will be reflected in Other (income) expenses, net.

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Revenues by segment ~~for the three and nine months ended September 30~~ were:

Three Months Ended September 30, Nine Months Ended September 30,
(in millions) Revenue % of Total
Revenue Segment
Profit (Loss) Segment
Profit (Loss)% Revenue
% of Total
Revenue

Segment
Profit (Loss)

Segment
Profit (Loss)%

2017
Commercial Industries $ 864
58 % $ 53
6.1 % $ 2,663
59 % $ 114
4.3 %
Public Sector 540
37 % 59
10.9 % 1,629
36 % 179
11.0 %
Other 76
5 % 1
1.3 % 237
5 % (7 ) (3.0 )%
Total $ 1,480
100 % $ 113
7.6 % $ 4,529
100 % $ 286
6.3 %

2016
Commercial Industries $ 923
58 % $ 42
4.6 % $ 2,869
59 % $ 103
3.6 %
Public Sector 584
37 % 78
13.4 % 1,734
35 % 217
12.5 %
Other 89
5 % (23 ) (25.8 )% 291
6 % (75 ) (25.8 )%
Total $ 1,596
100 % $ 97
6.1 % $ 4,894
100 % $ 245
5.0 %



($ in millions)	Commercial Industries			Public Sector			Other			Total
Three Months Ended June 30, 2018
Total Revenue	$	808		$	574		$	5		$	1,387
Profit (Loss)	$	47		$	68		$	(5	)	$	110
Adjusted EBITDA⁽¹⁾	$	80		$	91		$	(5	)	$	166

% of Total Revenue	58.2		%	41.4		%	0.4		%	100.0		%
Adjusted EBITDA Margin⁽¹⁾	9.9		%	15.9		%	(100.0		)%	12.0		%

Three Months Ended June 30, 2017
Total Revenue	$	856		$	598		$	42		$	1,496
Profit (Loss)	$	33		$	52		$	2		$	87
Adjusted EBITDA⁽¹⁾	$	71		$	82		$	4		$	157

% of Total Revenue	57.2		%	40.0		%	2.8		%	100.0		%
Adjusted EBITDA Margin⁽¹⁾	8.3		%	13.7		%	9.5		%	10.5		%



($ in millions)	Commercial Industries			Public Sector			Other			Total
Six Months Ended June 30, 2018
Total Revenue	$	1,662		$	1,132		$	13		$	2,807
Profit (Loss)	$	91		$	133		$	(9	)	$	215
Adjusted EBITDA⁽¹⁾	$	158		$	178		$	(9	)	$	327

% of Total Revenue	59.2		%	40.3		%	0.5		%	100.0		%
Adjusted EBITDA Margin⁽¹⁾	9.5		%	15.7		%	(69.2		)%	11.6		%

Six Months Ended June 30, 2017
Total Revenue	$	1,751		$	1,207		$	91		$	3,049
Profit (Loss)	$	59		$	109		$	5		$	173
Adjusted EBITDA⁽¹⁾	$	133		$	169		$	8		$	310

% of Total Revenue	57.4		%	39.6		%	3.0		%	100.0		%
Adjusted EBITDA Margin⁽¹⁾	7.6		%	14.0		%	8.8		%	10.2		%

___________


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

Commercial Industries Segment

Revenue

Commercial Industries revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was 58% and 59%, respectively, of total revenue and~~2018 decreased, ~~6% and 7%, respectively, from the~~compared to prior year ~~periods. The declines were~~periods, primarily driven ~~primarily~~ by strategic contract actions and ~~lost business in~~ the ~~Healthcare Payer, High Tech Industrial & Retail and Provider businesses and lower volumes from existing clients,~~impact of the new revenue standard, partially offset by revenue from new ~~contracts.~~contracts and volume increases from existing accounts.

Segment Profit

~~Increase in the Commercial Industries segment profit for the three months ended September 30, 2017 was driven by benefits from our strategic transformation cost initiatives~~ and ~~from new business, partially offset by losses in our customer experience services offering and the overall revenue decline from existing clients, investments and dis-synergy costs.~~

~~Conduent Form 10-Q~~

Adjusted EBITDA

Increase in the Commercial Industries segment profit and adjusted EBITDA margin for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2018, compared to prior year periods, was mainly driven by ~~benefits~~reductions in real estate, information technology and labor costs from our strategic transformation ~~cost~~ initiatives and from increases in new business, partially offset by ~~losses in our customer experience services offering and~~ the overall revenue decline from existing clients and investments, ~~and dis-synergy costs.~~primarily in our sales force.

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Public Sector Segment

Revenue

Public Sector revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was 37% of total revenue for both periods and~~2018, decreased ~~8% and 6%, respectively,~~ compared to ~~the~~ prior year ~~periods. The decreases were~~periods, primarily driven by strategic contract actions and the impact of the new revenue standard, contract losses ~~in State & Local, Government Healthcare~~ and ~~Payment Services. These declines for the nine months ended were~~lower volumes, partially ~~mitigated~~offset by ~~growth in our Transportation business.~~certain price increases as a result of contract remediation.

Segment Profit and Adjusted EBITDA

~~Decrease~~

Increase in the Public Sector segment profit and adjusted EBITDA margin for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 were due~~2018, compared to prior year periods, was mainly driven by reductions in real estate, information technology and labor costs from our strategic transformation initiatives and contract ~~losses in Government Healthcare, State & Local,~~remediation, partially offset by the overall revenue decline from existing clients and ~~Payment Services, dis-synergies and investments~~investment, primarily in our ~~core offerings.~~sales force.

Other Segment

Revenue

Other revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was 5% of total revenues for both~~2018 decreased, compared to prior year periods, ~~and decreased 15% and 19%, respectively,~~ driven mainly by the ~~exit from the NY MMIS contract~~divestitures completed in 2017 and the run-off of ~~the student loan~~our Student Loan business.

Segment Profit (Loss) and Adjusted EBITDA

Other segment ~~profit (loss) of $1 million~~loss and ~~$(7) million~~adjusted EBITDA for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 improved $24 million and $68 million, respectively, compared to the prior year periods~~2018 were primarily due to ~~improved profitability~~divestitures completed in 2017 and the ~~student loan business, improvements in the HE~~run-off of our Student Loan business.

~~Health Enterprise~~Metrics

In February 2017, we determined that it was not probable that the NY MMIS project would be completed. As a result of this determination, we recorded a pre-tax charge of $161 million ($98 million after-tax) in the fourth quarter 2016 financial results. The charge included $83 million for the write-off of contract receivables which were recorded as a reduction of revenue and $78 million recorded in costs of outsourcing, including $36 million for wind down costs, a $28 million non-cash charge for the impairment of software and $14 million for the write-off of deferred contract set-up and transition costs and other related assets and liabilities. The three and nine months ended September 30, 2017, includes adjustments to increase our estimated wind-down costs of approximately $1 million and $10 million, respectively.Signings

We have reached agreement in principle with the State of New York regarding resolution of the Health Enterprise (HE) platform project, which would result in settlement of our New York Health Enterprise platform exposure. Under this agreement in principle, we would pay, or incur costs on behalf of, the State of New York in the amount of approximately $20 million which is reserved. This agreement in principle remains subject to ongoing negotiations and a settlement will not be effective unless and until we enter into a definitive agreement with the State of New York. Our HE platform has been fully implemented in New Hampshire, Alaska and North Dakota and we are in the process of obtaining certification for Alaska and North Dakota.

~~Metrics~~

~~Signings~~

Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Total Contract Value (TCV) is the estimated total contractual revenue related to signed contracts. The amounts in the following table reflect the impact of our adoption of the new revenue recognition standard on January 1, 2018. Refer to Note 2 – Recent Accounting Pronouncements in the Condensed Consolidated Financial Statements for further discussion of the estimated impact of the adoption of this standard.

Signings for the three and six months ended June 30, were:

~~Conduent Form 10-Q~~



	Three Months Ended June 30,				2018 vs. 2017
($ in millions)	2018		2017		$ Change			% Change
New business TCV	$	372	$	657	$	(285	)	(43	)%
Renewals TCV	1,575		587		988			168	%
Total Signings	$	1,947	$	1,244	$	703		57	%

Annual recurring revenue signings⁽¹⁾	$	86	$	130	$	(44	)	(34	)%
Non-recurring revenue signings⁽²⁾	$	69	$	109	$	(40	)	(37	)%

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	Six Months Ended June 30,				2018 vs. 2017
($ in millions)	2018		2017		$ Change			% Change
New business TCV	$	778	$	1,187	$	(409	)	(34	)%
Renewals TCV	2,597		988		1,609			163	%
Total Signings	$	3,375	$	2,175	$	1,200		55	%

Annual recurring revenue signings⁽¹⁾	$	179	$	274	$	(95	)	(35	)%
Non-recurring revenue signings⁽²⁾	$	132	$	201	$	(69	)	(34	)%

___________


(1)	Annual recurring revenue signings are for contracts longer than one year.


(2)	Non-recurring revenue signings are for contracts shorter than one year.

Signings for the three and ~~nine~~six months ended ~~September~~June 30, ~~were:~~

Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2017 2016 2017 2016
New business TCV $ 390
$ 633
$ 1,577
$ 1,803
Renewals TCV 657
913
1,645
3,388
Total Signings $ 1,047
$ 1,546
$ 3,222
$ 5,191

Annual recurring revenue signings $ 92
$ 167
$ 366
$ 408
Non-recurring revenue signings $ 86
$ 104
$ 287
$ 326

S~~ignings for the three and nine months ended September 30, 2017 decreased 32% and 38%, from~~2018 increased, compared to the prior year, ~~periods, respectively, reflecting the impact of lower contract renewals,~~mainly due to increased renewal activities; partially ~~resulting from our~~offset by new business signings decline due to a continued focus on strategic ~~contract remediation actions in 2017 and a large contract renewal in the second quarter of 2016.~~wins with acceptable margins.

Renewal Rate

Renewal rate is defined as the annual recurring revenue (ARR) on contracts that are renewed during the period as

a percentage of ARR on all contracts for which 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. ~~Renewal rate~~

Excluding our strategic decision not to renew certain contracts, renewal rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was 98%~~2018 were 99% and ~~93%~~97%, ~~respectively, and exceeded our target range of 85%-90%. Excluding these strategic actions, renewals would have been approximately 95% and 83% for the three and nine months ended September 30, 2017 .~~respectively.

Capital Resources and Liquidity

As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, total cash and cash equivalents were ~~$468~~$993 million ~~(inclusive of $141 million cash related to the termination of the deferred compensation plan)~~ and ~~$390~~$658 million, respectively. ~~We had no~~As of June 30, 2018, there were $1.5 billion outstanding borrowings under our ~~Revolving~~ Credit ~~Facility as of September 30, 2017.~~Agreement.

~~Additionally, we have letters of credit and bank guarantees outstanding from time-to-time~~

On June 28, 2018, the Company entered into Amendment No. 3 to ~~secure our performance of contractual obligation to our clients and other corporate obligations.~~the December 7, 2016 Credit Agreement. Refer to Note ~~11 - Contingencies and Litigation,~~6 – Debt in the Condensed Consolidated Financial Statements for additional ~~information regarding these guarantees.~~information.

In July 2018, the Company redeemed most of its Senior Notes, which included principal, premium and interest, of $575 million. Also in July 2018, the Company completed the sale of a non-core business with total proceeds of $24 million. Refer to Note 15 – Subsequent Events in the Condensed Consolidated Financial Statements for additional information.

Cash Flow Analysis

The following table summarizes our cash flows, as reported in our Condensed Consolidated Statement of Cash Flows in the accompanying Condensed Consolidated Financial Statements:


	Nine Months Ended September 30,									Six Months Ended June 30,
(in millions)	2017			2016			Increase (Decrease)			2018			2017			Better (Worse)
Net cash provided by (used in) operating activities	$	65		$	(38	)	$	103		$	60		$	(40	)	$	100
Net cash provided by (used in) investing activities	122			(129		)	251			322			(19		)	341
Net cash (used in) provided by financing activities	(111		)	177			(288		)
Net cash provided by (used in) financing activities										(40		)	(25		)	(15		)

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Operating activities: The increase in cash generated from operating activities was primarily attributable to improvements in working capital ~~reduced~~and lower Health Enterprise wind-down payments ~~associated with implementations in California, Montana and New York,~~for certain contracts, partially offset by ~~income-tax payments.~~payments for restructuring and prepaid software licenses.

Investing activities: The increase in cash ~~provided by~~generated from investing activities was primarily ~~related~~due to the ~~following:~~

~~$116 million increase due to~~ proceeds ~~received on long-term investments driven by~~from the ~~termination~~sale of the ~~deferred compensation plan.~~

~~$109 million increase due to proceeds received from 2017 divestitures ($56 million) and payment made to Atos~~CVO business, partially offset by increased spending for ~~an adjustment to purchase price related to a divestiture in 2016 ($53 million).~~

~~Conduent Form 10-Q~~

capital expenditures.

Financing activities: The ~~decrease~~increase in cash used from financing activities was ~~primarily~~ related to ~~the following:~~

~~$351 million decrease due to~~ net ~~transfers to former parent.~~

~~$214 million decrease due to increase in payments~~debt repayments, including repayments of ~~debt.~~

~~$300 million increase due to proceeds on issuance of debt~~capital leases..

~~Capital Market Activity~~

On October 10, 2017, we entered into Amendment No. 2 to the Credit Agreement dated December 7, 2016 and amended by Amendment No. 1 dated April 7, 2017. Amendment No. 2 reduced the interest rate on our Term Loan B by 1.0% from 4.0% over LIBOR to 3.0% over LIBOR.

~~On April 7, 2017, we entered into Amendment No. 1 to the Credit Agreement, dated December 7, 2016 which reduced the interest rate on our Term Loan B by 1.5% from 5.5% over LIBOR to 4.0% 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 6 - Debt, in the Condensed Consolidated Financial Statements for additional information.~~

Market Risk Management

We are exposed to market risk from changes in foreign currency exchange rates which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. 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.

Recent market events have not caused us to materially modify nor change our financial risk management strategies with respect to our exposures to foreign currency risk. Refer to Note 7 – Financial Instruments in the Condensed Consolidated Financial Statements for additional discussion on our financial risk management.

Non-GAAP Financial Measures

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

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 Condensed 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 ~~to how management reviews and evaluates our business results and trends. These non-GAAP measures are among~~ 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 certain of these non-GAAP measures.

~~A reconciliation~~Reconciliations 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 ~~for~~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.~~method to the results including an adjustment for estimated BEAT. The ~~noted~~ 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

~~Conduent Form 10-Q~~

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.

~~Constant Currency~~

To better understand trends in our business, we believe that it is helpful to adjust revenue to exclude the impact of changes in the translation of foreign currencies into U.S. Dollars. We refer to this adjusted revenue as “constant currency.” Currency impact is the difference between actual growth ratesAdjusted Net Income (Loss), Adjusted Earnings per Share and ~~constant currency growth rates.~~Adjusted Effective Tax Rate

~~Adjusted Operating Income and Adjusted Operating Margin~~

We ~~make~~made adjustments to ~~Pre-Tax~~ Income (Loss) before Income Taxes for the following items for the purpose of calculating Adjusted ~~Operating~~Net Income (Loss), Adjusted Earnings per Share and Adjusted ~~Operating Margin.~~Effective Tax Rate:

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 from period to period.

Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program.

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Amortization of acquired intangible assets. The amortization of acquired 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.

Separation costs. Separation costs are expenses incurred in connection with ~~the~~ 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~~(Gain) loss on ~~long-term debt~~divestitures and ~~amortization of debt issuance~~transaction costs. Represents (gain) loss on divested businesses and transactions costs.

Litigation costs ~~and related party interest.~~(recoveries), net. Litigation costs (recoveries), net represents reserves for certain terminated contracts that are subject to litigation.

Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net ~~litigation matters~~ and all other (income) expenses, net.

~~NY MMIS (2017 only)~~New York Medicaid Management Information System (NY MMIS). Costs associated with the ~~company~~Company not fully completing the State of New York Health Enterprise Platform project.

HEHealth Enterprise charge ~~(2017 only)~~(HE charge). Costs associated with not fully completing the Health Enterprise Medical ~~Platform implementation~~platform projects in California and Montana.

~~(Gain) loss on sale of asset and businesses.~~

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.

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

~~We make 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:~~

~~Amortization of intangible assets.~~

~~Restructuring and related costs.~~

~~Separation costs.~~

~~Other (income) expenses, net.~~

~~NY MMIS (2017 only).~~

~~HE charge (2017 only).~~

~~(Gain) loss on sale of asset and businesses.~~

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.

~~Conduent Form 10-Q~~

~~Operating Income / Margin Reconciliation:~~

Three Months Ended
September 30, 2017 Three Months Ended
September 30, 2016
(in millions) Pre Tax Income (Loss) Revenue Margin Pre Tax Income (Loss) Revenue Margin
GAAP as Reported⁽¹⁾
$ 13
$ 1,480
0.9 % $ 2
1,596
0.1 %
Adjustments:
Amortization of intangible assets 60
63

NY MMIS 1
—

Restructuring and related costs 22
8

HE charge (3 )
—

Separation costs 2
15

Interest expense 35
1

Related party interest —
10

(Gain) loss on sale of asset and businesses (16 ) —

Other (income) expenses, net (3 ) (2 ) —

Adjusted Operating Income/Margin $ 111
$ 1,480
7.5 % $ 97
$ 1,596
6.1 %

(1) Pre-Tax Income (Loss) and revenue from continuing operations.

Nine Months Ended
September 30, 2017 Nine Months Ended
September 30, 2016
(in millions) Pre Tax Income (Loss) Revenue Margin Pre Tax Income (Loss) Revenue Margin
GAAP as Reported⁽¹⁾
$ (20 ) $ 4,529
(0.4 )% $ (86 ) 4,894
(1.8 )%
Adjustments:
Goodwill impairment 182
200

Amortization of intangible assets 10
—

NY MMIS 76
57

Restructuring and related costs (8 )
—

HE charge 8
34

Interest expense 105
3

Related party interest —
30

(Gain) loss on sale of asset and businesses (41 ) 1

Other (income) expenses, net (24 ) 6
—

Adjusted Operating Income/Margin $ 288
$ 4,529
6.4 % $ 245
$ 4,894
5.0 %

(1) Pre-Tax Income (Loss) and revenue from continuing operations.

~~Conduent Form 10-Q~~

~~Effective Tax Rate Reconciliation:~~

Three Months Ended
September 30, 2017 Three Months Ended
September 30, 2016
(in millions) 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 $ 13
$ 30
230.8 % $ 2
$ 1
50.0 %
Non-GAAP adjustments⁽¹⁾
63
17
84
33

Termination of COLI plan —
(19 ) —
—

Adjusted⁽²⁾
$ 76
$ 28
36.8 % $ 86
$ 34
39.5 %

(1) Refer to Net Income (Loss) reconciliation for details.
(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, which employs an annual effective tax rate method to the results.

Nine Months Ended
September 30, 2017 Nine Months Ended
September 30, 2016
(in millions) 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 $ (20 ) $ 11
(55.0 )% $ (86 ) $ (54 ) 62.8 %
Non-GAAP adjustments⁽¹⁾
203
72
298
104

Termination of COLI plan —
(19 ) —
—

Adjusted⁽²⁾
$ 183
$ 64
35.0 % $ 212
$ 50
23.6 %

(1) Refer to Net Income (Loss) reconciliation for details.
(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, which employs an annual effective tax rate method to the results.

Net Income (Loss) and EPS Reconciliation:


	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016					Three Months Ended June 30, 2018					Three Months Ended June 30, 2017
(in millions, except earnings per share)	Net Income (Loss)			EPS			Net Income (Loss)			EPS
GAAP as Reported From Continuing Operations	$	(17	)	$	(0.09	)	$	1		$	0.01
(in millions, except per share data. Shares in thousands)												Net Income (Loss)			Diluted EPS		Net Income (Loss)			Diluted EPS
Income (Loss) from Continuing Operations												$	11		$	0.04	$	(4	)	$	(0.03	)
Adjustments:
Amortization of intangible assets	60						63
Restructuring and related costs												17					36
Amortization of acquired intangible assets												60					61
Separation costs												—					1
(Gain) loss on divestitures and transaction costs												(60		)			(25		)
Litigation costs (recoveries), net												4					(9		)
Other (income) expenses, net												(2		)			—
NY MMIS	1						—					(1		)			1
Restructuring and related costs	22						8
HE charge	(3		)				—					—					—
Separation costs	2						15
(Gain) loss on sale of asset and businesses	(16		)				—
Other (income) expenses, net	(3		)				(2		)
Less: Income tax adjustments⁽¹⁾	2						(33		)			35					(25		)
Adjusted Net Income (Loss) and EPS	$	48		$	0.22		$	52		$	0.24	$	64		$	0.29	$	36		$	0.16

(shares)
(GAAP Shares in thousands)
Weighted average common shares outstanding				204						203					205,296					203,673
Restricted stock and performance shares				3						3
8% Convertible preferred stock				—						5
Stock options															146					—
Restricted stock and performance units / shares															3,447					—
Adjusted Weighted Average Shares Outstanding⁽²⁾				207						211					208,889					203,673
(1) Reflects the income tax (expense) benefit of the adjustments. Refer to the Effective Tax Rate reconciliation details.
(2) Average shares for the 2017 calculation of adjusted EPS excludes 5 million shares associated with our Series A convertible preferred stock and includes the impact of the preferred stock quarterly dividend of $2 million for the three months ended September 30, 2017. Average shares for the 2016 calculation of adjusted EPS includes 5 million shares associated with our Series A convertible preferred stock and excludes the impact of the preferred stock quarterly dividend.
(Non-GAAP Shares in thousands)
Weighted average common shares outstanding															205,296					203,673
Stock options															146					229
Restricted stock and performance units / shares															3,447					2,797
Adjusted Weighted Average Shares Outstanding⁽²⁾															208,889					206,699

~~Conduent Form 10-Q~~

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	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2016						Six Months Ended June 30, 2018						Six Months Ended June 30, 2017
(in millions, except earnings per share)	Net Income (Loss)			EPS			Net Income (Loss)			EPS
GAAP as Reported From Continuing Operations	$	(31	)	$	(0.19	)	$	(32	)	$	(0.16	)
(in millions, except per share data. Shares in thousands)													Net Income (Loss)			Diluted EPS			Net Income (Loss)			Diluted EPS
Income (Loss) from Continuing Operations													$	(39	)	$	(0.21	)	$	(14	)	$	(0.09	)
Adjustments:
Amortization of intangible assets	182						200
Restructuring and related costs													37						54
Amortization of acquired intangible assets													121						122
Separation costs													—						6
(Gain) loss on divestitures and transaction costs													(45		)				(25		)
Litigation costs (recoveries), net													35						(20		)
Other (income) expenses, net													(3		)				(1		)
NY MMIS	10						—						(1		)				9
Restructuring and related costs	76						57
HE charge	(8		)				—						—						(5		)
Separation costs	8						34
(Gain) loss on sale of asset and businesses	(41		)				1
Other (income) expenses, net	(24		)				6
Less: Income tax adjustments⁽¹⁾	(53		)				(104		)				6						(55		)
Adjusted Net Income (Loss) and EPS	$	119		$	0.54		$	162		$	0.77		$	111		$	0.51		$	71		$	0.32

(shares)
(GAAP Shares in thousands)
Weighted average common shares outstanding				204						203						205,184						203,522
Stock options																—						—
Restricted stock and performance units / shares																—						—
Adjusted Weighted Average Shares Outstanding⁽²⁾																205,184						203,522
(Non-GAAP Shares in thousands)
Weighted average common shares outstanding																205,184						203,522
Stock options																144						249
Restricted stock and performance shares				3						3						3,117						2,473
8% Convertible preferred stock				—						5
Adjusted Weighted Average Shares Outstanding⁽²⁾				207						211						208,445						206,244
(1) Reflects the income tax (expense) benefit of the adjustments. Refer to the Effective Tax Rate reconciliation details.
(2) Average shares for the 2017 calculation of adjusted EPS excludes 5 million shares associated with our Series A convertible preferred stock and includes the impact of the preferred stock quarterly dividend of $7 million for the nine months ended September 30, 2017. Average shares for the 2016 calculation of adjusted EPS includes 5 million shares associated with our Series A convertible preferred stock and excludes the impact of the preferred stock quarterly dividend.

___________


(1)	Reflects the income tax (expense) benefit of the adjustments. Refer to Effective Tax Rate reconciliation below for details.


(2)	Average shares for the 2018 and 2017 calculation of adjusted EPS excludes 5 million shares associated with our Series A convertible preferred stock and includes the impact of the preferred stock dividend of $2.4 million for both of the three months ended June 30, 2018 and 2017 and $5 million for both of the six months ended June 30, 2018 and 2017, respectively.

Effective Tax Rate Reconciliation:



	Three Months Ended June 30, 2018							Three Months Ended June 30, 2017
($ in millions)	Pre-Tax Income (Loss)		Income Tax (Benefit) Expense			Effective Tax Rate		Pre-Tax Income (Loss)			Income Tax (Benefit) Expense			Effective Tax Rate
As Reported from Continuing Operations	$	54	$	43		79.6	%	$	(11	)	$	(7	)	63.6	%
Non-GAAP adjustments⁽²⁾	18		(35		)			65			25
Adjusted⁽³⁾	$	72	$	8		11.1	%	$	54		$	18		33.3	%



	Six Months Ended June 30, 2018							Six Months Ended June 30, 2017
($ in millions)	Pre-Tax Income (Loss)		Income Tax (Benefit) Expense			Effective Tax Rate		Pre-Tax Income (Loss)			Income Tax (Benefit) Expense			Effective Tax Rate
As Reported from Continuing Operations⁽¹⁾	$	—	$	39				$	(33	)	$	(19	)	57.6	%
Non-GAAP adjustments⁽²⁾	144		(6		)			140			55
Adjusted⁽³⁾	$	144	$	33		22.9	%	$	107		$	36		33.6	%

__________


(1)	The effective tax rate was anomalous for the six months ended June 30, 2018. Refer to MD&A—Financial Review of Operations—Income Taxes for additional information.


(2)	Refer to Net Income (Loss) reconciliation for details of non-GAAP adjustments.

(3)

The tax impact of Adjusted Pre-tax income (loss) from continuing operations was 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 with an adjustment for the accounting of BEAT and without regard to the sale of the CVO business, charges for amortization of intangible assets, restructuring and divestiture related costs.

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ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the “Market Risk Management” section in Item 2 of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this Item.

ITEM 4 — CONTROLS AND PROCEDURES

(a)Evaluation of 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 ("Exchange Act") as of the end of the period covered by this report. 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, 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 Exchange Act, 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.

(b)Changes in Internal Controls

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 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~Conduent Form 10-Q~~

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

The information set forth under Note 11 – Contingencies and Litigation in the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item.

ITEM 1A — RISK FACTORS

Reference is made to the Risk Factors set forth in Part I, Item 1A of our ~~2016~~2017 Annual Report. There have been no material changes to our risk factors as previously reported in our ~~2016~~2017 Annual Report.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


(a)	Sales of Unregistered Securities during the Quarter ended ~~September~~June 30, ~~2017~~ 2018

During the quarter ended ~~September~~June 30, ~~2017,~~2018, the Company did not issue any securities in transactions that were not registered under the Securities Act of 1933, as amended.


(b)	Issuer Purchases of Equity Securities during the Quarter ended ~~September~~June 30, ~~2017~~2018

None.

Table of Contents

ITEM 6 — EXHIBITS



3.1		Restated Certificate of Incorporation of Registrant filed with the Department of the State of New York on December 31, ~~2016~~2016..
		Incorporated by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated December 23, 2016.

3.2		Amended and Restated By-Laws of Registrant as amended through December 31, ~~2016~~2016..
		Incorporated by reference to Exhibit 3.2 to Registrants Current Report on Form 8-K dated December 23, 2016.

4.1(a)		First Supplemental Indenture, dated as of January 9, 2018, among Conduent Finance, Inc., Xerox Business Services, LLC, the Guarantors named therein and U.S. Bank National Association, as trustee.

4.1(b)		Second Supplemental Indenture, dated as of June 1, 2018, among Conduent Finance, Inc., Xerox Business Services, LLC, the Guarantors named therein and U.S. Bank National Association, as trustee.

4.1(c)		Third Supplemental Indenture, dated as of June 1, 2018, among Conduent Finance, Inc., Xerox Business Services, LLC, the Guarantors named therein and U.S. Bank National Association, as trustee.

4.1(d)		Fourth Supplemental Indenture, dated as of June 1, 2018, among Conduent Finance, Inc., Xerox Business Services, LLC, the Guarantors named therein and U.S. Bank National Association, as trustee.

4.1(e)		Fifth Supplemental Indenture, dated as of July 12, 2018, among Conduent Finance, Inc., Xerox Business Services, LLC, the Guarantors named therein and U.S. Bank National Association, as trustee.
		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).

10.1(d)		Amendment No. 23 to Credit Agreement, dated as of ~~April 7, 2017,~~June 28, 2018, among Conduent Incorporated, Conduent Business Services, ~~LLS,~~LLC (f/k/a Xerox Business Services, LLC), Affiliated Computer Services International B.V. ~~and~~, Conduent Finance, Inc., the Lenders from time to time party thereto and JPMorgan Chase Bank, ~~N/A.,~~N.A. as Administrative ~~Agent~~Agent..
		Incorporated by reference to ~~Registrant's~~Exhibit 10.1 to Registrant’s Current Report on Form 8-K ~~filed October 10, 2017.~~dated June 28, 2018. (See SEC File Number 001-37817).

~~10.6(h)~~		~~Executive Change in Control Severance Plan, dated as of October 1, 2017~~31(a).
		~~Incorporated by reference to Registrant's Current Report on Form 8-K, filed October 4, 2017.~~

~~31(a)~~		Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a)..
31(b)		Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32		Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.
101.DEF		XBRL Taxonomy Extension Definition Linkbase.
101.INS		XBRL Instance Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase.
101.SCH		XBRL Taxonomy Extension Schema Linkbase.

~~Conduent Form 10-Q~~

Table of Contents

SIGNATURES

Pursuant to the requirements 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 (Registrant)

By:	/S/ ALLAN COHEN
	Allan Cohen Vice President and Chief Accounting Officer (Principal Accounting Officer)

Date: ~~November~~August 8, ~~2017~~2018

Conduent Q2 2018 Form 10-Q

3037



(in millions, except share data in thousands)	September 30, 2017			December 31, 2016
Assets
Cash and cash equivalents	$	468		$	390
Accounts receivable, net	1,380			1,286
Net receivable from former parent company	31			—
Other current assets	233			241
Total current assets	2,112			1,917
Land, buildings and equipment, net	249			283
Intangible assets, net	959			1,144
Goodwill	3,899			3,889
Other long-term assets	328			476
Total Assets	$	7,547		$	7,709

Liabilities and Equity
Short-term debt and current portion of long-term debt	$	71		$	28
Accounts payable	147			164
Accrued compensation and benefits costs	221			269
Unearned income	184			206
Net payable to former parent company	—			124
Other current liabilities	591			611
Total current liabilities	1,214			1,402
Long-term debt	1,991			1,913
Pension and other benefit liabilities	151			172
Deferred taxes	605			619
Other long-term liabilities	132			173
Total Liabilities	4,093			4,279

Contingencies (See Note 11)
Series A Convertible Preferred Stock	142			142

Common Stock	2			2
Additional paid-in-capital	3,834			3,812
Retained deficit	(34		)	—
Accumulated other comprehensive loss	(490		)	(526		)
Total Equity	3,312			3,288
Total Liabilities and Equity	$	7,547		$	7,709

Shares of common stock issued and outstanding	210,372			202,875
Shares of Series A convertible preferred stock issued and outstanding	120			120



	Three Months Ended September 30,									Nine Months Ended September 30,
(in millions)	Revenue		% of Total Revenue		Segment Profit (Loss)			Segment Profit (Loss)%		Revenue		% of Total Revenue		Segment Profit (Loss)			Segment Profit (Loss)%
2017
Commercial Industries	$	864	58	%	$	53		6.1	%	$	2,663	59	%	$	114		4.3	%
Public Sector	540		37	%	59			10.9	%	1,629		36	%	179			11.0	%
Other	76		5	%	1			1.3	%	237		5	%	(7		)	(3.0	)%
Total	$	1,480	100	%	$	113		7.6	%	$	4,529	100	%	$	286		6.3	%

2016
Commercial Industries	$	923	58	%	$	42		4.6	%	$	2,869	59	%	$	103		3.6	%
Public Sector	584		37	%	78			13.4	%	1,734		35	%	217			12.5	%
Other	89		5	%	(23		)	(25.8	)%	291		6	%	(75		)	(25.8	)%
Total	$	1,596	100	%	$	97		6.1	%	$	4,894	100	%	$	245		5.0	%