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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
_______________
 
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 20182019
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to
Commission File Number 001-37817
conduentlogoq2a03.jpg
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 200
Florham Park, New Jersey
 07932
(Address of principal executive offices) (Zip Code)
(844) 663-2638
(Registrant’s telephone number, including area code)
_________________________________________________  

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueCNDTNew York Stock Exchange
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 ý Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company o
Large accelerated filerxAccelerated filero
Non-accelerated filero(Do not check if a smaller reporting company)Small reporting companyo
Emerging growth companyo
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 April 30, 20182019
Common Stock, $0.01 par value 210,506,096210,406,011



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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'smanagement's current beliefs, assumptions and expectations and are subject to a number of factors that could cause actual results to differ materially.

Such factors include, but are not limited to: government appropriations and 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 andor any service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our continuing emphasis on and shift toward technology-led digital transactions; customer decision-making cycles and lead time for customer commitments; 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 modernize our information technology infrastructure and consolidate data centers; our ability to comply with data security standards; 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, as well as in our 20172018 Annual Report on Form 10-K filed with the Securities and Exchange Commission.Commission and any current Report on Form 8-K. 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.








 



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CONDUENT INCORPORATED
FORM 10-Q
March 31, 20182019
TABLE OF CONTENTS
 
 Page
Part I — Financial Information
 
Item 1.
Financial Statements (Unaudited)
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 PresentationItem 2.
7
Note 2 – Recent Accounting Pronouncements
8
Note 3 – Segment Reporting
12
Note 4 – Assets/Liabilities Held for Sale
14
Note 5 – Restructuring Programs and Related Costs
14
Note 6 – Debt
15
Note 7 – Financial Instruments
16
Note 8 – Fair Value of Financial Assets and Liabilities
16
Note 9 – Employee Benefit Plans
17
Note 10 – Accumulated Other Comprehensive Loss (AOCL)
17
Note 11 – Contingencies and Litigation
17
Note 12 – Preferred Stock
20
Note 13 – Shareholders’ Equity
20
Note 14 – Earnings per Share
21
Note 15 – Subsequent Event
21
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2223
 
Capital Resources and Liquidity
2629
 
Market Risk Management
27
Non-GAAP Financial Measures
27
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 4.3.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 4.
Controls and Procedures
30
  
Part II — Other Information
 
   
Item 1.
Legal Proceedings
30
Item 1A.
Risk Factors
3130
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 6.
Exhibits
32
Signatures
33


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.



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PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED)


CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
  Three Months Ended
March 31,
(in millions, except per share data) 2018 2017
Revenue $1,420
 $1,553
Cost of services 1,168
 1,294
Gross Margin 252
 259
     
Operating Costs and Expenses    
Research and development 2
 4
Selling, general and administrative 145
 169
Restructuring and related costs 20
 18
Amortization of acquired intangible assets 61
 61
Separation costs —
 5
Interest expense 33
 36
(Gain) loss on divestitures and transaction costs 15
 —
Litigation costs (recoveries), net 31
 (11)
Other (income) expenses, net (1) (1)
Total Operating Costs and Expenses 306
 281
     
Income (Loss) Before Income Taxes (54) (22)
Income tax expense (benefit) (4) (12)
Income (Loss) From Continuing Operations (50) (10)
Income (loss) from discontinued operations, net of tax —
 4
Net Income (Loss) $(50) $(6)
     
Basic Earnings (Loss) per Share:    
Continuing operations $(0.26) $(0.06)
Discontinued operations —
 0.02
Total Basic Earnings (Loss) per Share $(0.26) $(0.04)
     
Diluted Earnings (Loss) per Share:    
Continuing operations $(0.26) $(0.06)
Discontinued operations —
 0.02
Total Diluted Earnings (Loss) per Share $(0.26) $(0.04)
  Three Months Ended
March 31,
(in millions, except per share data) 2019 2018
Revenue $1,158
 $1,420
     
Operating Costs and Expenses    
Cost of Services (excluding depreciation and amortization) 906
 1,115
Selling, general and administrative (excluding depreciation and amortization) 127
 143
Research and development (excluding depreciation and amortization) 3
 2
Depreciation and amortization 115
 116
Restructuring and related costs 16
 20
Interest expense 20
 33
Goodwill impairment 284
 —
(Gain) loss on divestitures and transaction costs 14
 15
Litigation costs (recoveries), net 12
 31
Other (income) expenses, net (1) (1)
Total Operating Costs and Expenses 1,496
 1,474
     
Income (Loss) Before Income Taxes (338) (54)
     
Income tax expense (benefit) (30) (4)
Net Income (Loss) $(308) $(50)
     
Net Income (Loss) per Share:    
Basic $(1.49) $(0.26)
Diluted $(1.49) $(0.26)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

  Three Months Ended
March 31,
(in millions) 2018 2017
Net Income (Loss) $(50) $(6)
Other Comprehensive Income (Loss), Net 
 
Currency translation adjustments, net 9
 12
Reclassification of currency translation adjustments on divestitures 5
 —
Unrecognized gains (loss), net (1) 2
Changes in benefit plans, net —
 1
Other Comprehensive Income (Loss), Net 13
 15
     
Comprehensive Income (Loss), Net $(37) $9


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


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

  Three Months Ended
March 31,
(in millions) 2019 2018
Net Income (Loss) $(308) $(50)
Other Comprehensive Income (Loss), Net 
 
Currency translation adjustments, net 7
 9
Reclassification of currency translation adjustments on divestitures 15
 5
Reclassification of divested benefit plans and other (1) —
Unrecognized gains (loss), net 1
 (1)
Other Comprehensive Income (Loss), Net 22
 13
     
Comprehensive Income (Loss), Net $(286) $(37)

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


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CONDUENT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands) March 31,
2019		 December 31,
2018
Assets    
Cash and cash equivalents $520
 $756
Accounts receivable, net 820
 782
Assets held for sale —
 15
Contract assets 197
 177
Other current assets 294
 234
Total current assets 1,831
 1,964
Land, buildings and equipment, net 336
 328
Operating lease right-of-use assets 338
 —
Intangible assets, net 627
 651
Goodwill 3,171
 3,408
Other long-term assets 360
 329
Total Assets $6,663
 $6,680
Liabilities and Equity    
Current portion of long-term debt $53
 $55
Accounts payable 313
 230
Accrued compensation and benefits costs 148
 193
Unearned income 103
 112
Liabilities held for sale —
 40
Other current liabilities 817
 567
Total current liabilities 1,434
 1,197
Long-term debt 1,496
 1,512
Deferred taxes 283
 327
Operating lease liabilities 282
 —
Other long-term liabilities 99
 280
Total Liabilities 3,594
 3,316
     
Contingencies (See Note 13) 


 


Series A convertible preferred stock 142
 142
     
Common stock 2
 2
Additional paid-in capital 3,879
 3,878
Retained earnings (deficit) (551) (233)
Accumulated other comprehensive loss (403) (425)
Total Equity 2,927
 3,222
Total Liabilities and Equity $6,663
 $6,680
     
Shares of common stock issued and outstanding 211,623
 211,306
Shares of series A convertible preferred stock issued and outstanding 120
 120

(in millions, except share data in thousands) March 31,
2018		 December 31,
2017
Assets    
Cash and cash equivalents $553
 $658
Accounts receivable, net 1,026
 1,114
Assets held for sale 659
 757
Contract assets 163
 —
Other current assets 219
 181
Total current assets 2,620
 2,710
Land, buildings and equipment, net 260
 257
Intangible assets, net 831
 891
Goodwill 3,457
 3,366
Other long-term assets 343
 324
Total Assets $7,511
 $7,548
Liabilities and Equity    
Short-term debt and current portion of long-term debt $81
 $82
Accounts payable 152
 138
Accrued compensation and benefits costs 289
 335
Unearned income 142
 151
Liabilities held for sale 173
 169
Other current liabilities 537
 493
Total current liabilities 1,374
 1,368
Long-term debt 1,972
 1,979
Deferred taxes 382
 384
Other long-term liabilities 131
 146
Total Liabilities 3,859
 3,877
     
Contingencies (See Note 11) 

 

Series A convertible preferred stock 142
 142
     
Common stock 2
 2
Additional paid-in capital 3,853
 3,850
Retained earnings (deficit) 136
 171
Accumulated other comprehensive loss (481) (494)
Total Equity 3,510
 3,529
Total Liabilities and Equity $7,511
 $7,548
     
Shares of common stock issued and outstanding 210,494
 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
March 31,		 Three Months Ended
March 31,
(in millions) 2018 2017 2019 2018
Cash Flows from Operating Activities:        
Net income (loss) $(50) $(6) $(308) $(50)
Adjustments required to reconcile net income (loss) to cash flows from operating activities:        
Depreciation and amortization 117
 125
 115
 116
Contract inducement amortization 1
 1
Deferred income taxes (8) (6) (45) (8)
Goodwill impairment 284
 —
(Gain) loss from investments (1) (3) (1) (1)
Amortization of debt financing costs 2
 2
 2
 2
Net (gain) loss on divestitures and transaction costs 15
 (7)
(Gain) loss on divestitures and transaction costs 14
 15
Stock-based compensation 7
 6
 7
 7
Changes in operating assets and liabilities:        
(Increase) decrease in accounts receivable (75) (110) (60) (75)
(Increase) decrease in other current and long-term assets (49) (34) (112) (49)
Increase (decrease) in accounts payable and accrued compensation (40) (49) 58
 (40)
Increase (decrease) in restructuring liabilities 7
 3
 4
 7
Increase (decrease) in other current and long-term liabilities 43
 (17) (12) 43
Net change in income tax assets and liabilities (5) (9) 5
 (5)
Other operating, net (1) (2) (1) (1)
Net cash provided by (used in) operating activities (38) (107) (49) (38)
Cash Flows from Investing Activities:        
Cost of additions to land, buildings and equipment (33) (17) (53) (33)
Proceeds from sale of land, buildings and equipment 1
 —
Cost of additions to internal use software (6) (8) (17) (6)
Payments for acquisitions, net of cash acquired (90) —
Payments from divestitures, including cash sold (9) —
Net cash provided by (used in) investing activities (39) (25) (168) (39)
Cash Flows from Financing Activities:        
Proceeds on long-term debt —
 306
Debt issuance fee payments —
 (1)
Payments on debt (21) (144) (14) (21)
Net (payments to) transfer from former parent company —
 (161)
Issuance of common stock related to employee stock plans (4) (2)
Taxes paid for settlement of stock based compensation (6) (4)
Dividends paid on preferred stock (2) (2) (2) (2)
Other financing —
 (2)
Net cash provided by (used in) financing activities (27) (6) (22) (27)
Effect of exchange rate changes on cash, cash equivalents and restricted cash —
 2
 2
 —
Increase (decrease) in cash, cash equivalents and restricted cash (104) (136) (237) (104)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period(1)
 667
 416
Cash, Cash Equivalents and Restricted Cash at Beginning of Period 765
 667
Cash, Cash Equivalents and Restricted Cash at End of period(1)
 $563
 $280
 $528
 $563
 ___________
(1)Includes approximately $10$8 million and $25$10 million of restricted cash foras of March 31, 2019 and 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.



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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 Company is a global enterprise and leading provider of business process services with expertise in managing operations involving high volume, repeatabletransaction-intensive processing, analytics and individualized interactions.automation. The Company's portfolio coversCompany serves as a trusted business partner in both the front office and back office, operations; however, the majority of its revenue and differentiation derives from engagements where it servesenabling personalized, seamless interactions on behalf of its clients to managea massive scale that improve end-user interactions across a wide-range of domains. Examples include payments, collections, benefit administration and end-user communication services.experience. 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 appliesby applying its expertise, technology and innovation to continually modernize its offering for improvedhelp them drive customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics. The Company's portfolio includes industry-focused service offerings in attractive growth markets such as healthcare and transportation, as well as multi-industry service offerings such as transaction processing, customer care and payment services.


Basis of Presentation


The unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). The year-end Condensed Consolidated Balance Sheet was derived from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.2018. Certain reclassifications have been made to prior year information to conform to current year presentation. Intercompany balances and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows have been made. These adjustments consist of normal recurring items. InterimThe interim results of operations are not necessarily indicative of the results of the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.


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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 20172018 Annual Report on Form 10-K. Summarized below are the accounting pronouncements adopted subsequent to December 31, 20172018 that were applicable and material to the Company.


New Accounting Standards 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 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. Leases: The Company adopted the new revenue standardupdated lease guidance as of January 1, 2018,2019, using the modified retrospective method.cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company is applyinghas elected the new revenue standard onlypackage of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts not completed as of the adoption date are, or contain, leases, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial application.direct costs for any existing leases as of the adoption date. The adoptionCompany did not elect to apply the hindsight practical expedient. Additionally, the Company has primarily impacted the following: (1) revenue associatedelected not to include short-term leases, with postage recognizeda term of 12 months or less, on its Condensed Consolidated Balance Sheets.


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The impact of adopting this new guidance resulted in an increase to Operating lease right-of-use (ROU) assets of $387 million, an increase to Other current liabilities of $103 million, a decrease to Other long-term liabilities of $21 million, an increase to Operating lease liabilities of $316 million and a net basis versus previously being recognized on a gross basis; (2) the timing of revenue recognition associated with fixed fees for certain contracts with more than one performance obligation; and (3) the timing of recognition of certain pricing discounts and credits.

The Company recorded a net increasedecrease to opening retained earnings (deficit) of $17$8 million as of January 1, 2018, due2019. The adoption did not have an impact on the Company’s Condensed Consolidated Statements of Income (Loss) or Condensed Consolidated Statements of Cash Flows.

Summary of Accounting Policies

Leases
The Company determines if an arrangement is a lease at the inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. The Company has operating and finance leases for real estate and equipment. Operating leases are included in Operating lease ROU assets, Other current liabilities, and Operating lease liabilities in our Condensed Consolidated Balance Sheets. Finance leases are included in Land, buildings and equipment, net, Current portion of long-term debt, and Long-term debt in our Condensed Consolidated Balance Sheets.

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

The components of lease costs were as follows:

(in millions) Three Months Ended March 31, 2019
Finance Lease Costs:  
Amortization of right of use assets $3
Total Finance Lease Costs $3
Operating lease costs:  
Base rent $31
Short-term lease costs 3
Variable lease costs(1)
 7
Sublease income (1)
Total Operating Lease Costs $40

__________
(1)Primarily related to taxes, insurance and common area and other maintenance costs for real estate leases.

Interest expense related 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 standardfinance leases for the three months ended March 31, 2018,2019 was a decrease in Revenueimmaterial.

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Table of $44 million, 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 period ended March 31, 2018, on the Company’s pre-tax income, Condensed Consolidated Balance Sheets and Statements of Cash Flows was not material.

Summary of Accounting PolicyContents
                            
Revenue recognition


The Company recognizes revenue when control of the promised goods or services is transferred


Supplemental cash flow information related to its customers, in an amount that reflects the consideration that the Company expectsleases was as follows:

(in millions) Three Months Ended March 31, 2019
Cash paid for the amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases $(30)
   
Financing cash flow from finance leases $(3)
   
Supplemental non-cash information on right of use assets obtained in exchange for new lease obligations:  
Operating leases $6


Supplemental balance sheet information related to receive in exchange for those goods or services.leases was as follows:


(in millions) March 31, 2019
Operating Leases:  
Operating lease right of use assets $338
   
Other current liabilities $112
Operating lease liabilities 282
Total Operating Lease Liabilities $394
   
Finance Leases:  
Land, buildings and Equipment, net $21
   
Current portion of long-term debt $9
Long-term debt 14
Total Finance Lease Liabilities $23


The Company's contracts with customers often include promises to transfer multiple productsleases generally do not provide an implicit rate, 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,therefore the Company may contract foruses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an implementation or development project and also provide services to operateestimate of the system whichinterest rate the Company implements or developswould incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a periodlease within a particular currency environment. The weighted average discount rates for operating and finance leases were 5.2% and 4.8%, respectively.

The weighted average remaining lease terms for operating and finance leases at March 31, 2019, were 5 years and 3 years, respectively.


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The aggregate future lease payments for operating leases were as follows:

  March 31, 2019
(in millions) Operating Lease Payments
Maturity Of Lease Liabilities:  
2019 (remaining) $100
2020 105
2021 75
2022 52
2023 35
Thereafter 84
Total undiscounted operating lease payments 451
Less imputed interest 57
Present value of operating lease liabilities $394


Maturities of finance lease liabilities were as follows:

  March 31, 2019
(in millions) Finance Lease Payments
2019 (remaining) $8
2020 6
2021 5
2022 4
2023 1
Thereafter —
Total undiscounted finance lease payments 24
Less imputed interest 1
Present value of finance lease liabilities $23


As of March 31, 2019, the Company may contracthad an additional operating lease for real estate of $14 million, which has not commenced and has not been recognized on the Company's Consolidated Balance Sheet. This operating lease is expected 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 allocatedcommence in 2019 with a lease term of 10 years.

As previously disclosed in Note 5 to the separate performance obligationsConsolidated Financial Statements included in the Company's Annual Report on a relative standalone selling price basis. The Company generally determines standalone selling prices based onForm 10-K for the prices charged to customersyear ended December 31, 2018, under the previous lease accounting, future minimum lease payments for operating leases having initial or using expected cost plus margin.remaining non-cancelable lease term in excess of one year were as follows:


  December 31, 2018
(in millions) Operating Lease Payments
Maturity Of Lease Liabilities:  
2019 $153
2020 113
2021 78
2022 53
2023 33
Thereafter 76
Total minimum operating lease payments $506



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OnceNew Accounting Standards To Be Adopted

Credit Losses: In June 2016, the Company determinesFASB updated the performance obligations, the Company estimates the amountaccounting guidance related to measurement of variable consideration, if any,credit losses on financial instruments, which requires financial assets measured at amortized cost to be included in determining the transaction price. The majority of the Company's contracts consist of fixed, variable consideration or both. Typical forms of variable consideration include variable pricing such as volume discounts, tiered and 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 considerationpresented at the inception of the contract, either utilizing the expected value or the most likelynet 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 futurecollected. This updated guidance is effective for fiscal years beginning after December 15, 2019, including interim periods exclude unexercised customer options to purchase additional services that do not represent material rights towithin those fiscal years. Early adoption is permitted. We are currently evaluating 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 feesimpact 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.

Table of ContentsConsolidated Financial Statements.
 

Note 3 – Revenue, Contract Assets and Liabilities


Disaggregation of Revenue


The following table provides information about disaggregated revenue by major service line, andthe timing of revenue recognition as well asand a reconciliation of the disaggregated revenue withby reportable segments:

(in millions) Three Months Ended March 31, 2018
Commercial Industries:  
Digital interactions $295
Customer experience 299
Human resource services 260
Total Commercial Industries 854
Public Sector:  
Federal, state and local government 274
Payment services 84
Transportation services 200
Total Public Sector 558
Other:  
Other 8
Total Other 8
Total Consolidated Revenue $1,420
Timing of Revenue Recognition:  
Point in time $36
Over time 1,384
Total Revenue $1,420

segments. Refer to Note 34 – Segment Reporting for additional information on the Company's reportable segments.

  Three Months Ended March 31,
(in millions) 2019 2018
Commercial Industries:    
Omni-channel communications $211
 $219
Human resource services 182
 187
Industry services 219
 248
Total Commercial Industries 612
 654
Government Services:    
Government Services and Healthcare 119
 114
Payment Services 74
 82
State and Local 119
 126
Federal 13
 13
Total Government Services 325
 335
Transportation:    
Tolling 79
 72
Transit 54
 54
Photo and Parking 48
 46
Commercial Vehicle 3
 4
Total Transportation 184
 176
Other:    
Divestitures 36
 248
Education 1
 7
Total Other 37
 255
Total Consolidated Revenue $1,158
 $1,420
     
Timing of Revenue Recognition:    
Point in time $39
 $36
Over time 1,119
 1,384
Total Revenue $1,158
 $1,420

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.

Digital Interactions: The Company leverages technology to assist its clients with transaction processing as well as providing platform solutions.

Customer Experience: The Company offers a range of services that help its clients support their end-users. This includes in-bound and out-bound call support spanning from simple customer care to complex 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 in Workers Compensation claims management.

Federal, State and Local Government: 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.

Payment Services: The Company’s payment services include Prepaid Cards, Child Support disbursements and other government support programs, disbursement of electronic payments directly to end users, collections and transfer of payments.

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Transportation Services: The transportation services the Company offers include support for electronic toll collection, public transit, parking, photo enforcement and commercial vehicle operations.


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 to consideration become unconditional. Unearned income includes payments received in advance of performance under the contract, which are realized when the associated revenue is recognized under the contract.


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


(in millions) March 31, 2018 January 1, 2018 March 31, 2019 December 31, 2018
Contract Assets (Unearned Income)        
Current contract assets(1)
 $163
 $191
 $197
 $177
Long-term contract assets(2)(1)
 35
 2
 14
 7
Current unearned income (142) (128) (103) (112)
Long-term unearned income(3)(2)
 (42) (46) (29) (32)
Net Contract Assets (Unearned Income) $14
 $19
 $79
 $40
Accounts receivable, net $1,026
 $908
 $820
 $782
__________
(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)(2)Presented in Other long-term liabilities in the Condensed Consolidated Balance Sheets


RevenueRevenues of $53 million and $83 million waswere recognized during the three months ended March 31, 2019 and 2018, respectively, related to the Company's unearned income at December 31, 2018 and January 1, 2018. The Company had no asset impairment charges related to contract assets for the three months ended March 31, 2018.2018, respectively.


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 March 31, 2018,2019, was approximately $2.4$2 billion. The Company expects to recognize approximately 40% and 23%65% of the remaining performance obligations through 2018 and 2019, respectively, with the remaining recognized thereafter.

Costs to Obtain and Fulfill a Contract

The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining customer contracts. The net book value of these costs, which were $29 million as of March 31, 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 costsrevenues over the term of the contract or the estimated life of the customer relationship, if renewals are expectednext two years 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.remainder thereafter.

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Also, the Company capitalizes costs incurred to fulfill its contracts that (i) relate directly to the contract (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and (iii) are expected to be recovered through revenue generated under the contract. The net book value of these costs, which comprise set-up/transition activities, were $68 million as of March 31, 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 amount of amortization of cost incurred to obtain and fulfill a contract for the three months ended March 31, 2018, was $14 million.

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 on January 1, 2018 using the retrospective method. The revision to prior year Condensed Consolidated Statements of Cash Flows from the adoption of this guidance was a reclassification in the Condensed Consolidated Statements of Cash Flows of $25 million of restricted cash to cash, cash equivalents and restricted cash.

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. 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.

Note 34 – Segment Reporting


The Company's reportable segments correspond to how we organizethe Company organizes and managemanages the business and are aligned to the industries in which ourthe Company's clients operate.

Beginning in 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 the Other segment from both the Commercial Industries and the Public Sector segments. The prior periods presented have been revised to reflect these changes.


Our financial performance is based on Segment Profit / (Loss) and Segment Adjusted EBITDA for the following twothree reportable segments:
Commercial Industries, Government Services and Transportation.
Public Sector

Commercial Industries: Our Commercial Industries segment provides business process services and customized solutions to clients in a variety of industries. Across the Commercial Industries segment, we 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: Government Services: Our Public SectorGovernment Services segment provides government-centric business process services to U.S. federal, state and local and foreign governments for, transportation, public assistance, program administration, transaction processing Medicaid platform and payment services.


Transportation: Our Transportation segment provides systems and support services to transportation departments and agencies globally. Offerings include support for electronic toll collection, public transit, parking and photo enforcement.

Other segment includes our divestitures and our Student Loan business, which isthe Company exited in run-off mode.the third quarter of 2018.



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Selected financial information for our reportable segments is as follows:


  Three Months Ended March 31,
(in millions) Commercial Industries Government Services Transportation Other Shared IT / Infrastructure & Corporate Costs Total
March 31, 2019       Divestitures Other    
Revenue $612
 $325
 $184
 $36
 $1
 $—
 $1,158
Segment profit (loss) $113
 $86
 $20
 $1
 $—
 $(151) $69
Segment depreciation and amortization $22
 $9
 $9
 $—
 $—
 $14
 $54
Adjusted EBITDA $135
 $95
 $29
 $1
 $—
 $(137) $123
               
March 31, 2018              
Revenue $654
 $335
 $176
 $248
 $7
 $—
 $1,420
Segment profit (loss) $110
 $108
 $27
 $39
 $(3) $(176) $105
Segment depreciation and amortization $28
 $7
 $8
 $2
 $1
 $10
 $56
Adjusted EBITDA $138
 $115
 $35
 $41
 $(2) $(166) $161

  Three Months Ended March 31,
(in millions) Commercial Industries Public Sector Other Total
2018        
Revenue $854
 $558
 $8
 $1,420
Segment profit (loss) $44
 $65
 $(4) $105
Segment depreciation and amortization $34
 $22
 $—
 $56
Adjusted EBITDA $78
 $87
 $(4) $161
         
2017        
Revenue $895
 $609
 $49
 $1,553
Segment profit (loss) $26
 $57
 $3
 $86
Segment depreciation and amortization $36
 $27
 $1
 $64
Adjusted EBITDA(1)
 $62
 $87
 $4
 $153
__________
(1)2017 Adjusted EBITDA for Public Sector does not include $3 million of net NY MMIS and HE charge.


(in millions) Three Months Ended March 31,
Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2019 2018
Income (Loss) Before Income Taxes $(338) $(54)
Reconciling items:    
Amortization of acquired intangible assets 62
 61
Restructuring and related costs 16
 20
Interest expense 20
 33
Goodwill impairment 284
 —
(Gain) loss on divestitures and transaction costs 14
 15
Litigation costs (recoveries), net 12
 31
Other (income) expenses, net (1) (1)
Segment Pre-tax Income (Loss) $69
 $105
Segment depreciation and amortization (including contract inducements) $54
 $56
Adjusted EBITDA $123
 $161

(in millions) Three Months Ended March 31,
Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2018 2017
Income (Loss) Before Income Taxes $(54) $(22)
Reconciling items:    
Restructuring and related costs 20
 18
Amortization of acquired intangible assets 61
 61
Interest expense 33
 36
Separation costs —
 5
(Gain) loss on divestitures and transaction costs 15
 —
Litigation costs (recoveries), net 31
 (11)
Other (income) expenses, net (1) (1)
Segment Pre-tax Income (Loss) $105
 $86
Segment depreciation and amortization $56
 $64
NY MMIS —
 8
HE charge —
 (5)
Adjusted EBITDA $161
 $153


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Note 45 – Assets/Liabilities Held for Sale


AsIn February 2019, the Company completed the sale of a portfolio of select standalone customer care contracts to Skyview Capital LLC. During the first quarter of 2019, the Company recorded an additional loss, inclusive of transaction costs, of $12 million on the sale of this portfolio, reflecting certain changes in estimates that were made when recording the initial charge. The revenue generated from this business was $36 million for the three months ended March 31, 20182019 and $439 million for the year ended December 31, 2017, there were certain businesses that qualified as assets/liabilities held for sale due to plans for disposal through sale. These assets/liabilities held for sale include a mix of both Commercial Industries and Public Sector that represent businesses in markets or with services that2018.

Note 6 – Business Acquisition

In January 2019, the Company did not seecompleted the acquisition of Health Solutions Plus (HSP), a software provider of healthcare payer administration solutions, for a total base consideration of $90 million and a maximum contingent consideration payment of $8 million based on a cumulative achievement over two years. Revenue and pre-tax income recorded since the acquisition date through March 31, 2019 were $4 million and $3 million, respectively.

The Company’s purchase price allocation for the HSP acquisition is preliminary and subject to revision as strategic or core. The following is a summary ofadditional information related to the major categoriesfair value of assets and liabilities that have been reclassified to held for sale.becomes available. The preliminary purchase price based upon the current determination of fair values as at March 31, 2019 was as follows:


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(in millions) March 31, 2018 December 31, 2017
Accounts Receivable, net $134
 $160
Other current assets 42
 41
Contract assets 5
 —
Land, building and equipment, net 5
 6
Product Software, net 4
 3
Intangible assets, net 7
 7
Goodwill 458
 537
Other long-term assets 4
 3
   Total Assets held for sale $659
 $757
     
Accounts payable $8
 $9
Accrued compensation 16
 20
Unearned revenue 24
 30
Other current liabilities 71
 53
Pension and other benefit obligations 48
 50
Other long-term liabilities 6
 7
  Total Liabilities held for sale $173
 $169



(in millions) March 31, 2019
Fair Value of Consideration Transferred:  
Cash paid $90
Recorded earn-out payable 7
Total Consideration $97
Allocation of Purchase Price:  
Net tangible assets $10
Costs Assigned to Intangible Assets  
Developed technology 20
Customer relationships 18
Trademarks and trade names 1
Goodwill 48
Total Intangible Assets 87
   
Total Assets $97


The useful lives are 7 years, 15 years and 1.5 years for Developed technology, Customer relationships and Trademarks and trade names, respectively. The acquired goodwill is associated with the Company's Commercial Industries segment. This acquired goodwill, while tax deductible, includes $7 million related to contingent consideration payable that is not tax deductible until it is earned and paid. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of HSP.

The Company has not presented separate results of operations or combined pro forma financial information of the Company and the acquired interests because the results of operations of the acquired business are considered immaterial.

Note 57 – Restructuring Programs and Related Costs


The Company engages in a series of restructuring programs related to downsizing its employee base, exiting certain activities, outsourcing certain internal functions and engaging in other actions designed to reduce its cost structure and improve productivity. The implementation of the Company's strategic transformation 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. Also included in Restructuring and Related Costs are incremental, non-recurring costs related to the consolidation of the Company's data centers, which totaled $9 million for the three months ended March 31, 2019. Management continues to evaluate the Company's business; therefore,business, and in the future, years, there may be additional provisions for new plan initiatives as well asand/or changes in previously recorded estimates as payments are made, or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these programs.


Costs associated with restructuring, including employee severance and lease termination costs, are generally recognized when it has been determined that a liability has been incurred, which is generally upon communication to the affected employees or exit from the leased facility. In those geographies where we have either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, we recognize employee severance costs when they are both probable and reasonably estimable.

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A summary of the Company's restructuring program activity during the three months ended March 31, 2019 and 2018 was as follows:

(in millions)
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 Total
Accrued Balance at December 31, 2018$13
 $36
 $49
Restructuring provision3
 14
 17
Adjustments to prior accruals—
 (1) (1)
Total Net Current Period Charges3
 13
 16
Payments against reserve and currency(5) (6) (11)
Adoption of new lease standard—
 (22) (22)
Other—
 (3) (3)
Accrued Balance at March 31, 2019$11
 $18
 $29


(in millions)
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 Total
Accrued Balance at December 31, 2017$14
 $30
 $44
Restructuring provision17
 7
 24
Adjustments to prior accruals(3) (2) (5)
Total Net Current Period Charges14
 5
 19
Payments against reserve and currency(5) (8) (13)
Other—
 1
 1
Accrued Balance at March 31, 2018$23
 $28
 $51

(in millions)
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 Total
Accrued Balance at December 31, 2017$14
 $30
 $44
Restructuring provision17
 7
 24
Reversals of prior accruals(3) (2) (5)
Total Net Current Period Charges14
 5
 19
Payments against reserve and currency(5) (8) (13)
Liabilities held for sale—
 1
 1
Accrued Balance at March 31, 2018$23
 $28
 $51

(in millions)
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 Total
Accrued Balance at December 31, 2016$15
 $6
 $21
Restructuring provision11
 3
 14
Reversals of prior accruals(1) (1) (2)
Total Net Current Period Charges10
 2
 12
Payments against reserve and currency(8) (1) (9)
Accrued Balance at March 31, 2017$17
 $7
 $24


In addition, the Company recorded professional support costs associated with the strategic transformation program of $1 million and $6 million in Restructuring and related costs duringof $0 million and $1 million for the three months ended March 31, 20182019 and 2017,2018, respectively.


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


  Three Months Ended
March 31,
(in millions) 2019 2018
Commercial Industries $2
 $12
Shared IT / Infrastructure & Corporate Costs 14
 7
Total Net Restructuring Charges $16
 $19

  Three Months Ended
March 31,
(in millions) 2018 2017
Commercial Industries $15
 $8
Public Sector 3
 4
Other 1
 —
Total Net Restructuring and Asset Impairment Charges $19
 $12


Note 6 -8 – Debt


Long-term debt was as follows:


(in millions) March 31, 2019 December 31, 2018
Term loan A due 2022 $691
 $705
Term loan B due 2023 831
 833
Senior notes due 2024 34
 34
Finance lease obligations 23
 26
Principal debt balance 1,579
 1,598
Debt issuance costs and unamortized discounts (30) (31)
Less: current maturities (53) (55)
Total Long-term Debt $1,496
 $1,512



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(in millions) March 31, 2018 December 31, 2017
Term loan A due 2021 $728
 $732
Term loan B due 2023 840
 842
Senior notes due 2024 510
 510
Capital lease obligations 28
 33
Principal debt balance 2,106
 2,117
Debt issuance costs and unamortized discounts (53) (56)
Less: current maturities (81) (82)
Total Long-term Debt $1,972
 $1,979

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Note 79 – Financial Instruments


The Company is a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As a part of the Company's foreign exchange risk management strategy, the Company uses derivative instruments, primarily forward contracts, to hedge the funding of foreign entities which have a non-dollar functional currency, thereby reducing volatility of earnings or protecting fair values of assets and liabilities.
 
At March 31, 20182019 and December 31, 2017,2018, the Company had outstanding forward exchange contracts with gross notional values of approximately $137$164 million and $160$167 million, respectively. Approximately 61%65% of these contracts mature within three months, 15%14% in three to six months, 19%16% in six to 12twelve months and 5% in greater than 12twelve months. The majorityMost of these foreign currency derivative contracts are designated as cash flow hedges and did not have a material impact on the Company's balance sheet, income statement or cash flows for the periods presented.

Refer to Note 10 – Fair Value of Financial Assets and Liabilities for additional information regarding the fair value of the Company's foreign exchange forward contracts.
 
Note 810 – 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.


Unless noted herein, the Company's valuation methodologies for assets and liabilities measured at fair value are described in Note 10 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Summary of Financial Assets and Liabilities Accounted for at Fair Value on a Recurring Basis

The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2. 


(in millions) March 31, 2019 December 31, 2018
Assets:    
Foreign exchange contract - forward $3
 $3
Total Assets $3
 $3
Liabilities:    
Foreign exchange contracts - forwards $1
 $1
Total Liabilities $1
 $1

(in millions) March 31, 2018 December 31, 2017
Assets:    
Foreign exchange contract - forward $1
 $2
Total Assets $1
 $2
Liabilities:    
Foreign exchange contracts - forwards $1
 $1
Deferred compensation plan liabilities(1)
 92
 99
Total Liabilities $93
 $100

_____________________________
(1)In September 2017, the Company terminated the legacy deferred compensation plans (Plans) and the Company Owned Life Insurance (COLI), which held the Plans’ investments. The Company will make payments to Plan participants during the remainder of 2018.


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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:


 March 31, 2019 December 31, 2018
(in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Assets:       
Assets held for sale—
 —
 15
 15
Liabilities:       
Long-term debt1,496
 1,478
 1,512
 1,463
Liabilities held for sale—
 —
 40
 40

 March 31, 2018 December 31, 2017
(in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt1,972
 2,063
 1,979
 2,070


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

The fair value of the Goodwill impairment of $284 million recorded for the three months ended March 31, 2019, was estimated based on a discounted cash flow and market multiple analysis (level 3). Refer to Note 18 – Goodwill to the Condensed Consolidated Financial Statements for additional information regarding this impairment charge.

The fair value of the Assets held for sale and the Liabilities held for sale were measured based on the sales price less estimated transactions costs (Level 3). Refer to Note 5 – Assets/Liabilities Held for Sale to the Condensed Consolidated Financial Statements for additional information

The fair value of Long-term debt was estimated based on the current rates offered to the Company for debt of similar maturities (Level 2).
 
Note 911 – Employee Benefit Plans


The Company has post-retirement savings and investment plans in several countries, including the U.S., U.K. and Canada. In many instances, employees from those defined benefit pension plans that have been amended to freeze future service accruals were transitioned to an enhanced defined contribution plan. In these plans, employees are allowed to contribute a portion of their salaries and bonuses to the plans. Historically, the Company matched a portion of employee contributions. However, beginning in 2019, the Company has suspended its match to the 401(k) plan for all U.S. employees, except hourly employees.

The Company recognized an expense related to its defined contribution plans of $8$3 million and $10$8 million for the three months ended March 31, 2019 and 2018, and 2017, respectively. As a result of suspending 401(K) match for U.S. employees as indicated above, there was a $3 million reduction in expense for the three months ended March 31, 2019.


Note 10 -12 – Accumulated Other Comprehensive Loss (AOCL)


AOCL is comprised ofBelow are the following:balances and changes in AOCL(1):


(in millions) March 31, 2018 December 31, 2017
Cumulative currency translation adjustments $(423) $(437)
Other unrealized gains (losses), net —
 1
Benefit plans net actuarial losses and prior service credits (58) (58)
Total Accumulated Other Comprehensive Loss $(481) $(494)
(in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total
Balance at December 31, 2018 $(426) $2
 $(1) $(425)
Other comprehensive income (loss) before reclassifications 7
 1
 —
 8
Amounts reclassified from accumulated other comprehensive loss 15
 —
 (1) 14
Net current period other comprehensive income (loss) 22
 1
 (1) 22
Balance at March 31, 2019 $(404) $3
 $(2) $(403)



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(in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total
Balance at December 31, 2017 $(437) $1
 $(58) $(494)
Other comprehensive income (loss) before reclassifications 9
 (1) —
 8
Amounts reclassified from accumulated other comprehensive loss 5
 —
 —
 5
Net current period other comprehensive income (loss) 14
 (1) —
 13
Balance at March 31, 2018 $(423) $—
 $(58) $(481)
__________
(1)All amounts are net of tax. Tax effects were immaterial.

Note 1113 – Contingencies and Litigation


As more fully discussed below, 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, regulations and regulations.matters. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing its litigation and regulatory matters using available information. The Company develops its view on estimated losses in consultation with outside counsel handling its defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in the Company's determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts in excess of any accrual for such matter or matters, this could have a material adverse effect on the Company's results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. The Company believes it has recorded adequate provisions for any such matters as of March 31, 2018.2019. Litigation is inherently unpredictable, and it is not possible to predict the ultimate outcome of these matters and such outcome in any such matters could be in excess of any amounts accrued and could be material to the Company's results of operations, cash flows or financial position in any reporting period.


Additionally, guarantees, indemnifications and claims arise during the ordinary course of business from relationships with suppliers, customers and nonconsolidatednon-consolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, real estate, intellectual property such as patents, environmental matters and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the
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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 March 31, 2018,2019, the Company had accrued its estimate of liability incurred under its indemnification arrangements and guarantees.



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Litigation Against the Company


State of Texas v. Xerox Corporation, Conduent Business Services, LLC (f/k/a Xerox Business Services, LLC), Conduent State Healthcare, LLC (f/k/a Xerox State Healthcare, LLC, f/k/a ACS State Healthcare, 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,Conduent State Healthcare LLC (f/k/a Xerox State Healthcare, LLC and ACS State HealthcareHealthcare) (“CSH”), Conduent Business Services LLC (“CBS”) and Conduent Incorporated (“CI”) (collectively, CSH, CBS and CI are referred to herein as the "Xerox"Conduent Defendants") and Xerox Corporation (together with the Conduent Defendants called “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 Action”). TheIn February 2019 a settlement agreement and release was reached among the Defendants, the State alleges thatand HHSC. Pursuant to the Xerox Defendants made false representationsterms of material facts regarding the processes, procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks recovery of amounts paid for orthodontic treatment under the Texas Medicaid program forAgreement ("Texas Agreement"), the periodConduent Defendants will pay the State of Texas $236 million in full settlement of the claims asserted against the Defendants. This amount was payable in installments and all proceedings in the lawsuit were suspended and the State and the HHSC agreed to dismiss the lawsuit with prejudice and release the Defendants from approximately 2004all of the State’s claims after all settlement payments are made. In May 2019, the Defendants entered into the First Amendment to 2012, three timesSettlement Agreement and Release with the State (the “Amended Agreement”). Pursuant to the terms of the Amended Agreement, the amount paid to the State by the Conduent Defendants in full settlement of the State Action will be paid as follows: (1) $40 million on or before April 15, 2019 (which the Company has already paid); (2) $78 million on or before May 15, 2019 (the “First Payment”); and (3) $118 million on or before January 15, 2020 (the “Second Payment”). In order to secure the Second Payment, the Company will provide bank issued letters of credit to the State in the full amount of the payments made asSecond Payment (the “LCs”) which the State may present for payment to the issuing banks if the Conduent Defendants do not make the Second Payment. On the 91st day following receipt of the First Payment and the LCs, the State will file a dismissal with prejudice dismissing the State Action and fully release and discharge the Defendants. As a result of the alleged unlawful acts, civil penalties, pre- and post-judgment interest and all costs and attorneys’ fees. The Xerox Defendants filed their Answerchange in June, 2014 denying all allegations. A trial date is schedule for November, 2018. Duringpayment terms pursuant to the first quarterAmended Agreement, the Company recognized an additional $13 million of 2018, the State notified the Xerox Defendantsexpense 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. We are not 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 thirty-eight million dollars the Company has already accrued. In the course of litigation, the Company periodically engages in discussions with the State's counsel for possible resolution of the matter. Should developments cause a change in 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 the Company's results of operations, cash flows and financial position in the period in which such change in determination, judgment or settlement occurs.quarter ended March 31, 2019.


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



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Conduent Business Services, LLC v. Cognizant Business Services, LLC:On April 12, 2017, Conduent Business Services LLC (“Conduent”) filed a lawsuit against Cognizant Business Services Corporation (“Cognizant”) in the Supreme Court of New York County, New York. The lawsuit relates to the Amended and Restated Master Outsourcing Services Agreement effective as of October 24, 2012, and the service delivery contracts and work orders thereunder, between Conduent and Cognizant, as amended and supplemented (the “Contract”). The Contract contains certain minimum purchase obligations by Conduent through the date of expiration. The lawsuit alleges that Cognizant committed multiple breaches of the Contract, including Cognizant’s failure to properly perform its obligations as subcontractor to Conduent under Conduent’s contract with the New York Department of Health to provide a Medicaid Management Information Systems (the “NY MMIS Contract”).Systems. In the lawsuit, Conduent seeks damages in excess of one hundred fifty million dollars.$150 million. During the first quarter of 2018, Conduent provided notice to Cognizant that it was terminating the Contract for cause and recorded in the same period certain charges associated with the termination. Cognizant has asserted two counterclaims against Conduent in the lawsuitfor breach of contract seeking recovery of damages in excess of twenty-two$47 million, dollars.which includes amounts alleged not paid to Cognizant under the contract and an alleged $25 million for termination fees. 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.


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 commencehave commenced an action, it may seekhave sought 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. 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, the U.S. Department of Education, the U.S. Department of Justice the New York Office of the Attorney General, the New York Department of Financial Services and the Massachusetts Office of the Attorney Generalseveral state agencies began similar reviews. XES has cooperated and continues to fully cooperate with all regulatory agencies and has resolved the Massachusetts Office of the Attorney General investigation in November 2016. Both asstate agency investigations. As a result of these regulatory inquiries, its own reviews of operations and work performed by external auditors, XES has identified and remediated certain other operational issues requiring remediation,issues. XES disclosed these additional operational projects to the Department at the end of the second quarter of 2018 and this remediation work either has commenced or will commence shortly. As it continues to wind down its business and deconvert loans to other servicers, XES continues to review its operations to determine whether any additional remediation work is necessary.the CFPB in late 2018. In the third quarter of 2018, the Company exited the Student Loan Services business. In the first quarter of 2019, the Company resolved the CFPB’s investigation. The Company cannot provide assurance that the CFPB, or another regulator, a financial institution on behalf of which the Company serviced third-party student loans, or another party will not ultimately commence a legal action against XES in in which fines, penalties or other liabilities are sought from XES, norXES. Nor is the Company able to predict the likely outcome of these investigations.matters, should any such matter be commenced, or reasonably provide an estimate or range of estimates of any loss in excess of current reserves. The Company could, in future periods, incur judgments or enter into settlements to resolve these investigationspotential matters for amounts in excess of current reserves and there could be a material adverse effect on the Company's results of operations, cash flows and financial position in the period in which such change in judgment or settlement occurs.



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Other Contingencies


Certain contracts, primarily in the Company's Public Sector segment,Government Services and Transportation segments, require the Company to provide a surety bond or a letter of credit as a guarantee of performance. As of March 31, 2018,2019, the Company had $590$636 million of outstanding surety bonds used to secure its performance of contractual obligations with its clients and $340$266 million of outstanding letters of credit issued to secure the Company's performance of contractual obligations to its clients as well as other corporate obligations.
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In general, the Company would only be liable for the amount of these guarantees in the event of default in the Company's performance of its obligations under each contract. The Company believes it has sufficient capacity in the surety markets and liquidity from its cash flow and its various credit arrangements (including its Credit Facility) to allow it to respond to future requests for proposals that require such credit support. The Company has service arrangements where the Company services third-party student loans in the Federal Family Education Loan program (FFEL) on behalf of various financial institutions. The Company services these loans for investors under outsourcing arrangements and do not acquire any servicing rights that are transferable by the Company to a third-party. At March 31, 2018, the Company serviced a FFEL portfolio of loans with an outstanding principal balance of approximately $4 billion. Some servicing agreements contain provisions that, under certain circumstances, require the 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 the Company's servicing error. If defaults caused by the Company are cured during an initial period, any obligation the Company may have to purchase these loans expires. Loans that the Company purchases may be subsequently cured, the guaranty reinstated and the loans repackaged for sale to third parties. The Company evaluates its exposure under its purchase obligations on defaulted loans and establishes a reserve for potential losses. The reserve is evaluated periodically and adjusted based upon management’s analysis of the historical performance of the defaulted loans. As of March 31, 2018, other current liabilities included reserves of approximately $2 million, which 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 -14 – Preferred Stock


Series A Preferred Stock


In December 2016, the Company issued 120 thousand120,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $120 million and an initial fair value of $142 million. The 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 thousand5,393,000 shares (reflecting an initial conversion price of approximately $22.25 per share of common stock), subject to customary anti-dilution adjustments.


Note 1315 – Shareholders’ Equity


(in millions)
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 AOCL 
Conduent Shareholders'
Equity
Balance at December 31, 2018$2
 $3,878
 $(233) $(425) $3,222
Cash dividends paid - preferred stock—
 —
 (2) —
 (2)
Cumulative impact of adopting the new lease standard—
 —
 (8) —
 (8)
Stock option and incentive plans, net—
 1
 —
 —
 1
Comprehensive Income (Loss):         
Net Income (Loss)—
 —
 (308) —
 (308)
Other comprehensive income (loss), net—
 —
 —
 22
 22
Total Comprehensive Income (Loss), Net—
 —
 (308) 22
 (286)
Balance at March 31, 2019$2
 $3,879
 $(551) $(403) $2,927

(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—
 —
 (50) 13
 (37)
Cash dividends paid - preferred stock—
 —
 (2) —
 (2)
Cumulative impact of adopting the new revenue standard—
 —
 17
 —
 17
Stock option and incentive plans, net—
 3
 —
 —
 3
Balance at March 31, 2018$2
 $3,853
 $136
 $(481) $3,510


(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
Cash dividends paid - preferred stock—
 —
 (2) —
 (2)
Cumulative impact of adopting the new revenue standard—
 —
 17
 —
 17
Stock option and incentive plans, net—
 3
 —
 —
 3
Comprehensive Income (Loss):         
Net Income (Loss)—
 —
 (50) —
 (50)
Other comprehensive income (loss), net—
 —
 —
 13
 13
Total Comprehensive Income (Loss), Net—
 —
 (50) 13
 (37)
Balance at March 31, 2018$2
 $3,853
 $136
 $(481) $3,510



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(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—
 —
 (6) 15
 9
Cash dividends paid - preferred stock—
 —
 (2) —
 (2)
Stock option and incentive plans, net—
 4
 —
 —
 4
Balance at March 31, 2017$2
 $3,816
 $(8) $(511) $3,299

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Note 1416 – 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):stock:
  Three Months Ended
March 31,
(in millions, except per share data in whole dollars and shares in thousands) 2019 2018
Net income (loss) $(308) $(50)
Accrued dividends on preferred stock (2) (2)
Adjusted Net Income (Loss) Available to Common Shareholders $(310) $(52)
     
Weighted average common shares outstanding 207,944
 205,093
Common shares issuable with respect to:    
Stock options —
 —
Restricted stock and performance units / shares —
 —
Adjusted Weighted Average Common Shares Outstanding 207,944
 205,093
     
Net Income (Loss) per Share:    
Basic $(1.49) $(0.26)
Diluted $(1.49) $(0.26)
     
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 110
 317
Restricted stock and performance shares/units 5,124
 5,527
Convertible preferred stock 5,393
 5,393
Total Anti-Dilutive Securities 10,627
 11,237

  Three Months Ended
March 31,
(in millions, except per share data. Shares in thousands) 2018 2017
Basic Earnings (Loss) per Share:    
Net income (loss) from continuing operations $(50) $(10)
Accrued dividends on preferred stock (2) (2)
Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders (52) (12)
Net income (loss) from discontinued operations —
 4
Adjusted Net Income (Loss) Available to Common Shareholders $(52) $(8)
Weighted average common shares outstanding 205,093
 203,400
     
Basic Earnings (Loss) per Share:    
Continuing operations $(0.26) $(0.06)
Discontinued operations —
 0.02
Basic Earnings (Loss) per Share $(0.26) $(0.04)
     
Diluted Earnings (Loss) per Share:    
Net income (loss) from continuing operations $(50) $(10)
Accrued dividends on preferred stock (2) (2)
Adjusted Net Income (Loss) From Continuing Operations Available to Common Shareholders (52) (12)
Net income (loss) from discontinued operations —
 4
Adjusted Net Income (Loss) Available to Common Shareholders $(52) $(8)
Weighted average common shares outstanding 205,093
 203,400
Common shares issuable with respect to:    
Stock options —
 —
Restricted stock and performance units / shares —
 —
8% Convertible preferred stock —
 —
Adjusted Weighted Average Common Shares Outstanding 205,093
 203,400
Diluted Earnings (Loss) per Share:    
Continuing operations $(0.26) $(0.06)
Discontinued operations —
 0.02
Diluted Earnings (Loss) per Share $(0.26) $(0.04)
     
The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive (shares in thousands):
     
Stock Options 317
 665
Restricted stock and performance shares 5,527
 4,916
Convertible preferred stock 5,393
 5,393
Total Anti-Dilutive Securities 11,237
 10,974

 
Note 1517 – Subsequent EventSupplementary Financial Information


In April 2018,The components of Other current liabilities were as follows:

(in millions) March 31,
2019		 December 31,
2018
Accrued liabilities $308
 $307
Legal settlements 280
 147
Current operating lease liabilities 112
 —
All other liabilities 117
 113
Total Other Current Liabilities $817
 $567


Note 18 – Goodwill

As a result of the Transportation reporting unit experiencing unanticipated losses of certain customer contracts, lower than expected new customer contracts and higher costs of delivery (all subsequent to February 2019), the growth of this reporting unit decreased resulting in its fair value being below its carrying value by approximately $284 million. As a result, the Company announced that it has entered into two binding agreements (subject to regulatory approval) to sell (1) its off-street Parking business, includingrecorded a pre-tax impairment charge of approximately $284 million for the Multipark System in France and the United Kingdom (U.K.), along with its U.S. Airport Parking business and (2) its U.S. Human Resource Consulting and Actuarial business and the Human Resource Consulting and Outsourcing business located in Canada and the U.K. The revenues generated from these businesses in 2017 were $321 million.three months ended March 31, 2019.


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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.


Overview


We are a leading provider of digital business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner inOur portfolio covers both the front office and back office enablingoperations; however, the majority of our revenue and differentiation derives from engagements where we serve on behalf of our clients to manage end-user interactions across a wide-range of domains. Examples include payments, collections, benefit administration and end-user engagement services. We create value for our clients through more efficient service delivery combined with a personalized and seamless interactions on a massive scale that improve end-user experience.experience for the end-user. We apply our expertise, technology and innovation to continually modernize our offerings for improved customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics. 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 have a team of approximately 85,00067,000 people as of March 31, 2018, who serves2019, servicing customers in 2823 countries.


Financial Review of Operations


 Three Months Ended March 31, 2018 vs. 2017 Three Months Ended March 31, 2019 vs. 2018
(in millions) 2018 2017 $ Change % Change
($ in millions) 2019 2018 $ Change % Change
Revenue $1,420
 $1,553
 $(133) (9)% $1,158
 $1,420
 $(262) (18)%
Cost of services 1,168
 1,294
 (126) (10)%
Gross Margin 252
 259
 (7) (3)%
                
Operating Costs and Expenses                
Research and development 2
 4
 (2) (50)%
Selling, general and administrative 145
 169
 (24) (14)%
Cost of Services (excluding depreciation and amortization) 906
 1,115
 (209) (19)%
Selling, general and administrative (excluding depreciation and amortization) 127
 143
 (16) (11)%
Research and development (excluding depreciation and amortization) 3
 2
 1
 50 %
Depreciation and amortization 115
 116
 (1) (1)%
Restructuring and related costs 20
 18
 2
 11 % 16
 20
 (4) (20)%
Amortization of acquired intangible assets 61
 61
 —
 — %
Separation costs —
 5
 (5) (100)%
Interest expense 33
 36
 (3) (8)% 20
 33
 (13) (39)%
Goodwill impairment 284
 —
 284
 — %
(Gain) loss on divestitures and transaction costs 15
 —
 15
 100 % 14
 15
 (1) (7)%
Litigation costs (recoveries), net 31
 (11) 42
 (382)% 12
 31
 (19) (61)%
Other (income) expenses, net (1) (1) —
 — % (1) (1) —
 — %
Total Operating Costs and Expenses 306
 281
 25
 9 % 1,496
 1,474
 22
 
                
Income (Loss) Before Income Taxes (54) (22) (32) 145 % (338) (54) (284) 
Income tax expense (benefit) (4) (12) 8
 (67)% (30) (4) (26) 

Income (Loss) From Continuing Operations $(50) $(10) $(40) 400 % $(308) $(50) $(258) 

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Revenue


Revenue for the three months ended March 31, 20182019 decreased, compared to the prior year period, mainlyprimarily due to the impact from adopting Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers" referred to herein as "new revenue standard", divestitures completed in 2017,2018 and 2019, strategic decisions by management as part of our portfolio rationalization, including exiting certain unprofitable contracts, contract losses and contract losses.currency fluctuations. Partially offsetting these declines were increases from the ramp of new business and certain price increases as a result of contract remediation.business.


Cost of Services (excluding depreciation and amortization)


Cost of services for the three months ended March 31, 20182019 decreased, compared to the prior year period, primarily due to costmainly driven by reductions in real estate, information technology and labor costs from our strategic transformation initiatives, lost business, strategic contract actions taken by management as part of portfolio management, lower volumes and divestitures completed in 2017.2018 and 2019.

Gross Margin

Decrease in gross margin for the three months ended March 31, 2018, compared to the prior year period, was driven primarily by contract losses and lower volumes with existing clients. These were partially offset by the impact of cost and productivity improvements, including benefits from our strategic transformation program and exiting or remediating certain underperforming contracts.


Selling, General and Administrative (SG&A) (excluding depreciation and amortization)


Lower SG&A for the three months ended March 31, 2018,2019, compared to the prior year period, reflectedwas reflective of the impact of our strategic transformation initiatives, on corporateprimarily due to reductions in labor costs as well as the reduction in 401(K) costs and other generalnegotiated IT contract costs. As a result of the Company suspending its 401(K) match for U.S. employees, except hourly employees, there was a $3 million reduction in expense for the three months ended March 31, 2019.

Depreciation and administrative spend, partially offset byAmortization

Depreciation and amortization for the expansion and investmentthree months ended March 31, 2019 decreased, compared to the prior period, primarily due to the divestitures in our sales force.2018.


Restructuring and Related Costs


Restructuring and related costs for the three months ended March 31, 2019 include $3 million of severance costs due to headcount reductions of approximately 200 employees worldwide, $9 million of costs related to data center migration and $4 million of lease cancellation and other costs as part of our effort to consolidate our real estate footprint.

Restructuring and related costs for the three months ended March 31, 2018 include $14 million of severance costs due to headcount reductions of approximately 700 employees worldwide and $5 million of lease cancellation and other costs as part of our effort to consolidate our real estate footprint, and $14$1 million of severance costs duestrategic transformation costs.

Management continues to headcount reductions of approximately 740 employees worldwide.evaluate the Company's business, and in the future, there may be additional provisions for new plan initiatives and/or changes in previously recorded estimates as payments are made, or actions are completed.


Refer to Note 57 – Restructuring Programs and Related Costs to the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.


Interest Expense

Interest expense represents interest on long-term debts and the amortization of debt issuance costs. Decrease in Interest expense for the three months ended March 31, 2019, compared to the prior period, was driven primarily by lower average debt balances and repricing as a result of the tender offer in 2018. Refer to Note 8 – Debt in the Condensed Consolidated Financial Statements for additional information.

Goodwill Impairment

The goodwill impairment for the three months ended March 31, 2019 related to the write-down of the Transportation segment's carrying value. Refer to Note 18 – Goodwill to the Condensed Consolidated Financial Statements for additional information regarding this impairment charge.


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(Gain) Loss on Divestitures and Transaction Costs


IncreaseThe current year period consists of $5 million of changes in lossestimates related to losses on divestitures and $9 million of transaction and related costs, $4 million of which relates to costs to remediate Payment Card Industry Data Security Standards compliance issues related to the sale of select standalone customer care contracts to Skyview Capital LLC.

Litigation Costs (Recoveries), Net

Net litigation costs for the three months ended March 31, 2018, compared2019, consists primarily of the $13 million expense related to the Texas litigation whereas the prior year period was driven primarily by transaction costs.

Litigation Costs (Recoveries), Net

Increase in net litigation costsexpense was primarily due to reservesthe establishment of a reserve for certain terminated contracts that arewere subject to litigation.litigation in 2018.


Refer to Note 13 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.

Income Taxes


On December 22, 2017,The effective tax rate for the Tax Cuts and Jobs Act (Tax Reform)three months ended March 31, 2019 was enacted.8.9%, compared with 7.4% for the three months ended March 31, 2018. The income tax effectsMarch 31, 2019 rate was lower than the U.S. statutory rate of the Tax Reform have been initially accounted for on a provisional basis pursuant21%, primarily due to the SEC staff guidancegoodwill impairment charge being partially non-deductible for tax and the geographic mix of income, partially offset by the tax benefit recognized on income taxes. Reasonable estimates for all material tax effectsthe sale of the Tax Reform have been provided and adjustmentsa portfolio of select standalone customer care contracts to provisional amounts will be made in subsequent reporting periods as information becomes available to complete provisional computations.Skyview Capital LLC.
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The effective tax rate for the three months ended March 31, 2018 was 7.4%, compared with 54.5% for the three months ended March 31, 2017. The March 31, 2018 rate was lower than the U.S. statutory tax rate of 21%, primarily due to the geographic mix of income and the impact of Global Intangible Low Tax Income and Base Erosion Anti-Abuse Tax (BEAT), which reduced the tax benefitbenefits on the worldwide loss.


TheExcluding the impact of the goodwill impairment, divestitures, the Texas litigation reserve, charges for amortization of intangible assets, restructuring and divestiture related costs, the normalized effective tax rate for the three months ended March 31, 20172019 was higher than the statutory34.7%. The normalized effective 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.

Excluding34.7% for the three months ended March 31, 2018, was predominantly impacted by the exclusion of charges for amortization of intangible assets, restructuring and divestiture related costs and the impact of BEAT, the normalized effectiveBEAT.

The Company believes it is reasonably possible that unrecognized tax rate for the threebenefits of approximately $20 million will reverse within 12 months ended March 31, 2018 was 34.7%. The normalized effective tax rate was 34% for the three months ended March 31, 2017, predominately from the exclusion of amortization of intangible assets and restructuring costs.due to an anticipated audit settlement.

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 divested businesses' historical results to Other segment from both the Commercial Industries and the Public Sector segments.

Our financial performance is based on Segment Profit / (Loss) and Segment Adjusted EBITDA for the following twothree segments:


Commercial Industries,
•
Government Services, and
Transportation.
Public Sector.


Other segment includes our divestitures and our Student Loan business, which the Company exited in the third quarter of 2018.

We are modernizing a significant portion of our information technology infrastructure with new systems and processes and consolidating our data centers as part of our transformation initiatives. We expect that these changes will provide greater strategic and operational flexibility and efficiency and better control of our systems and processes. Based on our continuing review of our cybersecurity, we are making additional investments to enhance our cybersecurity protection. There is in run-off mode,a risk, however, that our modernization efforts and divested businesses in 2017.data center consolidations could materially and adversely disrupt our operations. See Part I, Item 1A – Risk Factors of our 2018 Annual Report on Form 10-K for additional information.



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Revenues by segment were:


(in millions) Commercial Industries Public Sector Other Total
Three Months Ended March 31, 2018        
Total Revenue $854
 $558
 $8
 $1,420
Profit (Loss) $44
 $65
 $(4) $105
Adjusted EBITDA(1)
 $78
 $87
 $(4) $161
         
% of Total Revenue 60.1% 39.3% 0.6 % 100.0%
Adjusted EBITDA Margin(1)
 9.1% 15.6% (50.0)% 11.3%
         
Three Months Ended March 31, 2017        
Total Revenue $895
 $609
 $49
 $1,553
Profit (Loss) $26
 $57
 $3
 $86
Adjusted EBITDA(1)
 $62
 $87
 $4
 $153
         
% of Total Revenue 57.6% 39.2% 3.2 % 100.0%
Adjusted EBITDA Margin(1)
 6.9% 14.3% 8.2 % 9.9%
  Three Months Ended March 31,
(in millions) Commercial Industries Government Services Transportation Other Shared IT / Infrastructure & Corporate Costs Total
Three Months Ended March 31, 2019       Divestitures Other    
Revenue $612
 $325
 $184
 $36
 $1
 $—
 $1,158
Segment profit (loss) $113
 $86
 $20
 $1
 $—
 $(151) $69
Segment depreciation and amortization $22
 $9
 $9
 $—
 $—
 $14
 $54
Adjusted EBITDA $135
 $95
 $29
 $1
 $—
 $(137) $123
               
% of Total Revenue 52.8% 28.1% 15.9% 3.1% 0.1 % —% 100.0%
Adjusted EBITDA Margin 22.1% 29.2% 15.8% 2.8% — % —% 10.6%
               
Three Months Ended March 31, 2018              
Revenue $654
 $335
 $176
 $248
 $7
 $—
 $1,420
Segment profit (loss) $110
 $108
 $27
 $39
 $(3) $(176) $105
Segment depreciation and amortization $28
 $7
 $8
 $2
 $1
 $10
 $56
Adjusted EBITDA $138
 $115
 $35
 $41
 $(2) $(166) $161
               
% of Total Revenue 46.1% 23.6% 12.4% 17.5% 0.4 % —% 100.0%
Adjusted EBITDA Margin 21.1% 34.3% 19.9% 16.5% (28.6)% —% 11.3%
_______________

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

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Commercial Industries Segment


Revenue


Commercial Industries revenue for the three months ended March 31, 20182019 decreased, compared to prior year period, primarily driven by strategic contract actions and the impact of the new revenue standard,contract losses, partially offset by revenue from new contracts and price increases from existing accounts.contracts.


Segment Profit and Adjusted EBITDA


Increase in the Commercial Industries segment profit and adjusted EBITDA margin for the three months ended March 31, 2018,2019, compared to prior year period, was mainly driven by benefitsreductions in real estate, information technology and labor costs from our strategic transformation cost initiatives and from increases in new business, partially offset by the overall revenue decline from existing clientslost business, volumes and investments, primarily in technology and sales force.price declines.


Public SectorGovernment Services Segment


Revenue


Public SectorGovernment Services revenue for the three months ended March 31, 2018,2019, decreased compared to prior year period, primarily driven by strategic contract actions and the impact of the new revenue standard, contract losses, and lower volumes, partially offset by certain price increases as a resultramp of contract remediation.new business.


Segment Profit and Adjusted EBITDA


IncreaseDecrease in the Public SectorGovernment Services segment profit and adjusted EBITDA margin for the three months ended March 31, 2018,2019, compared to prior year period, werewas mainly driven by benefitslost business, increased IT spend and price declines as well as higher investments in technology platforms, partially offset by reductions in real estate and labor costs from our strategic transformation cost initiatives and contract remediation,remediation.


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Transportation Segment

Revenue

Transportation revenue for the three months ended March 31, 2019 increased, compared to the prior period, primarily driven by ramp of new business, partially offset by contract losses and service level penalties.

Segment Profit and Adjusted EBITDA

Transportation segment profit and adjusted EBITDA margin for the overall revenue declinethree months ended March 31, 2019 decreased, compared to the prior period, mainly driven by volume declines, service level penalties and increased IT spend, partially offset by reductions in real estate and labor costs from existing clients and investment, primarily in technology and sales force.our strategic transformation initiatives.


Other Segment


Revenue


Other revenue for the three months ended March 31, 20182019 decreased, compared to prior year period, driven mainly by the divestitures completed in 20172018 and 2019 and the run-off of our Student Loan Services business.


Segment Profit (Loss) and Adjusted EBITDA


Decrease in Other segment lossprofit and adjusted EBITDA for the three months ended March 31, 20182019, compared to the prior period, were primarily due to divestitures completed in 20172018 and 2019 and the run-off of our Student Loan Services business.


Shared IT / Infrastructure & Corporate Costs

Improvements in Shared IT/Infrastructure and Corporate costs for the three months ended March 31, 2019, compared to the prior year period, were primarily driven by reduced costs as a result of reductions in real estate, information technology and labor costs from our strategic transformation initiatives as well as a reduction in negotiated IT contract costs.
Metrics


Signings


Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Total Contract Value (TCV) 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.exclude divestitures.


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  Three Months Ended March 31, 2019 vs. 2018
($ in millions) 2019 2018 $ Change % Change
New business TCV $225
 $367
 $(142) (39)%
Renewals TCV 727
 926
 (199) (21)%
Total Signings $952
 $1,293
 $(341) (26)%
         
Recurring revenue signings(1)
 $52
 $81
 $(29) (36)%
Non-recurring revenue signings(2)
 $32
 $53
 $(21) (40)%
___________
(1)Recurring revenue signings are for new business contracts longer than one year.
(2)Non-recurring revenue signings are for contracts shorter than one year.

Signings for the three months ended March 31, were:

  Three Months Ended March 31, 2018 vs. 2017
(in millions) 2018 2017 $ Change % Change
New business TCV $406
 $530
 $(124) (23)%
Renewals TCV 1,022
 401
 621
 155 %
Total Signings $1,428
 $931
 $497
 53 %
         
Annual recurring revenue signings $93
 $143
 $(50) (35)%
Non-recurring revenue signings $63
 $92
 $(29) (32)%

Signings for the three months ended March 31, 2018 increased,2019 decreased, compared to the prior year, mainly due to increased renewal activities, partially offset by new business signings decline.a continued focus on strategic wins with acceptable margins, longer lead times and delays in signings.



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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.


Excluding our strategic decision not to renew certain contracts, renewal raterates for the three months ended March 31, 2019 and 2018 were 92% and 94%, respectively.

Critical Accounting Policies - Goodwill

As a result of the Transportation reporting unit experiencing unanticipated losses of certain customer contracts, lower than expected new customer contracts and higher costs of delivery (all subsequent to February 2019), the growth of this reporting unit decreased resulting in its fair value being below its carrying value by approximately $284 million. As a result, the Company recorded a pre-tax impairment charge of approximately $284 million.

In addition, based on our discounted cash flow and market multiple analysis, we evaluated if the goodwill of the other reporting units were also impaired. The weighted average cost of capital used for the discounted cash flow analysis was 94%.between 10% and 13%, depending on the reporting unit. Although, we did not have a goodwill impairment in the Financial Services & Healthcare (FS&H) reporting unit, the Consumer & Industrial (C&I) reporting unit or in the Government Services reporting unit, the fair values of each of these reporting units have declined. These reporting units may become impaired if they experience significant customer losses, do not achieve new customer signing projections, or incur higher costs than projected. The goodwill, carrying values and the headroom for FS&H, C&I, Europe and the Government reporting units are as follows:


  March 31, 2019
(amounts in millions) Goodwill Carrying Value Headroom
Reporting Unit:      
FS&H $982
 $1,023
 26%
C&I 389
 439
 30%
Europe 67
 90
 70%
Government services 1,376
 962
 17%
Transportation 357
 570
 —%

In addition, because the fair value of the Transportation unit is equal to the book value of the reporting unit, the Transportation reporting unit goodwill could be further impaired if there are further customer contracts losses and lower expected new customer contracts.

The most significant assumption used in the goodwill analysis relates to the long-term organic growth rates. For example, the EBITDA long-term growth rate for FS&H and C&I reporting units was 3%, and for Government Services was 2.5%. The growth rates are consistent with industry long-term growth rates and contemplate that Conduent will grow, on a long-term basis, at least consistent with its peers. To the extent that Conduent loses a significant contract or multiple significant contracts, such that its growth rates are negatively impacted, its goodwill could be impaired. For example, if Conduent’s EBITDA long-term growth rates were reduced to 1% for all reporting units (except for Europe and Transportation), the fair values of the reporting units would approximate their book values.


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Capital Resources and Liquidity


As of March 31, 20182019, and December 31, 2017,2018, total cash and cash equivalents were $553$520 million and $658$756 million, respectively. The Company also has a $750 million revolving line of credit for its various cash needs, of which $12 million has been utilized for letters of credit.

In May 2019, the Company entered into the First Amendment to Settlement Agreement and Release with the State of Texas. Pursuant to the terms of the Amended Agreement, the amount paid to the State by the Conduent Defendants in full settlement of the State Action will be paid as follows: (1) $40 million on or before April 15, 2019 (which the Company has already paid); (2) $78 million on or before May 15, 2019 (the “First Payment”); and (3) $118 million on or before January 15, 2020 (the “Second Payment”). In order to secure the Second Payment, the Company will provide bank issued letters of credit to the State in the full amount of the Second Payment (the “LCs”) which the State may present for payment to the issuing banks if the Conduent Defendants do not make the Second Payment.

As of March 31, 2018,2019, there were $1.6$1.5 billion outstanding borrowings under our Credit Agreement.Agreement of which $53 million was due within one year. Refer to Note 8 – Debt in the Condensed Consolidated Financial Statements for additional debt information.


We expect our operating cash flows combined with cash on hand and financing activities to be sufficient to fund expected operating and anticipated capital and other funding requirements for at least the next twelve months.

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:


 Three Months Ended
March 31,		 Three Months Ended March 31,
(in millions) 2018 2017 Better (Worse) 2019 2018 Better (Worse)
Net cash provided by (used in) operating activities $(38) $(107) $69
 $(49) $(38) $(11)
Net cash provided by (used in) investing activities (39) (25) (14) (168) (39) (129)
Net cash provided by (used in) financing activities (27) (6) (21) (22) (27) 5


Operating activities:The increase inHistorically the Company generates the majority of its cash generated from operating activities in the last two quarters of the year, as such the Company expects the second quarter cash flow from operations to also be negative.

Operating activities

Net cash used in operating activities of $(49) million was primarily attributable to improvementsthe result of $20 million in payments for the Texas litigation as well as negative working capital and lower Health Enterprise wind-down payments,(which was partially offset by paymentsunpaid accounts payables for prepaid software licenses.an IT supplier).


Investing activities: activities

The increase in cash used in investing activities for the three months ended March 31, 2019, compared to the prior period, was primarily due to the acquisition of HSP and increased spending for capital expenditures.expenditures related to modernizing our information technology infrastructure.


Financing activities:activities

The increasedecrease in cash used fromin financing activities for the three months ended March 31, 2019, compared to the prior period, was related to netlower debt repayments.payments.



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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. TheseWe may utilize derivative financial instruments are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We also may hedge the cost to fund material non-dollar entities by buying currencies periodically in advance of the funding date. This is accounted for using derivative accounting.


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 79 – 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. generally accepted accounting principles (GAAP). In addition, we have discussed our results using the non-GAAP 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 the factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.
A reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are provided in the tables below.

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

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

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

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.
NY MMIS. Costs associated with the Company not fully completing the State of New York Health Enterprise Platform project.
Restructuring and related costs. Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program.
HE charge. Costs associated with not fully completing the Health Enterprise Medical platform projects in California and Montana.
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Separation costs. Separation costs are expenses incurred in connection with separation from Xerox Corporation into a separate, independent, publicly traded company. These costs primarily relate to third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies.
(Gain) loss on divestitures and transaction costs.
Litigation costs (recoveries), net.
Other (income) expenses, net. Other (income) expenses, net includes currency (gains) losses, net and all other (income) expenses, net.

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

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

Consolidated Adjusted EBITDA and EBITDA Margin

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

Restructuring and related costs.
Amortization of acquired intangible assets.
Interest expense. Interest expense includes interest on long-term debt and amortization of debt issuance costs.
Separation costs.
(Gain) loss on divestitures and transaction costs.
Litigation costs (recoveries), net.
Other (income) expenses, net.
NY MMIS.
HE charge.

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

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Net Income (Loss) and EPS Reconciliation:

  Three Months Ended March 31, 2018 Three Months Ended March 31, 2017
(in millions; except per share amounts and share amounts in thousands) Net Income (Loss) EPS Net Income (Loss) EPS
Income (Loss) from Continuing Operations $(50) $(0.26) $(10) $(0.06)
Adjustments:        
Amortization of acquired intangible assets 61
   61
  
NY MMIS —
   8
  
Restructuring and related costs 20
   18
  
HE charge —
   (5)  
Separation costs —
   5
  
(Gain) loss on divestitures and transaction costs 15
   —
  
Litigation costs (recoveries), net 31
   (11)  
Other (income) expenses, net (1)   (1)  
Less: Income tax adjustments(1)
 (29)   (30)  
Adjusted Net Income (Loss) and EPS $47
 $0.22
 $35
 $0.16
         
(GAAP Shares in thousands)        
Weighted average common shares outstanding   205,093
   203,400
Stock options   —
   —
Restricted stock and performance units / shares   —
   —
Adjusted Weighted Average Shares Outstanding(2)
   205,093
   203,400
(Non-GAAP Shares in thousands)        
Weighted average common shares outstanding   205,093
   203,400
Stock options   143
   230
Restricted stock and performance shares   2,773
   2,152
Adjusted Weighted Average Shares Outstanding(2)
   208,009
   205,782
 ___________
(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 March 31, 2018 and 2017.

Effective Tax Rate Reconciliation:

  Three Months Ended March 31, 2018 Three Months Ended March 31, 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) $(4) 7.4% $(22) $(12) 54.5%
Non-GAAP adjustments(1)
 126
 29
   75
 30
  
Adjusted(2)
 $72
 $25
 34.7% $53
 $18
 34.0%
__________
(1)Refer to Net Income (Loss) reconciliation for details of non-GAAP adjustments.
(2)The tax impact of Adjusted Pre-tax income (Loss) from continuing operations is calculated under the same accounting principles applied to the 'As Reported' pre-tax income (loss), which employs an annual effective tax rate method to the results including an adjustment for estimated BEAT.

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Profit / Adjusted EBITDA / Adjusted EBITDA Margin Reconciliations:

(in millions) Three Months Ended March 31,
Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2018 2017
Consolidated Income (Loss) Before Income Taxes $(54) $(22)
Reconciling items:    
Restructuring and related costs 20
 18
Amortization of acquired intangible assets 61
 61
Interest expense 33
 36
Separation costs —
 5
(Gain) loss on divestitures and transaction costs 15
 —
Litigation costs (recoveries), net 31
 (11)
Other (income) expenses, net (1) (1)
Segment Pre-tax Income (Loss) $105
 $86
Segment depreciation and amortization $56
 $64
NY MMIS —
 8
HE charge —
 (5)
Adjusted EBITDA $161
 $153
Consolidated Revenue $1,420
 $1,553
Adjusted EBITDA Margin 11.3% 9.9%


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’sSEC’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 ControlsControl Over Financial Reporting


In connection withBeginning January1, 2019, we implemented the evaluation required by paragraph (d)new lease accounting standard. Although the adoption of Rule 13a-15 underthis standard did not have a material impact on our Condensed Consolidated Statements of Income (Loss) or Condensed Consolidated Statements of Cash Flows for the Exchange Act, there wasthree months ended March 31, 2019, we did implement changes to our internal controls related to the implementation of the new lease accounting standard. These changes included performing a comprehensive lease scoping analysis to identify, disaggregate and evaluate each of our lease categories and implementing a new information technology application to calculate ROU assets and lease liabilities values for our leases. There were no change identifiedother changes in our internal control over financial reporting that occurred during the lastour most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II — OTHER INFORMATION


ITEM 1 — LEGAL PROCEEDINGS


The information set forth under Note 1113 – Contingencies and Litigation in the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated herein 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 20172018 Annual Report.Report on Form 10-K. There have been no material changes to our risk factors as previously reported in our 20172018 Annual Report.Report on Form 10-K.



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


(a)Sales of Unregistered Securities during the Quarter ended March 31, 20182019


During the quarter ended March 31, 2018,2019, 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 March 31, 20182019


None.



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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.
  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.
  Incorporated by reference to Exhibit 3.2 to Registrants Current Report on Form 8-K dated December 23, 2016.
   
10.6(a)(vii)10.7(b)
 
First Amendment to Settlement Agreement and Release between the State of Texas, the Texas Health and Human Services Commission, Xerox Corporation, Conduent Incorporated, Conduent Business Services, LLC and Conduent State Healthcare, LLC dated May 6, 2019.
Incorporated by reference to the Registrant’s Current Report on Form of Restricted Stock Unit Award Agreement 2018 under the PIP Severance Plan,8-K dated as of October 1, 2017.May 6, 2019. (See SEC file Number 001-37817).
   
10.6(a)(viii)31(a)
 
Form of Performance Stock Unit Award Agreement 2018 under the PIP Severance Plan, dated as of October 1, 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.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.DEF XBRL Taxonomy Extension Definition Linkbase.
101.INSXBRL Instance Document.
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
101.SCH XBRL Taxonomy Extension Schema Linkbase.
 

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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: May 9, 20188, 2019



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