The following Management's Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition ofConduent 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
As one of the largest business process services companies in the world,Conduent delivers mission-critical services and solutions on behalf of businesses and governments - creating exceptional outcomes for its clients and the millions of people who count on them. Through people, process expertise in transaction-intensive processing and technology such as analytics and automation,Conduent's solutions and services create value by improving efficiencies, reducing costs and enabling revenue growth. A majority of Fortune 100 companies and over 500 government entities depend onConduent every day to manage their business processes and essential interactions with their end-users. We create value for our clients through efficient service delivery combined with a personalized and seamless experience for the end-user. We apply our expertise, technology and innovation to continually modernize our offerings for improved customer and constituent satisfaction and loyalty, 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. Our differentiated services and solutions improve experiences for millions of people every day.
Headquartered in
Executive Summary
We continue to transform our business through an intense focus on growth, quality, and efficiency - utilizing a programmatic, project management approach. Beginning in the first quarter of 2020 and through the second quarter of 2020, we have expanded the focus of our transformation initiative to include both permanent and temporary cost efficiencies, which we also refer to as a cost reduction initiative, aimed to offset as much of the COVID-19 related negative impacts as possible. We intend to drive portfolio focus, operating discipline, sales and delivery excellence and innovation, complemented by tightly aligned investments to achieve this mission and purpose. Our strategy is designed to deliver value by delivering profitable growth, expanding operating margins and deploying a disciplined capital allocation strategy. During the three and six months endedJune 30, 2020 , our strategy contributed to the following results: •Revenue of$1,016 million and$2,067 million for the three and six months endedJune 30, 2020 , respectively. Revenue performance in our Government Services segment was positively affected by the COVID-19 pandemic from increased volumes, partially offset by a negative COVID-19 effect on ourTransportation and Commercial Industries segments, •Strong new business signings results: •The strongest quarter of new business total contract value (TCV) signings since our separation as a stand-alone public company, of$623 million for the three months endedJune 30, 2020 , normalizing for any divestiture impact. New business TCV signings were up 90% compared to that of the prior year period and$947 million for the six months endedJune 30, 2020 , up 71% compared to that of the prior year period. •Annual recurring revenue signings of$105 million for the three months endedJune 30, 2020 , up 25% compared to that of the prior year period and$162 million for the six months endedJune 30, 2020 , up 19% compared to that of the prior year period. CNDT Q2 2020 Form 10-Q 23
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•The Company has shown year-over-year operational progress, including a reduction of the number and duration of technology related incidents and outages.
COVID-19 Outbreak
Throughout the COVID-19 pandemic, we have continued to provide critical and best-in-class services to our customers and their end-users, while ensuring the health and safety of our greatest assets - our associates. To address the potential impact to our business, over the near-term, our Business Continuity team has established a proactive plan, in the first quarter of 2020 and continuing into the second quarter, which includes: •Supporting our associates with a number of specific initiatives, including making improvements to our policies to extend short term disability, providing extra supplemental sick leave coverage and introducing a hardship leave policy. •At the end of the second quarter of 2020, approximately 75% of our workforce had been shifted to work-from-home. We are starting a slow and measured approach to bringing associates back toConduent offices, as appropriate. This will be a phased process and based on the specific COVID-19 conditions in certain geographies, as well as, business requirements.
•Increased sanitation and social distancing for required on-site essential associates.
•Draw down on our revolving credit facility (Revolver) as a precautionary measure.
In addition, the Company's response to the COVID-19 pandemic has also resulted in diversion of management's time and delayed investments from strategic, transformational and technology initiatives which had been planned.
As the crisis continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and their end-users and the Company and to continue to provide our mission-critical
services and solutions.
Refer to the discussion of results of operations below for a quantification and discussion of COVID-19 pandemic related effects.
CNDT Q2 2020 Form 10-Q 24
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Financial Review of Operations
Three Months Ended June 30, 2020 vs. 2019 ($ in millions) 2020 2019 $ Change % Change Revenue$ 1,016 $ 1,112 $ (96) (9) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 795 879 (84) (10) % Selling, general and administrative (excluding depreciation and amortization) 111 121 (10) (8) % Research and development (excluding depreciation and amortization) - 2 (2) (100) % Depreciation and amortization 115 112 3 3 % Restructuring and related costs 29 26 3 12 % Interest expense 15 20 (5) (25) % Goodwill impairment - 1,067 (1,067) (100) % (Gain) loss on divestitures and transaction costs 2 2 - - % Litigation costs (recoveries), net 14 1 13 Other (income) expenses, net (1) 1 (2) (200) % Total Operating Costs and Expenses 1,080 2,231 (1,151) Income (Loss) Before Income Taxes (64) (1,119) 1,055 Income tax expense (benefit) (13) (90) 77 Net Income (Loss)$ (51) $ (1,029) $ 978 Six Months Ended June 30, 2020 vs. 2019 ($ in millions) 2020 2019 $ Change % Change Revenue$ 2,067 $ 2,270 $ (203) (9) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 1,627 1,785 (158) (9) % Selling, general and administrative (excluding depreciation and amortization) 227 248 (21) (8) % Research and development (excluding depreciation and amortization) 1 5 (4) (80) % Depreciation and amortization 232 227 5 2 % Restructuring and related costs 36 42 (6) (14) % Interest expense 32 40 (8) (20) % Goodwill impairment - 1,351 (1,351) (100) % (Gain) loss on divestitures and transaction costs 6 16 (10) (63) % Litigation costs (recoveries), net 20 13 7 54 % Other (income) expenses, net 1 - 1 Total Operating Costs and Expenses 2,182 3,727 (1,545) Income (Loss) Before Income Taxes (115) (1,457) 1,342 Income tax expense (benefit) (15) (120) 105 Net Income (Loss)$ (100) $ (1,337) $ 1,237 CNDT Q2 2020 Form 10-Q 25
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Table of Contents Revenue Revenue for the three and six months endedJune 30, 2020 decreased, compared to the prior year periods, primarily due to lost business and the effect of the COVID-19 pandemic within our Transportation segment due to lower tolling volumes and within ourCommercial Industries segment due to lower revenue in our Human Resource Service (HRS) service offering and lower volumes in our Commercial Healthcare Solutions (CHS) and Business Operations Solutions (BOS) service offerings. These were partially offset by higher revenue due to COVID-19 related increased volumes in the government payments business, which is part of our Government Services Solutions service offering in our Government Services segment. Additionally, the decrease for the six months endedJune 30, 2020 was also due to the impact from divestitures completed during the first quarter of 2019.
Approximately
Cost of Services (excluding depreciation and amortization)
Cost of services for the three months endedJune 30, 2020 decreased, compared to the prior year period, driven by lost business and lower volumes as well as the cost reduction initiative, which led to reductions in real estate, information technology and labor costs. Also contributing to the decline were lower costs to support volume loss resulting from the effect of the COVID-19 pandemic. Cost of services for the six months endedJune 30, 2020 decreased, compared to the prior year period, mainly driven by lost business and lower volumes, the cost reduction initiative, which led to reductions in real estate, information technology and labor costs, as well as divestitures completed in the first quarter of 2019. Also contributing to the decline were lower costs to support volume loss resulting from the effect of the COVID-19 pandemic. Our net impact of temporary cost actions to mitigate the effect of the COVID-19 pandemic on revenue and contribution margin on the business resulted in approximately$27 million and$31 million of cost savings for the three and six months endedJune 30, 2020 , respectively. These temporary cost actions were primarily driven by furloughs, reduced travel and vendor spend, reduced facilities spend and a suspension of 401(k) match for allU.S. employees. These cost reductions are split between Costs of services and Selling, general, and administrative. These cost savings are net of incremental costs such as the costs to support work-from home and the costs of increased facilities sanitation. The approximate effect of the COVID-19 pandemic on our pre-tax income, which includes the net revenue impact, the incremental costs, and the temporary cost mitigation actions, was a loss of$8 million and$18 million for the three and six months endedJune 30, 2020 , respectively.
Selling, General and Administrative (SG&A) (excluding depreciation and amortization)
Lower SG&A for the three months endedJune 30, 2020 , compared to the prior year period, was driven by the cost reduction initiative, which led to reductions in real estate costs, lower corporate overhead costs and reductions in labor costs as well as temporary savings from lower travel expenses. Lower SG&A for the six months endedJune 30, 2020 , compared to the prior year period, was driven by divested SG&A expenses as well as the cost reduction initiative, which led to the reductions in real estate costs, lower corporate overhead costs and reductions in labor costs.
Depreciation and Amortization
Depreciation and amortization for the three and six months ended
CNDT Q2 2020 Form 10-Q 26
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Restructuring and Related Costs
We engage in a series of restructuring programs related to optimizing our employee base, reducing our real estate footprint, exiting certain activities, outsourcing certain internal functions, consolidating our data centers and engaging in other actions designed to reduce our cost structure and improve productivity. Additionally, during the latter part of the first quarter of 2020, the Company began an expanded cost transformation program to partially offset the negative effects of the COVID-19 pandemic, also referred to as a cost reduction initiative. This resulted in increased Restructuring and related costs for the three months endedJune 30, 2020 . This included the elimination of approximately 1,500 positions and closure of approximately 20 facilities across all geographies. The following are the components of our Restructuring and related costs: Three Months Ended Six Months Ended June 30, June 30, (in millions, except headcount in whole numbers) 2020 2019 2020 2019 Severance and related costs$ 10 $ 13 $ 10 $ 16 Data center consolidation 6 9 8 18 Termination, asset impairment and other costs 11 2 14 6 Total net current period charges 27 24 32 40 Consulting and other costs(1) 2 2 4 2 Restructuring and related costs$ 29 $ 26 $ 36 $ 42
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(1)Represents professional support costs associated with our strategic transformation program.
Refer to Note 5 - 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 debt and the amortization of
debt issuance costs. The decrease in Interest expense for the three and six
months ended
Goodwill Impairment
There were no goodwill impairment charges for the three and six months endedJune 30, 2020 . The goodwill impairment for the three and six months endedJune 30, 2019 related to the write-down of the carrying values of all the Company's reporting units.
(Gain) Loss on Divestitures and Transaction Costs
The costs included in the three and six months endedJune 30, 2020 consist of professional fees related to the strategic review by the Company's Board of Directors. The costs included in the six months endedJune 30, 2019 consist of$5 million of changes in estimates 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 toSkyview Capital LLC .
Litigation Costs (Recoveries), Net
Net litigation costs for the three and six months endedJune 30, 2020 primarily consist of reserves for various matters that are subject to litigation and costs related to certain reimbursement matters with our former parent company,Xerox Corporation . Net litigation costs for the six months endedJune 30, 2019 primarily consist of the$13 million expense related to theTexas litigation.
Refer to Note 11 - Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.
CNDT Q2 2020 Form 10-Q 27
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Table of Contents Income Taxes OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act provides for various tax relief and tax incentive measures, which are not expected to have a material impact on the Company's income tax provision. The payment of the employer share of payroll taxes for the remainder of 2020 will be deferred to 2021 and 2022 under the CARES Act, which will provide a temporary operating cash flow benefit. The effective tax rate for the three months endedJune 30, 2020 was 20.3%, compared to 8.0% for the three months endedJune 30, 2019 . TheJune 30, 2020 rate was slightly lower than theU.S. statutory rate of 21%, primarily due to the geographic mix of income. The effective tax rate for the three months endedJune 30, 2019 was lower than theU.S. statutory tax rate of 21%, primarily due to the goodwill impairment charge being partially non-deductible for tax, the geographic mix of income and the inclusion of Global Intangible Low Tax Income (GILTI). Excluding the impact of amortization of intangible assets and restructuring costs, the normalized effective tax rate for the three months endedJune 30, 2020 was 32.5%. The normalized effective tax rate of 30.2% for the three months endedJune 30, 2019 , was predominantly impacted by the exclusion of a goodwill impairment, divestitures, charges for amortization of intangible assets and restructuring costs. The effective tax rate for the six months endedJune 30, 2020 was 13.0%, compared to 8.2% for the six months endedJune 30, 2019 . TheJune 30, 2020 rate was lower than theU.S. statutory rate of 21%, primarily due to the geographic mix of income, valuation allowances and tax charges recognized on the vesting of employee equity awards, partially offset by tax credits. The effective tax rate for the six months endedJune 30, 2019 was lower than theU.S. statutory tax rate of 21%, primarily due to the goodwill impairment charge being partially non-deductible for tax and the geographic mix of income, partially offset byU.S. federal tax credits and tax benefits recognized on the sale of a portfolio of select standalone customer care contracts toSkyview Capital LLC . Excluding the impact of valuation allowances, vesting of equity awards, amortization of intangible assets and restructuring costs, the normalized effective tax rate for the six months endedJune 30, 2020 was 32.8%. The normalized effective tax rate of 32.6% for the six months endedJune 30, 2019 , was predominantly impacted by the goodwill impairment, divestitures, theTexas litigation reserve, charges for amortization of intangible assets and restructuring costs. The Company believes it is reasonably possible that unrecognized tax benefits of approximately$13 million will reverse within 12 months due to an anticipated audit settlement.
Operations Review of Segment Revenue and Profit
During the first quarter of 2020, we realigned our sales organization and certain shared IT and other allocated costs to reflect how we currently manage our business. All prior periods presented have been revised to reflect this change. Our financial performance is based on Segment Profit / (Loss) and Segment Adjusted EBITDA for the following three segments:
•Commercial Industries, •Government Services, and •Transportation.
Other includes our divestitures and our Student Loan business, which the Company exited in the third quarter of 2018.
Shared IT / Infrastructure & Corporate Costs includes both normal ongoing IT infrastructure and enterprise application costs and costs related to the modernization of a significant portion of our infrastructure with new systems and processes. It also includes costs related to corporate overhead functions and shared real estate costs. These costs are not allocated to the reportable segments. CNDT Q2 2020 Form 10-Q 28
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Table of Contents There is a risk, however, that our modernization efforts and data center consolidations could materially and adversely disrupt our operations. In addition, the Company's COVID-19 response has also resulted in diversion of management's time and delayed investments from strategic, transformational and technology initiatives which had been planned. See Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and see Part II, Item 1A - Risk Factors of this Form 10-Q for additional information.
Results of financial performance by segment were:
Three Months Ended June 30, Shared IT / Commercial Government Infrastructure & (in millions) Industries Services Transportation Other Corporate Costs Total 2020 Divestitures Other Revenue$ 520 $ 331 $ 165 $ - $ - $ - $ 1,016 Segment profit (loss)$ 72 $ 115 $ 31 $ -$ (1) $ (162) $ 55 Segment depreciation and amortization$ 24 $ 5 $ 8 $ - $ -$ 18 $ 55 Adjusted EBITDA$ 96 $ 120 $ 39 $ -$ (1) $ (144) $ 110 % of Total Revenue 51.2 % 32.6 % 16.2 % - % - % - % 100.0 % Adjusted EBITDA Margin 18.5 % 36.3 % 23.6 % - % - % - % 10.8 % 2019 Revenue$ 592 $ 326 $ 194 $ - $ - $ - $ 1,112 Segment profit (loss)$ 111 $ 95 $ 29 $ - $ -$ (176) $ 59 Segment depreciation and amortization$ 21 $ 7 $ 8 $ - $ -$ 15 $ 51 Adjusted EBITDA$ 132 $ 102 $ 41 $ - $ -$ (161) $ 114 % of Total Revenue 53.2 % 29.3 % 17.5 % - % - % - % 100.0 % Adjusted EBITDA Margin 22.3 % 31.3 % 21.1 % - % - % - % 10.3 % CNDT Q2 2020 Form 10-Q 29
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Table of Contents Six Months Ended June 30, Shared IT / Commercial Government Infrastructure & (in millions) Industries Services Transportation Other Corporate Costs Total 2020 Divestitures Other Revenue$ 1,092 $ 621 $ 354 $ - $ - $ - $ 2,067 Segment profit (loss)$ 162 $ 208 $ 54 $ -$ 3 $ (327) $ 100 Segment depreciation and amortization$ 49 $ 11 $ 17 $ - $ -$ 36 $ 113 Adjusted EBITDA$ 211 $ 219 $ 71 $ -$ (4) $ (291) $ 206 % of Total Revenue 52.8 % 30.1 % 17.1 % - % - % - % 100.0 % Adjusted EBITDA Margin 19.3 % 35.3 % 20.1 % - % - % - % 10.0 % 2019 Revenue$ 1,204 $ 651 $ 378$ 36 $ 1 $ - $ 2,270 Segment profit (loss)$ 228 $ 175 $ 48 $ 1 $ -$ (324) $ 128 Segment depreciation and amortization$ 43 $ 16 $ 17 $ - $ -$ 29 $ 105 Adjusted EBITDA$ 271 $ 191 $ 69 $ 1 $ -$ (295) $ 237 % of Total Revenue 53.0 % 28.7 % 16.7 % 1.6 % - % - % 100.0 % Adjusted EBITDA Margin 22.5 % 29.3 % 18.3 % 2.8 % - % - % 10.4 %
Commercial Industries Segment
Revenue
Commercial Industries revenue for the three months endedJune 30, 2020 decreased, compared to the prior year period, primarily driven by lost business within our Customer Experience Management (CXM) and our HRS service offerings, as well as COVID-19 related volume declines and interest rate impact in our BenefitWallet business. For the three months endedJune 30, 2020 , approximately$44 million of the revenue decline in theCommercial Industries segment was attributable to the COVID-19 pandemic or COVID-19 related effects. This was primarily due to: 1) lower transaction processing activity for client in the auto, dental, financial services and travel industries within of our BOS service offering, 2) reduced workers compensation claims and commercial healthcare claims processing in our Commercial Healthcare Solutions (CHS) service offering, and 3) reduced revenue from BenefitWallet in our HRS service offering, as a result of interest rate reductions.Commercial Industries revenue for the six months endedJune 30, 2020 decreased, compared to the prior year period, primarily driven by loss of business within our CXM and HRS service offerings, as well as COVID-19 and COVID 19 related volume declines and interest rate impact. For the six months endedJune 30, 2020 , approximately$51 million of the revenue decline in theCommercial Industries segment was directly attributable to the effects of the COVID-19 pandemic.
Segment Profit and Adjusted EBITDA
Decreases in theCommercial Industries segment profit and adjusted EBITDA margin for the three and six months endedJune 30, 2020 , compared to the prior year periods, were mainly driven by overall revenue declines, the adverse effects of the COVID-19 pandemic and current period exit costs from prior year contract losses, partially offset by reductions in IT, real estate and labor costs. CNDT Q2 2020 Form 10-Q 30
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Table of Contents Government Services Segment Revenue Government Services revenue for the three months endedJune 30, 2020 increased compared to the prior year period, primarily driven by ramp of new business and volume increases and COVID-19 related volume increases. These increases were partially offset by contract losses and volume pressure. For the three months endedJune 30, 2020 , approximately$45 million of the revenue increase in the Government Services segment was attributable to the COVID-19 pandemic or COVID-19 related effects. This was largely driven by: 1) increases in theSupplemental Nutrition Assistance Program (SNAP) volumes and Pandemic SNAP volumes, 2) an increase in the number of citizens to which we distribute unemployment insurance benefits, and 3) the additional unemployment insurance benefit distributions under the CARES Act. Within the unemployment benefit business, we generate revenue based on the amount of spending by card holders. Government Services revenue for the six months endedJune 30, 2020 decreased compared to the prior year period, primarily driven by contract losses, partially offset by ramp up of new business, volume increases and COVID-19 related volume increases, particularly in the second quarter of 2020. For the six months endedJune 30, 2020 , approximately$46 million of revenue in the Government Services segment was attributable to the COVID-19 pandemic or COVID-19 related effects.
Segment Profit and Adjusted EBITDA
Increases in the Government Services segment profit and adjusted EBITDA margin for the three and six months endedJune 30, 2020 , compared to the prior year periods, were mainly driven by increased revenue and reductions in IT and delivery spend. Transportation Segment Revenue Transportation revenue for the three and six months endedJune 30, 2020 decreased, compared to the prior year periods, primarily driven by lost business and COVID-19 related impact, partially offset by ramp of new business. For the three and six months endedJune 30, 2020 , approximately$36 million and$44 million , respectively, of the revenue declines in the Transportation segment were attributable to the COVID-19 pandemic or COVID-19 related effects. The COVID-19 related impacts were primarily driven by volume pressure in the Roadway Charging & Management Services and Curbside Management Solutions service offerings and project delays in the Transit Solutions service offering.
Segment Profit and Adjusted EBITDA
Transportation segment profit and adjusted EBITDA margin for the three and six months endedJune 30, 2020 increased, compared to the prior year periods, mainly driven by reduced IT and labor costs as a result of the cost reduction initiative. Other Revenue
Other revenue for the three months ended
Other revenue for the six months ended
CNDT Q2 2020 Form 10-Q 31
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Segment Profit (Loss) and Adjusted EBITDA
Increase in Other segment profit for the six months endedJune 30, 2020 , compared to the prior year period, was primarily due to the adjustment to the remaining California MMIS settlement liability of$7 million as a result of the contract expiration onMarch 31, 2020 , partially offset by ongoing costs related to the portfolio of select standalone customer care contracts that were sold toSkyview Capital LLC in 2019. The$7 million benefit was removed from adjusted EBITDA for segment reporting purposes due to its non-recurring nature.
Shared IT / Infrastructure & Corporate Costs
Shared IT/Infrastructure and Corporate costs for the three and six months endedJune 30, 2020 decreased, compared to the prior year period. This was primarily driven by the efficiencies created by the cost reduction initiative and lower facilities costs as a result of the COVID-19 related stay-at-home orders, partially offset by an increase in shared infrastructure related IT due to some discrete non-recurring credits benefiting the prior year, as well as increased costs incurred due to the effects of the COVID-19 pandemic.
Metrics
Signings
Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. TCV is the estimated total contractual revenue related to signed contracts. Total signings for the three and six months endedJune 30, 2020 increased, compared to the prior year periods, driven by increases in new business and renewal TCV signings. TCV signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. TCV is the estimated total contractual revenue related to signed contracts, excluding the impact of divested business as required. For the three months endedJune 30, 2020 , the Company signed$623 million of new business, representing a 90% increase compared to the prior year period, which is the strongest quarter of new business TCV signings since our separation as a stand-alone public company. Renewal TCV for the three months endedJune 30, 2020 was$912 million , an increase of 88% compared to the prior year period. The Company continues to build the size and strength of the newly centralized sales team. For the six months endedJune 30, 2020 , the Company signed$947 million of new business, representing 71% increase compared to the prior year period. Renewal TCV for the six months endedJune 30, 2020 was$1,427 million , an increase of 18% compared to the prior year period.
The amounts in the following table exclude divestitures.
Three Months Ended June 30, 2020 vs. 2019 ($ in millions) 2020 2019 $ Change % Change New business TCV$ 623 $ 328 $ 295 90 % Renewals TCV 912 485 427 88 % Total Signings$ 1,535 $ 813 $ 722 89 %
Annual recurring revenue signings(1)
21 25 % Non-recurring revenue signings(2)$ 76 $ 49 $ 27 55 % CNDT Q2 2020 Form 10-Q 32
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Table of Contents Six Months Ended June 30, 2020 vs. 2019 ($ in millions) 2020 2019 $ Change % Change New Business TCV$ 947 $ 553 $ 394 71 % Renewals TCV 1,427 1,212 215 18 % Total Signings$ 2,374 $ 1,765 $ 609 35 %
Annual recurring revenue signings(1)
26 19 % Non-recurring revenue signings(2)$ 120 $ 81 $ 39 48 %
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(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. The total new business pipeline at the end ofJune 30, 2020 and 2019 was$22.0 billion and$18.0 billion , respectively. Total new business pipeline is defined as total new business TCV pipeline of deals in all sell stages. This extends past the next twelve-month period to include total pipeline, excluding the impact of divested business as required.
Critical Accounting Policies
COVID-19 Outbreak
The Company is experiencing disruptions to its business, costs, operations, supply chain, and customer demand for its services and solutions due to the rapid and widening spread of the COVID-19 pandemic. While we experienced expansion of volumes and revenues in some of our service offerings, mainly increases in certain government subsidy programs such asSNAP and Unemployment Insurance , these were more than offset with declines in retail call volumes, large banking, healthcare, automotive and other client volume declines in transaction processing, interest rate exposure in our BenefitWallet business, declines in our tolling business, which is part of our Transit solutions service offering, and our Curbside management solutions volume, among other challenges. We expect similar challenges and potential declines in volume ahead of us, but we also anticipate other factors to offset these declines such as leveraging automation, focusing on temporary and long-term cost solutions through re-engineering our operating model and leveraging our work-from-home infrastructure. The Company also continues to monitor the potential effect on the carrying values of certain assets. These foregoing factors and other factors, which may worsen, can be expected to have a material adverse effect on our business, operations, financial results and capital resources. The ultimate effect of the COVID-19 pandemic on us is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, new information that will emerge concerning the severity and effects of COVID-19 and the actions taken to contain the pandemic or address its impact in the short and long term, among others. We do not yet know and cannot predict the full extent of potential impacts on our business, our services and business offerings or our operating results, financial condition and cash flow. Management uses significant judgment in determining the impact of the COVID-19 pandemic on its financial results for the current period and for any future periods. Changes in management's assumptions and judgment relating to the impact of COVID-19 could significantly affect the amounts disclosed in the MD&A - Financial Review of Operations and the MD&A - Operations Review of Segment Revenue and Profit, as the effect of the COVID-19 pandemic remains ongoing. For additional information on various COVID-19 impacts, uncertainties and risks, see Part II, Item 1A - Risk Factors included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 (2019 Annual Report on Form 10-K), as updated by our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . CNDT Q2 2020 Form 10-Q 33
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Capital Resources and Liquidity
As ofJune 30, 2020 , andDecember 31, 2019 , total cash and cash equivalents were$428 million and$496 million , respectively. The Company also has a$750 million Revolver for its various cash needs, of which$150 million was drawn inMarch 2020 as a precautionary measure in response to the COVID-19 pandemic, and$8 million issued for letters of credit. The net amount available to be drawn upon under our Revolver as ofJune 30, 2020 , was$592 million . Pursuant to the terms of the State of Texas Agreement, the Company was required to pay theState of Texas $236 million , of which$118 million was paid in 2019 and$118 million paid inJanuary 2020 . The case has been dismissed with prejudice with a full release and discharge of the Company. Refer to Note 11 - Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.
As of
In order to provide financial flexibility and finance certain investments and projects, we may continue to utilize external financing arrangements. However, we believe that our cash on hand, projected cash flow from operations, sound balance sheet and revolving line of credit will continue to provide sufficient financial resources to meet our expected business obligations for at least the next twelve months. Cash Flow Analysis The following table summarizes our cash flows, as reported in our Condensed Consolidated Statement of Cash Flows in the accompanying Condensed Consolidated Financial Statements: Six Months Ended June 30, (in millions) 2020 2019 Better (Worse) Net cash provided by (used in) operating activities$ (118) $ (234) $ 116 Net cash provided by (used in) investing activities$ (58) $ (209) 151
Net cash provided by (used in) financing activities
153
Historically the Company generates the majority of its cash from operating activities in the latter part of the year.
Operating activities
The net improvement in cash used in operating activities of$116 million , compared to the prior year period, was primarily related to timing of payments of Accounts payable and other current liabilities of$30 million , the deferral of payroll taxes allowed by the CARES Act of$18 million , lower net cash income tax payments of$36 million and other working capital changes of$30 million .
Investing activities
The decrease in cash used in investing activities of$151 million was primarily due to decreased spending for capital expenditures and the absence of the HSP acquisition in the first quarter of 2019 and lower divestiture payments.
Financing activities
The increase in cash from financing activities was primarily related to the
CNDT Q2 2020 Form 10-Q 34
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Table of Contents 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. We may utilize derivative financial instruments 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 and economic events, including the effects of the COVID-19 pandemic, have not caused us to materially modify nor change our financial risk management strategies with respect to our exposures to foreign currency risk. Refer to Note 7 - Financial Instruments in the Condensed Consolidated Financial Statements for additional discussion on our financial risk management.
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