# CONDUENT Inc (CNDT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CONDUENT Inc's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1677703/000167770322000015/cndt-20211231.htm
Accession: 0001677703-22-000015
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CNDT/
All MD&A years: /company/CNDT/mda/
Next year: /company/CNDT/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in six sections:

•Overview;

•Financial Information and Analysis of Results of Operations;

•Metrics;

•Capital Resources and Liquidity;

•Critical Accounting Estimates and Policies; and

•Recent Accounting Changes.

This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes in this Form 10-K for the year ended December 31, 2021. This MD&A provides additional information about our operations, current developments, financial condition, cash flows and results of operations.

The year-over-year comparisons in this MD&A are as of and for the years ended December 31, 2021 and 2020, unless stated otherwise. The discussion of 2020 results and related year-over-year comparisons as of and for the years ended December 31, 2020 and 2019 are found in Item 7 of Part II of our Form 10-K for the year ended December 31, 2020.

Throughout the MD&A, we refer to various notes to our Consolidated Financial Statements which appear in Item 8 of this Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.

Overview

With revenues of $4.1 billion, we are a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experience.

Headquartered in Florham Park, New Jersey, we have a team of approximately 60,000 people as of December 31, 2021, servicing customers from service centers in 24 countries. In 2021, 10% of our revenue was generated outside the U.S.

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate.

We organize and manage our businesses through three reportable segments.

•Commercial Industries – Our Commercial Industries segment provides business process services and customized solutions to clients in a variety of industries. Across the Commercial Industries segment, we operate on our clients’ behalf to deliver mission-critical solutions and services to reduce costs, improve efficiencies and enable revenue growth for our clients and their consumers and employees.

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

•Transportation – Our Transportation segment provides systems and support, as well as revenue-generating services, to government clients. On behalf of government agencies and authorities in the transportation industry, we deliver mission-critical mobility and payment solutions that improve automation, interoperability and

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decision-making to streamline operations, increase revenue and reduce congestion while creating safer communities and seamless travel experiences for consumers.

Significant 2021 Actions

•Stabilizing Revenue - Revenue of $4,140 million for the year ended December 31, 2021 was a decline of 0.55%, a significantly improved trend compared with the prior year.

•Strong Net Annual Recurring Revenue (ARR) Activity results: In the fourth quarter of 2020, we introduced the Net ARR activity Metric, a trailing twelve-month metric that measures the revenue from recurring services provided to a client inclusive of all new business annual recurring revenue, notification of lost clients and contractual impacts to price and volume. We have seen steady positive growth in this metric from $60 million in the fourth quarter of 2020 to $128 million in the fourth quarter of 2021, an increase of 113%. This increase is driven by new business ARR signings of $408 million for the year ended December 31, 2021, an increase of 16% compared to that of the prior year, and stronger retention of existing clients.

•Debt Refinancing - On October 15, 2021, the Company closed on a debt refinancing and extended its maturity profile. The debt refinancing transactions were as follows:

◦Term Loan A due 2026 in the amount of $265 million;

◦Term Loan B due 2028 in the amount of $515 million;

◦Senior Notes due 2029 in the amount of $520 million; and

◦Revolving Credit Facility maturing 2026 in the amount of $550 million

Upon closing the debt refinancing, $100 million was borrowed under the new revolving credit facility. The net proceeds of the new Term Loan A, Term Loan B, Senior Notes and $100 million of borrowing under the Revolver were used to repay the borrowings under the 2016 Credit Facilities that were outstanding on October 15, 2021. This $100 million was repaid on February 11, 2022. Refer to Note 11 – Debt in the Consolidated Financial Statements for definition of 2016 Credit Facilities and additional information on the debt refinancing.

•Disposition – In December 2021, we entered into an agreement with Symplr Software, Inc. to sell our Midas suite of patient safety, quality and advanced analytics solutions for cash consideration of $321 million subject to customary working capital adjustments. The Midas solution represented approximately $70 million and $72 million of revenue in 2021 and 2020, respectively. The transaction closed on February 8, 2022.

•Global Labor Market Dynamics – To address the significant change in the labor market environment, we responded by strengthening our talent acquisition organization and processes and maintaining an appropriate mix of work-from-home and work-from-office roles, which has resulted in increasing hire rates and improved ratings on Comparably and Glassdoor.

Significant 2020 Actions

•Strong new business signings results – A strong year of new business with total contract value (TCV) signings of $1,934 million in 2020, representing an increase of 94% compared to that of the prior year period.

•Draw down on revolver – In March 2020, we drew down $150 million of our $750 million 2016 Revolving Credit Facility as a precautionary measure in response to the COVID-19 pandemic. This amount was repaid in December 2020.

•Cost savings initiative – Beginning in the first quarter of 2020, we expanded the focus of our efficiency initiatives to include both permanent and temporary cost efficiencies, aimed to offset as much of the COVID-19 related negative impacts as possible. We announced an initial target amount of approximately $100 million of cost savings impact in 2020 and subsequently increased this amount throughout the year. We achieved approximately $145 million of cost savings impact in 2020 in both permanent savings, such as headcount and vendor optimization, and temporary savings, such as furloughs and reduced travel.

•Operational improvements – We have made significant progress on our “Growth”, “Quality”, and “Efficiency”

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initiatives by leveraging changes to people, process, and technology. Specific actions have included standardizing governance processes for client implementations, account management, and incident response, centralizing and enhancing the salesforce, restructuring to leverage a shared services model and addressing spans and layers, instituting a global IT command center, continuing to make progress on the data center consolidation plan, among others. These actions have resulted in improvements across the “Growth”, “Quality”, and “Efficiency” pillars. For example, we have shown a significant reduction of the number of technology-related incidents and outages, improvements in associate satisfaction survey results, and increases in service level agreement payments from customers.

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 associates. To address the potential impact to our business over the near-term, our Business Continuity team established a proactive plan in the first quarter of 2020 that has continued throughout the pandemic, which includes:

•Supporting our associates with several 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.

•Increased sanitation and social distancing for required on-site essential associates.

At the end of 2021, we continued to have most of our workforce in a work-from-home environment. We will continue to assess when to bring associates back to our offices, as appropriate, based on the specific COVID-19 conditions in certain geographies, as well as business requirements.

As the crisis continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and their end-users as well as the Company's needs and to continue to provide our mission-critical services and solutions.

Refer to the discussion of results of operations below for additional discussion of COVID-19 pandemic related effects.

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Financial Information

The section below provides a comparative discussion of our consolidated results of operations for the year ended December 31, 2021 and 2020. See Item 7. MD&A–Financial Information in our Annual Report on Form 10-K for the year ended December 31, 2020, for a comparative discussion of our consolidated results of operations between 2020 and 2019.

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[[/GREPCENT_TABLE]]

Revenue

Revenue for 2021 decreased, compared to the prior year. This is due to lost business from prior years, partially offset by increases attributable to lesser impacts of the COVID-19 pandemic across our Transportation and Commercial Industries segments, increased volumes in our Government Services segment, primarily a result of increased payments activity because of Federal stimulus, and the ramp of new business.

Cost of Services (excluding depreciation and amortization)

Cost of services for 2021 decreased, compared to the prior year, mainly driven by revenue mix, lost business, our efficiency initiatives and cost actions.

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

SG&A for 2021 increased, compared to the prior year, mainly driven by $32 million of costs related to an abandonment of an internal project initiated in 2018 by prior leadership, an increase in certain employee-compensation costs, growth in the sales organization and higher recruiting expenses. Refer to Note 6 – Land, Buildings, Equipment and Software, Net for additional information on the abandonment of the internal project.

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Depreciation and Amortization

Depreciation and amortization for 2021 decreased, compared to the prior year, primarily due to a portion of certain customer relationship intangible assets being fully amortized in the first quarter of 2021.

Restructuring and Related Costs

We engage in a series of restructuring programs related to downsizing 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. The following are the components of our Restructuring and related costs:

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[[/GREPCENT_TABLE]]

__________

(1)Represents professional support costs associated with certain strategic transformation programs.

(2)Relates to approximate headcount reductions worldwide associated with Severance and related costs

Refer to Note 9 – Restructuring Programs and Related Costs to the Consolidated Financial Statements for additional information regarding our restructuring programs.

Interest Expense

Interest expense represents interest on long-term debt and the amortization of debt issuance costs. The decrease in Interest expense for 2021, compared to the prior year, was driven primarily by lower interest rates, a lower Term Loan A due 2023 principal balance and the May 1, 2021 repayment of the previously outstanding $34 million Senior Notes due 2024. Additionally, 2020 included interest expense attributable to the $150 million drawdown on our Senior Revolving Credit Facility (Prior Revolver) in March 2020, which was repaid in December 2020. These decreases were partially offset by interest on the Senior notes due 2029. Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information.

Loss on Divestitures and Transaction Costs

The costs incurred in 2021 consist of professional fees and other costs related to certain divestiture activities. The costs included in 2020 consist of professional fees related to the strategic review by the Company's Board of Directors and reserves for certain divestiture related litigation.

Litigation Costs, Net

Net litigation costs for 2021 and 2020 primarily consist of reserves for various matters that are subject to litigation. The prior year amount related to certain reimbursement matters with our former parent company, Xerox Corporation.

Refer to Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information.

Other (Income) Expenses, Net

Other (income) expenses, net for 2021 and 2020 primarily includes an impairment loss on an equity investment, foreign currency transaction losses (gains), interest income and the Student Loan business shut-down costs.

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Income Taxes

The 2021 effective tax rate was (9.7)%, compared to 15.1% for 2020. The 2021 rate was lower than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, valuation allowances, non-deductible expenses and tax settlement adjustments, partially offset by tax credits. The 2020 rate was lower than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, tax settlements, and valuation allowances partially offset by tax credits. The GAAP tax rate is lower in 2021 compared to 2020 due to the impact of discrete tax charges and a small pre-tax loss.

Excluding the impact of amortization, restructuring and other adjustments and discrete tax items, the normalized effective tax rate for 2021 was 26.6%, consistent with the 2020 rate of 27.3%.

The Company believes it is reasonably possible that unrecognized tax benefits of approximately $11 million will reverse within 12 months due to anticipated audit settlements.

In recent years, government agencies and global organizations have had an increased focus on the issues of taxation of multinational corporations. During 2021, following a framework agreement reached between almost all member countries of the Organization for Economic Co-operation and Development (OECD), the OECD released rules around global taxation of the digital services businesses and a global minimum tax rate, commonly referred to as Pillar 1 and Pillar 2 of the Base Erosion and Profit Shifting (BEPS) initiative, respectively. Pillar 1 addresses the broader challenge of a digitalized economy and focuses on the allocation of group profits among taxing jurisdictions based on a market based concept rather than historical “permanent establishment” concepts. Pillar 1 is directed at companies with revenues greater than 20 billion Euro and is not applicable to Conduent. Pillar 2 addresses the remaining BEPS risk of profit shifting to entities in low tax jurisdictions by introducing a global minimum tax rate and a proposed withholding tax on certain base eroding payments. Pillar 2 may have limited application to Conduent but we do not anticipate a material impact based on current guidance.

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Operations Review of Segments

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

•Commercial Industries,

•Government Services, and

•Transportation.

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

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

The section below provides a comparative discussion of our financial performance by segment between the year ended December 31, 2021 and 2020. See Item 7. MD&A - Operations Review of Segments in our Annual Report on Form 10-K for the year ended December 31, 2020 for a comparative discussion of our consolidated results of operations by segment between 2020 and 2019.

Segment Performance Review

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[[/GREPCENT_TABLE]]

Commercial Industries Segment

Revenue

Commercial Industries revenue for 2021 decreased, compared to the prior year, due to reduced revenue from our HSA offering "Benefit Wallet" (within our HRLS business) as a result of Federal Reserve initiated interest rate reductions, as well as lost business from prior years, partially offset by the ramp of new business.

Segment Profit and Adjusted EBITDA

Decreases in the Commercial Industries segment profit and adjusted EBITDA for 2021, compared to the prior year, were mainly driven by overall revenue declines and the dynamics of a challenging labor market in both North America and Europe, partially offset by the result of progress in our efficiency initiatives and one-time contract exit costs in the second quarter of 2020.

Government Services Segment

Revenue

Government Services revenue for 2021 increased, compared to the prior year, primarily driven by COVID-19 related volume increases. These increases were partially offset by lost business from prior years. The increased volumes from the COVID-19 pandemic were largely driven by the increase in Pandemic SNAP volumes.

Segment Profit and Adjusted EBITDA

Increases in the Government Services segment profit and adjusted EBITDA for 2021, compared to the prior year, were mainly driven by higher COVID-19 related volumes at strong margins and expense reductions resulting from progress in our efficiency initiatives.

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Transportation Segment

Revenue

Transportation revenue for 2021 increased, compared to the prior year, driven by the ramp of new business and the impact of loosening of numerous COVID-19 related restrictions, particularly in the United States, partially offset by lost business from prior years.

Segment Profit and Adjusted EBITDA

Transportation segment profit and adjusted EBITDA for 2021 decreased, compared to the prior year, driven by lower margins on new business in our Tolling business, the impact of lost business in the prior year and temporary cost savings in the prior year that more than offset progress in our efficiency initiatives.

Other

Segment Profit (Loss) and Adjusted EBITDA

The decrease in Other segment profit for 2021 compared to the prior year, was primarily due to an adjustment to the then remaining California Medicaid Management Information System settlement liability of $7 million as a result of the contract expiring in March 2020. This benefit was excluded from adjusted EBITDA for segment reporting purposes due to its non-recurring nature.

Unallocated Costs

The decrease in segment profit is primarily due to the $32 million charge related to the abandonment of an internal project. The decrease in adjusted EBITDA for 2021, compared to the prior year, was mainly driven by a greater proportion of legal costs being related to corporate matters and therefore not being allocated to a segment.

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, excluding the impact of divested business as required.

For the year ended December 31, 2021, the Company signed $1,785 million of new business, representing an 8% decrease compared to the prior year. Renewal TCV for the year ended December 31, 2021 was $2,835 million, an increase of 1% compared to the prior year.

The amounts in the following table exclude the impact of divestitures.

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[[/GREPCENT_TABLE]]

___________

(1)New business ARR measures the revenue from recurring services provided to the client for any new business signing. ARR represents the recurring services provided to a customer with the opportunity for renewal at the end of the contract term.

(2)New business NRR measures the non-recurring revenue for any new business signing, including (i) signing value of any contract with term less than 12 months and (ii) signing value of project based revenue, not expected to continue long term.

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Net ARR Activity

The Net ARR Activity metric is defined as Projected Annual Recurring Revenue for contracts signed in the prior 12 months, less the annualized impact of any client losses, contractual volume and price changes, and other known impacts for which the Company was notified in that same time period, which could positively or negatively impact results. The metric annualizes the net impact to revenue. Timing of revenue impact varies and may not be realized within the forward 12-month timeframe. The metric is for indicative purposes only. This metric excludes COVID-related volume impacts and non-recurring revenue signings. This metric is not indicative of any specific 12-month timeframe.

The Net ARR activity metric for the trailing twelve months for each of the prior four quarters was as follows:

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[[/GREPCENT_TABLE]]

Capital Resources and Liquidity

As of December 31, 2021 and 2020, total cash and cash equivalents were $415 million (of which approximately $132 million was cash in foreign locations) and $450 million (of which approximately $124 million was cash in foreign locations), respectively. We also have a $550 million revolving line of credit for our various cash needs, of which $100 million has been utilized for borrowings and $20 million has been utilized for letters of credit as of December 31, 2021. On February 11, 2022, we repaid this $100 million.

As of December 31, 2021, in addition to the borrowings under our revolving line of credit, there was a total of $1.3 billion outstanding borrowings under our 2021 Term Loan A, Term Loan B and Senior notes, of which $22 million was due within one year. Refer to Note 11 – Debt to the Consolidated Financial Statements for additional debt information.

In January 2019, we acquired Health Solution Plus, a software provider of healthcare payer administration solutions for a total base consideration of $90 million. This acquisition is part of the Commercial Industries segment.

In February 2019, we reached a settlement agreement and release with the State of Texas (State) and the Texas Department of Health and Human Services, which was amended in May 2019 (Texas Agreement). Pursuant to the terms of the Texas Agreement, the Company was required to pay the State $236 million, of which $118 million was paid in 2019 and the remaining $118 million was paid in January 2020.

Cash Flow Analysis

The following summarizes our cash flows for the two years ended December 31, 2021, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:

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[[/GREPCENT_TABLE]]

Operating Activities

The net improvement in cash flow provided by operating activities of $82 million, compared to the prior year, was primarily attributable to the absence of the payment in 2020 under the Texas Agreement, partially offset by higher net income tax payments and other working capital changes.

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Investing Activities

The increase in cash used in investing activities of $8 million, compared to the prior year, was primarily due to increased spending related to modernizing our infrastructure and productivity tools.

Financing Activities

The increase in cash used in financing activities of $58 million, compared to the prior year, was primarily due to increased payments of principal on debt and payment of debt issuance costs related to our debt refinancing in 2021 and payment of the previously outstanding $34 million of Senior Notes due 2024.

Sales of Accounts Receivable

The net impact from the sales of accounts receivable on net cash provided by (used in) operating activities for the years ended December 31, 2021, 2020 and 2019 was $(10) million, $(22) million and $51 million, respectively. The net impact from the sales of accounts receivable represents the difference between current and prior year fourth quarter accounts receivable sales adjusted for the effects of collections prior to the end of the year.

Financial Instruments

Refer to Note 12 – Financial Instruments to the Consolidated Financial Statements for additional information.

Material Cash Requirements from Contractual Obligations

The Company believes its balances of cash and cash equivalents, which totaled $415 million as of December 31, 2021, along with cash generated by operations and amounts available for borrowing under its 2021 Revolving Credit Facility, will be sufficient to satisfy its cash requirements over the next 12 months and beyond.

At December 31, 2021, the Company’s material cash requirements include the following contractual and other obligations.

Debt

As of December 31, 2021, we had outstanding debt with floating and fixed rates totaling $1,440 million, of which $30 million was due within 12 months. Future interest payments associated with this debt, which has maturities through 2029, are $511 million, of which $71 million is due within 12 months. Refer to Note 11 – Debt in the Consolidated Financial Statements for additional information.

Leases

In the normal course of business, we enter lease arrangements for certain equipment and facilities. As of December 31, 2021, total fixed lease payables were $309 million, of which $92 million was due within 12 months. Refer to Note 7 – Leases in the Consolidated Financial Statements for additional information.

Estimated Purchase Commitments

We have committed to purchasing certain materials and services to support our operations. The total of these commitments was $138 million as of December 31, 2021, of which $88 million was due within 12 months.

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Other Contingencies and Commitments

As more fully discussed in Note 16 – Contingencies and Litigation to the Consolidated Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers and customers. Nonperformance under a contract including a guarantee, indemnification or claim could trigger an obligation of the Company.

We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. Refer to Note 16 – Contingencies and Litigation in the Consolidated Financial Statements for additional information.

Off-Balance Sheet Arrangements

As of December 31, 2021, we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In addition, refer to the preceding discussion of the Company's contractual cash obligations and other commercial commitments and Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding contingencies, guarantees and indemnifications.

Critical Accounting Estimates and Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and notes thereto. In preparing our Consolidated Financial Statements, we have made our best estimates and judgments of certain amounts included in the Consolidated Financial Statements giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Senior management has discussed the development and selection of the critical accounting policies, estimates and related disclosures included herein with the Audit Committee of the Board of Directors. We consider these as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management's judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclose the impact of these different estimates on our operations. In certain instances, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period.

Specific risks associated with these critical accounting policies are discussed in MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements.

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Assets/Liabilities Held for Sale

We classify assets as held for sale in the period when the following conditions are met: (i) management, having the authority to approve the action, commits to a plan to sell the asset (disposal group); (ii) the asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal group); (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated; (iv) the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal group) beyond one year; (v) the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

A long-lived asset (disposal group) that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale.

The fair value of a long-lived asset (disposal group) less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale. Upon determining that a long-lived asset (disposal group) meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group in the line items Assets held for sale and Liabilities held for sale, respectively, in the Consolidated Balance Sheets.

On December 29, 2021, the Company signed a definitive agreement to sell its Midas Suite of Solutions to Symplr Software, Inc. This action was taken because of the Company's strategy to streamline its portfolio and its consideration of divestitures of select businesses to enhance shareholder and client value. As of December 31, 2021, the Company determined that this business met the conditions above to be classified as held for sale. Refer to Note 4 – Assets/Liabilities Held for Sale and Divestiture to the Consolidated Financial Statements for additional information.

Revenue Recognition

Application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies and Note 2 – Revenue to the Consolidated Financial Statements for additional information regarding our revenue recognition policies.

Goodwill

Goodwill is not amortized but rather tested for impairment annually, or more frequently if an event or circumstance indicates that impairment may have been incurred. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated adverse events or conditions impacting revenues, cash flows or profitability, unanticipated competitive activities and acts by governments and courts. Refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies and Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information regarding our goodwill policies.

Application of the interim and annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment of the fair value of each reporting unit. We currently have six reporting units which support our three reportable segments: Customer Experience Management, Business Operations Solutions, Commercial Healthcare and Human Resources and Learning Services (together comprising Commercial Industries), Government Services and Transportation.

Our annual quantitative impairment test of goodwill was performed as of October 1, 2021.

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In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income approach (discounted cash flow methodology) and market approach. These valuation approaches require significant judgment and consider several factors that include, but are not limited to, expected future cash flows, growth rates and discount rates and comparable multiples from publicly traded companies in our industry. In addition, we are required to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses.

When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions. The cash-flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, restructuring activities, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business. The selected discount rates consider the risk and nature of the respective reporting units' cash flows, appropriate capital structure and rates of return that market participants would require to invest their capital in our reporting units.

We believe these assumptions are appropriate and reflect our forecasted long-term business model and consider our historical results as well as the current economic environment and markets that we serve. The most significant assumptions used in the goodwill analysis relate to the discount rates (ranging from 11.50% to 13.50%) and long-term organic growth rates (ranging from 2.5% to 3.0%) for the reporting units within the Commercial Industries, Government Services and Transportation reportable segments.

Based on our quantitative assessments, we concluded that the fair value of our reporting units exceeded their respective carrying values and, accordingly, we did not record any goodwill impairment charge in the year ended December 31, 2021. If we used different assumptions for discount rates or long-term organic growth rates, our calculated fair values of our reporting units could be higher or lower which could result in a goodwill impairment.

Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances and other factors, that may not be predictable. If there is a significant unusual or one-time item recognized in our operating results, the taxes attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item.

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded in our Consolidated Balance Sheets and provide valuation allowances as required. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Gross deferred tax assets of $265 million and $294 million had valuation allowances of $82 million and $83 million at December 31, 2021 and 2020, respectively.

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We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were $23 million, $23 million and $24 million at December 31, 2021, 2020 and 2019, respectively.

Refer to Note 15 – Income Taxes to the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.

Loss Contingencies

We are currently involved in various claims and legal proceedings. At least quarterly, we review the status of each significant matter and assess its potential financial exposure considering all available information including, but not limited to, the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise estimates. These revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial position.

Refer to Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding loss contingencies.

Recent Accounting Changes

See Note 1 – Basis of Presentation and Summary of Significant Accounting Policies for information on accounting standards adopted during the current year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A.

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