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 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.
The 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 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 58,000 associates as of June 30, 2022, servicing customers from service centers in 24 countries.
Our reportable segments correspond to how we organize and manage the business and are aligned to the solutions we offer our clients.
We organize and manage our businesses through three reportable segments.
•Commercial – Our Commercial segment provides business process services and customized solutions to clients in a variety of industries. Across the Commercial 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 decision-making to streamline operations, increase revenue and reduce congestion while creating safer communities and seamless travel experiences for consumers.
Executive Summary
We continue to transform our business through an intense focus on growth, quality, and efficiency – utilizing a programmatic and project management approach. Beginning in the first quarter of 2020 and through the first and second quarter of 2022, we have expanded the focus of our project portfolio to include both efficiency and growth initiatives, aimed to position the company to pivot to revenue growth and margin expansion over time.
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 six months ended June 30, 2022, our strategy is showing results, including the following:
•Net income of $136 million for the six months ended June 30, 2022 as compared to net income of $1 million for the same period in the prior year.
•New Business annual contract value (ACV) of $180 million increased for the fourth consecutive quarter, with strong contributions of $124 million from the Commercial segment.
•Net Annual Recurring Revenue (ARR) activity metric of $104 million, as compared to $106 million in the same period in the prior year, $102 million in the first quarter of 2022 and positive for the seventh consecutive quarter.
•Annual recurring revenue signings of $207 million for the six months ended June 30, 2022 is substantially unchanged compared to the prior year.
•Renewal TCV of $1,238 million for the six months ended June 30, 2022 is 13% higher than the same period in the prior year.
COVID-19 Pandemic
Throughout the COVID-19 pandemic, we have continued to provide critical and best-in-class services to our customers and their end-users, while ensuring the health and safety of our greatest assets - our associates. To address the potential impact to our business over the near-term, our Business Continuity team established a proactive plan in the first quarter of 2020 that has continued throughout the pandemic, which includes:
•Supporting our associates with a number of specific initiatives, including making improvements to our policies to extend short-term disability, providing extra supplemental sick leave coverage and introducing a hardship leave policy.
•Increased sanitation and social distancing for on-site essential associates.
At the end of the second quarter of 2022, we continued to have most of our workforce in either a work-from-home or hybrid environment. We will continue to assess when to bring associates back to our offices, as appropriate, based on the specific COVID-19 conditions in certain geographies, as well as business requirements.
As the pandemic continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and their end-users as well as the Company's needs and to continue to provide our mission-critical services and solutions.
Financial Review of Operations
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| | Three Months Ended June 30, | | 2022 vs. 2021 |
($ in millions) | | 2022 | | 2021 | | $ Change | | % Change |
Revenue | | $ | 928 | | | $ | 1,026 | | | $ | (98) | | | (10) | % |
| | | | | | | | |
Operating Costs and Expenses | | | | | | | | |
Cost of services (excluding depreciation and amortization) | | 727 | | | 772 | | | (45) | | | (6) | % |
Selling, general and administrative (excluding depreciation and amortization) | | 113 | | | 125 | | | (12) | | | (10) | % |
Research and development (excluding depreciation and amortization) | | 2 | | | 1 | | | 1 | | | 100 | % |
Depreciation and amortization | | 53 | | | 86 | | | (33) | | | (38) | % |
Restructuring and related costs | | 11 | | | 8 | | | 3 | | | 38 | % |
Interest expense | | 18 | | | 13 | | | 5 | | | 38 | % |
| | | | | | | | |
(Gain) loss on divestitures and transaction costs | | 3 | | | (1) | | | 4 | | | n/m |
Litigation settlements (recoveries), net | | (3) | | | 1 | | | (4) | | | n/m |
Loss on extinguishment of debt | | — | | | 2 | | | (2) | | | n/m |
Other (income) expenses, net | | (1) | | | — | | | (1) | | | n/m |
Total Operating Costs and Expenses | | 923 | | | 1,007 | | | (84) | | | |
| | | | | | | | |
Income (Loss) Before Income Taxes | | 5 | | | 19 | | | (14) | | | |
Income tax expense (benefit) | | 5 | | | 7 | | | (2) | | | |
Net Income (Loss) | | $ | — | | | $ | 12 | | | $ | (12) | | | |
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| | Six Months Ended June 30, | | 2022 vs. 2021 |
($ in millions) | | 2022 | | 2021 | | $ Change | | % Change |
Revenue | | $ | 1,895 | | | $ | 2,054 | | | $ | (159) | | | (8) | % |
| | | | | | | | |
Operating Costs and Expenses | | | | | | | | |
Cost of services (excluding depreciation and amortization) | | 1,482 | | | 1,559 | | | (77) | | | (5) | % |
Selling, general and administrative (excluding depreciation and amortization) | | 215 | | | 251 | | | (36) | | | (14) | % |
Research and development (excluding depreciation and amortization) | | 3 | | | 1 | | | 2 | | | n/m |
Depreciation and amortization | | 114 | | | 181 | | | (67) | | | (37) | % |
Restructuring and related costs | | 20 | | | 21 | | | (1) | | | (5) | % |
Interest expense | | 37 | | | 26 | | | 11 | | | 42 | % |
| | | | | | | | |
(Gain) loss on divestitures and transaction costs | | (160) | | | 1 | | | (161) | | | n/m |
Litigation settlements (recoveries), net | | (31) | | | 2 | | | (33) | | | n/m |
Loss on extinguishment of debt | | — | | | 2 | | | (2) | | | n/m |
Other (income) expenses, net | | — | | | — | | | — | | | n/m |
Total Operating Costs and Expenses | | 1,680 | | | 2,044 | | | (364) | | | |
| | | | | | | | |
Income (Loss) Before Income Taxes | | 215 | | | 10 | | | 205 | | | |
Income tax expense (benefit) | | 79 | | | 9 | | | 70 | | | |
Net Income (Loss) | | $ | 136 | | | $ | 1 | | | $ | 135 | | | |
Revenue
Revenue for the three and six months ended June 30, 2022 decreased, compared to the prior year periods, primarily due to lower federal stimulus revenue in the Government Services segment, lost business from prior years, as well as negative foreign exchange translation impact, particularly the Euro and British pound, partially offset by new business ramp across all segments.
Cost of Services (excluding depreciation and amortization)
Cost of services for the three and six months ended June 30, 2022 decreased, compared to the prior year periods, driven by lost business from prior years, increased operational efficiency and favorable foreign exchange translation impact, slightly offset by an increase in hiring activity to support new deal ramp in the Commercial segment.
Selling, General and Administrative (SG&A) (excluding depreciation and amortization)
SG&A for the three months ended June 30, 2022 decreased, compared to the prior year period, primarily driven by lower variable employee costs.
SG&A for the six months ended June 30, 2022 decreased, compared to the prior year period, primarily driven by the recovery of $14 million of defense costs as part of the settlement with insurance carriers relating to the previously disclosed State of Texas matter, as well as lower variable employee costs.
Depreciation and Amortization
Depreciation and amortization for the three and six months ended June 30, 2022 decreased, compared to the prior year periods, primarily due to portions of certain customer relationship intangible assets from acquisitions in years past being fully amortized.
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. The following are the components of our Restructuring and related costs:
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Severance and related costs | | $ | 1 | | | $ | 2 | | | $ | 1 | | | $ | 2 | |
Data center consolidation | | 3 | | | 8 | | | 7 | | | 15 | |
Termination and asset impairment costs | | 6 | | | (3) | | | 10 | | | 2 | |
Total net current period charges | | 10 | | | 7 | | | 18 | | | 19 | |
Consulting and other costs(1) | | 1 | | | 1 | | | 2 | | | 2 | |
Restructuring and related costs | | $ | 11 | | | $ | 8 | | | $ | 20 | | | $ | 21 | |
___________
(1)Represents professional support costs associated with certain strategic transformation programs.
Refer to Note 6 – 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. On October 15, 2021, we completed the refinancing of our previously outstanding debt, which extended the maturity profile of our debt. The increase in Interest expense for the three and six months ended June 30, 2022, compared to the prior year periods, was driven by higher interest rates on our refinanced credit facilities, partially offset by a lower total outstanding debt balance.
(Gain) Loss on Divestitures and Transaction Costs
The divestiture of the Midas business in the first quarter of 2022 resulted in a gain of $166 million. Additionally, professional fees and other costs related to certain consummated and non-consummated transactions considered by the Company are included in this financial statement line item.
Litigation Settlements (Recoveries), Net
Litigation settlements (recoveries), net for the six months ended June 30, 2022 primarily consist of $24 million of insurance recoveries recorded in the first quarter of 2022 related to the previously disclosed State of Texas matter.
Refer to Note 12 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.
Income Taxes
The effective tax rate for the three months ended June 30, 2022 was 99.6%, compared to 38.2% for the three months ended June 30, 2021. The June 30, 2022 rate was higher than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, state and local taxes, other non-deductible permanent differences, and valuation allowances, partially offset by tax credits.
The effective tax rate for the three months ended June 30, 2021 was higher than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, other non-deductible permanent differences, valuation allowances and tax audit reserves, partially offset by tax credits.
Excluding the impact of discrete tax adjustments, amortization of intangible assets, litigation reserves and restructuring costs, the normalized effective tax rate for the three months ended June 30, 2022 was 46.7%. The normalized effective tax rate for the three months ended June 30, 2021 was 25.7%, predominantly due to excluding the impact of discrete tax adjustments, amortization of intangible assets and restructuring costs. The normalized effective tax rate for the second quarter of 2022 was higher than the second quarter of 2021 rate due to the geographic mix of income, increase in permanent tax differences and lower adjusted pre-tax income.
The effective tax rate for the six months ended June 30, 2022 was 37.0%, compared to 94.3% for the six months ended June 30, 2021. The June 30, 2022 rate was higher than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, state and local taxes and permanently non-deductible amounts related to the Midas divestiture transaction, partially offset by the tax benefit of valuation allowances released due to the gain from this divestiture and tax credits.
The effective tax rate for the six months ended June 30, 2021 was higher than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, other non-deductible permanent differences, valuation allowances, and tax audit reserves, partially offset by tax credits.
Excluding the impact of the Midas divestiture, the litigation insurance recoveries, amortization of intangible assets, restructuring costs and certain discrete tax items, the normalized effective tax rate for the six months ended June 30, 2022 was 35.2%. The normalized effective tax rate for the six months ended June 30, 2021 was 24.7%, predominantly due to excluding the impact of discrete tax adjustments, charges for amortization of intangible assets and restructuring costs. The normalized effective tax rate for the year-to-date June 30, 2022 was higher than the year-to-date June 30, 2021 rate predominantly due to the geographic mix of income, increase in permanent tax differences and lower adjusted pre-tax income.
We believe it is reasonably possible that unrecognized tax benefits of approximately $3 million will reverse within 12 months due to settlements. A payment of $8 million was made in June 2022 decreasing unrecognized tax benefits.
In recent years, government agencies and global organizations have had an increased focus on the issues of taxation of multinational corporations. In March 2022, the Organization for Economic Co-operation and Development (OECD) released the Commentary to the Pillar 2 Model Rules as agreed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. The Pillar 2 Model Rules, released on December 20, 2021, define the scope and key mechanics for the Pillar 2 system of global minimum tax rules. We are monitoring the development and assessing any potential impact. We do not anticipate a material impact based on current guidance.
Operations Review of Segment Revenue and Profit
In the first quarter of 2022, we realigned certain clients between reportable segments to reflect how we currently manage our business. Certain clients were reclassified from the Government Services reportable segment to the Commercial reportable segment to align with a product view of the business. This change had an insignificant impact. Additionally, in the first quarter of 2022, in order to provide greater visibility into the profitability of our segments, certain real estate costs that were previously included in Unallocated Costs have been allocated to each of the reportable segments. As described in Note 5 – Assets/Liabilities Held for Sale and Divestiture, we sold our Midas Suite of patient safety, quality and advanced analytics solutions to a third party in the first quarter of 2022. Accordingly, the results of this disposed business, which had been reported in the Commercial segment have been reclassified to the Divestitures segment. All prior periods presented have been recast to reflect these changes.
Our financial performance is based on Segment Profit/(Loss) and Segment Adjusted EBITDA for the following three segments:
•Commercial;
•Government Services; and
•Transportation.
Divestitures includes our Midas business which was sold in the first quarter of 2022.
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.
We continue to modernize a significant portion of our infrastructure with new systems and processes and consolidate our data centers as part of our quality and efficiency initiatives. There is a risk, however, that our modernization efforts and data center consolidations could materially and adversely disrupt our operations. See Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.
Results of financial performance by segment were:
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| | Three Months Ended June 30, |
(in millions) | | Commercial | | Government Services | | Transportation | | Divestitures | | Unallocated Costs | | Total |
2022 | | | | | | | | | | | | |
Revenue | | $ | 470 | | | $ | 279 | | | $ | 179 | | | $ | — | | | $ | — | | | $ | 928 | |
Segment profit (loss) | | $ | 22 | | | $ | 70 | | | $ | 16 | | | $ | — | | | $ | (72) | | | $ | 36 | |
Segment depreciation and amortization | | $ | 24 | | | $ | 8 | | | $ | 8 | | | $ | — | | | $ | 11 | | | $ | 51 | |
Adjusted EBITDA | | $ | 46 | | | $ | 78 | | | $ | 24 | | | $ | — | | | $ | (61) | | | $ | 87 | |
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% of Total Revenue | | 50.6 | % | | 30.1 | % | | 19.3 | % | | — | % | | — | % | | 100.0 | % |
Adjusted EBITDA Margin | | 9.8 | % | | 28.0 | % | | 13.4 | % | | — | % | | — | % | | 9.4 | % |
| | | | | | | | | | | | |
2021 | | | | | | | | | | | | |
Revenue | | $ | 488 | | | $ | 336 | | | $ | 185 | | | $ | 17 | | | $ | — | | | $ | 1,026 | |
Segment profit (loss) | | $ | 19 | | | $ | 110 | | | $ | 17 | | | $ | 7 | | | $ | (79) | | | $ | 74 | |
Segment depreciation and amortization | | $ | 23 | | | $ | 8 | | | $ | 8 | | | $ | 1 | | | $ | 14 | | | $ | 54 | |
Adjusted EBITDA | | $ | 42 | | | $ | 118 | | | $ | 25 | | | $ | 8 | | | $ | (65) | | | $ | 128 | |
| | | | | | | | | | | | |
% of Total Revenue | | 47.6 | % | | 32.7 | % | | 18.0 | % | | 1.7 | % | | — | % | | 100.0 | % |
Adjusted EBITDA Margin | | 8.6 | % | | 35.1 | % | | 13.5 | % | | 47.1 | % | | — | % | | 12.5 | % |
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| | Six Months Ended June 30, |
(in millions) | | Commercial | | Government Services | | Transportation | | Divestitures | | Unallocated Costs | | Total |
2022 | | | | | | | | | | | | |
Revenue | | $ | 982 | | | $ | 565 | | | $ | 341 | | | $ | 7 | | | $ | — | | | $ | 1,895 | |
Segment profit (loss) | | $ | 50 | | | $ | 145 | | | $ | 24 | | | $ | 2 | | | $ | (131) | | | $ | 90 | |
Segment depreciation and amortization | | $ | 50 | | | $ | 16 | | | $ | 17 | | | $ | — | | | $ | 23 | | | $ | 106 | |
Adjusted EBITDA | | $ | 100 | | | $ | 161 | | | $ | 41 | | | $ | 2 | | | $ | (108) | | | $ | 196 | |
| | | | | | | | | | | | |
% of Total Revenue | | 51.8 | % | | 29.8 | % | | 18.0 | % | | 0.4 | % | | — | % | | 100.0 | % |
Adjusted EBITDA Margin | | 10.2 | % | | 28.5 | % | | 12.0 | % | | 28.6 | % | | — | % | | 10.3 | % |
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2021 | | | | | | | | | | | | |
Revenue | | $ | 1,000 | | | $ | 650 | | | $ | 369 | | | $ | 35 | | | $ | — | | | $ | 2,054 | |
Segment profit (loss) | | $ | 43 | | | $ | 195 | | | $ | 38 | | | $ | 16 | | | $ | (158) | | | $ | 134 | |
Segment depreciation and amortization | | $ | 50 | | | $ | 13 | | | $ | 17 | | | $ | 2 | | | $ | 27 | | | $ | 109 | |
Adjusted EBITDA | | $ | 93 | | | $ | 208 | | | $ | 55 | | | $ | 18 | | | $ | (131) | | | $ | 243 | |
| | | | | | | | | | | | |
% of Total Revenue | | 48.7 | % | | 31.6 | % | | 18.0 | % | | 1.7 | % | | — | % | | 100.0 | % |
Adjusted EBITDA Margin | | 9.3 | % | | 32.0 | % | | 14.9 | % | | 51.4 | % | | — | % | | 11.8 | % |
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(in millions) | | Three Months Ended June 30, | | Six Months Ended June 30, | | |
Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Income (Loss) Before Income Taxes | | $ | 5 | | | $ | 19 | | | $ | 215 | | | $ | 10 | | | | | |
Reconciling items: | | | | | | | | | | | | |
Amortization of acquired intangible assets | | 3 | | | 32 | | | 9 | | | 72 | | | | | |
Restructuring and related costs | | 11 | | | 8 | | | 20 | | | 21 | | | | | |
Interest expense | | 18 | | | 13 | | | 37 | | | 26 | | | | | |
| | | | | | | | | | | | |
(Gain) loss on divestitures and transaction costs | | 3 | | | (1) | | | (160) | | | 1 | | | | | |
Litigation costs | | (3) | | | 1 | | | (31) | | | 2 | | | | | |
Loss on extinguishment of debt | | — | | | 2 | | | — | | | 2 | | | | | |
Other (income) expenses, net | | (1) | | | — | | | — | | | — | | | | | |
Segment Pre-tax Income (Loss) | | $ | 36 | | | $ | 74 | | | $ | 90 | | | $ | 134 | | | | | |
Segment depreciation and amortization (including contract inducements) | | $ | 51 | | | $ | 54 | | | $ | 106 | | | $ | 109 | | | | | |
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| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 87 | | | $ | 128 | | | $ | 196 | | | $ | 243 | | | | | |
Commercial Segment
Revenue
Commercial revenue for the three and six months ended June 30, 2022 was lower compared to the prior year periods, primarily due to the merger of two of our clients resulting in lower volumes as well as unfavorable exchange rate movement and lost business from prior years, partially offset by strong new business ramp.
Segment Profit and Adjusted EBITDA
Increases in the Commercial segment profit and adjusted EBITDA margin for the three and six months ended June 30, 2022, compared to the prior year periods, were mainly driven by increased operational efficiency and expense reductions resulting from progress in our efficiency initiatives and higher interest rates positively impacting our Benefit Wallet business, more than offsetting the dynamics of a challenging labor market in both North America and Europe.
Government Services Segment
Revenue
Government Services revenue for the three and six months ended June 30, 2022 decreased, compared to the prior year periods. This decrease was primarily driven by significantly lower Federal stimulus revenue, while increases in volume, price and new business offset lost business from prior years.
Segment Profit and Adjusted EBITDA
Decreases in the Government Services segment profit and adjusted EBITDA margin for the three and six months ended June 30, 2022, compared to the prior year periods, were mainly driven by lower Federal stimulus revenue.
Transportation Segment
Revenue
Transportation revenue for the three months ended June 30, 2022 decreased, compared to the prior year period, primarily driven by unfavorable exchange rate movement, particularly the Euro.
Transportation revenue for the six months ended June 30, 2022 decreased, compared to the prior year period, primarily driven by the impact of lower volume and project timing in our International transit business, unfavorable exchange rate movement, particularly the Euro, a one-time revenue benefit in the prior year period and lost business from prior years, partially offset by new business.
Segment Profit and Adjusted EBITDA
Transportation segment profit and adjusted EBITDA margin for the three months ended June 30, 2022 was substantially unchanged.
Transportation segment profit and adjusted EBITDA margin decreased for the six months ended June 30, 2022, compared to the prior year period, mainly driven by the impact of lost business, project timing in the International business, and a one-time item benefiting the prior year period, partially offset by new business.
Divestitures
Revenue, Segment Profit (Loss) and Adjusted EBITDA
The decline in revenue, segment profit and Adjusted EBITDA for the three and six months ended June 30, 2022 was primarily due to the sale of the Midas Suite of products. The current year includes slightly more than one month of activity versus the prior year, which includes a full six months of activity.
Unallocated Costs
Unallocated Costs for the three and six months ended June 30, 2022 decreased, compared to the prior year periods, primarily due to a portion of the recovery of defense costs as part of the settlement with insurance carriers relating to the previously disclosed State of Texas matter that settled in February 2019 that was allocated to SG&A, progress with our efficiency initiatives and lower variable employee costs.
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. TCV signings is defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Due to the inconsistency of when existing contracts end, quarterly and yearly comparisons are not a good measure of renewal performance. New business ACV is calculated as TCV divided by the contract term, in months, multiplied by 12 for an annual measure.
For the three months ended June 30, 2022, the Company signed $180 million of new business ACV, an increase for the fourth consecutive quarter, with strong contributions from the Commercial segment. While down 30% compared to the corresponding prior year period, the prior year benefited from $85 million of stimulus signings and volume from a large client we no longer include in the sales metrics.
For the six months ended June 30, 2022, the Company signed $347 million of new business ACV, down 26% from the prior year, primarily due to $147 million of stimulus signings and volume from a large client we no longer include in the sales metrics.
Signing information for the three and six months ended June 30, 2022 and 2021 is as follows:
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| | Three Months Ended June 30, | | 2022 vs. 2021 |
($ in millions) | | 2022(3) | | 2021(3) | | $ Change | | % Change |
New business ACV | | $ | 180 | | | $ | 257 | | | $ | (77) | | | (30) | % |
| | | | | | | | |
New business TCV | | $ | 396 | | | $ | 771 | | | $ | (375) | | | (49) | % |
Renewals TCV | | 302 | | | 825 | | | (523) | | | (63) | % |
Total Signings | | $ | 698 | | | $ | 1,596 | | | $ | (898) | | | (56) | % |
| | | | | | | | |
Annual recurring revenue signings(1) | | $ | 100 | | | $ | 114 | | | $ | (14) | | | (12) | % |
Non-recurring revenue signings(2) | | $ | 82 | | | $ | 150 | | | $ | (68) | | | (45) | % |
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| | Six Months Ended June 30, | | 2022 vs. 2021 |
($ in millions) | | 2022(3) | | 2021(3) | | $ Change | | % Change |
New business ACV | | $ | 347 | | | $ | 467 | | | $ | (120) | | | (26) | % |
| | | | | | | | |
New business TCV | | $ | 860 | | | $ | 1,123 | | | $ | (263) | | | (23) | % |
Renewals TCV | | 1,238 | | | 1,098 | | | 140 | | | 13 | % |
Total Signings | | $ | 2,098 | | | $ | 2,221 | | | $ | (123) | | | (6) | % |
| | | | | | | | |
Annual recurring revenue signings(1) | | $ | 207 | | | $ | 208 | | | $ | (1) | | | — | % |
Non-recurring revenue signings(2) | | $ | 144 | | | $ | 276 | | | $ | (132) | | | (48) | % |
___________
(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.
(3)Adjusted to remove Midas new business signings.
The total new business pipeline at the end of June 30, 2022 and 2021 was $22.0 billion and $21.0 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.
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 five quarters was as follows:
| | | | | | | | |
(in millions) | | Net ARR Activity metric |
June 30, 2022 | | $ | 104 | |
March 31, 2022 | | 102 | |
December 31, 2021 | | 128 | |
September 30, 2021 | | 132 | |
June 30, 2021 | | 106 | |
| | |
Capital Resources and Liquidity
As of June 30, 2022 and December 31, 2021, total cash and cash equivalents were $519 million and $415 million, respectively. We also have a $550 million revolving line of credit for our various cash needs, of which $4 million was used for letters of credit. In the first quarter of 2022, we repaid $100 million that was outstanding as of December 31, 2021 under our revolving line of credit. The net amount available to be drawn upon under our revolving line of credit as of June 30, 2022, was $546 million.
As of June 30, 2022, our total debt outstanding was $1.3 billion of which $30 million was due within one year. Refer to Note 7 – Debt in the Condensed Consolidated Financial Statements for additional debt information.
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 our 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) | | 2022 | | 2021 | | Better (Worse) |
Net cash provided by (used in) operating activities | | $ | (5) | | | $ | 103 | | | $ | (108) | |
Net cash provided by (used in) investing activities | | $ | 242 | | | $ | (69) | | | 311 | |
Net cash provided by (used in) financing activities | | $ | (121) | | | $ | (87) | | | (34) | |
Operating activities
The net decrease in cash generated from operating activities of $108 million, compared to the prior year period, was primarily related to lower Adjusted EBITDA, higher cash taxes mainly related to the Midas gain and insurance recoveries, higher cash interest and working capital timing, primarily related to Accounts receivable collections timing. These items were partially offset by the $38 million of insurance recoveries related to the previously disclosed State of Texas matter.
Investing activities
The increase in cash provided by investing activities of $311 million was primarily due to the proceeds from the divestiture of the Midas business, partially offset by increased spending related to modernizing our infrastructure and productivity tools.
Financing activities
The increase in cash used in financing activities was primarily related to the repayment of the $100 million borrowed under the revolver partially offset by lower Term loan and Senior note principal payments.
Material Cash Requirements from Contractual Obligations
The Company believes its balances of cash and cash equivalents, which totaled $519 million as of June 30, 2022, 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 June 30, 2022, the Company’s material cash requirements include debt, leases and estimated purchase commitments. See Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information on our material cash requirements.
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 Condensed Consolidated Financial Statements and notes thereto. There have been no significant changes during the six months ended June 30, 2022 to our critical accounting estimates and policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Changes
See Note 2 – Recent Accounting Pronouncements 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.