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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
_______________  
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to
Commission File Number 001-37817
https://cdn.kscope.io/6f08d921ebc18413f0d77bdeda88be19-cndt-20190930_g1.jpg
CONDUENT INCORPORATED
(Exact Name of Registrant as specified in its charter)
New York81-2983623
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
100 Campus Drive, Suite 200,Florham Park,New Jersey07932
(Address of principal executive offices)(Zip Code)
(844) 663-2638
(Registrant’s telephone number, including area code)
_________________________________________________  

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockCNDTNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmall reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
Class Outstanding at October 31, 2019
Common Stock,$0.01 par value   211,397,100  

CNDT Q3 2019 Form 10-Q



FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that could cause actual results to differ materially. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements.

Important factors and uncertainties that could cause our actual results to differ materially from those in our forward-looking statements include, but are not limited to: our ability to successfully manage the leadership transition and the potential for disruptions to our business from the transition and strategic and operational review; government appropriations and termination rights contained in our government contracts; our ability to renew commercial and government contracts, including contracts awarded through competitive bidding processes; our ability to recover capital and other investments in connection with our contracts; our ability to attract and retain necessary technical personnel and qualified subcontractors; our ability to deliver on our contractual obligations properly and on time; competitive pressures; our significant indebtedness; changes in interest in outsourced business process services; our ability to obtain adequate pricing for our services and to improve our cost structure; claims of infringement of third-party intellectual property rights; the failure to comply with laws relating to individually identifiable information and personal health information and laws relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions; breaches of our information systems or security systems or any service interruptions; our ability to estimate the scope of work or the costs of performance in our contracts; our continuing emphasis on and shift toward technology-led digital transactions; customer decision-making cycles and lead time for customer commitments; our ability to collect our receivables, including those for unbilled services; a decline in revenues from, or a loss of, or a reduction in business from or failure of significant clients; fluctuations in our non-recurring revenue; our failure to maintain a satisfactory credit rating; our ability to attract and retain key employees; increases in the cost of telephone and data services or significant interruptions in such services; our failure to develop new service offerings; our ability to modernize our information technology infrastructure and consolidate data centers; our ability to comply with data security standards; our ability to receive dividends or other payments from our subsidiaries; changes in tax and other laws and regulations; changes in government regulation and economic, strategic, political and social conditions; changes in U.S. GAAP or other applicable accounting policies; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our quarterly reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, as well as in our 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission and any Current Report on Form 8-K. Any forward-looking statements made by us in this Quarterly Report on Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
CNDT Q3 2019 Form 10-Q
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CONDUENT INCORPORATED

FORM 10-Q

September 30, 2019
TABLE OF CONTENTS
 
 Page

For additional information about Conduent Incorporated and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at https://investor.conduent.com/. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.
CNDT Q3 2019 Form 10-Q
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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED)

CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
(in millions, except per share data)2019201820192018
Revenue$1,098  $1,304  $3,368  $4,111  
Operating Costs and Expenses
Cost of services (excluding depreciation and amortization)859  1,005  2,644  3,193  
Selling, general and administrative (excluding depreciation and amortization)112  139  360  427  
Research and development (excluding depreciation and amortization)1  2  6  7  
Depreciation and amortization115  113  342  345  
Restructuring and related costs8  31  50  68  
Interest expense20  22  60  92  
(Gain) loss on extinguishment of debt  108    108  
Goodwill impairment    1,351    
(Gain) loss on divestitures and transaction costs3  54  19  9  
Litigation costs (recoveries), net2  78  15  113  
Other (income) expenses, net(8) 4  (8) 1  
Total Operating Costs and Expenses1,112  1,556  4,839  4,363  
Income (Loss) Before Income Taxes(14) (252) (1,471) (252) 
Income tax expense (benefit)2  (15) (118) 24  
Net Income (Loss)$(16) $(237) $(1,353) $(276) 
Net Income (Loss) per Share:
Basic$(0.09) $(1.16) $(6.52) $(1.38) 
Diluted$(0.09) $(1.16) $(6.52) $(1.38) 

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

CNDT Q3 2019 Form 10-Q
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CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)(1)

 Three Months Ended
September 30,
Nine Months Ended
September 30,
(in millions)2019201820192018
Net Income (Loss)$(16) $(237) $(1,353) $(276) 
Other Comprehensive Income (Loss), Net
Currency translation adjustments, net(15) (4) (9) (27) 
Reclassification of currency translation adjustments on divestitures  36  15  41  
Reclassification of divested benefit plans and other  61  (1) 64  
Unrecognized gains (losses), net    1  (3) 
Other Comprehensive Income (Loss), Net(15) 93  6  75  
Comprehensive Income (Loss), Net$(31) $(144) $(1,347) $(201) 
__________
(1)All amounts are net of tax. Tax effects were immaterial.



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



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CONDUENT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)September 30, 2019December 31, 2018
Assets
Cash and cash equivalents$228  $756  
Accounts receivable, net840  782  
Assets held for sale  15  
Contract assets165  177  
Other current assets313  234  
Total current assets1,546  1,964  
Land, buildings and equipment, net331  328  
Operating lease right-of-use assets290    
Intangible assets, net487  651  
Goodwill2,090  3,408  
Other long-term assets370  329  
Total Assets$5,114  $6,680  
Liabilities and Equity
Current portion of long-term debt$50  $55  
Accounts payable145  230  
Accrued compensation and benefits costs140  193  
Unearned income95  112  
Liabilities held for sale  40  
Other current liabilities693  567  
Total current liabilities1,123  1,197  
Long-term debt1,468  1,512  
Deferred taxes181  327  
Operating lease liabilities245    
Other long-term liabilities87  280  
Total Liabilities3,104  3,316  
Contingencies (See Note 13)
Series A convertible preferred stock142  142  
Common stock2  2  
Additional paid-in capital3,886  3,878  
Retained earnings (deficit)(1,601) (233) 
Accumulated other comprehensive loss(419) (425) 
Total Equity1,868  3,222  
Total Liabilities and Equity$5,114  $6,680  
Shares of common stock issued and outstanding211,364  211,306  
Shares of series A convertible preferred stock issued and outstanding120  120  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
CNDT Q3 2019 Form 10-Q
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CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months Ended
September 30,
(in millions)20192018
Cash Flows from Operating Activities:
Net income (loss)$(1,353) $(276) 
Adjustments required to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization342  345  
Contract inducement amortization2  2  
Deferred income taxes(148) (90) 
Goodwill impairment1,351    
(Gain) loss from investments(3) (1) 
Amortization of debt financing costs5  9  
(Gain) loss on extinguishment of debt  108  
(Gain) loss on divestitures and transaction costs19  9  
Stock-based compensation19  30  
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable(84) (40) 
(Increase) decrease in other current and long-term assets(34) (116) 
Increase (decrease) in accounts payable and accrued compensation(128) (36) 
Increase (decrease) in restructuring liabilities4  16  
Increase (decrease) in other current and long-term liabilities(199) 38  
Net change in income tax assets and liabilities(9) 36  
Other operating, net  (4) 
Net cash provided by (used in) operating activities(216) 30  
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment(109) (119) 
Proceeds from sale of land, buildings and equipment2  12  
Cost of additions to internal use software(49) (31) 
Payments for acquisitions, net of cash acquired(90)   
Proceeds from divestitures and sale of assets, net of cash  672  
Payments from divestitures, including cash sold(7)   
Net cash provided by (used in) investing activities(253) 534  
Cash Flows from Financing Activities:
Debt issuance fee payments  (3) 
Payments on debt(42) (513) 
Premium on debt redemption  (95) 
Taxes paid for settlement of stock based compensation(11) (9) 
Dividends paid on preferred stock(7) (7) 
Net cash provided by (used in) financing activities(60) (627) 
Effect of exchange rate changes on cash, cash equivalents and restricted cash  (9) 
Increase (decrease) in cash, cash equivalents and restricted cash(529) (72) 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period765  667  
Cash, Cash Equivalents and Restricted Cash at End of period(1)
$236  $595  
 ___________
(1)Includes $8 million and $9 million of restricted cash as of September 30, 2019 and 2018, respectively, that were included in Other current assets on the Condensed Consolidated Balance Sheets.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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CONDUENT INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(in millions)Common StockAdditional Paid-in CapitalRetained Earnings (Deficit)
AOCL(1)
Shareholders'
Equity
Balance at June 30, 2019$2  $3,886  $(1,583) $(404) $1,901  
Cash dividends paid - preferred stock, $20/share    (2)   (2) 
Comprehensive Income (Loss):
Net Income (Loss)    (16)   (16) 
Other comprehensive income (loss), net      (15) (15) 
Total Comprehensive Income (Loss), Net    (16) (15) (31) 
Balance at September 30, 2019$2  $3,886  $(1,601) $(419) $1,868  

(in millions)Common StockAdditional Paid-in CapitalRetained Earnings (Deficit)
AOCL(1)
Shareholders'
Equity
Balance at June 30, 2018$2  $3,865  $144  $(512) $3,499  
Cash dividends paid - preferred stock, $20/share    (2)   (2) 
Reclassification of amounts impacted by Tax Reform    5  (5)   
Stock option and incentive plans, net  6      6  
Comprehensive Income (Loss):
Net Income (Loss)    (237)   (237) 
Other comprehensive income (loss), net      93  93  
Total Comprehensive Income (Loss), Net    (237) 93  (144) 
Balance at September 30, 2018$2  $3,871  $(90) $(424) $3,359  

(in millions)Common StockAdditional Paid-in CapitalRetained Earnings (Deficit)
AOCL(1)
Shareholders'
Equity
Balance at December 31, 2018$2  $3,878  $(233) $(425) $3,222  
Cash dividends paid - preferred stock, $60/per share    (7)   (7) 
Cumulative impact of adopting the new lease standard    (8)   (8) 
Stock option and incentive plans, net  8      8  
Comprehensive Income (Loss):
Net Income (Loss)    (1,353)   (1,353) 
Other comprehensive income (loss), net      6  6  
Total Comprehensive Income (Loss), Net    (1,353) 6  (1,347) 
Balance at September 30, 2019$2  $3,886  $(1,601) $(419) $1,868  

(in millions)Common StockAdditional Paid-in CapitalRetained Earnings (Deficit)
AOCL(1)
Shareholders'
Equity
Balance at December 31, 2017$2  $3,850  $171  $(494) $3,529  
Cash dividends paid - preferred stock, $60/per share    (7)   (7) 
Cumulative impact of adopting the new revenue standard    17    17  
Reclassification of amounts impacted by Tax Reform    5  (5)   
Stock option and incentive plans, net  21      21  
Comprehensive Income (Loss):
Net Income (Loss)    (276)   (276) 
Other comprehensive income (loss), net      75  75  
Total Comprehensive Income (Loss), Net    (276) 75  (201) 
Balance at September 30, 2018$2  $3,871  $(90) $(424) $3,359  
 ___________
(1)AOCL - Accumulated other comprehensive loss.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
CNDT Q3 2019 Form 10-Q
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CONDUENT INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Basis of Presentation

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

Description of Business

Conduent is a global enterprise and leading provider of 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 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 on Conduent every day to manage their business processes and essential interactions with their end users. The Company's portfolio includes industry-focused solutions in attractive growth markets such as healthcare and transportation, as well as solutions that serve multiple industries such as transaction processing, customer care, human resource solutions and payment services.

Basis of Presentation

The unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). The year-end Condensed Consolidated Balance Sheet was derived from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. Certain reclassifications have been made to prior year information to conform to current year presentation. Intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows have been made. These adjustments consist of normal recurring items. The interim results of operations are not necessarily indicative of the results of the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Note 2 – Recent Accounting Pronouncements

The Company's significant accounting policies are described in Note 1–Basis of Presentation and Summary of Significant Accounting Policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. Summarized below are the accounting pronouncements adopted subsequent to December 31, 2018 that were applicable and material to the Company.

New Accounting Standards Adopted

Leases: The Company adopted the new lease guidance as of January 1, 2019, using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are, or contain, leases, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. The Company did not elect to apply the hindsight practical expedient. Additionally, the Company has elected not to include short-term leases, with a term of 12 months or less, on its Condensed Consolidated Balance Sheets.

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The impact of adopting this new guidance included the establishment of Operating lease right-of-use (ROU) assets of $387 million, an increase to Other current liabilities of $103 million, a decrease to Other long-term liabilities of $21 million, the establishment of Operating lease liabilities of $316 million and a net decrease to opening retained earnings (deficit) of $8 million, as of January 1, 2019. The adoption did not have an impact on the Company’s Condensed Consolidated Statements of Income (Loss) or Condensed Consolidated Statements of Cash Flows.

Summary of Accounting Policies

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

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

The components of lease costs were as follows:

(in millions)Three Months Ended
September 30, 2019
Nine Months Ended
September 30, 2019
Finance Lease Costs:
Amortization of right of use assets$2  $8  
Interest on lease liabilities  1  
Total Finance Lease Costs$2  $9  
Operating lease costs:
Base rent$25  $85  
Short-term lease costs  7  
Variable lease costs(1)
8  23  
Sublease income(2) (4) 
Total Operating Lease Costs$31  $111  
__________
(1)Primarily related to taxes, insurance and common area and other maintenance costs for real estate leases.

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Supplemental cash flow information related to leases was as follows:

(in millions)Nine Months Ended
September 30, 2019
Cash paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$(93) 
Operating cash flows from finance leases(1) 
Total Cash Flow from Operating Activities$(94) 
Financing cash flow from finance leases$(9) 
Supplemental non-cash information on right of use assets obtained in exchange for new lease obligations:
Operating leases$27  

Supplemental balance sheet information related to leases was as follows:

(in millions)September 30, 2019
Operating lease assets:
Operating lease right-of-use assets$290  
Operating lease liabilities:
Other current liabilities$97  
Operating lease liabilities245  
Total Operating Lease Liabilities$342  
Finance lease assets:
Land, buildings and equipment, net$16  
Finance lease liabilities:
Current portion of long-term debt$7  
Long-term debt10  
Total Finance Lease Liabilities$17  

The Company's leases generally do not provide an implicit rate, therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The weighted average discount rates for operating and finance leases were 5.5% and 4.8%, respectively.

The weighted average remaining lease terms for operating and finance leases at September 30, 2019, were 5 years and 3 years, respectively.

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Maturities of operating lease liabilities were as follows:

September 30, 2019
(in millions)Operating Lease Payments
2019 (remaining)$30  
2020104  
202177  
202253  
202335  
Thereafter94  
Total undiscounted operating lease payments393  
Less imputed interest51  
Present value of operating lease liabilities$342  

Maturities of finance lease liabilities were as follows:

September 30, 2019
(in millions)Finance Lease Payments
2019 (remaining)$3  
20206  
20215  
20223  
20231  
Thereafter  
Total undiscounted finance lease payments18  
Less imputed interest1  
Present value of finance lease liabilities$17  

As of September 30, 2019, the Company had entered into additional operating lease agreements for real estate of $15 million, which have not commenced and have not been recognized on the Company's Consolidated Balance Sheet. These operating leases are expected to commence between the fourth quarter of 2019 and the first quarter of 2020 with lease terms of 4 to 10 years.

As previously disclosed in Note 5 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining non-cancelable lease term in excess of one year were as follows:

December 31, 2018
(in millions)Operating Lease Payments
2019$153  
2020113  
202178  
202253  
202333  
Thereafter76  
Total minimum operating lease payments$506  

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New Accounting Standards To Be Adopted

Credit Losses: In June 2016, the FASB updated the accounting guidance related to measurement of credit losses on financial instruments, which requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. This updated guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact on its Consolidated Financial Statements.
Note 3 – Revenue

Disaggregation of Revenue

During the second quarter of 2019, the Company changed how it presents the disaggregated revenue by major service line for Government Services and Healthcare and State and local to reflect how the businesses are managed. This change had no impact on disaggregated revenue by reportable segment or the timing of revenue recognition. All prior periods presented have been revised to reflect this change.

The following table provides information about disaggregated revenue by major service line, the timing of revenue recognition and a reconciliation of the disaggregated revenue by reportable segments. Refer to Note 4 – Segment Reporting for additional information on the Company's reportable segments.

Three Months Ended
September 30,
Nine Months Ended
September 30,
(in millions)2019201820192018
Commercial Industries:
Omni-channel communications$194  $209  $597  $627  
Human resource services176  183  540  559  
Industry services207  228  644  714  
Total Commercial Industries577  620  1,781  1,900  
Government Services:
Government Services and Healthcare173  182  528  542  
Payment Services72