CONDUENT Inc 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Conduent Incorporated and its consolidated subsidiaries. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes. Overview We are a leading provider of 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 61,000 associates as of September 30, 2021, 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 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 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 third quarter of 2021, 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 three and nine months ended September 30, 2021, our strategy is showing results, including the following: • Revenue of $1,038 million and $3,092 million for the three and nine months ended September 30, 2021, respectively, was substantially unchanged. • Positive net income of $11 million and $12 million for the three and nine months ended September 30, 2021, respectively, as compared to net loss of $7 million and $107 million for the same periods in the prior year. • Net Annual Recurring Revenue (ARR) activity metric (as defined in "Metrics") of $132 million, a 25% improvement over the second quarter of 2021. This metric continues to be positive for the fourth consecutive quarter. CNDT Q3 2021 Form 10-Q 24 Table of Contents • New business signings results: ◦ New business total contract value (TCV) signings of $344 million and $1,475 million for the three and nine months ended September 30, 2021, respectively, representing a decrease of 26% and an increase of 4%, respectively, compared to the same periods of the prior year. ◦ Annual recurring revenue signings of $87 million and $297 million for the three and nine months ended September 30, 2021, respectively, representing a decrease of 9% and an increase of 15%, respectively, compared to the same periods of the prior year. • The Company has shown year-over-year operational progress, including an improvement to technology platform uptime, improvements in associate satisfaction survey results and increases in performance incentives from customers. • Subsequent to September 30, 2021, the Company closed on a debt refinancing and extended its maturity profile. 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 into the third quarter of 2021, which includes: • Supporting our associates with a number of specific initiatives, including making improvements to our policies to extend short-term disability, providing extra supplemental sick leave coverage and introducing a hardship leave policy. • At the end of 2020, approximately 75% of our workforce had been shifted to work-from-home. In 2021, we have started a slow and measured approach to bringing associates back to Conduent offices, as appropriate. This is an ongoing phased process and is based on the specific COVID-19 conditions in certain geographies, as well as business requirements. • Increased sanitation and social distancing for required on-site associates. As the world increasingly becomes vaccinated, we will evolve our approach to various initiatives or take additional actions to meet the needs of our employees, customers and their end-users and the Company to continue to provide our mission-critical services and solutions. CNDT Q3 2021 Form 10-Q 25 Table of Contents Financial Review of Operations Three Months Ended September 30, 2021 vs. 2020 ($ in millions) 2021 2020 $ Change % Change Revenue $ 1,038 $ 1,041 $ (3) — % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 776 779 (3) — % Selling, general and administrative (excluding depreciation and amortization) 131 122 9 7 % Research and development (excluding depreciation and amortization) 2 — 2 n/m Depreciation and amortization 84 112 (28) (25) % Restructuring and related costs 10 20 (10) (50) % Interest expense 12 14 (2) (14) % (Gain) loss on divestitures and transaction costs — 8 (8) (100) % Litigation costs — — — n/m Loss on extinguishment of debt — — — n/m Other (income) expenses, net 4 (1) 5 n/m Total Operating Costs and Expenses 1,019 1,054 (35) Income (Loss) Before Income Taxes 19 (13) 32 Income tax expense (benefit) 8 (6) 14 Net Income (Loss) $ 11 $ (7) $ 18 Nine Months Ended September 30, 2021 vs. 2020 ($ in millions) 2021 2020 $ Change % Change Revenue $ 3,092 $ 3,108 $ (16) (1) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 2,335 2,406 (71) (3) % Selling, general and administrative (excluding depreciation and amortization) 382 349 33 9 % Research and development (excluding depreciation and amortization) 3 1 2 200 % Depreciation and amortization 265 344 (79) (23) % Restructuring and related costs 31 56 (25) (45) % Interest expense 38 46 (8) (17) % (Gain) loss on divestitures and transaction costs 1 14 (13) (93) % Litigation costs 2 20 (18) (90) % Loss on extinguishment of debt 2 — 2 n/m Other (income) expenses, net 4 — 4 n/m Total Operating Costs and Expenses 3,063 3,236 (173) Income (Loss) Before Income Taxes 29 (128) 157 Income tax expense (benefit) 17 (21) 38 Net Income (Loss) $ 12 $ (107) $ 119 CNDT Q3 2021 Form 10-Q 26 Table of Contents Revenue Revenue for the three months ended September 30, 2021 was substantially unchanged, compared to the prior year period, primarily due to lesser impacts of the COVID-19 pandemic across our Transportation and Commercial Industries segments, increased volumes in our Government Services segment, primarily increased payments activity because of Federal stimulus, and the ramp of new business. These increases were offset by lost business from prior years. Revenue for the nine months ended September 30, 2021 decreased by less than 1%, compared to the prior year period, primarily due to lost business from prior years and the effect of the COVID-19 pandemic across our Commercial Industries and our Transportation segments, which had only a minimal impact on the first quarter of 2020. These unfavorable impacts were largely offset by increased volumes in our Government Services segment, primarily increased payments activity because of Federal stimulus, and the ramp of new business. Cost of Services (excluding depreciation and amortization) Cost of services for the three months ended September 30, 2021 was substantially unchanged compared to the prior year period, which tracked to the small change in Revenue. Cost of services for the nine months ended September 30, 2021 decreased slightly, compared to the prior year period, driven by lost business from prior years as well as increased operational efficiency, which led to reductions in information technology, labor and real estate costs. Also contributing to the decline were lower costs to support volume loss resulting from the effect of the COVID-19 pandemic. Selling, General and Administrative (SG&A) (excluding depreciation and amortization) SG&A for the three and nine months ended September 30, 2021 increased, compared to the prior year periods, driven by an increase in certain employee-related compensation costs and growth in the sales organization and higher recruiting expenses, partially offset by lower medical benefit costs in the third quarter of 2021. Depreciation and Amortization Depreciation and amortization for the three and nine months ended September 30, 2021 decreased, compared to the prior year periods, 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 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: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Severance and related costs $ — $ 4 $ 2 $ 14 Data center consolidation 4 8 19 16 Termination, asset impairment and other costs 5 6 7 20 Total net current period charges 9 18 28 50 Consulting and other costs (1) 1 2 3 6 Restructuring and related costs $ 10 $ 20 $ 31 $ 56 ___________ (1) Represents professional support costs associated with certain strategic transformation programs. Refer to Note 5 – Restructuring Programs and Related Costs to the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs. CNDT Q3 2021 Form 10-Q 27 Table of Contents Interest Expense Interest expense represents interest on long-term debt and the amortization of debt issuance costs. The decreases in Interest expense for the three and nine months ended September 30, 2021, compared to the prior year periods, 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, the three and nine months ended September 30, 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. Refer to Note 6 – Debt in the Condensed Consolidated Financial Statements for additional information. Additionally, refer to Note 17 - Subsequent Event for additional information about the refinancing of our debt on October 15, 2021. (Gain) Loss on Divestitures and Transaction Costs These costs consist of professional fees and other costs related to certain consummated and non-consummated transactions considered by the Company. Litigation Costs Net litigation costs for the nine months ended September 30, 2021 primarily consist of reserves for various matters that are subject to litigation; the nine months ended September 30, 2020 amount also included costs related to certain reimbursement matters with our former parent company, Xerox Corporation. Refer to Note 11 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information. Income Taxes The effective tax rate for the three months ended September 30, 2021 was 38.3%, compared to 46.2% for the three months ended September 30, 2020. The September 30, 2021 rate was higher than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, permanent book-tax differences and valuation allowances, partially offset by a benefit attributable to the 2020 return to provision adjustment. The effective tax rate for the three months ended September 30, 2020 was higher than the U.S. statutory rate of 21%, primarily due to the geographic mix of income, the election of the high tax exception for Global Intangible Low Tax Income (GILTI), an increase in US federal tax credits and a benefit attributable to the 2019 return to provision adjustment, partially offset by audit adjustments. Excluding the impact of discrete tax adjustments, amortization of intangible assets and restructuring costs, the normalized effective tax rate for the three months ended September 30, 2021 was 30.4%. The normalized effective tax rate for the three months ended September 30, 2020 was 23.0%, predominately due to excluding the impact of discrete tax adjustments, the true-up for divestitures, amortization of intangible assets and the restructuring cost. The normalized effective tax rate for the three months ended September 30, 2021 was higher than the three months ended September 30, 2020 rate predominantly due to earnings mix. The effective tax rate for the nine months ended September 30, 2021 was 58.5% compared with 16.4% for the nine months ended September 30, 2020. The September 30, 2021 rate was higher than the U.S. statutory rate of 21% primarily due to the geographic mix of income, permanent book-tax differences, valuation allowances, and tax audit reserves, partially offset by tax credits. The September 30, 2020 rate was lower than the U.S. statutory rate of 21%, primarily due to geographic mix of income, increases in valuation allowances, audit adjustments and tax charges recognized on the vesting of employee equity awards, partially offset by an increase in US federal tax credits and a benefit attributable to the 2019 return to provision adjustment. Excluding the impact of discrete tax adjustments, amortization of intangible assets and restructuring costs, the normalized effective tax rate for the nine months ended September 30, 2021 was 26.8%. The normalized effective tax rate for the nine months ended September 30, 2020 was 27.4%, predominantly due to excluding the impact of true up for divestitures, amortization of intangible assets and restructuring costs and discrete tax items. The normalized effective tax rate for the nine months ended September 30, 2021 was lower than the nine months ended September 30, 2020 rate predominantly due to the geographic mix of income. CNDT Q3 2021 Form 10-Q 28 Table of Contents The Company believes it is reasonably possible that unrecognized tax benefits of approximately $14 million will reverse within 12 months due to an anticipated audit settlement. Operations Review of Segment Revenue and Profit 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 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. We continue to modernize a significant portion of our infrastructure with new systems and processes and consolidate our data centers as part of our transformation initiatives. There is a risk, however, that our modernization efforts and data center consolidations could materially and adversely disrupt our operations. In addition, the Company’s COVID-19 response has also resulted in diversion of management's time and delayed investments from strategic, transformational and technology initiatives which had been planned. See Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information. Results of financial performance by segment were: Three Months Ended September 30, (in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total 2021 Revenue $ 509 $ 349 $ 180 $ — $ — $ 1,038 Segment profit (loss) $ 29 $ 125 $ 16 $ — $ (94) $ 76 Segment depreciation and amortization $ 24 $ 8 $ 9 $ — $ 13 $ 54 Adjusted EBITDA $ 53 $ 133 $ 25 $ — $ (81) $ 130 % of Total Revenue 49.0 % 33.7 % 17.3 % — % — % 100.0 % Adjusted EBITDA Margin 10.4 % 38.1 % 13.9 % — % — % 12.5 % 2020 Revenue $ 518 $ 348 $ 175 $ — $ — $ 1,041 Segment profit (loss) $ 32 $ 122 $ 26 $ 6 $ (98) $ 88 Segment depreciation and amortization $ 24 $ 6 $ 9 $ — $ 14 $ 53 Adjusted EBITDA $ 56 $ 128 $ 35 $ 6 $ (84) $ 141 % of Total Revenue 49.8 % 33.4 % 16.8 % — % — % 100.0 % Adjusted EBITDA Margin 10.8 % 36.8 % 20.0 % — % — % 13.5 % CNDT Q3 2021 Form 10-Q 29 Table of Contents Nine Months Ended September 30, (in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total 2021 Revenue $ 1,538 $ 1,005 $ 549 $ — $ — $ 3,092 Segment profit (loss) $ 93 $ 322 $ 54 $ — $ (259) $ 210 Segment depreciation and amortization $ 76 $ 21 $ 26 $ — $ 40 $ 163 Adjusted EBITDA $ 169 $ 343 $ 80 $ — $ (219) $ 373 % of Total Revenue 49.7 % 32.5 % 17.8 % — % — % 100.0 % Adjusted EBITDA Margin 11.0 % 34.1 % 14.6 % — % — % 12.1 % 2020 Revenue $ 1,610 $ 969 $ 529 $ — $ — $ 3,108 Segment profit (loss) $ 99 $ 282 $ 56 $ 9 $ (258) $ 188 Segment depreciation and amortization $ 79 $ 19 $ 27 $ — $ 41 $ 166 Adjusted EBITDA $ 178 $ 301 $ 83 $ 2 $ (217) $ 347 % of Total Revenue 51.8 % 31.2 % 17.0 % — % — % 100.0 % Adjusted EBITDA Margin 11.1 % 31.1 % 15.7 % — % — % 11.2 % (in millions) Three Months Ended September 30, Nine Months Ended September 30, Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2021 2020 2021 2020 Income (Loss) Before Income Taxes $ 19 $ (13) $ 29 $ (128) Reconciling items: Amortization of acquired intangible assets 31 60 103 180 Restructuring and related costs 10 20 31 56 Interest expense 12 14 38 46 (Gain) loss on divestitures and transaction costs — 8 1 14 Litigation costs — — 2 20 Loss on extinguishment of debt — — 2 — Other (income) expenses, net 4 (1) 4 — Segment Pre-tax Income (Loss) $ 76 $ 88 $ 210 $ 188 Segment depreciation and amortization (including contract inducements) $ 54 $ 53 $ 163 $ 166 CA MMIS charge (credit) — — — (7) Adjusted EBITDA $ 130 $ 141 $ 373 $ 347 Commercial Industries Segment Revenue Commercial Industries revenue for the three months ended September 30, 2021 decreased, compared to the prior year period, due to lost business from prior years, partially offset by higher volumes as the impacts from COVID-19 were less in the third quarter of 2021 as many regions continued to loosen restrictions. Commercial Industries revenue for the nine months ended September 30, 2021 decreased, compared to the prior year period, due to COVID-19 related volume declines in our Business Operations Solutions service offering and 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. CNDT Q3 2021 Form 10-Q 30 Table of Contents Segment Profit and Adjusted EBITDA Decreases in the Commercial Industries segment profit and adjusted EBITDA margin for the three months ended September 30, 2021, compared to the prior year period, were mainly driven by revenue declines, the dynamics of a challenging labor market in both North America and Europe and the impact of temporary cost savings in the third quarter of 2020. Commercial Industries segment profit and adjusted EBITDA margin decreased for the nine months ended September 30, 2021, compared to the prior year period, 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 the three months ended September 30, 2021 were substantially unchanged, compared to the prior year period. COVID-19 related volume increases were largely offset by lost business from prior years. The increased volumes from the COVID-19 pandemic were largely driven by the increases in the Supplemental Nutrition Assistance Program (SNAP) volumes and Pandemic SNAP volumes. The legislation for two Federal stimulus programs (Pandemic SNAP and additional unemployment insurance) ended in September 2021. However, some residual revenue from these programs is expected to continue into the fourth quarter of 2021. Government Services revenue for the nine months ended September 30, 2021 increased, compared to the prior year period, 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 was largely driven by the increases in the SNAP volumes and Pandemic SNAP volumes, an increase in the number of citizens to which we distribute unemployment insurance benefits and additional unemployment insurance benefit distributions as a result of Federal stimulus. Within the unemployment benefit business, we generate revenue based on the amount of spending by card holders. Segment Profit and Adjusted EBITDA Increases in the Government Services segment profit and adjusted EBITDA margin for the three and nine months ended September 30, 2021, compared to the prior year period, were mainly driven by increased COVID-19 related volume increases at strong margins and expense reductions resulting from progress in our efficiency initiatives. Transportation Segment Revenue Transportation revenue for the three and nine months ended September 30, 2021 increased, compared to the prior year period, primarily driven by the impact of loosening of numerous COVID-19 related restrictions, particularly in the United States, and the ramp of new business, partially offset by lost business from prior years. Segment Profit and Adjusted EBITDA Transportation segment profit and adjusted EBITDA margin decreased for the three and nine months ended September 30, 2021, compared to the prior year period, mainly driven by the impact of legacy lost business in the quarter and temporary cost savings in the prior year that more than offset progress in our efficiency initiatives. CNDT Q3 2021 Form 10-Q 31 Table of Contents Other Segment Profit (Loss) and Adjusted EBITDA The segment profit for the nine months ended September 30, 2020 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 Unallocated Costs for the three months ended September 30, 2021 decreased, compared to the prior year period primarily due to lower employee medical expenses and a one-time unfavorable COVID-19 related item in the third quarter of 2020. Unallocated Costs for the nine months ended September 30, 2021 were substantially unchanged compared to the prior year period. This was primarily driven by increases in certain employee costs, partially offset by progress in our efficiency initiatives. 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. For the three months ended September 30, 2021, the Company signed $344 million of new business, representing a 26% decrease compared to the prior year period. Renewal TCV for the three months ended September 30, 2021 was $276 million. For the nine months ended September 30, 2021, the Company signed $1,475 million of new business, representing a 4% increase compared to the prior year period. Renewal TCV for the nine months ended September 30, 2021 was $1,374 million. Three Months Ended September 30, 2021 vs. 2020 ($ in millions) 2021 2020 $ Change % Change New business TCV $ 344 $ 468 $ (124) (26) % Renewals TCV 276 745 (469) (63) % Total Signings $ 620 $ 1,213 $ (593) (49) % Annual recurring revenue signings (1) $ 87 $ 96 $ (9) (9) % Non-recurring revenue signings (2) $ 70 $ 58 $ 12 21 % Nine Months Ended September 30, 2021 vs. 2020 ($ in millions) 2021 2020 $ Change % Change New business TCV $ 1,475 $ 1,415 $ 60 4 % Renewals TCV 1,374 2,172 (798) (37) % Total Signings $ 2,849 $ 3,587 $ (738) (21) % Annual recurring revenue signings (1) $ 297 $ 258 $ 39 15 % Non-recurring revenue signings (2) $ 349 $ 178 $ 171 96 % ___________ (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. CNDT Q3 2021 Form 10-Q 32 Table of Contents The total new business pipeline at the end of September 30, 2021 and 2020 was $21.0 billion and $22.0 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 four quarters was as follows: (in millions) Net ARR Activity metric September 30, 2021 $ 132 June 30, 2021 106 March 31, 2021 87 December 31, 2020 60 Capital Resources and Liquidity As of September 30, 2021 and December 31, 2020, total cash and cash equivalents were $394 million and $450 million, respectively. Under the Prior Revolver, the Company also had $750 million available for its various cash needs, of which $10 million was used for letters of credit. The net amount available to be drawn upon under our Prior Revolver as of September 30, 2021, was $740 million. See Note 17 - Subsequent Event for information about the refinancing of our debt, including replacement of our Prior Revolver. As of September 30, 2021, our total debt outstanding was $1.4 billion of which $21 million was due within one year. Refer to Note 6 – 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 the extended maturity profile of our debt resulting from the refinancing described in Note 17 - Subsequent Event 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: Nine Months Ended September 30, (in millions) 2021 2020 Better (Worse) Net cash provided by (used in) operating activities $ 158 $ (11) $ 169 Net cash provided by (used in) investing activities $ (97) $ (92) (5) Net cash provided by (used in) financing activities $ (112) $ 99 (211) CNDT Q3 2021 Form 10-Q 33 Table of Contents Operating activities The net improvement in cash used in operating activities of $169 million, compared to the prior year period, was primarily related to the absence of the 2020 Texas Litigation payment and improved Adjusted EBITDA, partly offset by higher cash used related to product software and deferred contract costs for new business activities and higher net income tax payments. Investing activities The increase in cash used in investing activities of $5 million was primarily due to 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 absence of the March 2020 $150 million draw down from our Prior Revolver, which was subsequently repaid in December 2020. Additionally, we repaid the previously outstanding $34 million of Senior Notes due 2024 on May 1, 2021 and made higher scheduled payments on Term loans of $27 million in 2021. Market Risk Management We are exposed to market risk from changes in foreign currency exchange rates which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We may utilize derivative financial instruments to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We also may hedge the cost to fund material non-dollar entities by buying currencies periodically in advance of the funding date. This is accounted for using derivative accounting. Recent market and economic events, including the effects of the COVID-19 pandemic, have not caused us to materially modify nor change our financial risk management strategies with respect to our exposures to foreign currency risk. Refer to Note 7 – Financial Instruments in the Condensed Consolidated Financial Statements for additional discussion on our financial risk management.