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Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2021-11-04 · 112 added, 176 removed, 134 unchanged (68% of the section changed)

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.

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:

• Financial Information and Analysis of Results of Operations;

• Capital Resources and Liquidity;

• Critical Accounting Estimates and Policies;

• 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.

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.

Headquartered in Florham Park, New Jersey, we have a team of approximately 58,000 associates as of March 31, 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 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.

• 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.

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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.

Beginning in the first quarter of 2020 and through the first 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 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.

During the three months ended March 31, 2022, our strategy is showing results, including the following:

CNDT Q1 2022 Form 10-Q

• Net income of $136 million for the three months ended March 31, 2022, as compared to net loss of $11 million for the same period in the prior year.

• Net Annual Recurring Revenue (ARR) activity metric (as defined in "Metrics") of $102 million, a 17% increase over the first quarter of 2021.

• 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.

◦ New business total contract value (TCV) signings of $464 million for the three months ended March 31, 2022, representing an increase of 32% compared to the same period of the prior year.

◦ Annual recurring revenue signings of $107 million for the three months ended March 31, 2022, representing an increase of 14% compared to the same period of the prior year.

• Renewal TCV of $936 million for the three months ended March 31, 2022, substantially higher than the same period of the prior year.

• The Company completed the sale of its Midas suite of solutions on February 8, 2022 for cash consideration of $321 million and, subsequent to the end of the first quarter of 2022, announced the planned separation of the Transportation segment.

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:

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.

• 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.

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

At the end of the first quarter of 2022, we continued to have most of our workforce in a work-from-home environment.

We will continue to assess when to bring associates back to our offices, as appropriate, based on the specific COVID-19 conditions in certain geographies, as well as business requirements.

As the 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.

CNDT Q1 2022 Form 10-Q

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Three Months Ended

September 30, 2021 vs.

March 31, 2022 vs.

($ in millions) 2022 2021 $ Change % Change

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Interest expense 19 13 6 46 %

(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.

($ 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

(Gain) loss on divestitures and transaction costs (163) 2 (165) n/m

Litigation settlements (recoveries), net (28) 1 (29) n/m

Other (income) expenses, net 1 — 1 n/m

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Net Income (Loss) $ 136 $ (11) $ 147

CNDT Q3 2021 Form 10-Q

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.

Revenue for the three months ended March 31, 2022 was down, compared to the prior year period, primarily due to lower federal stimulus revenue in the Government Services segment, as well as lost business from prior years partially offset by new business ramp across all segments.

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.

Cost of services for the three months ended March 31, 2022 decreased, compared to the prior year period, driven by lost business from prior years as well as increased operational efficiency, 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 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.

SG&A for the three months ended March 31, 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.

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.

Depreciation and amortization for the three months ended March 31, 2022 decreased, compared to the prior year period, primarily due to portions of certain customer relationship intangible assets being fully amortized during both the first quarters of 2022 and 2021.

CNDT Q1 2022 Form 10-Q

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.

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) 2022 2021

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Data center consolidation 4 7

Termination, asset impairment and other costs 5 6 7 20

Termination and asset impairment costs 4 5

Total net current period charges 8 12

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Refer to Note 6 – Restructuring Programs and Related Costs to the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.

CNDT Q3 2021 Form 10-Q

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.

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 months ended March 31, 2022, compared to the prior year period, 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

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.

The divestiture of the Midas business in the first quarter of 2022 resulted in a gain of $165 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 three months ended March 31, 2022 primarily consist of $24 million of insurance recoveries 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.

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.

The effective tax rate for the three months ended March 31, 2022 was 35.2%, compared to (23.4)% for the three months ended March 31, 2021.

The March 31, 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 divestiture transaction, partially offset by the tax benefit of valuation allowances released due to the gain from divestiture and tax credits.

The effective tax rate for the three months ended March 31, 2021 was negative as compared to the U.S.

statutory rate of 21%, primarily due to pre-tax loss and tax expense resulting from geographic mix of income, valuation allowances, and tax charges recognized on employee equity award vestings, partially offset by tax credits.

CNDT Q1 2022 Form 10-Q

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 three months ended March 31, 2022 was 29.6%.

The normalized effective tax rate for the three months ended March 31, 2021 was 23.4%, predominantly due to excluding the impact of valuation allowances, equity award vesting, amortization of intangible assets and restructuring costs.

The normalized effective tax rate for the three months ended March 31, 2022 was higher than the three months ended March 31, 2021 rate due to the geographic mix of income.

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

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.

The Company is 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 Industries,

• Government Services, and

• Commercial;

• Government Services;

• Transportation.

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

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.

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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, 2021 for additional information.

CNDT Q1 2022 Form 10-Q

Results of financial performance by segment were:

Three Months Ended

September 30,

(in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total

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 %

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

Nine Months Ended

September 30,

(in millions) Commercial Industries Government Services Transportation Other Unallocated Costs Total

(in millions) Commercial Government Services Transportation Divestitures Unallocated Costs Total

Revenue $ 512 $ 286 $ 162 $ 7 $ — $ 967

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(in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2022 2021

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Litigation costs (28) 1

Loss on extinguishment of debt — — 2 —

Other (income) expenses, net 1 —

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Segment depreciation and amortization (including contract inducements) $ 55 $ 55

CA MMIS charge (credit) — — — (7)

Adjusted EBITDA $ 109 $ 115

Commercial Industries Segment

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

Commercial Segment

Commercial revenue for the three months ended March 31, 2022 was substantially unchanged, compared to the prior year period, due to new business ramp, which was especially strong in Customer Experience Management, being offset by lost business from prior years.

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.

Increases in the Commercial segment profit and adjusted EBITDA margin for the three months ended March 31, 2022, compared to the prior year period, were mainly driven by increased operational efficiency and expense reductions resulting from progress in our efficiency initiatives, more than offsetting the dynamics of a challenging labor market in both North America and Europe.

CNDT Q1 2022 Form 10-Q

Government Services Segment

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.

Government Services revenue for the three months ended March 31, 2022 decreased, compared to the prior year period.

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

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.

Decreases in the Government Services segment profit and adjusted EBITDA margin for the three months ended March 31, 2022, compared to the prior year period, were mainly driven by lower Federal stimulus revenue, partially offset by expense reductions resulting from progress in our efficiency initiatives.

Transportation Segment

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.

Transportation revenue for the three months ended March 31, 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, 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 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

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.

Transportation segment profit and adjusted EBITDA margin decreased for the three months ended March 31, 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.

Revenue, Segment Profit (Loss) and Adjusted EBITDA

The decline in revenue, segment profit and Adjusted EBITDA for the three months ended March 31, 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 includes a full quarter of activity.

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.

Unallocated Costs for the three months ended March 31, 2022 decreased, compared to the prior year period 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 and progress with our efficiency initiatives.

Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts.

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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.

For the three months ended March 31, 2022, the Company signed $464 million of new business, representing a 32% increase compared to the prior year period.

Renewal TCV for the three months ended March 31, 2022 was $936 million.

CNDT Q1 2022 Form 10-Q

Three Months Ended

September 30, 2021 vs.

($ 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.

($ in millions) 2021 2020 $ Change % Change

March 31, 2022 vs.

($ in millions) 2022 (3)

$ Change % Change

New business TCV $ 464 $ 352 $ 112 32 %

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(2) Non-recurring revenue signings are for contracts shorter than one year.

CNDT Q3 2021 Form 10-Q

The total new business pipeline at the end of September 30, 2021 and 2020 was $21.0 billion and $22.0 billion, respectively.

(3) Adjusted to remove Midas new business signings.

The total new business pipeline at the end of March 31, 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.

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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:

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

March 31, 2022 $ 102

December 31, 2021 128

September 30, 2021 132

1 unchanged sentence

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.

As of March 31, 2022 and December 31, 2021, total cash and cash equivalents were $588 million and $415 million, respectively.

We also have a $550 million revolving line of credit for our various cash needs, of which $10 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 March 31, 2022, was $540 million.

As of March 31, 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 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.

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.

CNDT Q1 2022 Form 10-Q

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,

Three Months Ended March 31,

(in millions) 2022 2021 Better (Worse)

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Net cash provided by (used in) financing activities $ (110) $ (25) (85)

CNDT Q3 2021 Form 10-Q

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.

The net improvement in cash used in operating activities of $13 million, compared to the prior year period, was primarily related to the $38 million of insurance recoveries related to the previously disclosed State of Texas matter, partially offset by lower Adjusted EBITDA and higher cash taxes.

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.

The increase in cash provided by investing activities of $302 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 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.

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 principal payments.

Material Cash Requirements from Contractual Obligations

The Company believes its balances of cash and cash equivalents, which totaled $588 million as of March 31, 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 March 31, 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 three months ended March 31, 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.

CNDT Q1 2022 Form 10-Q

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis