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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-23 · 149 added, 126 removed, 260 unchanged (51% of the section changed)

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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.

These three segments are:

• Commercial – Our Commercial segment provides business process services and customized solutions to clients in a variety of commercial 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 – Our Government 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

The solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations.

• Transportation – Our Transportation segment provides systems, support, and revenue-generating solutions to government transportation agency clients.

We deliver mission-critical public safety, mobility and digital payment solutions that streamline operations, increase revenue and reduce congestion while creating safe, seamless travel experiences for consumers and have a positive impact on the environment.

CNDT 2022 Annual Report

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

Significant 2022 Actions

• Disposition and Portfolio Review – On February 8, 2022, we closed a transaction with Symplr Software, Inc.

to sell our Midas suite of patient safety, quality and advanced analytics solutions (Midas business) for cash consideration of $322 million resulting in a pre-tax gain of $166 million.

The Midas business represented approximately $7 million, $70 million and $72 million of revenue in 2022, 2021 and 2020, respectively.

Refer to Note 4 – Assets/Liabilities Held for Sale and Divestiture in the Consolidated Financial Statements for additional information.

During the fourth quarter, we concluded our long-range planning processes which included a full evaluation of our portfolio of solutions and identified incremental opportunities to streamline the portfolio.

• New Business Signings – In 2022 we introduced a new primary signings metric Annual Contract Value (ACV), which provides more focus on the near-term revenue generation of new business signings as compared to the traditional view of Total Contract Value (TCV).

This ACV metric has increased sequentially each quarter in 2022, totaling $724 million in 2022, an increase of 16.8% versus 2021 excluding the impact of Government stimulus payments.

• Strategic Growth Efforts – During the latter part of 2022, we dedicated a small number of senior associates with the mission to accelerate future revenue growth by selling existing solutions into new and adjacent markets and geographies.

The results of this action are becoming visible, for example, by the collaboration with a major bank to launch a Digital Payments Hub delivering faster, easier, and more secure payments.

• Operational Service Levels – We continue to make significant improvements with our operational and technology service levels, and while we will always believe there is room for improvement in these areas, we have reached a standard consistent with the markets that we operate in.

These operational improvements together with the significant progress being made in closing out major litigation cases, position us well with a solid foundation to embark on the next chapter of our journey.

Significant 2021 Actions

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

• Strong Net Annual Recurring Revenue (ARR) Activity results :

In the fourth quarter of 2020, we introduced the Net ARR activity Metric, a trailing twelve-month metric that measures the revenue from recurring services provided to a client inclusive of all new business annual recurring revenue, notification of lost clients and contractual impacts to price and volume.

• Strong Net Annual Recurring Revenue (ARR) Activity results – In the fourth quarter of 2020, we introduced the Net ARR Activity metric, a trailing twelve-month metric that measures the revenue from recurring services provided to a client inclusive of all new business annual recurring revenue, notification of lost clients and contractual impacts to price and volume.

We have seen steady positive growth in this metric from $60 million in the fourth quarter of 2020 to $128 million in the fourth quarter of 2021, an increase of 113%.

This increase is driven by new business ARR signings of $408 million for the year ended December 31, 2021, an increase of 16% compared to that of the prior year, and stronger retention of existing clients.

• Debt Refinancing - On October 15 , 2021, the Company closed on a debt refinancing and extended its maturity profile.

This increase was driven by new business ARR signings of $402 million for the year ended December 31, 2021, an increase of 16% compared to that of the prior year, and stronger retention of existing clients.

• Debt Refinancing – On October 15, , 2021, we closed on a debt refinancing which extended our maturity profile.

The debt refinancing transactions were as follows:

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Upon closing the debt refinancing, $100 million was borrowed under the new Revolving Credit Facility.

The net proceeds of the new Term Loan A, Term Loan B, Senior Notes and $100 million of borrowing under the Revolver were used to repay the borrowings under the 2016 Credit Facilities that were outstanding on October 15, 2021.

The net proceeds of the new Term Loan A, Term Loan B, Senior Notes and $100 million of borrowing under the Revolving Credit Facility were used to repay the borrowings under the previous credit facilities that were outstanding on October 15, 2021.

This $100 million was repaid on February 11, 2022.

Refer to Note 11 – Debt in the Consolidated Financial Statements for definition of 2016 Credit Facilities and additional information on the debt refinancing.

• Disposition – In December 2021, we entered into an agreement with Symplr Software, Inc.

to sell our Midas suite of patient safety, quality and advanced analytics solutions for cash consideration of $321 million subject to customary working capital adjustments.

The Midas solution represented approximately $70 million and $72 million of revenue in 2021 and 2020, respectively.

The transaction closed on February 8, 2022.

Refer to Note 11 – Debt to the Consolidated Financial Statements for definition of 2016 Credit Facilities and additional information on the debt refinancing.

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

Significant 2020 Actions

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

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

This amount was repaid in December 2020.

• Cost savings initiative – Beginning in the first quarter of 2020, we expanded the focus of our efficiency initiatives to include both permanent and temporary cost efficiencies, aimed to offset as much of the COVID-19 related negative impacts as possible.

We announced an initial target amount of approximately $100 million of cost savings impact in 2020 and subsequently increased this amount throughout the year.

We achieved approximately $145 million of cost savings impact in 2020 in both permanent savings, such as headcount and vendor optimization, and temporary savings, such as furloughs and reduced travel.

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

CNDT 2022 Annual Report

initiatives by leveraging changes to people, process, and technology.

Specific actions have included standardizing governance processes for client implementations, account management, and incident response, centralizing and enhancing the salesforce, restructuring to leverage a shared services model and addressing spans and layers, instituting a global IT command center, continuing to make progress on the data center consolidation plan, among others.

These actions have resulted in improvements across the “Growth”, “Quality”, and “Efficiency” pillars.

For example, we have shown a significant reduction of the number of technology-related incidents and outages, improvements in associate satisfaction survey results, and increases in service level agreement payments from customers.

COVID-19 Outbreak

Throughout the COVID-19 pandemic, we have continued to provide critical and best-in-class services to our customers and their end-users, while ensuring the health and safety of our associates.

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

• Supporting our associates with several specific initiatives, including making improvements to our policies to extend short term disability, providing extra supplemental sick leave coverage and introducing a hardship leave policy.

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

At the end of 2021, we continued to have most of our workforce in a work-from-home environment.

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

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

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

CNDT 2021 Annual Report

Macroeconomic and Geopolitical Uncertainty

Given the nature of our business and our global operations, the effects of global macroeconomic and geopolitical uncertainty, including COVID-19 pandemic related factors (as discussed in more detail below) could have a materially adverse effect on our business, results of operations and financial condition.

Financial Information

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Interest expense 84 55 29 53 %

Loss on extinguishment of debt 15 — 15 nm

Loss on divestitures and transaction costs 3 17 (14) (82) %

Litigation costs, net 3 20 (17) (85) %

Loss on extinguishment of debt — 15 (15) n/m

Goodwill impairment 358 — 358 n/m

(Gain) loss on divestitures and transaction costs, net (158) 3 (161) (5,367) %

Litigation settlements (recoveries), net (32) 3 (35) (1,167) %

Other (income) expenses, net (1) 6 (7) (117) %

Total Operating Costs and Expenses 3,985 4,165 (180)

Loss Before Income Taxes (25) (139) 114

Income (Loss) Before Income Taxes (127) (25) (102)

Income tax expense (benefit) 55 3 52

Net Loss $ (28) $ (118) $ 90

Net Income (Loss) $ (182) $ (28) $ (154)

Revenue for 2022 decreased 7%, compared to the prior year.

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

This is primarily due to lower federal stimulus revenue in the Government segment, lost business from prior years, the impact of the disposition of the Midas business, as well as negative foreign exchange translation impact, partially offset by higher interest rates positively impacting our BenefitWallet business, and the ramp of new business.

Cost of Services (excluding depreciation and amortization)

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

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

SG&A for 2021 increased, compared to the prior year, mainly driven by $32 million of costs related to an abandonment of an internal project initiated in 2018 by prior leadership, an increase in certain employee-compensation costs, growth in the sales organization and higher recruiting expenses.

Refer to Note 6 – Land, Buildings, Equipment and Software, Net for additional information on the abandonment of the internal project.

Cost of services for 2022 decreased 4%, compared to the prior year, mainly driven by lost business from prior years, the disposition of the Midas business, increased operational efficiency and favorable foreign exchange translation impact.

The decrease in cost was less than the decrease in revenue due to lower federal stimulus revenue which had a higher margin.

CNDT 2022 Annual Report

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

SG&A for 2022 decreased 19%, compared to the prior year, 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, progress in our efficiency initiatives, most notably within shared technology infrastructure, as well as lower variable employee costs.

The prior year also included $32 million of costs related to an abandonment of an internal project initiated in 2018.

Refer to Note 6 – Land, Buildings, Equipment and Software, Net for additional information on the abandonment of the internal project and Note 16 – Contingencies and Litigation for additional information on the State of Texas matter.

Depreciation and Amortization

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Interest expense represents interest on long-term debt and the amortization of debt issuance costs.

The decrease in Interest expense for 2021, compared to the prior year, was driven primarily by lower interest rates, a lower Term Loan A due 2023 principal balance and the May 1, 2021 repayment of the previously outstanding $34 million Senior Notes due 2024.

Additionally, 2020 included interest expense attributable to the $150 million drawdown on our Senior Revolving Credit Facility (Prior Revolver) in March 2020, which was repaid in December 2020.

These decreases were partially offset by interest on the Senior notes due 2029.

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 2022, compared to the prior year, was driven primarily by higher interest rates on our refinanced credit facilities, partially offset by a lower total outstanding debt balance.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information.

Loss on Divestitures and Transaction Costs

The costs incurred in 2021 consist of professional fees and other costs related to certain divestiture activities.

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

Litigation Costs, Net

Net litigation costs for 2021 and 2020 primarily consist of reserves for various matters that are subject to litigation.

The prior year amount related to certain reimbursement matters with our former parent company, Xerox Corporation.

Goodwill Impairment

The goodwill impairment for 2022 related to the write-down of the carrying value of the Commercial reporting unit.

Refer to Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information.

(Gain) Loss on Divestitures and Transaction Costs

The divestiture of the Midas business in the first quarter of 2022 resulted in a pre-tax gain of $166 million.

Additionally, professional fees and other costs related to certain consummated and non-consummated transactions considered by us are included in this financial statement line item.

CNDT 2022 Annual Report

Litigation Settlements (Recoveries), Net

Litigation settlements (recoveries), net for 2022 primarily consisted of $24 million of insurance recoveries recorded in the first quarter of 2022 related to the previously disclosed State of Texas matter.

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

Other (Income) Expenses, Net

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

CNDT 2021 Annual Report

Other (income) expenses, net for 2022 and 2021 primarily includes interest income on cash investments and foreign currency transaction losses (gains).

2021 also included an impairment loss on an equity investment.

The 2022 effective tax rate was (43.9)%, compared to (9.7)% for 2021.

The 2022 rate was negative and lower than the U.S.

statutory rate of 21% due to pre-tax book loss and an increase in taxes due to the geographic mix of income, and non-deductible expenses primarily driven by book and tax basis differences in the Midas divestiture goodwill and the Commercial reporting unit goodwill impairment.

The 2021 rate was lower than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income, valuation allowances, non-deductible expenses and tax settlement adjustments, partially offset by tax credits.

The 2020 rate was lower than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income, tax settlements, and valuation allowances partially offset by tax credits.

The GAAP tax rate is lower in 2021 compared to 2020 due to the impact of discrete tax charges and a small pre-tax loss.

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

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

Excluding the impact of amortization, restructuring, the divestiture of the Midas business, insurance recoveries, goodwill impairment and discrete tax items, the normalized effective tax rate for 2022 was 34.3%.

The 2021 rate was 26.6% excluding the impact of amortization, restructuring and discrete tax items.

The increase in the normalized effective tax rate is primarily due to the mix of book pre-tax income weighted more heavily in 2022 towards foreign jurisdictions with higher tax rates and losses in jurisdictions with valuation allowances.

In recent years, government agencies and global organizations have had an increased focus on the issues of taxation of multinational corporations.

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Pillar 2 may have limited application to Conduent, but we do not anticipate a material impact based on current guidance.

On December 15, 2022, EU member states unanimously adopted the Minimum Tax Directive of Pillar 2.

Member states have until December 31, 2023 to transpose the Minimum Tax Directive into national legislation.

CNDT 2022 Annual Report

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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, and

• Transportation.

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

The section below provides a comparative discussion of our financial performance by segment between the year ended December 31, 2021 and 2020.

The section below provides a comparative discussion of our financial performance by segment between the years ended December 31, 2022 and 2021.

MD&A - Operations Review of Segments in our Annual Report on Form 10-K for the year ended December 31, 2021 for a comparative discussion of our consolidated results of operations by segment between 2021 and 2020.

CNDT 2022 Annual Report

Segment Performance Review

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

(in millions) Commercial Government Transportation Other Unallocated Costs Total

Year Ended Dec 31, 2022 Divestitures Other

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Adjusted EBITDA Margin 9.6 % 33.4 % 14.2 % 55.7 % — % — % 11.8 %

CNDT 2021 Annual Report

(in millions) Year Ended December 31,

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Goodwill impairment 358 — —

Loss on divestitures and transaction costs 3 17 25

Litigation costs, net 3 20 17

(Gain) loss on divestitures and transaction costs, net (158) 3 17

Litigation settlements (recoveries), net (32) 3 20

Other (income) expenses, net (1) 6 1

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Segment depreciation and amortization 220 218 222

NY MMIS/HE charge (credit) — — 1

CA MMIS charge (credit) — — (7)

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Adjusted EBITDA $ 396 $ 487 $ 480

Commercial Industries Segment

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

Commercial Segment

Commercial revenue for 2022 decreased, compared to the prior year, due to the impact of our largest client normalizing to lower post pandemic call volumes, the merger of two of our clients resulting in lower volumes as well as unfavorable exchange rate movement, partially offset by higher interest rates positively impacting our BenefitWallet business, recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client and strong net new business ramp.

CNDT 2022 Annual Report

Segment Profit and Adjusted EBITDA

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

Government Services Segment

Government Services revenue for 2021 increased, compared to the prior year, primarily driven by COVID-19 related volume increases.

These increases were partially offset by lost business from prior years.

The increased volumes from the COVID-19 pandemic were largely driven by the increase in Pandemic SNAP volumes.

Increases in the Commercial segment profit and adjusted EBITDA for 2022, compared to the prior year, were mainly driven by higher interest rates positively impacting our BenefitWallet business, recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client, increased operational efficiency and expense reductions resulting from progress in our efficiency initiatives more than offsetting the dynamics of a challenging labor market in certain geographies.

Revenue mix also had a slightly negative impact on segment margin where we had strong signings in our Customer Experience Management service solution, which has slightly lower margins.

Government Segment

Government revenue for 2022 decreased, compared to the prior year, primarily driven by significantly lower federal stimulus revenue, while increases in volume, price and new business substantially offset lost business from prior years.

Segment Profit and Adjusted EBITDA

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

CNDT 2021 Annual Report

Decreases in the Government segment profit and adjusted EBITDA for 2022, compared to the prior year, were mainly driven by lower Federal stimulus revenue.

Transportation Segment

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

Transportation revenue for 2022 decreased, compared to the prior year, driven by unfavorable exchange rate movement, particularly the Euro, slower implementation of new business contracts, and a one-time revenue benefit in the prior year period.

Segment Profit and Adjusted EBITDA

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

Segment Profit (Loss) and Adjusted EBITDA

The decrease in Other segment profit for 2021 compared to the prior year, was primarily due to an adjustment to the then remaining California Medicaid Management Information System settlement liability of $7 million as a result of the contract expiring in March 2020.

This benefit was excluded from adjusted EBITDA for segment reporting purposes due to its non-recurring nature.

Transportation segment profit and adjusted EBITDA for 2022 decreased, compared to the prior year, driven by a one-time item benefiting the prior year period, the impact of net new and lost business, as well as the impact of unfavorable exchange rate movement.

Revenue, Segment Profit (Loss) and Adjusted EBITDA

The decline in revenue, segment profit and Adjusted EBITDA for 2022 was primarily due to the sale of the Midas business.

The current year includes slightly more than one month of activity versus the prior year, which includes a full twelve months of activity.

Unallocated Costs

The decrease in segment profit is primarily due to the $32 million charge related to the abandonment of an internal project.

The decrease in adjusted EBITDA for 2021, compared to the prior year, was mainly driven by a greater proportion of legal costs being related to corporate matters and therefore not being allocated to a segment.

The decrease in segment loss is 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 and shareholder matters which was allocated to SG&A, progress with our efficiency initiatives and lower variable employee costs, as well as $32 million of costs related to the abandonment of an internal project recorded in the prior year.

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

TCV is the estimated total contractual revenue related to signed contracts, excluding the impact of divested business as required.

For the year ended December 31, 2021, the Company signed $1,785 million of new business, representing an 8% decrease compared to the prior year.

Renewal TCV for the year ended December 31, 2021 was $2,835 million, an increase of 1% compared to the prior year.

TCV is the estimated total contractual revenue related to signed contracts.

TCV signings is defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts.

Due to the inconsistency of when existing contracts end, quarterly and yearly comparisons are not a good measure of renewal performance.

New business ACV is calculated as TCV divided by the contract term, in months, multiplied by 12 for an annual measure.

CNDT 2022 Annual Report

For the year ended December 31, 2022, the Company signed $732 million of new business ACV, up 1% from the prior year, primarily due to strong signings in Government Healthcare Solutions and Customer Experience Management being partially offset by $106 million of federal stimulus signings in the prior year.

For the year ended December 31, 2022, the Company signed $1,887 million of new business TCV, representing a 11% increase compared to the prior year.

Renewal TCV for the year ended December 31, 2022 was $2,477 million, a decrease of 13% compared to the prior year due to timing on renewals;

however the renewal rate for the year ended December 31, 2022 was consistent with the prior year.

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

Year Ended December 31, 2022 vs.

(in millions) 2021 2020 $ Change % Change

(in millions) 2022 (3)

$ Change % Change

New business ACV $ 732 $ 726 $ 6 1 %

New business TCV $ 1,887 $ 1,705 $ 182 11 %

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

CNDT 2021 Annual Report

(3) Adjusted to remove Midas new business signings.

In addition, 2021 amounts have been revised to exclude a large client we no longer consider in these metrics.

The total new business pipeline at the end of December 31, 2022 and 2021 was $22.6 billion and $21.4 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

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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:

(in millions) Net ARR Activity metric

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

(in millions)

December 31, 2022 $ 114

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March 31, 2022 102

December 31, 2021 128

CNDT 2022 Annual Report

Capital Resources and Liquidity

As of December 31, 2022 and 2021, total cash and cash equivalents were $582 million (of which approximately $111 million was cash in foreign locations) and $415 million (of which approximately $132 million was cash in foreign locations), respectively.

We also have a $550 million revolving line of credit for our various cash needs, of which $100 million has been utilized for borrowings and $20 million has been utilized for letters of credit as of December 31, 2021.

On February 11, 2022, we repaid this $100 million.

As of December 31, 2021, in addition to the borrowings under our revolving line of credit, there was a total of $1.3 billion outstanding borrowings under our 2021 Term Loan A, Term Loan B and Senior notes, of which $22 million was due within one year.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional debt information.

In January 2019, we acquired Health Solution Plus, a software provider of healthcare payer administration solutions for a total base consideration of $90 million.

This acquisition is part of the Commercial Industries segment.

We also have a $550 million Revolving Credit Facility for our various cash needs, of which none has been utilized for borrowings and $2 million has been utilized for letters of credit as of December 31, 2022.

On February 11, 2022, we repaid the then-outstanding borrowing under the Revolving Credit Facility of $100 million.

As of December 31, 2022, there was a total of $1,282 million of outstanding borrowings under our Term Loan A, Term Loan B and Senior Notes, of which $18 million was due within one year.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information regarding our debt.

In February 2019, we reached a settlement agreement and release with the State of Texas (State) and the Texas Department of Health and Human Services, which was amended in May 2019 (Texas Agreement).

Pursuant to the terms of the Texas Agreement, the Company was required to pay the State $236 million, of which $118 million was paid in 2019 and the remaining $118 million was paid in January 2020.

In order to provide financial flexibility and finance certain investments and projects, we may continue to utilize external financing arrangements.

However, we believe that our cash on hand, projected cash flow from operations, sound balance sheet and our Revolving Credit Facility will continue to provide sufficient financial resources to meet our expected business obligations for at least the next twelve months.

Cash Flow Analysis

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Operating Activities

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

CNDT 2021 Annual Report

The net decline in cash flow provided by operating activities of $99 million was primarily attributable to lower Adjusted EBITDA, increases in equipment to support new business in our Transportation segment, higher income tax payments and higher cash interest payments, partially offset by improved accounts receivable Days Sales Outstanding (DSO) and the insurance recovery related to the previously disclosed State of Texas matter.

Investing Activities

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

The increase in cash provided by investing activities of $315 million was primarily due to the proceeds from the divestiture of the Midas business, partially offset by slightly increased spending related to modernizing our infrastructure and productivity tools.

Financing Activities

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

Financing activities for 2022 primarily reflect the repayment of the $100 million borrowed under the Revolving Credit Facility, normal scheduled debt repayments and dividends on our Series A Preferred Stock.

Financing activities for 2021 primarily reflect the net activity related to our 2021 debt refinancing, payment of the previously outstanding $34 million of Senior Notes due 2024 and dividends on our Series A Preferred Stock, partially offset by the $100 million borrowed from the Revolving Credit Facility.

CNDT 2022 Annual Report

Sales of Accounts Receivable

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Material Cash Requirements from Contractual Obligations

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

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

As of December 31, 2021, we had outstanding debt with floating and fixed rates totaling $1,440 million, of which $30 million was due within 12 months.

Future interest payments associated with this debt, which has maturities through 2029, are $511 million, of which $71 million is due within 12 months.

Refer to Note 11 – Debt in the Consolidated Financial Statements for additional information.

We believe our balances of cash and cash equivalents, which totaled $582 million as of December 31, 2022, along with cash generated by operations and amounts available for borrowing under our Revolving Credit Facility, will be sufficient to satisfy our cash requirements over the next 12 months and beyond.

At December 31, 2022, our material cash requirements include the following contractual and other obligations.

As of December 31, 2022, we had total outstanding debt with floating and fixed rates totaling $1,335 million, of which $35 million was due within 12 months.

Future interest payments associated with this debt, which has maturities through 2029, are forecast to be $543 million, of which $98 million is due within 12 months.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information.

In the normal course of business, we enter lease arrangements for certain equipment and facilities.

As of December 31, 2022, total fixed lease payables were $271 million, of which $79 million was due within 12 months.

Refer to Note 7 – Leases in the Consolidated Financial Statements for additional information.

Refer to Note 7 – Leases to the Consolidated Financial Statements for additional information.

Estimated Purchase Commitments

We have committed to purchasing certain materials and services to support our operations.

The total of these commitments was $138 million as of December 31, 2021, of which $88 million was due within 12 months.

CNDT 2021 Annual Report

The total of these commitments was $112 million as of December 31, 2022, of which $81 million is due within the next 12 months.

Additionally, subsequent to December 31, 2022, we have entered into certain long-term purchase commitments with a third-party technology vendor totaling approximately $309 million over the next 5 years, of which $62 million is due within the next 12 months.

Other Contingencies and Commitments

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Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.

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

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

CNDT 2022 Annual Report

Off-Balance Sheet Arrangements

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For a detailed discussion of the application of these and other accounting policies, refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements.

CNDT 2021 Annual Report

Assets/Liabilities Held for Sale

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Upon determining that a long-lived asset (disposal group) meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group in the line items Assets held for sale and Liabilities held for sale, respectively, in the Consolidated Balance Sheets.

On December 29, 2021, the Company signed a definitive agreement to sell its Midas Suite of Solutions to Symplr Software, Inc.

CNDT 2022 Annual Report

On December 29, 2021, the Company signed a definitive agreement to sell its Midas Suite of Solutions (Midas business) to Symplr Software, Inc.

This action was taken because of the Company's strategy to streamline its portfolio and its consideration of divestitures of select businesses to enhance shareholder and client value.

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Application of the interim and annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment of the fair value of each reporting unit.

We currently have six reporting units which support our three reportable segments:

Customer Experience Management, Business Operations Solutions, Commercial Healthcare and Human Resources and Learning Services (together comprising Commercial Industries), Government Services and Transportation.

We currently have three reporting units which correlate to our three reportable segments:

Commercial, Government and Transportation.

As of January 1, 2022, we underwent an internal reorganization in our Commercial reportable segment resulting in the previous four Commercial operating segments being combined into one single operating segment and reporting unit, led by a single segment manager.

We considered the reorganization in the first quarter of 2022 a triggering event and performed an interim qualitative goodwill impairment assessment of the reporting units before and after the reorganization and concluded no impairment existed at the time of the change.

Additionally, as part of the reorganization in the first quarter of 2022, certain clients were reassigned from the Government reportable segment to the Commercial reportable segment.

This change resulted in less than 1% of goodwill being reallocated between the reporting units within the two reportable segments.

Our annual quantitative impairment test of goodwill was performed as of October 1, 2022.

CNDT 2021 Annual Report

In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income approach (discounted cash flow methodology) and market approach.

Goodwill is tested for impairment using a qualitative assessment and/or a quantitative assessment.

In our quantitative assessment, we estimate the fair value of each reporting unit by weighting the results from the Income Approach (discounted cash flow methodology) and Market Approach.

The Income Approach utilizes a discounted cash flow analysis based upon the forecasted future business results of its reporting units.

The Market Approach utilizes the guideline public company method.

These valuation approaches require significant judgment and consider several factors that include, but are not limited to, expected future cash flows, growth rates and discount rates and comparable multiples from publicly traded companies in our industry.

In addition, we are required to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses.

CNDT 2022 Annual Report

When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions.

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We believe these assumptions are appropriate and reflect our forecasted long-term business model and consider our historical results as well as the current economic environment and markets that we serve.

The most significant assumptions used in the goodwill analysis relate to the discount rates (ranging from 11.50% to 13.50%) and long-term organic growth rates (ranging from 2.5% to 3.0%) for the reporting units within the Commercial Industries, Government Services and Transportation reportable segments.

Based on our quantitative assessments, we concluded that the fair value of our reporting units exceeded their respective carrying values and, accordingly, we did not record any goodwill impairment charge in the year ended December 31, 2021.

If we used different assumptions for discount rates or long-term organic growth rates, our calculated fair values of our reporting units could be higher or lower which could result in a goodwill impairment.

The most significant assumptions used in the goodwill analysis relate to revenue growth rates, discount rate and long-term organic growth rate for the Commercial reporting unit and discount rates and long-term organic growth rates for the Government and Transportation reporting units.

If we used different assumptions for revenue growth rates, discount rates or long-term organic growth rates in these annual assessments, our calculated fair values of our reporting units could be higher or lower which could result in a goodwill impairment.

After completing the annual impairment test, the Commercial reporting unit experienced lower than expected new customer contract signings (all subsequent to November 1, 2022), and an unexpected softening of the future business pipeline for certain solutions.

Management believed these were driven by macroeconomic conditions present in the fourth quarter of 2022.

The combination of these factors led management, in December 2022, to review the Commercial reporting unit and further evaluate the portfolio.

These factors triggered the need for management to perform a goodwill impairment assessment for this reporting unit as of December 31, 2022, which resulted in a pre-tax impairment charge of $358 million.

In connection with the Commercial reporting unit impairment assessment, we first performed a recoverability assessment of long-lived assets and concluded that such assets were not impaired.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

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Gross deferred tax assets of $239 million and $265 million had valuation allowances of $102 million and $82 million at December 31, 2022 and 2021, respectively.

CNDT 2021 Annual Report

We are subject to ongoing tax examinations and assessments in various jurisdictions.

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Unrecognized tax benefits were $12 million, $23 million and $23 million at December 31, 2022, 2021 and 2020, respectively.

CNDT 2022 Annual Report

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

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If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss.

The estimated losses are recorded within Litigation settlements (recoveries), net in the Company's income statement.

Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable.

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These revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial position.

Our policy is to expense legal defense costs related to such matters as incurred.

These costs are recorded within Selling, general and administrative expenses in the Company's income statement.

Any insurance recoveries for litigation settlements and defense costs are recorded when such recoveries are deemed probable and collectability is reasonably assured.

Such recoveries are recorded in the same financial statement line as the related costs to which the recoveries relate.

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

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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-K

Item 7. Management’s Discussion and Analysis