What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-11-01 · 76 added, 172 removed, 152 unchanged (62% of the section changed)

8 unchanged sentences

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 62,000 associates as of September 30, 2022, servicing customers from service centers in 24 countries.

As a global technology-led business process solutions company, we deliver digital business solutions and services spanning the commercial, government and transportation spectrum – creating exceptional outcomes for our clients and the millions of people who count on them.

Through a dedicated global team of associates, process expertise, and advanced technologies, our solutions and services digitally transform our clients’ operations to enhance customer experiences, improve performance, increase efficiencies and reduce costs.

We add momentum to our clients’ missions in many ways including delivering 43 percent of nutrition assistance payments in the U.S., enabling 1.3 billion customer service interactions annually, empowering millions of employees through HR services every year and processing nearly 12 million tolling transactions every day.

Headquartered in Florham Park, New Jersey, we have a team of approximately 59,000 associates as of March 31, 2023, servicing customers from service centers in 25 countries.

Our reportable segments correspond to how we organize and manage the business and are aligned to the solutions we offer our clients.

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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.

• 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.

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On behalf of government agencies and authorities in the transportation industry, we deliver mission-critical mobility and payment solutions that improve automation, interoperability and decision-making to streamline operations, increase revenue and reduce congestion while creating safer communities and seamless travel experiences for consumers.

Executive Summary

We continue to transform our business through an intense focus on growth, quality, and efficiency – utilizing a programmatic and project management approach.

Beginning in the first quarter of 2020 and through the third quarter of 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 nine months ended September 30, 2022, our strategy is showing results, including the following:

CNDT Q1 2023 Form 10-Q

• Net income of $151 million for the nine months ended September 30, 2022 as compared to net income of $12 million for the same period in the prior year.

• Two of our three segments posting revenue growth for the quarter, including the first quarter of year-over-year revenue growth for the Commercial segment since the spin-off of Conduent as a separate public company.

• New Business annual contract value (ACV) of $191 million in the third quarter increased for the fifth consecutive quarter, with proportional contributions from all segments.

• Annual recurring revenue signings of $296 million for the nine months ended September 30, 2022 is substantially unchanged compared to the prior year.

• Renewal TCV of $1,896 million for the nine months ended September 30, 2022 is 38% higher than the same period in the prior year.

Executive Summary

During the first quarter of 2023, we held an investor briefing to communicate the next chapter in the Conduent journey.

Our intense emphasis on growth, quality, and efficiency, beginning in the first quarter of 2020 resulted in a strengthened foundation and we remain focused on accelerating growth and enhancing value for our stakeholders.

We intend to achieve this by doubling down on key themes outlined in the briefing, as well as through a process of portfolio rationalization, divesting certain solutions which have either scarcity value outside of Conduent or are capital intensive relative to their growth opportunity, enabling management bandwidth and capital investments to be focused on solutions where we believe we have competitive advantages or higher growth expectations.

This renewed portfolio focus will result in a more nimble and faster growing Conduent with modest levels of net leverage, enhanced valuation, and significant excess capital to be deployed over time.

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.

COVID-19 Pandemic

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

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

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

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

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

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

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

CNDT Q3 2022 Form 10-Q

Financial Review of Operations

Given the nature of our business and our global operations, the effects of global macroeconomic and geopolitical uncertainty could have a materially adverse effect on our business, results of operations and financial condition.

Financial Information and Analysis of Results of Operations

Three Months Ended

September 30, 2022 vs.

($ in millions) 2022 2021 $ Change % Change

Revenue $ 977 $ 1,038 $ (61) (6) %

Operating Costs and Expenses

Cost of services (excluding depreciation and amortization) 754 776 (22) (3) %

Selling, general and administrative (excluding depreciation and amortization) 117 131 (14) (11) %

Research and development (excluding depreciation and amortization) 2 2 — — %

Depreciation and amortization 54 84 (30) (36) %

Restructuring and related costs 4 10 (6) (60) %

Interest expense 22 12 10 83 %

(Gain) loss on divestitures and transaction costs 1 — 1 n/m

Litigation settlements (recoveries), net — — — n/m

Loss on extinguishment of debt — — — n/m

Other (income) expenses, net — 4 (4) n/m

Total Operating Costs and Expenses 954 1,019 (65)

Income (Loss) Before Income Taxes 23 19 4

Income tax expense (benefit) 8 8 —

Net Income (Loss) $ 15 $ 11 $ 4

Nine Months Ended

September 30, 2022 vs.

March 31, 2023 vs.

($ in millions) 2023 2022 $ Change % Change

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Interest expense 27 19 8 42 %

(Gain) loss on divestitures and transaction costs (159) 1 (160) n/m

Litigation settlements (recoveries), net (31) 2 (33) n/m

Loss on extinguishment of debt — 2 (2) n/m

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

Litigation settlements (recoveries), net (21) (28) 7 (25) %

Other (income) expenses, net (1) 1 (2) n/m

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Net Income (Loss) $ (6) $ 136 $ (142)

Revenue for the three months ended March 31, 2023 decreased, compared to the prior year period, primarily due to non-repeating federal stimulus revenue, lost business in our Government and Commercial segments, extended completion timelines to meet client requirements in the Transit solutions division of our Transportation segment and the impact of an out of period adjustment in our Government segment further described below, partially offset by higher interest rates positively impacting our Benefit Wallet business and new business ramp.

In the first quarter of 2023, the Company identified an error and recorded an out-of-period adjustment to correct the recognition of revenue on a Government segment contract that originated in 2020 and impacted all quarterly periods through December 31, 2022.

This adjustment resulted in a reduction to revenue and income (loss) before income taxes of $7 million.

CNDT Q1 2023 Form 10-Q

Revenue for the three and nine months ended September 30, 2022 decreased, compared to the prior year periods, primarily due to lower federal stimulus revenue in the Government Services segment, lost business from prior years, as well as negative foreign exchange translation impact, particularly the Euro and British pound, partially offset by recognition of a $15 million revenue benefit associated with a minimum annual volume commitment contract with a large client, higher interest rates positively impacting our Benefit Wallet business and new business ramp across all segments.

Cost of Services (excluding depreciation and amortization)

Cost of services for the three and nine months ended September 30, 2022 decreased, compared to the prior year periods, driven by lost business from prior years, increased operational efficiency and favorable foreign exchange translation impact.

Cost of services for the three months ended March 31, 2023 decreased, compared to the prior year periods, primarily driven by the impact of reduced revenue and a $17 million reversal of liabilities due to the settlement of the Cognizant matter described in Note 12 – Contingencies and Litigation to the Condensed Consolidated Financial Statements.

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

SG&A for the three months ended September 30, 2022 decreased, compared to the prior year period, driven by progress in our efficiency initiatives, most notably within shared technology infrastructure, as well as lower variable employee costs.

SG&A for the nine months ended September 30, 2022 decreased, compared to the prior year period, primarily driven by the recovery of $14 million of defense costs as part of the settlement with insurance carriers relating to the previously disclosed State of Texas matter, progress in our efficiency initiatives, most notably within shared technology infrastructure, as well as lower variable employee costs.

SG&A for the three months ended March 31, 2023 increased, compared to the prior year period, driven by the absence of 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 that occurred in 2022.

Depreciation and Amortization

Depreciation and amortization for the three and nine months ended September 30, 2022 decreased, compared to the prior year periods, primarily due to portions of certain customer relationship intangible assets from acquisitions in years past being fully amortized.

Depreciation and amortization for the three months ended March 31, 2023 was unchanged from the prior year.

This reflects new depreciation from recent capital expenditures being offset by run-off of depreciation on older assets.

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.

In addition, during the three months ended March 31, 2023, the Company also incurred $4 million of professional support costs associated with bringing certain technology functions in-house.

The following are the components of our Restructuring and related costs:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2023 2022

Severance and related costs $ 20 $ —

Data center consolidation 2 4 9 19

Termination and asset impairment costs — 5 10 7

Data center consolidation costs 2 4

Termination, insourcing and asset impairment costs 7 4

Total net current period charges 29 8

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(1) Represents professional support costs associated with certain strategic transformation programs.

The severance and related costs included costs related to the closure of one of our Commercial segment operations in Europe.

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

CNDT Q3 2022 Form 10-Q

Interest Expense

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

On October 15, 2021, we completed the refinancing of our previously outstanding debt, which extended the maturity profile of our debt.

The increase in Interest expense for the three and nine months ended September 30, 2022, compared to the prior year periods, was driven by higher interest rates on our refinanced credit facilities, partially offset by a lower total outstanding debt balance.

The increase in Interest expense for the three months ended March 31, 2023, compared to the prior year periods, was driven by higher interest rates on our credit facilities, partially offset by a lower total outstanding debt balance.

(Gain) Loss on Divestitures and Transaction Costs

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

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

The divestiture of the Midas business in the first quarter of 2022 resulted in a gain of $166 million ($165 million in the first quarter of 2022 and $1 million in the second quarter of 2022).

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 for both years.

CNDT Q1 2023 Form 10-Q

Litigation Settlements (Recoveries), Net

Litigation settlements (recoveries), net for the nine months ended September 30, 2022 primarily consist of $24 million of insurance recoveries recorded in the first quarter of 2022 related to the previously disclosed State of Texas matter.

Litigation settlements (recoveries), net for the three months ended March 31, 2023 primarily consist of a $26 million reversal of reserves due to the settlement of the Cognizant matter.

Litigation settlements (recoveries), net for the three months ended March 31, 2022 primarily consist of $24 million of insurance recoveries recorded in the first quarter of 2022 related to the previously disclosed State of Texas matter.

Refer to Note 12 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.

The effective tax rate for the three months ended September 30, 2022 was 33.8%, compared to 38.3% for the three months ended September 30, 2021.

The September 30, 2022 rate was higher than the U.S.

statutory rate of 21%, primarily due to charges related to return to provision adjustments for 2021 and charges of valuation allowances partially offset by changes in the geographic mix of income.

The effective tax rate for the three months ended September 30, 2021 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 return to provision adjustment for 2020.

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, 2022 was 27.5%.

The normalized effective tax rate for the three months ended September 30, 2021 was 30.4%, predominantly due to excluding the impact of discrete tax adjustments, amortization of intangible assets and restructuring costs.

The normalized effective tax rate for the third quarter of 2022 was lower than the third quarter of 2021 rate primarily due to the geographic mix of income.

The effective tax rate for the nine months ended September 30, 2022 was 36.7%, compared to 58.5% for the nine months ended September 30, 2021.

The September 30, 2022 rate was higher than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income, state and local taxes and permanently non-deductible amounts related to the Midas divestiture transaction, partially offset by the tax benefit of valuation allowances released due to the gain from this divestiture and tax credits.

The effective tax rate for the nine months ended September 30, 2021 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.

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 nine months ended September 30, 2022 was 32.4%.

The normalized effective tax rate for the nine months ended September 30, 2021 was 26.8%, predominantly due to excluding the impact of discrete tax adjustments, charges for amortization of intangible assets and restructuring costs.

The normalized effective tax rate for the year-to-date September 30, 2022 was higher than the year-to-date September 30, 2021 rate predominantly due to the geographic mix of income, increase in permanent tax differences and lower adjusted pre-tax income.

We believe it is reasonably possible that unrecognized tax benefits of approximately $3 million will reverse within 12 months due to settlements.

A payment of $8 million was made in June 2022 decreasing unrecognized tax benefits.

CNDT Q3 2022 Form 10-Q

On August 16, 2022, the Inflation Reduction Act (IRA) was enacted.

The law imposes two new taxes:

(i) 15% corporate alternative minimum tax (CAMT) on adjusted financial statement income of corporations with profits over $1 billion, which is effective for tax years beginning after December 31, 2022, and (ii) a 1% surcharge on corporate stock buybacks of public US companies, which applies to repurchases of stock after December 31, 2022.

We do not expect any material impacts from this tax law change.

The effective tax rate for the three months ended March 31, 2023 was 20.8%, compared to 35.2% for the three months ended March 31, 2022.

The March 31, 2023 rate approximates the U.S.

statutory rate of 21%.

The effective tax rate for the three months ended March 31, 2022 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.

Excluding the impact of restructuring costs, litigation reserve releases, valuation allowance and certain discrete tax items, the normalized effective tax rate for the three months ended March 31, 2023 was 35.0%.

The normalized effective tax rate for the three months ended March 31, 2022 was 29.6%, predominantly due to 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, 2023 was higher than the three months ended March 31, 2022 due to the geographic mix of income.

Operations Review of Segment Revenue and Profit

In the first quarter of 2022, we realigned certain clients between reportable segments to reflect how we currently manage our business.

Certain clients were reclassified from the Government Services reportable segment to the Commercial reportable segment to align with a product view of the business.

This change had an insignificant impact.

Additionally, in the first quarter of 2022, in order to provide greater visibility into the profitability of our segments, certain real estate costs that were previously included in Unallocated Costs have been allocated to each of the reportable segments.

As described in Note 5 – Assets/Liabilities Held for Sale and Divestiture, we sold our Midas Suite of patient safety, quality and advanced analytics solutions to a third party in the first quarter of 2022.

Accordingly, the results of this disposed business, which had been reported in the Commercial segment have been reclassified to the Divestitures segment.

All prior periods presented have been recast to reflect these changes.

Our financial performance is based on Segment Profit/(Loss) and Segment Adjusted EBITDA for the following three segments:

• Commercial;

• Government Services;

• Government;

• 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.

We continue to modernize a significant portion of our infrastructure with new systems and processes and consolidate our data centers as part of our quality and efficiency initiatives.

There is a risk, however, that our modernization efforts and data center consolidations could materially and adversely disrupt our operations.

See Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.

CNDT Q1 2023 Form 10-Q

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Three Months Ended

September 30,

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

Revenue $ 504 $ 291 $ 182 $ — $ — $ 977

Segment profit (loss) $ 44 $ 79 $ 16 $ — $ (87) $ 52

Segment depreciation and amortization $ 24 $ 9 $ 9 $ — $ 11 $ 53

Adjusted EBITDA $ 68 $ 88 $ 25 $ — $ (76) $ 105

% of Total Revenue 51.6 % 29.8 % 18.6 % — % — % 100.0 %

Adjusted EBITDA Margin 13.5 % 30.2 % 13.7 % — % — % 10.7 %

Revenue $ 493 $ 346 $ 180 $ 19 $ — $ 1,038

Segment profit (loss) $ 16 $ 125 $ 13 $ 11 $ (89) $ 76

Segment depreciation and amortization $ 24 $ 8 $ 9 $ 1 $ 12 $ 54

Adjusted EBITDA $ 40 $ 133 $ 22 $ 12 $ (77) $ 130

% of Total Revenue 47.5 % 33.4 % 17.3 % 1.8 % — % 100.0 %

Adjusted EBITDA Margin 8.1 % 38.4 % 12.2 % 47.1 % — % 12.5 %

Nine Months Ended

September 30,

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

(in millions) Commercial Government Transportation Divestitures Unallocated Costs Total

Revenue $ 508 $ 264 $ 150 $ — $ — $ 922

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Adjusted EBITDA Margin 10.5 % 29.0 % 10.5 % — % — % 11.3 %

CNDT Q3 2022 Form 10-Q

(in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2023 2022

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Litigation settlements (recoveries) (21) (28)

Loss on extinguishment of debt — — — 2

Other (income) expenses, net (1) 1

Segment Pre-tax Income (Loss) $ 52 $ 76 $ 142 $ 210

Segment Profit (Loss) $ 30 $ 54

Segment depreciation and amortization (including contract inducements) 60 55

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Commercial Segment

Commercial revenue for the three months ended September 30, 2022 was higher compared to the prior year period primarily due to recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client, as well as higher interest rates positively impacting our Benefit Wallet business, partially offset by unfavorable exchange rate movement.

Commercial revenue for the nine months ended September 30, 2022 was lower compared to the prior year periods, primarily due to the merger of two of our clients resulting in lower volumes as well as unfavorable exchange rate movement and lost business from prior years, partially offset by recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client, higher interest rates positively impacting our Benefit Wallet business and strong new business ramp.

Segment Profit and Adjusted EBITDA

Increases in the Commercial segment profit and adjusted EBITDA margin for the three and nine months ended September 30, 2022, compared to the prior year periods, were mainly driven by increased operational efficiency and expense reductions resulting from progress in our efficiency initiatives, higher interest rates positively impacting our Benefit Wallet business and recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client more than offsetting the dynamics of a challenging labor market in both North America and Europe.

Government Services Segment

Government Services revenue for the three and nine months ended September 30, 2022 decreased, compared to the prior year periods.

This decrease was primarily driven by significantly lower Federal stimulus revenue, while increases in volume, price and new business offset lost business from prior years.

Commercial revenue for the three months ended March 31, 2023 was lower compared to the prior year period primarily due to the final impact of the merger of two of our clients disclosed in the second quarter of 2022 resulting in lower volumes, partially offset by higher interest rates positively impacting our Benefit Wallet business.

Segment Profit and Adjusted EBITDA

Decreases in the Government Services segment profit and adjusted EBITDA margin for the three and nine months ended September 30, 2022, compared to the prior year periods, were mainly driven by lower Federal stimulus revenue.

Increases in the Commercial segment profit, adjusted EBITDA and adjusted EBITDA margin for the three months ended March 31, 2023, compared to the prior year period, were mainly driven by higher interest rates positively impacting our Benefit Wallet business.

CNDT Q1 2023 Form 10-Q

Government Segment

Government revenue for the three months ended March 31, 2023 decreased, compared to the prior year period.

This decrease was primarily driven by non-repeating federal stimulus revenue, lost business from prior years and the out of period adjustment mentioned above, partially offset by the ramping of new business in Government Healthcare solutions and higher volumes in Government services solutions.

Segment Profit and Adjusted EBITDA

Government segment profit and adjusted EBITDA for the three months ended March 31, 2023 were substantially unchanged compared to the prior year period with the $17 million reversal of reserves due to the settlement of the Cognizant matter being offset by the out of period adjustment and lower revenue.

Adjusted EBITDA margin improved due to the Cognizant matter partially offset by the out of period adjustment and the non-repeating federal stimulus revenue.

Transportation Segment

Transportation revenue for the three months ended September 30, 2022 increased slightly, compared to the prior year period, primarily driven by increased volumes offsetting the unfavorable exchange rate movement, particularly the Euro.

Transportation revenue for the nine months ended September 30, 2022 decreased, compared to the prior year period, primarily driven by unfavorable exchange rate movement, particularly the Euro, and a one-time revenue benefit in the prior year period.

Transportation revenue for the three months ended March 31, 2023 decreased compared to the prior year period, primarily driven by extended completion timelines to meet client requirements in our Transit solutions service offering, which affected the recognition timeframe for revenue.

Segment Profit and Adjusted EBITDA

Transportation segment profit and adjusted EBITDA margin for the three months ended September 30, 2022 increased primarily due to progress in our efficiency initiatives.

Transportation segment profit and adjusted EBITDA margin decreased for the nine months ended September 30, 2022, compared to the prior year period, mainly driven by the impact of lost business, a one-time item benefiting the prior year period and the impact of unfavorable exchange rate movement, partially offset by new business.

Transportation segment profit, adjusted EBITDA and adjusted EBITDA margin for the three months ended March 31, 2023 decreased primarily due to extended completion timelines to meet client requirements in our Transit solutions service offering.

Revenue, Segment Profit (Loss) and Adjusted EBITDA

The decline in revenue, segment profit and Adjusted EBITDA for the three and nine months ended September 30, 2022 was primarily due to the sale of the Midas Suite of products.

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

The decline in revenue, segment profit and Adjusted EBITDA for the three months ended March 31, 2023 was due to the sale of the Midas Suite of products.

The prior year included activity through the date of disposition whereas there was no activity in the current year.

Unallocated Costs

Unallocated Costs for the three months ended September 30, 2022 were substantially unchanged compared to the prior year period.

Unallocated Costs for the nine months ended September 30, 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, progress with our efficiency initiatives and lower variable employee costs.

Unallocated Costs for the three months ended March 31, 2023 increased compared to the prior year period primarily due to the prior year reflecting the recovery of defense costs as part of the settlement with insurance carriers relating to the previously disclosed State of Texas matter, partially offset by 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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New business ACV is calculated as TCV divided by the contract term, in months, multiplied by 12 for an annual measure.

For the three months ended September 30, 2022, the Company signed $191 million of new business ACV, an increase for the fifth consecutive quarter, with proportional contributions from all segments.

For the nine months ended September 30, 2022, the Company signed $538 million of new business ACV, down 13% from the prior year, primarily due to $158 million of federal stimulus signings and volume from a large client we no longer include in the sales metrics.

Signing information for the three and nine months ended September 30, 2022 and 2021 is as follows:

For the three months ended March 31, 2023, the Company signed $125 million of new business ACV.

CNDT Q1 2023 Form 10-Q

Signing information for the three months ended March 31, 2023 and 2022 is as follows:

Three Months Ended

September 30, 2022 vs.

($ in millions) 2022 (3)

$ Change % Change

New business ACV $ 191 $ 150 $ 41 27 %

New business TCV $ 348 $ 339 $ 9 3 %

Renewals TCV 658 276 382 138 %

Total Signings $ 1,006 $ 615 $ 391 64 %

Annual recurring revenue signings (1)

$ 89 $ 86 $ 3 3 %

Non-recurring revenue signings (2)

$ 107 $ 68 $ 39 57 %

Nine Months Ended

September 30, 2022 vs.

March 31, 2023 vs.

($ in millions) 2023 (3)

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(3) Adjusted to remove Midas new business signings.

The total new business pipeline at the end of September 30, 2022 and 2021 was $24.0 billion and $21.0 billion, respectively.

The total new business pipeline at the end of March 31, 2023 and 2022 was $23.2 billion and $22.0 billion, respectively.

Total new business pipeline is defined as total new business TCV pipeline of deals in all sell stages.

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(in millions) Net ARR Activity metric

September 30, 2022 $ 70

June 30, 2022 104

March 31, 2023 $ 108

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September 30, 2022 70

CNDT Q3 2022 Form 10-Q

June 30, 2022 104

March 31, 2022 102

Capital Resources and Liquidity

As of September 30, 2022 and December 31, 2021, total cash and cash equivalents were $577 million and $415 million, respectively.

As of March 31, 2023 and December 31, 2022, total cash and cash equivalents were $526 million and $582 million, respectively.

We also have a $550 million revolving line of credit for our various cash needs, of which $2 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 September 30, 2022, was $548 million.

As of September 30, 2022, our total debt outstanding was $1,272 million of which $33 million was due within one year.

The net amount available to be drawn upon under our revolving line of credit as of March 31, 2023, was $548 million.

As of March 31, 2023, our total debt outstanding was $1,277 million of which $38 million was due within one year.

Refer to Note 7 – Debt in the Condensed Consolidated Financial Statements for additional debt information.

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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 2023 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) 2023 2022 Better (Worse)

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Operating activities

The net decrease in cash generated from operating activities of $65 million, compared to the prior year period, was primarily related to lower Adjusted EBITDA, higher cash tax payments, which are mainly related to the Midas gain, and higher cash interest paid.

These items were partially offset by the $38 million of insurance recoveries related to the previously disclosed State of Texas matter.

The net decrease in cash generated from operating activities of $23 million, compared to the prior year period, was primarily related to the absence of the $38 million of insurance recoveries related to the previously disclosed State of Texas matter.

Investing activities

The increase in cash provided by investing activities of $313 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.

Investing cash flow decreased by $295 million primarily due to the proceeds from the divestiture of the Midas business in the prior year, partially offset by decreased capital spending in the current year.

Financing activities

The increase in cash used in financing activities was primarily related to the repayment of the $100 million borrowed under the revolver partially offset by lower Term loan and Senior note principal payments.

CNDT Q3 2022 Form 10-Q

The decrease in cash used in financing activities was primarily related to the repayment of the $100 million borrowed under the revolver in the prior year partially offset by higher taxes paid for settlement of stock-based compensation.

Sales of Accounts Receivable

We enter into factoring agreements in the normal course of business as part of our cash and liquidity management, to sell certain accounts receivable without recourse to third-party financial institutions.

During the third quarter of 2022, we replaced our previously outstanding factoring agreements with an agreement with a new third-party financial institution with substantially equivalent terms.

We have entered into a factoring agreement in the normal course of business as part of our cash and liquidity management, to sell certain accounts receivable without recourse to a third-party financial institution.

The transactions under this agreement are treated as a sale and are accounted for as a reduction in accounts receivable because the agreement transfers effective control over, and risk related to, the receivables to the buyer.

Cash proceeds from this arrangement are included in cash flow from operating activities in the Consolidated Statements of Cash Flows.

The net impact from the sales of accounts receivable on net cash provided by (used in) operating activities for the nine months ended September 30, 2022 and 2021 was $35 million and $(21) million, respectively.

The net impact from the sales of accounts receivable on net cash provided by (used in) operating activities for the three months ended March 31, 2023 and 2022 was $(27) million and $(8) million, respectively.

Material Cash Requirements from Contractual Obligations

The Company believes its balances of cash and cash equivalents, which totaled $577 million as of September 30, 2022, along with cash generated by operations and amounts available for borrowing under its 2021 Revolving Credit Facility, will be sufficient to satisfy its cash requirements over the next 12 months and beyond.

At September 30, 2022, the Company’s material cash requirements include debt, leases and estimated purchase commitments.

The Company believes its balances of cash and cash equivalents, which totaled $526 million as of March 31, 2023, 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, 2023, 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, 2022 for additional information on our material cash requirements.

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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 nine months ended September 30, 2022 to our critical accounting estimates and policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

There have been no significant changes during the three months ended March 31, 2023 to our critical accounting estimates and policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

CNDT Q1 2023 Form 10-Q

Recent Accounting Changes

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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-Q

Item 2. Management’s Discussion and Analysis