CONDUENT Inc 10-Q

ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED) CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) Three Months Ended March 31, (in millions, except per share data) 2023 2022 Revenue $ 922 $ 967 Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 720 755 Selling, general and administrative (excluding depreciation and amortization) 111 102 Research and development (excluding depreciation and amortization) 2 1 Depreciation and amortization 61 61 Restructuring and related costs 29 9 Interest expense 27 19 (Gain) loss on divestitures and transaction costs, net 2 ( 163 ) Litigation settlements (recoveries), net ( 21 ) ( 28 ) Other (income) expenses, net ( 1 ) 1 Total Operating Costs and Expenses 930 757 Income (Loss) Before Income Taxes ( 8 ) 210 Income tax expense (benefit) ( 2 ) 74 Net Income (Loss) $ ( 6 ) $ 136 Net Income (Loss) per Share: Basic $ ( 0.04 ) $ 0.62 Diluted $ ( 0.04 ) $ 0.61 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q1 2023 Form 10-Q 3 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended March 31, (in millions) 2023 2022 Net Income (Loss) $ ( 6 ) $ 136 Other Comprehensive Income (Loss), Net (1) Currency translation adjustments, net 17 ( 5 ) Unrecognized gains (losses), net 1 ( 1 ) Other Comprehensive Income (Loss), Net 18 ( 6 ) Comprehensive Income (Loss), Net $ 12 $ 130 __________ (1) All amounts are net of tax. Tax effects were immaterial. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q1 2023 Form 10-Q 4 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in millions, except share data in thousands) March 31, 2023 December 31, 2022 Assets Cash and cash equivalents $ 526 $ 582 Accounts receivable, net 590 630 Contract assets 163 171 Other current assets 277 242 Total current assets 1,556 1,625 Land, buildings and equipment, net 259 266 Operating lease right-of-use assets 192 197 Intangible assets, net 37 39 Goodwill 965 955 Other long-term assets 494 489 Total Assets $ 3,503 $ 3,571 Liabilities and Equity Current portion of long-term debt $ 38 $ 35 Accounts payable 176 228 Accrued compensation and benefits costs 174 197 Unearned income 79 81 Other current liabilities 375 382 Total current liabilities 842 923 Long-term debt 1,277 1,277 Deferred taxes 85 83 Operating lease liabilities 158 160 Other long-term liabilities 70 69 Total Liabilities 2,432 2,512 Contingencies (See Note 12) Series A convertible preferred stock 142 142 Common stock 2 2 Additional paid-in capital 3,926 3,924 Retained earnings (deficit) ( 2,551 ) ( 2,543 ) Accumulated other comprehensive loss ( 448 ) ( 466 ) Total Equity 929 917 Total Liabilities and Equity $ 3,503 $ 3,571 Shares of common stock issued and outstanding 218,443 218,348 Shares of series A convertible preferred stock issued and outstanding 120 120 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q1 2023 Form 10-Q 5 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, (in millions) 2023 2022 Cash Flows from Operating Activities: Net income (loss) $ ( 6 ) $ 136 Adjustments required to reconcile net income (loss) to cash flows from operating activities: Depreciation and amortization 61 61 Contract inducement amortization 1 — Deferred income taxes ( 8 ) 31 Amortization of debt financing costs 1 1 (Gain) loss on divestitures and sales of fixed assets, net — ( 164 ) Stock-based compensation 2 2 Changes in operating assets and liabilities: Accounts receivable 42 27 Other current and long-term assets ( 33 ) ( 69 ) Accounts payable and accrued compensation and benefits costs ( 65 ) ( 33 ) Other current and long-term liabilities ( 9 ) ( 17 ) Net change in income tax assets and liabilities 2 36 Net cash provided by (used in) operating activities ( 12 ) 11 Cash Flows from Investing Activities: Cost of additions to land, buildings and equipment ( 11 ) ( 34 ) Cost of additions to internal use software ( 11 ) ( 16 ) Proceeds from divestitures — 323 Net cash provided by (used in) investing activities ( 22 ) 273 Cash Flows from Financing Activities: Payments on revolving credit facility — ( 100 ) Payments on debt ( 10 ) ( 8 ) Taxes paid for settlement of stock-based compensation ( 7 ) — Dividends paid on preferred stock ( 2 ) ( 2 ) Net cash provided by (used in) financing activities ( 19 ) ( 110 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 2 ( 1 ) Increase (decrease) in cash, cash equivalents and restricted cash ( 51 ) 173 Cash, Cash Equivalents and Restricted Cash at Beginning of Period 598 420 Cash, Cash Equivalents and Restricted Cash at End of period (1) $ 547 $ 593 ___________ (1) Includes $ 21 million and $ 5 million of restricted cash as of March 31, 2023 and 2022, respectively, that were included in Other current assets on their respective Condensed Consolidated Balance Sheets. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q1 2023 Form 10-Q 6 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) Three Months Ended March 31, 2023 (in millions) Common Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Shareholders' Equity Balance at December 31, 2022 $ 2 $ 3,924 $ ( 2,543 ) $ ( 466 ) $ 917 Dividends - preferred stock, $ 20 /share — — ( 2 ) — ( 2 ) Stock incentive plans, net — 2 — — 2 Comprehensive Income (Loss): Net Income (Loss) — — ( 6 ) — ( 6 ) Other comprehensive income (loss), net — — — 18 18 Total Comprehensive Income (Loss), Net — — ( 6 ) 18 12 Balance at March 31, 2023 $ 2 $ 3,926 $ ( 2,551 ) $ ( 448 ) $ 929 Three Months Ended March 31, 2022 (in millions) Common Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Shareholders' Equity Balance at December 31, 2021 $ 2 $ 3,910 $ ( 2,351 ) $ ( 429 ) $ 1,132 Dividends - preferred stock, $ 20 /share — — ( 2 ) — ( 2 ) Stock incentive plans, net — 2 — — 2 Comprehensive Income (Loss): Net Income (Loss) — — 136 — 136 Other comprehensive income (loss), net — — — ( 6 ) ( 6 ) Total Comprehensive Income (Loss), Net — — 136 ( 6 ) 130 Balance at March 31, 2022 $ 2 $ 3,912 $ ( 2,217 ) $ ( 435 ) $ 1,262 ___________ (1) AOCL - Accumulated other comprehensive loss. Refer to Note 11 – Accumulated Other Comprehensive Loss for the components of AOCL. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q1 2023 Form 10-Q 7 Table of Contents Note 1 – Basis of Presentation References herein to “we,” “us,” “our,” the “Company” and “Conduent” refer to Conduent Incorporated and its consolidated subsidiaries unless the context suggests otherwise. Description of Business Conduent Incorporated is a New York corporation, organized in 2016. As a global technology-led business process solutions company, Conduent delivers digital business solutions and services spanning the commercial, government and transportation spectrum – creating exceptional outcomes for its clients and the millions of people who count on them. Through a dedicated global team of associates, process expertise, and advanced technologies, Conduent’s solutions and services digitally transform its clients’ operations to enhance customer experiences, improve performance, increase efficiencies and reduce costs. Basis of Presentation The unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The year-end Condensed Consolidated Balance Sheet was derived from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Certain reclassifications have been made to prior year information to conform to current year presentation. Intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows have been made. These adjustments consist of normal recurring items. The interim results of operations are not necessarily indicative of the results of the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 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 and a corresponding decrease to accounts receivable of $ 1 million and an increase to other current liabilities of $ 6 million in the first quarter of 2023. The Company evaluated the impact of the out-of-period adjustment and concluded it was not material to any previously issued interim or annual consolidated financial statements and the adjustment is not expected to be material to the year ending December 31, 2023. The Company has evaluated subsequent events through May 3, 2023, and no material subsequent events were identified. Use of Estimates Preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates, including those related to fair values of financial instruments, goodwill and intangible assets, income taxes and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. As of March 31, 2023, the effects of global macroeconomic and geopolitical uncertainty on the Company's business, results of operations and financial condition continue to evolve. As a result, many of the Company's estimates and assumptions continue to require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, the Company's estimates may change materially in the future. CNDT Q1 2023 Form 10-Q 8 Table of Contents Note 2 – Recent Accounting Pronouncements The Company's significant accounting policies are described in Note 1 – Basis of Presentation and Summary of Significant Accounting Policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. New Accounting Standards Adopted The Company has not adopted any new accounting standards in 2023 that had a material impact on its Consolidated Financial Statements. New Accounting Standards To Be Adopted The Company has considered all recent accounting standards issued, but not yet effective, and does not expect any to have a material impact on its Consolidated Financial Statements. Note 3 – Revenue Disaggregation of Revenue The following table provides information about disaggregated revenue by major service offering, the timing of revenue recognition and a reconciliation of the disaggregated revenue by reportable segment. Refer to Note 4 – Segment Reporting for additional information on the Company's reportable segments. Three Months Ended March 31, (in millions) 2023 2022 Commercial: Customer experience management $ 177 $ 161 Business operations solutions 135 151 Healthcare claims and administration solutions 90 90 Human capital solutions 106 110 Total Commercial 508 512 Government: Government healthcare solutions 143 145 Government services solutions 121 141 Total Government 264 286 Transportation: Road usage charging & management solutions 75 76 Transit solutions 40 49 Curbside management solutions 19 19 Public safety solutions 14 16 Commercial vehicles 2 2 Total Transportation 150 162 Divestitures — 7 Total Consolidated Revenue $ 922 $ 967 Timing of Revenue Recognition: Point in time $ 27 $ 19 Over time 895 948 Total Revenue $ 922 $ 967 CNDT Q1 2023 Form 10-Q 9 Table of Contents Contract Balances The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are the Company’s rights to consideration for services provided when the right is conditioned on something other than passage of time (for example, meeting a milestone for the right to bill under the cost-to-cost measure of progress). Contract assets are transferred to Accounts receivable, net when the rights to consideration become unconditional. Unearned income includes payments received in advance of performance under the contract, which are realized when the associated revenue is recognized under the contract. The following table provides information about the balances of the Company's contract assets, unearned income and receivables from contracts with customers: (in millions) March 31, 2023 December 31, 2022 Contract Assets (Unearned Income) Current contract assets $ 163 $ 171 Long-term contract assets (1) 14 12 Current unearned income ( 79 ) ( 81 ) Long-term unearned income (2) ( 40 ) ( 42 ) Net Contract Assets $ 58 $ 60 Accounts receivable, net $ 590 $ 630 __________ (1) Presented in Other long-term assets in the Condensed Consolidated Balance Sheets. (2) Presented in Other long-term liabilities in the Condensed Consolidated Balance Sheets. Revenues of $ 29 million were recognized during the three months ended March 31, 2023 related to the Company's unearned income at December 31, 2022. Revenues of $ 35 million were recognized during the three months ended March 31, 2022 related to the Company's unearned income at December 31, 2021. The Company had no material asset impairment charges related to contract assets for the three months ended March 31, 2023 or 2022. Transaction Price Allocated to the Remaining Performance Obligations Estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially satisfied at March 31, 2023 was approximately $ 1.1 billion. The Company expects to recognize approximately 75 % of this revenue over the next two years and the remainder thereafter. Note 4 – Segment Reporting The Company's reportable segments correspond to how it organizes and manages the business, as defined by the Company's Chief Executive Officer, who is also the Company's Chief Operating Decision Maker (CODM). The Company's segments involve the delivery of business process services and include service arrangements where it manages a customer's business activity or process. The Company's financial performance is based on Segment Profit (Loss) for its three reportable segments (Commercial, Government and Transportation), Divestitures and Unallocated Costs. The Company's CODM does not evaluate operating segments using discrete asset information. Commercial: The Commercial segment provides business process services and customized solutions to clients in a variety of industries. Across the Commercial segment, the Company operates on its clients’ behalf to deliver mission-critical solutions and services to reduce costs, improve efficiencies and enable revenue growth for the Company's clients and their consumers and employees. Government: The 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. The solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations. CNDT Q1 2023 Form 10-Q 10 Table of Contents Transportation: The Transportation segment provides systems, support, and revenue-generating solutions, to government transportation agency clients. The Company delivers mission-critical public safety, mobility and digital payment solutions that streamline operations, have a positive impact on the environment and increase revenue and reduce congestion while creating safe, seamless travel experiences for consumers. Divestitures includes the Company's Midas Suite of patient safety, quality and advanced analytics solutions which it sold to a third party in the first quarter of 2022. Unallocated Costs includes IT infrastructure costs that are shared by multiple reportable segments, enterprise application costs and certain corporate overhead expenses not directly attributable or allocated to the reportable segments. Selected financial information for the Company's reportable segments was as follows: Three Months Ended March 31, (in millions) Commercial Government Transportation Divestitures Unallocated Costs Total 2023 Revenue $ 508 $ 264 $ 150 $ — $ — $ 922 Segment profit (loss) $ 35 $ 73 $ ( 8 ) $ — $ ( 70 ) $ 30 2022 Revenue $ 512 $ 286 $ 162 $ 7 $ — $ 967 Segment profit (loss) $ 28 $ 75 $ 8 $ 2 $ ( 59 ) $ 54 (in millions) Three Months Ended March 31, Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2023 2022 Income (Loss) Before Income Taxes $ ( 8 ) $ 210 Reconciling items: Amortization of acquired intangible assets 2 6 Restructuring and related costs 29 9 Interest expense 27 19 (Gain) loss on divestitures and transaction costs, net 2 ( 163 ) Litigation settlements (recoveries), net ( 21 ) ( 28 ) Other (income) expenses, net ( 1 ) 1 Segment Profit (Loss) $ 30 $ 54 Refer to Note 3 – Revenue for additional information on disaggregated revenues of the reportable segments. Note 5 – Divestiture On February 8, 2022, the Company completed the sale of its Midas business to Symplr Software, Inc. The Company received $ 322 million of cash consideration for this divestiture ($ 321 million in the first quarter of 2022 and $ 1 million in the second quarter of 2022). The divestiture generated a pre-tax gain of $ 166 million ($ 165 million in the first quarter of 2022 and $ 1 million in the second quarter of 2022), which is included in (Gain) loss on divestitures and transaction costs, net. The Company recorded approximately $ 62 million of income taxes in connection with the divestiture. The revenue generated by this business was $ 7 million for the three months ended March 31, 2022. CNDT Q1 2023 Form 10-Q 11 Table of Contents Note 6 – Restructuring Programs and Related Costs The Company engages in a series of restructuring programs related to exiting certain activities, downsizing its employee base, outsourcing certain internal functions and engaging in other actions designed to reduce its cost structure and improve productivity. The implementation of the Company's operational efficiency improvement initiatives has reduced the Company's real estate footprint across all geographies and segments resulting in lease right-of-use asset (ROU) impairments and other related costs. Also included in Restructuring and related costs are incremental, non-recurring costs related to the consolidation of the Company's data centers, which totaled $ 2 million and $ 4 million for the three months ended March 31, 2023 and 2022, respectively. Management continues to evaluate the Company's businesses, and in the future, there may be additional provisions for new plan initiatives and/or changes in previously recorded estimates as payments are made, or actions are completed. Costs associated with restructuring, including employee severance and lease termination costs, are generally recognized when it has been determined that a liability has been incurred, which is generally upon communication to the affected employees or exit from the leased facility. In those geographies where the Company has either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, it recognizes employee severance costs when they are both probable and reasonably estimable. Asset impairment costs related to the reduction of the Company's real estate footprint include impairment of operating lease ROU assets and associated leasehold improvements. A summary of the Company's restructuring program activity during the three months ended March 31, 2023 and 2022 is as follows: (in millions) Severance and Related Costs Termination and Other Costs Asset Impairments Total Accrued Balance at December 31, 2022 $ 10 $ — $ — $ 10 Provision 20 7 2 29 Changes in estimates — — — — Total Net Current Period Charges (1) 20 7 2 29 Charges against reserve and currency ( 8 ) ( 3 ) ( 2 ) ( 13 ) Accrued Balance at March 31, 2023 $ 22 $ 4 $ — $ 26 (in millions) Severance and Related Costs Termination and Other Costs Asset Impairments Total Accrued Balance at December 31, 2021 $ 5 $ 1 $ — $ 6 Provision 1 4 4 9 Changes in estimates ( 1 ) — — ( 1 ) Total Net Current Period Charges (1) — 4 4 8 Charges against reserve and currency ( 4 ) ( 4 ) ( 4 ) ( 12 ) Accrued Balance at March 31, 2022 $ 1 $ 1 $ — $ 2 __________ (1) Represents amounts recognized within the Consolidated Statements of Income (Loss) for the years shown. 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. CNDT Q1 2023 Form 10-Q 12 Table of Contents The following table summarizes the total amount of costs incurred in connection with these restructuring programs by reportable and non-reportable segment: Three Months Ended March 31, (in millions) 2023 2022 Commercial $ 20 $ — Government — — Transportation — — Divestitures — — Unallocated Costs (1) 9 8 Total Net Restructuring Charges $ 29 $ 8 __________ (1) Represents costs related to the consolidation of the Company's data centers, operating lease ROU assets impairment, termination and other costs not allocated to the segments. Note 7 – Debt Long-term debt was as follows: (in millions) March 31, 2023 December 31, 2022 Term loan A due 2026 $ 249 $ 252 Term loan B due 2028 509 510 Senior notes due 2029 520 520 Revolving credit facility maturing 2026 — — Finance lease obligations 28 20 Other 31 33 Principal debt balance 1,337 1,335 Debt issuance costs and unamortized discounts ( 22 ) ( 23 ) Less: current maturities ( 38 ) ( 35 ) Total Long-term Debt $ 1,277 $ 1,277 As of March 31, 2023, the Company had no outstanding borrowings under its Revolver. However, the Company utilized $ 2 million of the Revolver to issue letters of credit as of March 31, 2023. The net Revolver available to be drawn upon as of March 31, 2023 was $ 548 million. At March 31, 2023, the Company was in compliance with all debt covenants related to the borrowings in the table above. Note 8 – Financial Instruments The Company is a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As a part of the Company's foreign exchange risk management strategy, the Company uses derivative instruments, primarily forward contracts, to hedge the funding of foreign entities which have a non-dollar functional currency, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. At March 31, 2023 and December 31, 2022, the Company had outstanding forward exchange contracts with gross notional values of $ 99 million and $ 104 million, respectively. At March 31, 2023, approximately 59 % of these contracts mature within three months, 17 % in three to six months, 18 % in six to twelve months and 6 % in greater than twelve months. Most of these foreign currency derivative contracts are designated as cash flow hedges and did not have a material impact on the Company's balance sheet, income statement or cash flows for the periods presented. Refer to Note 9 – Fair Value of Financial Assets and Liabilities for additional information regarding the fair value of the Company's foreign exchange forward contracts. CNDT Q1 2023 Form 10-Q 13 Table of Contents Note 9 – Fair Value of Financial Assets and Liabilities Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP established a hierarchy framework to classify the fair value based on the observability of significant inputs to the measurement. The levels of the fair value hierarchy are as follows: Level 1: Fair value is determined using an unadjusted quoted price in an active market for identical assets or liabilities. Level 2: Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. Level 3: Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Summary of Financial Assets and Liabilities Accounted for at Fair Value on a Recurring Basis The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases was Level 2. (in millions) March 31, 2023 December 31, 2022 Assets: Foreign exchange contract - forward $ 1 $ — Total Assets $ 1 $ — Liabilities: Foreign exchange contracts - forward $ — $ 1 Total Liabilities $ — $ 1 Summary of Other Financial Assets and Liabilities The estimated fair values of other financial assets and liabilities were as follows: March 31, 2023 December 31, 2022 (in millions) Carrying Amount Fair Value Carrying Amount Fair Value Liabilities: Long-term debt $ 1,277 $ 1,162 $ 1,277 $ 1,155 The fair value amounts for Cash and cash equivalents, Restricted cash, Accounts receivable, net and Short-term debt approximate carrying amounts due to the short-term maturities of these instruments. The fair value of Long-term debt was estimated using quoted market prices for identical or similar instruments (Level 2 inputs). Note 10 – Employee Benefit Plans The Company has post-retirement savings and investment plans in several countries, including the U.S., India and the Philippines. In many instances, employees participating in defined benefit pension plans that have been amended to freeze future service accruals were transitioned to an enhanced defined contribution plan. In these plans, employees are permitted to contribute a portion of their salaries and bonuses to the plans. The Company, at its discretion, matches a portion of employee contributions. The Company recognized an expense related to its defined contribution plans of $ 3 million and $ 5 million for the three months ended March 31, 2023 and 2022, respectively. The balance sheet and income statement impacts of any remaining defined benefit plans are immaterial for all periods presented in these Condensed Consolidated Financial Statements. CNDT Q1 2023 Form 10-Q 14 Table of Contents Note 11 – Accumulated Other Comprehensive Loss (AOCL) Below are the balances and changes in AOCL (1) : (in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total Balance at December 31, 2022 $ ( 472 ) $ 1 $ 5 $ ( 466 ) Other comprehensive income (loss) 17 1 — 18 Balance at March 31, 2023 $ ( 455 ) $ 2 $ 5 $ ( 448 ) (in millions) Currency Translation Adjustments Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Items Total Balance at December 31, 2021 $ ( 431 ) $ 2 $ — $ ( 429 ) Other comprehensive income (loss) ( 5 ) ( 1 ) — ( 6 ) Balance at March 31, 2022 $ ( 436 ) $ 1 $ — $ ( 435 ) __________ (1) All amounts are net of tax. Tax effects were immaterial. Note 12 – Contingencies and Litigation As more fully discussed below, the Company is involved in a variety of claims, lawsuits, investigations and proceedings concerning a variety of matters, including: governmental entity contracting, servicing and procurement law; intellectual property law; employment law; commercial and contracts law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing its litigation and regulatory matters using available information. The Company develops its view on estimated losses in consultation with outside counsel handling its defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in the Company's 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 in excess of any accrual for such matter or matters, this could have a material adverse effect on the Company's results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. The Company believes it has recorded adequate provisions for any such matters as of March 31, 2023. Litigation is inherently unpredictable, and it is not possible to predict the ultimate outcome of these matters and such outcome in any such matters could be more than any amounts accrued and could be material to the Company's results of operations, cash flows or financial position in any reporting period. Additionally, guarantees, indemnifications and claims arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, real estate, intellectual property (such as patents), environmental matters and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's Consolidated Financial position or liquidity. As of March 31, 2023, the Company had accrued its estimate of liability incurred under its indemnification arrangements and guarantees. CNDT Q1 2023 Form 10-Q 15 Table of Contents Litigation Against the Company Employees’ Retirement System of the Puerto Rico Electric Power Authority et al v. Conduent Inc. et al.: On March 8, 2019, a putative class action lawsuit alleging violations of certain federal securities laws in connection with our statements and alleged omissions regarding the Company's financial guidance and business and operations was filed against the Company, its former Chief Executive Officer, and its former Chief Financial Officer in the United States District Court for the District of New Jersey (the Court). The complaint seeks certification of a class of all persons who purchased or otherwise acquired the Company's securities from February 21, 2018 through November 6, 2018, and also seeks unspecified monetary damages, costs, and attorneys’ fees. The Company moved to dismiss the class action complaint in its entirety. In June 2020, the Court denied the motion to dismiss and allowed the claims to proceed. The Court granted Class Certification on February 28, 2022. Upon the substantial completion of document discovery, the parties agreed to engage in mediation, and the Court administratively terminated the litigation to permit those efforts to proceed. Without any admission of liability or damages, in the third quarter of 2022, the parties settled this matter following that mediation, and filed the necessary documentation for preliminary approval by the court, class notice, and the claims administration process. The Court granted preliminary approval of the settlement terms and related documentation on January 27, 2023, with a final Settlement Hearing scheduled for May 24, 2023. The Court's order notes that it "will likely be able to approve the proposed Settlement as fair, reasonable and adequate under Federal Rule of Civil Procedure 23(e)(2)." As a result, during the fourth quarter of 2022, the Company reversed the reserve pertaining to this matter. The Company maintains insurance that covers the costs arising out of this litigation and resulting settlement having met the deductible and other terms and conditions thereof. Skyview Capital LLC and Continuum Global Solutions, LLC v. Conduent Business Services, LLC: On February 3, 2020, plaintiffs Skyview LLC (Skyview) filed a lawsuit in the Superior Court of New York County, New York. The lawsuit relates to the sale of a portion of Conduent Business Service, LLC's (CBS) select standalone customer care call center business to plaintiffs, which sale closed in February 2019. Under the terms of the sale agreement, CBS received approximately $ 23 million of notes from plaintiffs (Notes). The lawsuit alleges various causes of action in connection with the acquisition, including: indemnification for breach of representation and warranty; indemnification for breach of contract and fraud. Plaintiffs allege that their obligation to mitigate damages and their contractual right of set-off permits them to withhold and deduct from any amounts that are owed to CBS under the Notes, and plaintiffs seek a judgement that they have no obligation to pay the Notes. On August 20, 2020, Conduent filed a counterclaim against Skyview seeking the outstanding balance on the Notes, the amounts owed for the Jamaica deferred closing, and other transition services agreement and late rent payment obligations. Conduent also moved to dismiss Skyview’s claims in 2020. In May 2021, the court denied the motion and allowed the claims to proceed. This matter has been proceeding through fact and expert discovery. Conduent denies all of the plaintiffs' allegations, believes that it has strong defenses to all of plaintiffs’ claims and will continue to defend the litigation vigorously. The Company is not able to determine or predict the ultimate outcome of this proceeding or reasonably provide an estimate or range of estimate of the possible outcome or loss, if any, in excess of currently recorded reserves. CNDT Q1 2023 Form 10-Q 16 Table of Contents Conduent Business Services, LLC v. Cognizant Business Services Corporation: On April 12, 2017, CBS filed a lawsuit against Cognizant Business Services Corporation (Cognizant) in the Supreme Court of New York County, New York. The lawsuit relates to the Amended and Restated Master Outsourcing Services Agreement effective as of October 24, 2012, and the service delivery contracts and work orders thereunder, between CBS and Cognizant, as amended and supplemented (Contract). The Contract contains certain minimum purchase obligations by CBS through the date of expiration. The lawsuit alleges that Cognizant committed multiple breaches of the Contract, including Cognizant’s failure to properly perform its obligations as subcontractor to CBS under CBS’s contract with the New York Department of Health to provide Medicaid Management Information Systems. In the lawsuit, CBS seeks damages in excess of $ 150 million. During the first quarter of 2018, CBS provided notice to Cognizant that it was terminating the Contract for cause and recorded in the same period certain charges associated with the termination. CBS also alleges that it terminated the Contract for cause, because, among other things, Cognizant violated the Foreign Corrupt Practices Act. In its answer, Cognizant asserted two counterclaims for breach of contract seeking recovery of damages in excess of $ 47 million, which includes amounts alleged not paid to Cognizant under the Contract and an alleged $ 25 million termination fee. Cognizant's second amended counterclaim increased Cognizant's damages to $ 89 million. The parties participated in a mediation in late February 2023, and this matter settled, following negotiations that continued thereafter. The parties executed the Settlement Agreement and Mutual Release on March 30, 2023, with no admission of liability or wrongdoing by either party. In April 2023, each side made reciprocal payments of $ 6 million to the other, with Conduent’s payment made toward the termination fee payable under the applicable service delivery contract. As a result of the settlement, during the first quarter of 2023, the Company adjusted the balance sheet amounts recorded pertaining to this matter. As such, the Company recognized a $ 17 million benefit in Cost of services (excluding depreciation and amortization) and a $ 26 million benefit in Litigation settlements (recoveries), net. Other Matters During the first quarter of 2022, the Company entered into settlement agreements with six of its insurers under its 2012–2013 errors and omission insurance policy in which the Company agreed to resolve its claims for insurance coverage in connection with the previously disclosed State of Texas matter that settled in February 2019, as included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. As a result of the settlement agreements entered with the insurers, in the three months ended March 31, 2022, the Company received an aggregate sum of $ 38 million, of which $ 14 million was recognized as defense costs recovery in Selling, general and administrative and $ 24 million was recognized in Litigation settlements (recoveries), net. Since 2014, Conduent Education Services, LLC, formerly Xerox Education Services LLC (CES), has cooperated with several federal and state agencies regarding a variety of matters, including CES' self-disclosure to the U.S. Department of Education (Department) and the Consumer Financial Protection Bureau (CFPB) that some third-party student loans under outsourcing arrangements for various financial institutions required adjustments. With the exception of one remaining state attorney general inquiry, the Company has resolved all investigations by the CFPB, several state agencies, the Department and the U.S. Department of Justice. The Company cannot provide assurance that the CFPB, another regulator, a financial institution on behalf of which CES serviced third-party student loans, or another party will not ultimately commence a legal action against CES in which fines, penalties or other liabilities are sought from CES. Nor is the Company able to predict the likely outcome of these matters, should any such matter be commenced, or reasonably provide an estimate or range of estimates of any loss in excess of currently recorded reserves. The Company could, in future periods, incur judgments or enter into settlements to resolve these potential matters for amounts in excess of current reserves and there could be a material adverse effect on the Company's results of operations, cash flows and financial position in the period in which such change in judgment or settlement occurs. Other Contingencies Certain contracts, primarily in the Company's Government and Transportation segments, require the Company to provide a surety bond or a letter of credit as a guarantee of performance. As of March 31, 2023, the Company had $ 631 million of outstanding surety bonds issued to secure its performance of contractual obligations with its clients and $ 91 million of outstanding letters of credit issued to secure the Company's performance of contractual obligations to its clients as well as other corporate obligations. In general, the Company would only be liable for these guarantees in the event of default in the Company's performance of its obligations under each contract. The Company believes it has sufficient capacity in the surety markets and liquidity from its cash flow and its various credit arrangements to allow it to respond to future requests for proposals that require such credit support. CNDT Q1 2023 Form 10-Q 17 Table of Contents Note 13 – Preferred Stock Series A Preferred Stock In December 2016, the Company issued 120,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $ 120 million and an initial fair value of $ 142 million. The convertible preferred stock earns quarterly cash dividends at a rate of 8 % per year ($ 9.6 million per year). Each share of convertible preferred stock is convertible at any time, at the option of the holder, into 44.9438 shares of common stock for a total of 5,393,000 shares (reflecting an initial conversion price of approximately $ 22.25 per share of common stock), subject to customary anti-dilution adjustments. Note 14 – Earnings (Loss) per Share The Company did not declare any common stock dividends in the periods presented. The following table sets forth the computation of basic and diluted earnings (loss) per share of common stock: Three Months Ended March 31, (in millions, except per share data in whole dollars and shares in thousands) 2023 2022 Basic Net Earnings (Loss) per Share: Net Income (Loss) $ ( 6 ) $ 136 Dividend - Preferred Stock ( 2 ) ( 2 ) Adjusted Net Income (Loss) Available to Common Shareholders - Basic $ ( 8 ) $ 134 Diluted Net Earnings (Loss) per Share: Net Income (Loss) $ ( 6 ) $ 136 Dividend - Preferred Stock ( 2 ) — Adjusted Net Income (Loss) Available to Common Shareholders - Diluted $ ( 8 ) $ 136 Weighted Average Common Shares Outstanding - Basic 218,410 215,503 Common Shares Issuable With Respect To: Restricted Stock And Performance Units / Shares — 2,994 8% Convertible Preferred Stock — 5,393 Weighted Average Common Shares Outstanding - Diluted 218,410 223,890 Net Earnings (Loss) per Share: Basic $ ( 0.04 ) $ 0.62 Diluted $ ( 0.04 ) $ 0.61 The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive (shares in thousands): Restricted stock and performance shares/units 5,574 2,698 Convertible preferred stock 5,393 — Total Anti-Dilutive and Contingently Issuable Securities 10,967 2,698 CNDT Q1 2023 Form 10-Q 18 Table of Contents Note 15 – Supplementary Financial Information The components of Other assets and Other liabilities were as follows: (in millions) March 31, 2023 December 31, 2022 Other Current Assets Prepaid expenses $ 101 $ 88 Income taxes receivable 40 41 Value-added tax (VAT) receivable 11 10 Restricted cash 21 16 Current portion of capitalized cloud computing implementation costs, net 4 5 Other 100 82 Total Other Current Assets $ 277 $ 242 Other Current Liabilities Accrued liabilities $ 190 $ 211 Litigation related accruals 21 37 Current operating lease liabilities 55 57 Restructuring liabilities 26 10 Income tax payable 2 2 Other taxes payable 15 16 Accrued interest 14 6 Other 52 43 Total Other Current Liabilities $ 375 $ 382 Other Long-term Assets Internal use software, net $ 188 $ 189 Deferred contract costs, net 80 82 Product software, net 104 110 Cloud computing implementation costs, net 3 4 Deferred tax assets 30 20 Other 89 84 Total Other Long-term Assets $ 494 $ 489 Other Long-term Liabilities Income tax liabilities 8 7 Unearned income 40 42 Other 22 20 Total Other Long-term Liabilities $ 70 $ 69 Note 16 – Related Party Transactions In the normal course of business, the Company provides services to, and purchases from, certain related parties with the same shareholders. The services provided to these entities included those related to human resources, end-user support and other services and solutions. The purchases from these entities included office equipment and related services and supplies. Revenue and purchases from these entities were included in Revenue and Costs of services or Selling, general and administrative, respectively, on the Company's Condensed Consolidated Statements of Income (Loss). CNDT Q1 2023 Form 10-Q 19 Table of Contents Transactions with related parties were as follows: Three Months Ended March 31, (in millions) 2023 2022 Revenue from related parties $ 2 $ 3 Purchases from related parties $ 6 $ 5 The Company's receivable and payable balances with related party entities were not material as of March 31, 2023 and December 31, 2022. CNDT Q1 2023 Form 10-Q 20 Table of Contents