What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-08-02 · 118 added, 88 removed, 217 unchanged (49% of the section changed)

11 unchanged sentences

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 57,000 associates as of June 30, 2023, servicing customers from service centers in 25 countries.

We add momentum to our clients’ missions in many ways including delivering 43% 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 September 30, 2023, servicing customers from service centers in 26 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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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.

During the second quarter of 2023 we achieved the following:

During the first three quarters of 2023 we achieved the following:

• Continued to make progress in our portfolio rationalization strategy;

• Entered into an agreement to transfer our BenefitWallet portfolio.

We anticipate completing the transfer of this portfolio in the first half of 2024, with an estimated pre-tax gain of approximately $425 million;

• The Board of Directors authorized a share repurchase program, granting approval for us to repurchase up to $75 million of our common stock over the next three years (see additional information included in Part II, Item 2);

• Signed our largest TCV deal in the history of Conduent within our Transportation segment, growing our international presence in Australia;

• Positioned our digital payments offering, in partnership with BNY Mellon, to leverage the newly released FedNow SM capability and provide enhanced real-time payment coverage to our clients.

• Had significantly less client attrition in the quarter, progressing towards the 3% to 5% range articulated in the investor briefing, and drove our Net ARR activity metric higher;

• Continued to make progress in our portfolio rationalization strategy;

• On May 16, 2023, the Board of Directors authorized a share repurchase program, granting approval for us to repurchase up to $75 million of our common stock over the next three years.

See additional information included in Part II, Item 2.

Macroeconomic and Geopolitical Uncertainty

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Three Months Ended

June 30, 2023 vs.

September 30, 2023 vs.

(in millions) 2023 2022 $ Change % Change

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Interest expense 28 22 6 27 %

Goodwill impairment 287 — 287 n/m

(Gain) loss on divestitures and transaction costs, net 3 1 2 200 %

Litigation settlements (recoveries), net (1) (3) 2 (67) %

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

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

4 unchanged sentences

CNDT Q3 2023 Form 10-Q

Six Months Ended

June 30, 2023 vs.

Nine Months Ended

September 30, 2023 vs.

(in millions) 2023 2022 $ Change % Change

7 unchanged sentences

Interest expense 82 59 23 39 %

Goodwill impairment 287 — 287 n/m

(Gain) loss on divestitures and transaction costs, net 8 (159) 167 n/m

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Net Income (Loss) $ (302) $ 151 $ (453)

Revenue for the three months ended June 30, 2023 decreased moderately, compared to the prior year period, primarily due to lost business from prior periods, lower volumes in our Commercial segment and prior year non-repeating federal stimulus revenue in our Government segment, partially offset by higher interest rates positively impacting our Benefit Wallet business, new business ramp and higher volumes in our Government segment.

Revenue for the six months ended June 30, 2023 decreased, compared to the prior year period, primarily due to prior year 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 in the first quarter of 2023, partially offset by higher interest rates positively impacting our Benefit Wallet business and new business ramp.

Revenue for the three months ended September 30, 2023 decreased, compared to the prior year period, primarily due to lost business from prior periods and non-repeating items in the prior year including recognition of the revenue benefit associated with an annual minimum volume commitment contract with a large client in our Commercial segment and federal stimulus revenue in our Government segment.

These were partially offset by higher interest rates positively impacting our BenefitWallet business and new business ramp in our Government segment.

Revenue for the nine months ended September 30, 2023 decreased, compared to the prior year period, primarily due to lost business from prior periods, lower volumes in our Commercial segment, extended completion timelines to meet client requirements in our Transportation segment and the impact of an out of period adjustment in our Government segment in the first quarter of 2023 and non-repeating items in the prior year including recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client in our Commercial segment and federal stimulus revenue in our Government segment.

These were partially offset by higher interest rates positively impacting our BenefitWallet business and new business ramp.

Cost of Services (excluding depreciation and amortization)

Cost of services for the three months ended June 30, 2023 decreased, compared to the prior year period, due to favorable revenue mix.

Cost of services for the six months ended June 30, 2023 decreased, compared to the prior year period, 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.

Cost of services for the three months ended September 30, 2023 decreased, in line with the decline in revenue.

Cost of services for the nine months ended September 30, 2023 decreased, compared to the prior year period, 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 14 – 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 June 30, 2023 increased, compared to the prior year period, driven by higher variable employee costs and expense credits in the prior year, partially offset by cost efficiencies.

SG&A for the six months ended June 30, 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.

SG&A for the three months ended September 30, 2023 decreased, compared to the prior year period, driven by cost efficiencies.

SG&A for the nine months ended September 30, 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.

CNDT Q3 2023 Form 10-Q

Depreciation and Amortization

Depreciation and amortization for the three and six months ended June 30, 2023 increased compared to the prior year periods, driven by completed capital investments being placed into service.

Depreciation and amortization for the three and nine months ended September 30, 2023 increased compared to the prior year periods.

This increase was driven by the write-off of capitalized software costs totaling $25 million, stemming from management’s decision to abandon an internal use software product and a decision by a customer to not implement a product software solution.

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.

During the three and six months ended June 30, 2023, the Company incurred $2 million and $6 million, respectively, 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

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2023 2022 2023 2022

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

Severance and related costs for the six months ended June 30, 2023 include costs related to the closure of one of our Commercial segment operations in Europe.

Severance and related costs for the nine months ended September 30, 2023 include costs related to the closure of one of our Commercial segment operations in Europe.

Refer to Note 8 – Restructuring Programs and Related Costs to the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.

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

The increase in Interest expense for the three and six months ended June 30, 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.

The increase in Interest expense for the three and nine months ended September 30, 2023, compared to the prior year periods, was driven by higher interest rates on our variable rate debt, including finance leases and other debt, partially offset by a lower total outstanding debt balance.

Goodwill Impairment

The goodwill impairment for the three and nine months ended September 30, 2023 is related to the write-down of the carrying value of the Commercial reporting unit.

This resulted from the evaluation of goodwill triggered by entering into the Custodial Transfer and Asset Purchase Agreement to transfer our BenefitWallet health savings account and medical savings account portfolio.

Refer to Note 5 – Divestiture and Note 7 – Goodwill 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 gain of $166 million ($165 million in the first quarter of 2022 and $1 million in the second quarter of 2022).

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 for both years.

Litigation Settlements (Recoveries), Net

Litigation settlements (recoveries), net for the six months ended June 30, 2023 primarily consist of a $26 million reversal of reserves due to the settlement of the Cognizant matter.

Litigation settlements (recoveries), net for the six months ended June 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.

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

Litigation settlements (recoveries), net for the nine months ended September 30, 2023 primarily consist of a $26 million reversal of reserves due to the settlement of the Cognizant matter.

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.

CNDT Q3 2023 Form 10-Q

The effective tax rate for the three months ended June 30, 2023 was (3.3)%, compared to 99.6% for the three months ended June 30, 2022.

The June 30, 2023 rate was lower than the U.S.

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

The effective tax rate for the three months ended June 30, 2022 was higher than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income, state and local taxes, other non-deductible permanent differences, and valuation allowances, partially offset by tax credits.

Excluding the impact of discrete tax adjustments, amortization of intangible assets and restructuring costs, the normalized effective tax rate for the three months ended June 30, 2023 was 42.2%.

The normalized effective tax rate for the three months ended June 30, 2022 was 46.7%, predominantly due to excluding the impact of discrete tax adjustments, amortization of intangible assets, litigation reserves and restructuring costs.

The normalized effective tax rate for the three months ended June 30, 2023 was lower than the three months ended June 30, 2022, primarily due to the geographic mix of income.

The effective tax rate for the six months ended June 30, 2023 was 9.2%, compared to 37.0% for the six months ended June 30, 2022.

The June 30, 2023 rate was lower than the U.S.

statutory rate of 21%, primarily due to the geographic mix of income, valuation allowances, and state and local taxes on pre-tax losses.

The effective tax rate for the six months ended June 30, 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 the amortization of intangible assets, restructuring costs and litigation reserve releases, the normalized effective tax rate for the six months ended June 30, 2023 was 40.5%.

The normalized effective tax rate for the six months ended June 30, 2022 was 35.2%, 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 six months ended June 30, 2023 was lower than the six months ended June 30, 2022 due to the geographic mix of income and lower adjusted pre-tax income.

Refer to Note 14 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information.

The effective tax rate for the three months ended September 30, 2023 was 7.8%, compared to 33.8% for the three months ended September 30, 2022.

The September 30, 2023 rate was lower than the U.S.

statutory rate of 21% primarily due to permanently non-deductible amounts related to the book goodwill impairment and changes in the geographic mix of income.

The effective tax rate for the three months ended September 30, 2022 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 allowance, partially offset by changes in the geographic mix of income.

Excluding the impact of discrete tax adjustments, amortization of intangible assets, restructuring costs and goodwill impairment, the normalized effective tax rate for the three months ended September 30, 2023 was (6.1)%.

The rate is lower than the US statutory rate of 21% as a result of an adjusted pre-tax loss and higher tax expense on pre-tax income in certain jurisdictions.

The normalized effective tax rate for the three months ended September 30, 2022 was 27.5%, predominantly due to 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, 2023 was lower than the three months ended September 30, 2022 rate, primarily due to the geographic mix of income and lower adjusted pre-tax income.

The effective tax rate for the nine months ended September 30, 2023 was 7.8%, compared to 36.7% for the nine months ended September 30, 2022.

The September 30, 2023 rate was lower than the U.S.

statutory rate of 21%, primarily due to permanently non-deductible amounts related to the book goodwill impairment, the geographic mix of income and the charge for valuation allowances.

The effective tax rate for the nine months ended September 30, 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 Midas divestiture transaction, partially offset by the tax benefit of valuation allowances released due to the gain from this divestiture and tax credits.

Excluding the impact of the goodwill impairment, amortization of intangible assets, restructuring costs, litigation reserve releases and certain discrete tax items, the normalized effective tax rate for the nine months ended September 30, 2023 was (158.4)%.

The rate is anomalous due to small adjusted pre-tax loss and tax, which is a result of geographic mix of income and valuation allowances against losses in certain jurisdictions resulting in no tax benefit.

The normalized effective tax rate for the nine months ended September 30, 2022 was 32.4%, 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 nine months ended September 30, 2023 was lower than the nine months ended September 30, 2022 rate predominantly due to change in the geographic mix of income, valuation allowance and lower adjusted pre-tax income.

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

At both the European Union and Organization for Economic Co-operation and Development level, significant legislative developments are anticipated regarding global tax initiatives in the second half of this year.

At both the European Union and Organization for Economic Co-operation and Development level, significant developments are anticipated regarding global tax initiatives in the remainder of 2023 and into 2024.

The Company is monitoring such developments and assessing any potential impact and disclosure requirement.

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Divestitures includes our Midas business which was sold in the first quarter of 2022.

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

CNDT Q3 2023 Form 10-Q

Results of financial performance by segment were:

Three Months Ended

September 30,

(in millions) Commercial Government Transportation Divestitures Unallocated Costs Total

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

Six Months Ended

Nine Months Ended

September 30,

(in millions) Commercial Government Transportation Divestitures Unallocated Costs Total

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(in millions) Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

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

4 unchanged sentences

Interest expense 28 22 82 59

Goodwill impairment 287 — 287 —

(Gain) loss on divestitures and transaction costs 3 1 8 (159)

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Commercial Segment

Commercial revenue for the three and six months ended June 30, 2023 was substantially unchanged compared to the prior year periods, with higher interest rates positively impacting our Benefit Wallet business, lower volumes in certain industries of our client base, and new business substantially offsetting lost business.

Commercial revenue for the three and nine months ended September 30, 2023 declined compared to the prior year periods, driven by lower volumes in certain industries of our client base and non-repeating items in the prior year period, including recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client, partially offset by higher interest rates positively impacting our BenefitWallet business.

Segment Profit and Adjusted EBITDA

Increases in the Commercial segment profit, adjusted EBITDA and adjusted EBITDA margin for the three and six months ended June 30, 2023, compared to the prior year periods, were mainly driven by higher interest rates positively impacting our Benefit Wallet business and cost efficiency.

Commercial segment profit for the three and nine months ended September 30, 2023 decreased compared to the prior year periods and were impacted by the EBITDA drivers mentioned below as well as by a write-off of capitalized software totaling $25 million stemming from management’s decision to abandon an internal use software product and a decision by a customer to not implement a product software solution.

Commercial segment adjusted EBITDA and adjusted EBITDA margin for the three months ended September 30, 2023, decreased compared to the prior year period, driven by non-repeating items in the prior year period, including recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client.

These were partially offset by higher interest rates positively impacting our BenefitWallet business and cost efficiency.

Increases in the Commercial segment adjusted EBITDA and adjusted EBITDA margin for the nine months ended September 30, 2023, compared to the prior year periods were mainly driven by higher interest rates positively impacting our BenefitWallet business, partially offset by non-repeating items in the prior year period, including recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client.

Government Segment

Government revenue for the three months ended June 30, 2023 decreased compared to the prior year period primarily driven by lost business from prior years and non-repeating federal stimulus revenue in the second quarter of 2022, partially offset by the ramping of new business in Government Healthcare solutions, including the recognition of revenue that was previously constrained, and higher volumes in Government services solutions.

Government revenue for the six months ended June 30, 2023 decreased, compared to the prior year period, primarily driven by lost business from prior years, non-repeating federal stimulus revenue in the prior year and an out of period adjustment in Q1 2023, partially offset by the ramping of new business in Government Healthcare solutions, including the recognition of revenue that was previously constrained, and higher volumes in Government services solutions.

Segment Profit and Adjusted EBITDA

Government segment profit, adjusted EBITDA and adjusted EBITDA margin for the three months ended June 30, 2023 were substantially unchanged compared to the prior year period with increased depreciation negatively impacting profit.

The high margin non-repeating federal stimulus revenue in the second quarter of 2022 and lost business from prior years was offset by the fall through of the revenue recognized due to the recognition of revenue that was previously constrained, margin on higher volumes and cost efficiency.

Government segment profit and adjusted EBITDA for the six months ended June 30, 2023 were substantially unchanged compared to the prior year period with increased depreciation negatively impacting profit.

The $17 million reversal of reserves due to the settlement of the Cognizant matter, margin on higher volumes, fall through of the recognition of revenue that was previously constrained and cost efficiency, were offset by lost business, the high margin non-repeating federal stimulus revenue in the prior year and the out of period adjustment in the first quarter of 2023.

Adjusted EBITDA margin improved due to the substantially unchanged adjusted EBITDA resulting from items mentioned above on lower revenue.

Government revenue for the three months ended September 30, 2023 was substantially unchanged compared to the prior year period, with a contractual change to a client implementation positively impacting revenue recognition, higher volumes in Government services solutions and new business ramp being offset by lost business from prior periods.

Government revenue for the nine months ended September 30, 2023 decreased, compared to the prior year period, primarily driven by lost business from prior years, non-repeating federal stimulus revenue in the prior year and the impact of an out of period adjustment in our Government segment in the first quarter of 2023.

These were partially offset by the ramping of new business in Government Healthcare solutions and higher volumes in Government services solutions.

CNDT Q3 2023 Form 10-Q

Segment Profit and Adjusted EBITDA

Government segment profit, adjusted EBITDA and adjusted EBITDA margin for the three months ended September 30, 2023 increased compared to the prior year period due to a contractual change to a client implementation positively impacting revenue recognition.

Government segment profit for the nine months ended September 30, 2023 was substantially unchanged with the EBITDA variances described below being offset with higher depreciation driven by the deployment of our new modularized CMdS platform in our Government Heathcare Solutions business.

Government segment adjusted EBITDA and adjusted EBITDA margin for the nine months ended September 30, 2023 increased compared to the prior year period due primarily due to the $17 million reversal of reserves due to the settlement of the Cognizant matter, margin on higher volumes, a contractual change to a client implementation positively impacting revenue recognition and cost efficiency.

These were partially offset by lost business, the high margin non-repeating federal stimulus revenue in the prior year and the out of period adjustment in the first quarter of 2023.

Transportation Segment

Transportation revenue for the three months ended June 30, 2023 decreased compared to the prior year period, primarily driven by the completion of smaller projects and lower revenue recognition from larger implementations in our Transit solutions service offering and lost business from prior years, partially offset by new business.

Transportation revenue for the six months ended June 30, 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, the completion of smaller projects in our Transit solutions service offering and lost business from prior years, partially offset by new business.

Transportation revenue for the three months ended September 30, 2023 decreased compared to the prior year period, primarily driven by extended completion timelines to meet client requirements, which affected the recognition timeframe for revenue.

Transportation revenue for the nine months ended September 30, 2023 decreased compared to the prior year period, primarily driven by extended completion timelines to meet client requirements, which affected the recognition timeframe for revenue, the completion of smaller projects in our Transit solutions service offering and lost business from prior years, partially offset by new business.

Segment Profit and Adjusted EBITDA

Transportation segment profit, adjusted EBITDA and adjusted EBITDA margin for the three months ended June 30, 2023 decreased primarily due to the completion of smaller projects and lower revenue recognition from larger implementations in our Transit solutions service offering and lost business from prior years.

Transportation segment profit, adjusted EBITDA and adjusted EBITDA margin for the six months ended June 30, 2023 decreased primarily due to extended completion timelines on our larger implementations to meet client requirements, which affected the recognition timeframe for revenue and the completion of smaller projects in our Transit solutions service offering.

Transportation segment profit, adjusted EBITDA and adjusted EBITDA margin for the three and nine months ended September 30, 2023 decreased primarily due to extended completion timelines on our larger implementations to meet client requirements, which affected the recognition timeframe for revenue and the completion of smaller projects 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 six months ended June 30, 2023 was due to the sale of the Midas Suite of products.

The decline in revenue, segment profit and Adjusted EBITDA for the three and nine months ended September 30, 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 June 30, 2023 increased compared to the prior year period primarily due to technology supplier credits in the prior year, partially offset by progress with our efficiency initiatives.

Unallocated Costs for the six months ended June 30, 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 and technology supplier credits in the prior year, partially offset by progress with our efficiency initiatives.

Unallocated Costs for the three months ended September 30, 2023 decreased compared to the prior year period primarily due to lower variable compensation, healthcare and insurance costs as well as progress with our efficiency initiatives.

Unallocated Costs for the nine months ended September 30, 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.

CNDT Q3 2023 Form 10-Q

We use metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business.

We disclose these metrics to provide transparency in our performance trends.

We discuss certain key metrics, including Signings and Net ARR Activity below.

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.

Total Contract Value ("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.

For the three and six months ended June 30, 2023, the Company signed $208 million and $333 million of new business ACV, respectively.

New business Annual Contract Value ("ACV") is calculated as TCV divided by the contract term, in months, multiplied by 12 for an annual measure.

For the three and nine months ended September 30, 2023, the Company signed $154 million and $487 million of new business ACV, respectively.

Included in these amounts is ACV related to the May 2023 award of a significant contract in the Transportation segment.

CNDT Q2 2023 Form 10-Q

Signing information for the three and six months ended June 30, 2023 and 2022 is as follows:

Signing information for the three and nine months ended September 30, 2023 and 2022 is as follows:

Three Months Ended

June 30, 2023 vs.

September 30, 2023 vs.

($ in millions) 2023 (3)

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$ 96 $ 107 $ (11) (10) %

Six Months Ended

June 30, 2023 vs.

Nine Months Ended

September 30, 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 June 30, 2023 and 2022 was $20.7 billion and $22.0 billion, respectively.

CNDT Q3 2023 Form 10-Q

The total new business pipeline at the end of September 30, 2023 and 2022 was $23.4 billion and $24.0 billion, respectively.

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

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Net ARR Activity

The Net ARR Activity metric is defined as Projected Annual Recurring Revenue for contracts signed in the prior 12 months, less the annualized impact of any client losses, contractual volume and price changes, and other known impacts for which the Company was notified in that same time period, which could positively or negatively impact results.

Net ARR Activity is a metric is defined as Projected Annual Recurring Revenue for contracts signed in the prior 12 months, less the annualized impact of any client losses, contractual volume and price changes, and other known impacts for which the Company was notified in that same time period, which could positively or negatively impact results.

The metric annualizes the net impact to revenue.

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(in millions) Net ARR Activity metric

September 30, 2023 $ 103

June 30, 2023 137

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September 30, 2022 70

June 30, 2022 104

CNDT Q2 2023 Form 10-Q

Capital Resources and Liquidity

As of June 30, 2023 and December 31, 2022, total cash and cash equivalents were $500 million and $582 million, respectively.

As of September 30, 2023 and December 31, 2022, total cash and cash equivalents were $451 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.

The net amount available to be drawn upon under our revolving line of credit as of June 30, 2023, was $548 million.

As of June 30, 2023, our total debt outstanding was $1,336 million of which $41 million was due within one year.

The net amount available to be drawn upon under our revolving line of credit as of September 30, 2023, was $548 million.

As of September 30, 2023, our total principal debt outstanding was $1,326 million, of which $40 million was due within one year.

Refer to Note 9 – Debt in the Condensed Consolidated Financial Statements for additional debt information.

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

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 line of credit will continue to provide sufficient financial resources to meet our expected business obligations for at least the next twelve months.

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The following table summarizes our cash flows, as reported in our Condensed Consolidated Statement of Cash Flows in the accompanying Condensed Consolidated Financial Statements:

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) 2023 2022 Better (Worse)

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Operating activities

The net increase in cash used in operating activities of $17 million, compared to the prior year period, was primarily related to the absence of the $38 million of insurance recoveries related to the State of Texas matter and higher cash interest payments, partially offset by improved working capital performance and lower cash income taxes.

The net increase in cash used in operating activities of $126 million, compared to the prior year period, was primarily related to the negative impact of the sales of accounts receivable of $49 million, the absence of the $38 million of insurance recoveries related to the State of Texas matter, higher net cash interest payments, lower days payable outstanding and higher restructuring payments, all partially offset by lower cash income taxes.

CNDT Q3 2023 Form 10-Q

Investing activities

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The transactions under this agreement are treated as sales and are accounted for as reductions 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 six months ended June 30, 2023 and 2022 was $(24) million and $(14) million, respectively.

Cash proceeds from this arrangement are included in cash flow from operating activities in the Condensed 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, 2023 and 2022 was $(14) million and $35 million, respectively.

Material Cash Requirements from Contractual Obligations

The Company believes its balances of cash and cash equivalents, which totaled $500 million as of June 30, 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.

CNDT Q2 2023 Form 10-Q

At June 30, 2023, 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 $451 million as of September 30, 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 September 30, 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.

Critical Accounting Estimates and Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S.

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.

The preparation of financial statements in conformity with U.S.

GAAP requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Condensed Consolidated Financial Statements and notes thereto.

There have been no significant changes during the six months ended June 30, 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.

Except as set forth below, there have been no significant changes during the nine months ended September 30, 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.

Impairment of Goodwill

In September 2023, the Company entered into a Custodial Transfer and Asset Purchase Agreement (the "Purchase Agreement") to transfer its BenefitWallet health savings account and medical savings account portfolio (collectively, the "Portfolio"), which is reported within the Company’s Commercial segment.

Since the Purchase Agreement did not represent a disposition of a business, no goodwill was allocated to the Portfolio related to this transaction.

Consequently, the Purchase Agreement was identified as a triggering event for the Commercial reporting unit that required the Company to evaluate goodwill for impairment.

This evaluation resulted in a full impairment of the Commercial reporting unit's goodwill, totaling $287 million.

The impairment charge was primarily driven by the Purchase Agreement, and was recognized during the quarter ended September 30, 2023.

The fair values of the goodwill impairment charge were estimated based on a determination of the implied fair value of goodwill, leveraging the results from the Income Approach and Market Approach, and are designated as level 3 of the fair value hierarchy.

CNDT Q3 2023 Form 10-Q

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

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