CONDUENT Inc 10-Q

ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED) CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions, except per share data) 2023 2022 2023 2022 Revenue $ 932 $ 977 $ 2,769 $ 2,872 Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 724 754 2,148 2,236 Selling, general and administrative (excluding depreciation and amortization) 115 117 344 332 Research and development (excluding depreciation and amortization) 2 2 5 5 Depreciation and amortization 81 54 199 168 Restructuring and related costs 7 4 49 24 Interest expense 28 22 82 59 Goodwill impairment 287 — 287 — (Gain) loss on divestitures and transaction costs, net 3 1 8 ( 159 ) Litigation settlements (recoveries), net — — ( 22 ) ( 31 ) Other (income) expenses, net ( 2 ) — ( 3 ) — Total Operating Costs and Expenses 1,245 954 3,097 2,634 Income (Loss) Before Income Taxes ( 313 ) 23 ( 328 ) 238 Income tax expense (benefit) ( 24 ) 8 ( 26 ) 87 Net Income (Loss) $ ( 289 ) $ 15 $ ( 302 ) $ 151 Net Income (Loss) per Share: Basic $ ( 1.34 ) $ 0.06 $ ( 1.42 ) $ 0.67 Diluted $ ( 1.34 ) $ 0.06 $ ( 1.42 ) $ 0.66 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 2023 Form 10-Q 3 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Net Income (Loss) $ ( 289 ) $ 15 $ ( 302 ) $ 151 Other Comprehensive Income (Loss), Net (1) Currency translation adjustments, net ( 18 ) ( 37 ) 3 ( 82 ) Unrecognized gains (losses), net ( 1 ) ( 1 ) — ( 2 ) Other Comprehensive Income (Loss), Net ( 19 ) ( 38 ) 3 ( 84 ) Comprehensive Income (Loss), Net $ ( 308 ) $ ( 23 ) $ ( 299 ) $ 67 __________ (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 Q3 2023 Form 10-Q 4 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in millions, except share data in thousands) September 30, 2023 December 31, 2022 Assets Cash and cash equivalents $ 451 $ 582 Accounts receivable, net 612 630 Contract assets 197 171 Other current assets 275 242 Total current assets 1,535 1,625 Land, buildings and equipment, net 241 266 Operating lease right-of-use assets 202 197 Intangible assets, net 34 39 Goodwill 668 955 Other long-term assets 466 489 Total Assets $ 3,146 $ 3,571 Liabilities and Equity Current portion of long-term debt $ 40 $ 35 Accounts payable 166 228 Accrued compensation and benefits costs 195 197 Unearned income 99 81 Other current liabilities 305 382 Total current liabilities 805 923 Long-term debt 1,266 1,277 Deferred taxes 61 83 Operating lease liabilities 167 160 Other long-term liabilities 85 69 Total Liabilities 2,384 2,512 Contingencies (See Note 14) Series A convertible preferred stock 142 142 Common stock 2 2 Treasury stock, at cost ( 7 ) — Additional paid-in capital 3,937 3,924 Retained earnings (deficit) ( 2,852 ) ( 2,543 ) Accumulated other comprehensive loss ( 463 ) ( 466 ) Total Conduent Inc. Equity 617 917 Noncontrolling Interest 3 — Total Equity 620 917 Total Liabilities and Equity $ 3,146 $ 3,571 Shares of common stock issued and outstanding 216,287 218,348 Shares of series A convertible preferred stock issued and outstanding 120 120 Shares of common stock held in treasury 2,226 — The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 2023 Form 10-Q 5 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, (in millions) 2023 2022 Cash Flows from Operating Activities: Net income (loss) $ ( 302 ) $ 151 Adjustments required to reconcile net income (loss) to cash flows from operating activities: Depreciation and amortization 199 168 Contract inducement amortization 3 2 Deferred income taxes ( 23 ) 43 Goodwill impairment 287 — Amortization of debt financing costs 3 3 (Gain) loss on divestitures and sales of fixed assets, net — ( 166 ) Stock-based compensation 13 15 Changes in operating assets and liabilities: Accounts receivable 19 24 Other current and long-term assets ( 115 ) ( 116 ) Accounts payable and accrued compensation and benefits costs ( 55 ) 6 Other current and long-term liabilities ( 36 ) ( 33 ) Net change in income tax assets and liabilities ( 26 ) ( 4 ) Net cash provided by (used in) operating activities ( 33 ) 93 Cash Flows from Investing Activities: Cost of additions to land, buildings and equipment ( 33 ) ( 62 ) Cost of additions to internal use software ( 31 ) ( 48 ) Proceeds from divestitures — 326 Net cash provided by (used in) investing activities ( 64 ) 216 Cash Flows from Financing Activities: Payments on revolving credit facility — ( 100 ) Payments on debt ( 30 ) ( 24 ) Treasury stock purchases ( 7 ) — Taxes paid for settlement of stock-based compensation ( 7 ) ( 1 ) Dividends paid on preferred stock ( 7 ) ( 7 ) Contribution from noncontrolling interest 3 — Net cash provided by (used in) financing activities ( 48 ) ( 132 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 2 ( 10 ) Increase (decrease) in cash, cash equivalents and restricted cash ( 143 ) 167 Cash, Cash Equivalents and Restricted Cash at Beginning of Period 598 420 Cash, Cash Equivalents and Restricted Cash at End of period (1) $ 455 $ 587 ___________ (1) Includes $ 4 million and $ 10 million of restricted cash as of September 30, 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 Q3 2023 Form 10-Q 6 Table of Contents CONDUENT INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) Three Months Ended September 30, 2023 (in millions) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Non-controlling Interest Shareholders' Equity Balance at June 30, 2023 $ 2 $ ( 1 ) $ 3,931 $ ( 2,561 ) $ ( 444 ) $ — $ 927 Dividends - preferred stock, $ 20 /share — — — ( 2 ) — — ( 2 ) Stock incentive plans, net — — 6 — — — 6 Treasury stock purchases — ( 6 ) — — — — ( 6 ) Contribution from noncontrolling interest — — — — — 3 3 Comprehensive Income (Loss): Net Income (Loss) — — — ( 289 ) — — ( 289 ) Other comprehensive income (loss), net — — — — ( 19 ) — ( 19 ) Total Comprehensive Income (Loss), Net — — — ( 289 ) ( 19 ) — ( 308 ) Balance at September 30, 2023 $ 2 $ ( 7 ) $ 3,937 $ ( 2,852 ) $ ( 463 ) $ 3 $ 620 Three Months Ended September 30, 2022 (in millions) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Non-controlling Interest Shareholders' Equity Balance at June 30, 2022 $ 2 $ — $ 3,918 $ ( 2,220 ) $ ( 475 ) $ — $ 1,225 Dividends - preferred stock, $ 20 /share — — — ( 2 ) — — ( 2 ) Stock incentive plans, net — — 6 — — — 6 Treasury stock purchases — — — — — — — Contribution from noncontrolling interest — — — — — — — Comprehensive Income (Loss): Net Income (Loss) — — — 15 — — 15 Other comprehensive income (loss), net — — — — ( 38 ) — ( 38 ) Total Comprehensive Income (Loss), Net — — — 15 ( 38 ) — ( 23 ) Balance at September 30, 2022 $ 2 $ — $ 3,924 $ ( 2,207 ) $ ( 513 ) $ — $ 1,206 Nine Months Ended September 30, 2023 (in millions) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Non-controlling Interest Shareholders' Equity Balance at December 31, 2022 $ 2 $ — $ 3,924 $ ( 2,543 ) $ ( 466 ) $ — $ 917 Dividends - preferred stock, $ 60 /share — — — ( 7 ) — — ( 7 ) Stock incentive plans, net — — 13 — — — 13 Treasury stock purchases — ( 7 ) — — — — ( 7 ) Contribution from noncontrolling interest — — — — — 3 3 Comprehensive Income (Loss): Net Income (Loss) — — — ( 302 ) — — ( 302 ) Other comprehensive income (loss), net — — — — 3 — 3 Total Comprehensive Income (Loss), Net — — — ( 302 ) 3 — ( 299 ) Balance at September 30, 2023 $ 2 $ ( 7 ) $ 3,937 $ ( 2,852 ) $ ( 463 ) $ 3 $ 620 Nine Months Ended September 30, 2022 (in millions) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Deficit) AOCL (1) Non-controlling Interest Shareholders' Equity Balance at December 31, 2021 $ 2 $ — $ 3,910 $ ( 2,351 ) $ ( 429 ) $ — $ 1,132 Dividends - preferred stock, $ 60 /share — — — ( 7 ) — — ( 7 ) Stock incentive plans, net — — 14 — — — 14 Treasury stock purchases — — — — — — — Contribution from noncontrolling interest — — — — — — — Comprehensive Income (Loss): Net Income (Loss) — — — 151 — — 151 Other comprehensive income (loss), net — — — — ( 84 ) — ( 84 ) Total Comprehensive Income (Loss), Net — — — 151 ( 84 ) — 67 Balance at September 30, 2022 $ 2 $ — $ 3,924 $ ( 2,207 ) $ ( 513 ) $ — $ 1,206 ___________ (1) AOCL - Accumulated other comprehensive loss. Refer to Note 13 – Accumulated Other Comprehensive Loss for the components of AOCL. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. CNDT Q3 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. The Company leverages cloud computing, artificial intelligence, machine learning, automation and advanced analytics to deliver mission-critical solutions. 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 (the "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 November 1, 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 September 30, 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 Q3 2023 Form 10-Q 8 Table of Contents Summary of Significant Accounting Policies There have been no changes to the Company's Significant Accounting Policies as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 other than the addition of policies related to a share repurchase program and Noncontrolling interest as described below. Share Repurchase Program On May 16, 2023, the Board of Directors authorized a share repurchase program, granting approval for the Company to repurchase up to $ 75 million of its common stock over the next three years . The Company has the discretion to repurchase shares periodically through open market transactions and may include Rule 10b5-1 trading plans. This share repurchase program does not obligate the Company to acquire a specific number of shares and the program may be modified, suspended or discontinued at any time at the Company’s discretion without prior notice. The Company holds repurchased shares of common stock as treasury stock. The Company accounts for treasury stock under the cost method and includes treasury stock as a component of shareholders' equity. The Company accrues the cost of repurchased shares and excludes such shares from the calculation of basic and diluted earnings per share, as of the trade date. The Company recognizes a liability for share repurchases which have not settled and for which cash has not been paid in Other current liabilities on the Company's Condensed Consolidated Balance Sheets. Noncontrolling Interest The Company's Consolidated Financial Statements include the historical basis of assets, liabilities, revenues and expenses of the individual businesses of the Company, including joint ventures over which the Company has a controlling financial interest. Control is based on ownership interest. The ownership interest held by an owner other than the Company in a less than wholly owned subsidiary is classified as a non-controlling interest. Net income (loss) is allocated to the noncontrolling interest based on ownership interest. In May 2023, the Company signed a new customer contract with the State of Victoria, Australia to provide the next generation of the state's public transport ticketing system. As a result, the Company and Convergint Australia Pty Ltd (“Convergint”) entered into a shareholder agreement to form Conduent Victoria Ticketing System Pty Ltd (“Conduent Victoria”). The Company holds an 80 % equity investment in Conduent Victoria, while the remaining 20 % is owned by Convergint. For the three and nine months ended September 30, 2023, noncontrolling interest in Conduent Victoria was not material to the Company's Condensed Consolidated Statements of Income (Loss) or Condensed Consolidated Statements of Comprehensive Income (Loss) and, therefore, the Company did not present any separate disclosures for such noncontrolling interest in those statements. 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. CNDT Q3 2023 Form 10-Q 9 Table of Contents 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 September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Commercial: Customer experience management $ 144 $ 162 $ 463 $ 468 Business operations solutions 126 138 388 415 Healthcare claims and administration solutions 87 100 266 278 Human capital solutions 108 104 327 325 Total Commercial 465 504 1,444 1,486 Government: Government healthcare solutions 159 150 453 438 Government services solutions 131 141 371 418 Total Government 290 291 824 856 Transportation: Road usage charging & management solutions 81 87 237 244 Transit solutions 61 55 157 161 Curbside management solutions 18 22 57 63 Public safety solutions 15 16 44 49 Commercial vehicles 2 2 6 6 Total Transportation 177 182 501 523 Divestitures — — — 7 Total Consolidated Revenue $ 932 $ 977 $ 2,769 $ 2,872 Timing of Revenue Recognition: Point in time $ 25 $ 37 $ 76 $ 82 Over time 907 940 2,693 2,790 Total Revenue $ 932 $ 977 $ 2,769 $ 2,872 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. CNDT Q3 2023 Form 10-Q 10 Table of Contents The following table provides information about the balances of the Company's contract assets, unearned income and receivables from contracts with customers: (in millions) September 30, 2023 December 31, 2022 Contract Assets (Unearned Income) Current contract assets $ 197 $ 171 Long-term contract assets (1) 11 12 Current unearned income ( 99 ) ( 81 ) Long-term unearned income (2) ( 55 ) ( 42 ) Net Contract Assets $ 54 $ 60 Accounts receivable, net $ 612 $ 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 $ 8 million and $ 50 million were recognized during the three and nine months ended September 30, 2023, respectively, related to the Company's unearned income at December 31, 2022. Revenues of $ 14 million and $ 67 million were recognized during the three and nine months ended September 30, 2022, respectively, 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 and nine months ended September 30, 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 September 30, 2023 was approximately $ 1.6 billion. The Company expects to recognize approximately 62 % 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 (the "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. 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. CNDT Q3 2023 Form 10-Q 11 Table of Contents 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 September 30, (in millions) Commercial Government Transportation Divestitures Unallocated Costs Total 2023 Revenue $ 465 $ 290 $ 177 $ — $ — $ 932 Segment profit (loss) $ 6 $ 84 $ ( 4 ) $ — $ ( 75 ) $ 11 2022 Revenue $ 504 $ 291 $ 182 $ — $ — $ 977 Segment profit (loss) $ 44 $ 79 $ 16 $ — $ ( 87 ) $ 52 Nine Months Ended September 30, (in millions) Commercial Government Transportation Divestitures Unallocated Costs Total 2023 Revenue $ 1,444 $ 824 $ 501 $ — $ — $ 2,769 Segment profit (loss) $ 87 $ 224 $ ( 9 ) $ — $ ( 224 ) $ 78 2022 Revenue $ 1,486 $ 856 $ 523 $ 7 $ — $ 2,872 Segment profit (loss) $ 94 $ 224 $ 40 $ 2 $ ( 218 ) $ 142 (in millions) Three Months Ended September 30, Nine Months Ended September 30, Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2023 2022 2023 2022 Income (Loss) Before Income Taxes $ ( 313 ) $ 23 $ ( 328 ) $ 238 Reconciling items: Amortization of acquired intangible assets 1 2 5 11 Restructuring and related costs 7 4 49 24 Interest expense 28 22 82 59 Goodwill impairment 287 — 287 — (Gain) loss on divestitures and transaction costs, net 3 1 8 ( 159 ) Litigation settlements (recoveries), net — — ( 22 ) ( 31 ) Other (income) expenses, net ( 2 ) — ( 3 ) — Segment Profit (Loss) $ 11 $ 52 $ 78 $ 142 Refer to Note 3 – Revenue for additional information on disaggregated revenues of the reportable segments. Note 5 – Divestitures Announced Transfer of BenefitWallet Portfolio In September 2023, the Company entered into a Custodial Transfer and Asset Purchase Agreement to transfer its BenefitWallet health savings account and medical savings account portfolio (collectively, the "Portfolio") to HealthEquity, Inc. ("HealthEquity"). The transfer is expected to close in multiple tranches during the first half of 2024 and is subject to the satisfaction of certain customary closing conditions. As of September 30, 2023, there were no asset or liability balances related to the Portfolio that would require disclosure as assets and liabilities held for sale on the Company's Condensed Consolidated Balance Sheet. The Portfolio generated revenue of $ 32 million and $ 95 million in the three and nine months ended September 30, 2023, respectively and $ 20 million and $ 46 million in the three and nine months ended September 30, 2022, respectively. CNDT Q3 2023 Form 10-Q 12 Table of Contents Completed 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 nine months ended September 30, 2022. Note 6 – Software, Net Internal Use and Product Software Internal use and Product software are included in Other long-term assets on the Company's Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, with their respective balances as follows: (in millions) September 30, 2023 December 31, 2022 Internal use software, at cost $ 636 $ 621 Accumulated amortization and impairment ( 476 ) ( 432 ) Internal use software, net $ 160 $ 189 Product software, at cost $ 221 $ 207 Accumulated amortization and impairment ( 126 ) ( 97 ) Product software, net $ 95 $ 110 During the third quarter of 2023, the Company made a strategic decision to abandon an Internal use software project and a customer decided not to implement a Product software solution. Consequently, the Company recorded an impairment charge of $ 19 million and $ 6 million in the third quarter of 2023, respectively, for the previously capitalized software costs associated with these projects. The total impairment charge of $ 25 million related to these software projects are included in Depreciation and amortization line item on the Condensed Consolidated Statements of Income (Loss). Note 7 – Goodwill The following table presents the changes in the carrying amount of goodwill, by reportable segment: (in millions) Commercial Government Transportation Total Balance at December 31, 2022 $ 287 $ 611 $ 57 $ 955 Foreign currency translation — — — — Impairment ( 287 ) — — ( 287 ) Balance at September 30, 2023 $ — $ 611 $ 57 $ 668 Gross goodwill $ 2,198 $ 1,365 $ 637 $ 4,200 Accumulated impairment ( 2,198 ) ( 754 ) ( 580 ) ( 3,532 ) Balance at September 30, 2023 $ — $ 611 $ 57 $ 668 Impairment Charge 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, which is reported within the Company’s Commercial segment. Since the Purchase Agreement does not represent a disposition of a business, no goodwill was allocated to the Portfolio related to this transaction. CNDT Q3 2023 Form 10-Q 13 Table of Contents 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. 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. Note 8 – 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 $ 3 million and $ 2 million for the three months ended September 30, 2023 and 2022, respectively, and $ 7 million and $ 9 million for the nine months ended September 30, 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 nine months ended September 30, 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 25 18 7 50 Changes in estimates ( 1 ) — — ( 1 ) Total Net Current Period Charges (1) 24 18 7 49 Charges against reserve and currency ( 24 ) ( 17 ) ( 7 ) ( 48 ) Accrued Balance at September 30, 2023 $ 10 $ 1 $ — $ 11 (in millions) Severance and Related Costs Termination and Other Costs Asset Impairments Total Accrued Balance at December 31, 2021 $ 5 $ 1 $ — $ 6 Provision 4 13 6 23 Changes in estimates ( 1 ) — — ( 1 ) Total Net Current Period Charges (1) 3 13 6 22 Charges against reserve and currency ( 7 ) ( 14 ) ( 6 ) ( 27 ) Accrued Balance at September 30, 2022 $ 1 $ — $ — $ 1 __________ (1) Represents amounts recognized within the Consolidated Statements of Income (Loss) for the years shown. During the three and nine months ended September 30, 2023, the Company incurred $ 0 million and $ 6 million, respectively, of professional support costs associated with bringing certain technology functions in-house. CNDT Q3 2023 Form 10-Q 14 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 September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Commercial $ 2 $ 1 $ 25 $ 2 Government — — — — Transportation — — — — Divestitures — — — — Unallocated Costs (1) 5 3 24 20 Total Net Restructuring Charges $ 7 $ 4 $ 49 $ 22 __________ (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 9 – Debt Long-term debt was as follows: (in millions) September 30, 2023 December 31, 2022 Term loan A due 2026 $ 242 $ 252 Term loan B due 2028 506 510 Senior notes due 2029 520 520 Revolving credit facility maturing 2026 — — Finance lease obligations 30 20 Other 28 33 Principal debt balance 1,326 1,335 Debt issuance costs and unamortized discounts ( 20 ) ( 23 ) Less: current maturities ( 40 ) ( 35 ) Total Long-term Debt $ 1,266 $ 1,277 As of September 30, 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 September 30, 2023. The net Revolver available to be drawn upon as of September 30, 2023 was $ 548 million. At September 30, 2023, the Company was in compliance with all debt covenants related to the borrowings in the table above. Note 10 – 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 September 30, 2023 and December 31, 2022, the Company had outstanding forward exchange contracts with gross notional values of $ 143 million and $ 104 million, respectively. At September 30, 2023, approximately 68 % of these contracts mature within three months, 12 % in three to six months, 14 % 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 11 – Fair Value of Financial Assets and Liabilities for additional information regarding the fair value of the Company's foreign exchange forward contracts. CNDT Q3 2023 Form 10-Q 15 Table of Contents Note 11 – 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) September 30, 2023 December 31, 2022 Assets: Foreign exchange contract - forward $ 1 $ — Total Assets $ 1 $ — Liabilities: Foreign exchange contracts - forward $ 1 $ 1 Total Liabilities $ 1 $ 1 Summary of Other Financial Assets and Liabilities The estimated fair values of other financial assets and liabilities were as follows: September 30, 2023 December 31, 2022 (in millions) Carrying Amount Fair Value Carrying Amount Fair Value Liabilities: Long-term debt $ 1,266 $ 1,192 $ 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 12 – 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 $ 2 million and $ 4 million for the three months ended September 30, 2023 and 2022, respectively, and $ 8 million and $ 12 million for the nine months ended September 30, 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 Q3 2023 Form 10-Q 16 Table of Contents Note 13 – 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) 3 — — 3 Balance at September 30, 2023 $ ( 469 ) $ 1 $ 5 $ ( 463 ) (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) ( 82 ) ( 2 ) — ( 84 ) Balance at September 30, 2022 $ ( 513 ) $ — $ — $ ( 513 ) __________ (1) All amounts are net of tax. Tax effects were immaterial. Note 14 – 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 September 30, 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 September 30, 2023, the Company had accrued its estimate of liability incurred under its indemnification arrangements and guarantees. CNDT Q3 2023 Form 10-Q 17 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 sought 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 sought 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, and conducted the final Settlement Hearing on May 24, 2023, at which time the settlement received final approval as did plaintiffs' fee request. The Court's preliminary order had previously noted 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)." 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. As a result, during the fourth quarter of 2022, the Company reversed the reserve pertaining to this matter. 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 (the "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. Fact and expert discovery has been concluded and the parties filed summary judgment motions on July 24, 2023. Briefings on the motions were completed as of September 29, 2023, and oral argument has been scheduled for December 5, 2023. Conduent denies all 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 Q3 2023 Form 10-Q 18 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 (the "Contract"). The Contract contains certain minimum purchase obligations by CBS through the date of expiration. The lawsuit alleged 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 sought 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 alleged 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 included 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 (the "Department") and the Consumer Financial Protection Bureau (the "CFPB") that some third-party student loans under outsourcing arrangements for various financial institutions required adjustments. Except for 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. There have been three consecutive quarters with no material activity. The Company is also nearing completion of the return of loan documentation to the pertinent lenders from the former business portfolio. 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. CNDT Q3 2023 Form 10-Q 19 Table of Contents 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 September 30, 2023, the Company had $ 637 million of outstanding surety bonds issued to secure its performance of contractual obligations with its clients and $ 184 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 . Note 15 – 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 16 – 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 September 30, Nine Months Ended September 30, (in millions, except per share data in whole dollars and shares in thousands) 2023 2022 2023 2022 Basic Net Earnings (Loss) per Share: Net Income (Loss) $ ( 289 ) $ 15 $ ( 302 ) $ 151 Dividend - Preferred Stock ( 2 ) ( 2 ) ( 7 ) ( 7 ) Adjusted Net Income (Loss) Available to Common Shareholders - Basic $ ( 291 ) $ 13 $ ( 309 ) $ 144 Diluted Net Earnings (Loss) per Share: Net Income (Loss) $ ( 289 ) $ 15 $ ( 302 ) $ 151 Dividend - Preferred Stock ( 2 ) ( 2 ) ( 7 ) ( 7 ) Adjusted Net Income (Loss) Available to Common Shareholders - Diluted $ ( 291 ) $ 13 $ ( 309 ) $ 144 Weighted Average Common Shares Outstanding - Basic 217,348 215,775 217,992 215,632 Common Shares Issuable With Respect To: Restricted Stock And Performance Units / Shares — 3,668 — 3,384 8% Convertible Preferred Stock — — — — Weighted Average Common Shares Outstanding - Diluted 217,348 219,443 217,992 219,016 Net Earnings (Loss) per Share: Basic $ ( 1.34 ) $ 0.06 $ ( 1.42 ) $ 0.67 Diluted $ ( 1.34 ) $ 0.06 $ ( 1.42 ) $ 0.66 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 12,297 5,717 12,297 5,705 Convertible preferred stock 5,393 5,393 5,393 5,393 Total Anti-Dilutive and Contingently Issuable Securities 17,690 11,110 17,690 11,098 CNDT Q3 2023 Form 10-Q 20 Table of Contents Note 17 – Supplementary Financial Information The components of Other assets and Other liabilities were as follows: (in millions) September 30, 2023 December 31, 2022 Other Current Assets Prepaid expenses $ 93 $ 88 Income taxes receivable 65 41 Value-added tax (VAT) receivable 8 10 Restricted cash 4 16 Other 105 87 Total Other Current Assets $ 275 $ 242 Other Current Liabilities Accrued liabilities to vendors $ 167 $ 211 Litigation related accruals 15 37 Current operating lease liabilities 56 57 Restructuring liabilities 11 10 Income tax payable — 2 Other taxes payable 16 16 Accrued interest 14 6 Other 26 43 Total Other Current Liabilities $ 305 $ 382 Other Long-term Assets Internal use software, net $ 160 $ 189 Deferred contract costs, net 101 82 Product software, net 95 110 Deferred tax assets 22 20 Other 88 88 Total Other Long-term Assets $ 466 $ 489 Other Long-term Liabilities Income tax liabilities 7 7 Unearned income 55 42 Other 23 20 Total Other Long-term Liabilities $ 85 $ 69 Note 18 – 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). Xerox Corporation ("Xerox") has historically been classified as a related party due to significant shares of both Xerox and the Company being held by entities controlled by one individual. As of September 28, 2023, Xerox is no longer considered a related party due to the disposition of all Xerox stock by these entities and, therefore, the Company will not consider transactions with Xerox after that date to be transactions with related parties. CNDT Q3 2023 Form 10-Q 21 Table of Contents Transactions with related parties were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Revenue from related parties $ 1 $ 2 $ 6 $ 8 Purchases from related parties $ 6 $ 7 $ 18 $ 20 The Company's receivable and payable balances with related party entities were not material as of September 30, 2023 and December 31, 2022. CNDT Q3 2023 Form 10-Q 22 Table of Contents