CONDUENT Inc 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in six sections: • Overview; • Financial Information and Analysis of Results of Operations; • Metrics; • Capital Resources and Liquidity; • Critical Accounting Estimates and Policies; and • Recent Accounting Changes. The MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes. Overview As a global technology-led business process solutions company, we deliver digital business solutions and services spanning the commercial, government and transportation spectrum – creating exceptional outcomes for our clients and the millions of people who count on them. We leverage cloud computing, artificial intelligence, machine learning, automation and advanced analytics to deliver mission-critical services. 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% 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. We organize and manage our businesses through three reportable segments. • Commercial – Our Commercial segment provides business process services and customized solutions to clients in a variety of industries. Across the Commercial segment, we operate on our clients’ behalf to deliver mission-critical solutions and services to reduce costs, improve efficiencies and enable revenue growth for our clients and their consumers and employees. • Government – Our Government segment provides government-centric business process services to U.S. federal, state and local and foreign governments for public assistance, health services, program administration, transaction processing and payment services. Our solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations. • Transportation – Our Transportation segment provides systems and support, as well as revenue-generating services, to government clients. On behalf of government agencies and authorities in the transportation industry, we deliver mission-critical mobility and payment solutions that improve automation, interoperability and decision-making to streamline operations, increase revenue and reduce congestion while creating safer communities and seamless travel experiences for consumers. CNDT Q3 2023 Form 10-Q 23 Table of Contents Executive Summary During the first quarter of 2023, we held an investor briefing to communicate the next chapter in the Conduent journey. Our intense emphasis on growth, quality, and efficiency, beginning in the first quarter of 2020, resulted in a strengthened foundation and we remain focused on accelerating growth and enhancing value for our stakeholders. We intend to achieve this by doubling down on key themes outlined in the briefing, as well as through a process of portfolio rationalization, divesting certain solutions which have either scarcity value outside of Conduent or are capital intensive relative to their growth opportunity, enabling management bandwidth and capital investments to be focused on solutions where we believe we have competitive advantages or higher growth expectations. This renewed portfolio focus will result in a more nimble and faster growing Conduent with modest levels of net leverage, enhanced valuation, and significant excess capital to be deployed over time. 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; and • 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. Macroeconomic and Geopolitical Uncertainty Given the nature of our business and our global operations, the effects of global macroeconomic and geopolitical uncertainty could have a materially adverse effect on our business, results of operations and financial condition. Financial Information and Analysis of Results of Operations Three Months Ended September 30, 2023 vs. 2022 (in millions) 2023 2022 $ Change % Change Revenue $ 932 $ 977 $ (45) (5) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 724 754 (30) (4) % Selling, general and administrative (excluding depreciation and amortization) 115 117 (2) (2) % Research and development (excluding depreciation and amortization) 2 2 — — % Depreciation and amortization 81 54 27 50 % Restructuring and related costs 7 4 3 75 % 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 — — — n/m Other (income) expenses, net (2) — (2) n/m Total Operating Costs and Expenses 1,245 954 291 Income (Loss) Before Income Taxes (313) 23 (336) Income tax expense (benefit) (24) 8 (32) Net Income (Loss) $ (289) $ 15 $ (304) CNDT Q3 2023 Form 10-Q 24 Table of Contents Nine Months Ended September 30, 2023 vs. 2022 (in millions) 2023 2022 $ Change % Change Revenue $ 2,769 $ 2,872 $ (103) (4) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 2,148 2,236 (88) (4) % Selling, general and administrative (excluding depreciation and amortization) 344 332 12 4 % Research and development (excluding depreciation and amortization) 5 5 — — % Depreciation and amortization 199 168 31 18 % Restructuring and related costs 49 24 25 104 % 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 Litigation settlements (recoveries), net (22) (31) 9 (29) % Other (income) expenses, net (3) — (3) n/m Total Operating Costs and Expenses 3,097 2,634 463 Income (Loss) Before Income Taxes (328) 238 (566) Income tax expense (benefit) (26) 87 (113) Net Income (Loss) $ (302) $ 151 $ (453) Revenue 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 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 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 25 Table of Contents Depreciation and Amortization 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. The following are the components of our Restructuring and related costs: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Severance and related costs $ 1 $ 2 $ 24 $ 3 Data center consolidation costs 3 2 7 9 Termination, insourcing and asset impairment costs 3 — 18 10 Total net current period charges 7 4 49 22 Consulting and other costs (1) — — — 2 Restructuring and related costs $ 7 $ 4 $ 49 $ 24 ___________ (1) Represents professional support costs associated with certain strategic transformation programs. 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. Interest Expense Interest expense represents interest on long-term debt and the amortization of debt issuance costs. 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. 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 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 26 Table of Contents Refer to Note 14 – Contingencies and Litigation to the Condensed Consolidated Financial Statements for additional information. Income Taxes 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 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. We do not anticipate a material impact based on current guidance. Operations Review of Segment Revenue and Profit Our financial performance is based on Segment Profit/(Loss) and Segment Adjusted EBITDA for the following three segments: • Commercial; • Government; and • Transportation. Divestitures includes our Midas business which was sold in the first quarter of 2022. CNDT Q3 2023 Form 10-Q 27 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 our reportable segments. Results of financial performance by segment were: 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 Segment depreciation and amortization $ 51 $ 11 $ 11 $ — $ 8 $ 81 Adjusted EBITDA $ 57 $ 95 $ 7 $ — $ (67) $ 92 % of Total Revenue 49.9 % 31.1 % 19.0 % — % — % 100.0 % Adjusted EBITDA Margin 12.3 % 32.8 % 4.0 % — % — % 9.9 % 2022 Revenue $ 504 $ 291 $ 182 $ — $ — $ 977 Segment profit (loss) $ 44 $ 79 $ 16 $ — $ (87) $ 52 Segment depreciation and amortization $ 24 $ 9 $ 9 $ — $ 11 $ 53 Adjusted EBITDA $ 68 $ 88 $ 25 $ — $ (76) $ 105 % of Total Revenue 51.6 % 29.8 % 18.6 % — % — % 100.0 % Adjusted EBITDA Margin 13.5 % 30.2 % 13.7 % — % — % 10.7 % 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 Segment depreciation and amortization $ 107 $ 31 $ 32 $ — $ 27 $ 197 Adjusted EBITDA $ 194 $ 255 $ 23 $ — $ (197) $ 275 % of Total Revenue 52.1 % 29.8 % 18.1 % — % — % 100.0 % Adjusted EBITDA Margin 13.4 % 30.9 % 4.6 % — % — % 9.9 % 2022 Revenue $ 1,486 $ 856 $ 523 $ 7 $ — $ 2,872 Segment profit (loss) $ 94 $ 224 $ 40 $ 2 $ (218) $ 142 Segment depreciation and amortization $ 74 $ 25 $ 26 $ — $ 34 $ 159 Adjusted EBITDA $ 168 $ 249 $ 66 $ 2 $ (184) $ 301 % of Total Revenue 51.8 % 29.8 % 18.2 % 0.2 % — % 100.0 % Adjusted EBITDA Margin 11.3 % 29.1 % 12.6 % 28.6 % — % 10.5 % CNDT Q3 2023 Form 10-Q 28 Table of Contents (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 3 1 8 (159) Litigation settlements (recoveries) — — (22) (31) Other (income) expenses, net (2) — (3) — Segment Profit (Loss) $ 11 $ 52 $ 78 $ 142 Segment depreciation and amortization (including contract inducements) 81 53 $ 197 $ 159 Adjusted EBITDA $ 92 $ 105 $ 275 $ 301 Commercial Segment Revenue 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 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 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 29 Table of Contents 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 Revenue 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 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. Divestitures Revenue, Segment Profit (Loss) and Adjusted EBITDA The decline in revenue, segment profit and Adjusted EBITDA for the three and nine months ended September 30, 2023 was due to the sale of the Midas Suite of products. The prior year included activity through the date of disposition whereas there was no activity in the current year. Unallocated Costs Unallocated Costs for the three months ended September 30, 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 30 Table of Contents Metrics Metrics 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 Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing 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 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 $487 million of new business ACV, respectively. Included in these amounts is ACV related to the May 2023 award of a significant contract in the Transportation segment. Signing information for the three and nine months ended September 30, 2023 and 2022 is as follows: Three Months Ended September 30, 2023 vs. 2022 ($ in millions) 2023 (3) 2022 (3) $ Change % Change New business ACV $ 154 $ 191 $ (37) (19) % New business TCV $ 316 $ 347 $ (31) (9) % Renewals TCV 454 658 (204) (31) % Total Signings $ 770 $ 1,005 $ (235) (23) % Annual recurring revenue signings (1) $ 66 $ 89 $ (23) (26) % Non-recurring revenue signings (2) $ 96 $ 107 $ (11) (10) % Nine Months Ended September 30, 2023 vs. 2022 ($ in millions) 2023 (3) 2022 (3) $ Change % Change New business ACV $ 487 $ 538 $ (51) (9) % New business TCV $ 1,921 $ 1,207 $ 714 59 % Renewals TCV 1,512 1,896 (384) (20) % Total Signings $ 3,433 $ 3,103 $ 330 11 % Annual recurring revenue signings (1) $ 238 $ 296 $ (58) (20) % Non-recurring revenue signings (2) $ 517 $ 251 $ 266 106 % ___________ (1) Recurring revenue signings are for new business contracts longer than one year. (2) Non-recurring revenue signings are for contracts shorter than one year. (3) Adjusted to remove Midas new business signings. CNDT Q3 2023 Form 10-Q 31 Table of Contents 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. This extends past the next twelve-month period to include total pipeline, excluding the impact of divested business as required. Net ARR Activity 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. Timing of revenue impact varies and may not be realized within the forward 12-month timeframe. The metric is for indicative purposes only. This metric excludes COVID-related volume impacts and non-recurring revenue signings. This metric is not indicative of any specific 12-month timeframe. The Net ARR activity metric for the trailing twelve months for each of the prior five quarters was as follows: (in millions) Net ARR Activity metric September 30, 2023 $ 103 June 30, 2023 137 March 31, 2023 108 December 31, 2022 114 September 30, 2022 70 Capital Resources and Liquidity 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 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. 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. Cash Flow Analysis The following table summarizes our cash flows, as reported in our Condensed Consolidated Statement of Cash Flows in the accompanying Condensed Consolidated Financial Statements: Nine Months Ended September 30, (in millions) 2023 2022 Better (Worse) Net cash provided by (used in) operating activities $ (33) $ 93 $ (126) Net cash provided by (used in) investing activities $ (64) $ 216 (280) Net cash provided by (used in) financing activities $ (48) $ (132) 84 Operating activities 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 32 Table of Contents Investing activities Investing cash flow decreased by $280 million mainly due to the proceeds from the divestiture of the Midas business in the prior year. This was partially offset by decreased capital spending in the current year. Financing activities The decrease in cash used in financing activities was mainly driven by the repayment of the $100 million borrowed under the revolver in the prior year. This was partially offset by higher taxes paid for settlement of stock-based compensation. Sales of Accounts Receivable We have entered into a factoring agreement in the normal course of business as part of our cash and liquidity management, to sell certain accounts receivable without recourse to a third-party financial institution. The transactions under this agreement are treated as 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 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 $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 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. GAAP"). 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. 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 33 Table of Contents 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 See Note 2 – Recent Accounting Pronouncements for information on accounting standards adopted during the current year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards.