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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 181 added, 124 removed, 285 unchanged (52% of the section changed)

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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:

Our MD&A is presented in seven sections:

• Financial Information and Analysis of Results of Operations;

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• Recent Accounting Changes;

• Non-GAAP Financial Measures.

This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes in this Form 10-K for the year ended December 31, 2023.

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Throughout the MD&A, we refer to various notes to our Consolidated Financial Statements which appear in Item 8 of this Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.

With revenues of $3.9 billion, we are a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation.

We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experience.

We deliver digital business solutions and services spanning the commercial, government and transportation spectrum – creating valuable 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 business process solutions.

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.

Headquartered in Florham Park, New Jersey, we have a team of approximately 59,000 people as of December 31, 2023, servicing customers from service centers in 26 countries.

In 2022, 10% of our revenue was generated outside the U.S.

In 2023, approximately 11% of our revenue was generated outside the U.S.

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate.

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• 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.

The solutions in this segment help governments respond to changing rules for eligibility and increasing citizen expectations.

federal, state and local and foreign governments for public assistance, healthcare programs and 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, support, and revenue-generating solutions to government transportation agency clients.

We deliver mission-critical public safety, mobility and digital payment solutions that streamline operations, increase revenue and reduce congestion while creating safe, seamless travel experiences for consumers and have a positive impact on the environment.

We deliver mission-critical public safety, mobility and digital payment

CNDT 2023 Annual Report

solutions that streamline operations, increase revenue and reduce congestion while creating safe, seamless travel experiences for consumers while reducing impact on the environment.

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.

We remain focused on accelerating growth and enhancing value for our stakeholders and intend to achieve this by doubling down on key themes outlined in the March 2023 investor briefing.

We also intend to continue our portfolio rationalization strategy, divesting certain solutions which have either scarcity value outside of Conduent or are capital intensive relative to their growth opportunity, and thereby allowing management the bandwidth and increased capital to devote focus to solutions where we believe we have competitive advantages or higher growth expectations.

We believe this renewed focus on our portfolio rationalization strategy 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.

Significant 2023 Actions

• Portfolio Rationalization – In the March 2023 investor briefing we set an expectation of generating between $500 million to $700 million of after-tax proceeds from divestiture activity, and we have made significant progress this year towards this goal.

On September 29, 2023, we entered into an agreement to transfer our BenefitWallet portfolio for approximately $425 million.

The portfolio is expected to transfer in multiple phases in the first half of 2024, with an estimated pre-tax gain of approximately $425 million.

Also, on December 27, 2023, we entered into a definitive agreement to sell our Curbside Management Solutions and Public Safety Solutions businesses for $230 million plus the assumption of certain liabilities.

This transaction is expected to close in the first half of 2024.

The after-tax proceeds from these two transactions, plus other anticipated divestitures in 2024 will drive an upward revision of total net proceeds from divestitures to between $600 million and $800 million.

Refer to Note 4 – Assets/Liabilities Held for Sale and Divestitures in the Consolidated Financial Statements for additional information.

• Strategic Growth Efforts – During 2023, we continued to see opportunities in our Government Healthcare segment, particularly with our cloud-native Medicaid Claims solution, and we now have a number of significant implementations underway in the space.

Our pipeline of opportunities remains strong in this area.

We also continued to make progress with our Immediate Payments offering, laying the marketing and educational foundation with our existing clients, and enhancing our partnership strategy.

We were the first organization to execute transactions over the newly implemented FedNow capability and we anticipate an acceleration of new business signings to occur in 2024.

• New Business Signings – While we experienced some softness in New Business Signings in 2023, we successfully attained the highest Total Contract Value ("TCV" as defined in Metrics section below) in several years, with an increase of 20% versus 2022.

This was predominantly driven by the $1 billion TCV deal in our Transportation segment, with the State of Victoria, Australia.

This is our largest TCV deal in the history of Conduent and continues to grow our international presence.

Our New Business pipeline remains strong at approximately $25 billion, with significant opportunities across the portfolio.

• Return to Shareholders – 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 5).

Through December 31, 2023, we acquired $27 million worth of our shares under this share repurchase program.

Significant 2022 Actions

• Disposition and Portfolio Review – On February 8, 2022, we closed a transaction with Symplr Software, Inc.

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The Midas business represented approximately $7 million, $70 million and $72 million of revenue in 2022, 2021 and 2020, respectively.

Refer to Note 4 – Assets/Liabilities Held for Sale and Divestiture in the Consolidated Financial Statements for additional information.

During the fourth quarter, we concluded our long-range planning processes which included a full evaluation of our portfolio of solutions and identified incremental opportunities to streamline the portfolio.

• New Business Signings – In 2022 we introduced a new primary signings metric Annual Contract Value (ACV), which provides more focus on the near-term revenue generation of new business signings as compared to the traditional view of Total Contract Value (TCV).

This ACV metric has increased sequentially each quarter in 2022, totaling $724 million in 2022, an increase of 16.8% versus 2021 excluding the impact of Government stimulus payments.

• Strategic Growth Efforts – During the latter part of 2022, we dedicated a small number of senior associates with the mission to accelerate future revenue growth by selling existing solutions into new and adjacent markets and geographies.

The results of this action are becoming visible, for example, by the collaboration with a major bank to launch a Digital Payments Hub delivering faster, easier, and more secure payments.

• Operational Service Levels – We continue to make significant improvements with our operational and technology service levels, and while we will always believe there is room for improvement in these areas, we have reached a standard consistent with the markets that we operate in.

These operational improvements together with the significant progress being made in closing out major litigation cases, position us well with a solid foundation to embark on the next chapter of our journey.

Significant 2021 Actions

• Stabilizing Revenue – Revenue of $4,140 million for the year ended December 31, 2021 was a decline of 0.55%, a significantly improved trend compared with the prior year.

• Strong Net Annual Recurring Revenue (ARR) Activity results – In the fourth quarter of 2020, we introduced the Net ARR Activity metric, a trailing twelve-month metric that measures the revenue from recurring services provided to a client inclusive of all new business annual recurring revenue, notification of lost clients and contractual impacts to price and volume.

We have seen steady positive growth in this metric from $60 million in the fourth quarter of 2020 to $128 million in the fourth quarter of 2021, an increase of 113%.

This increase was driven by new business ARR signings of $402 million for the year ended December 31, 2021, an increase of 16% compared to that of the prior year, and stronger retention of existing clients.

• Debt Refinancing – On October 15, , 2021, we closed on a debt refinancing which extended our maturity profile.

The debt refinancing transactions were as follows:

◦ Term Loan A due 2026 in the amount of $265 million;

◦ Term Loan B due 2028 in the amount of $515 million;

◦ Senior Notes due 2029 in the amount of $520 million;

◦ Revolving Credit Facility maturing 2026 in the amount of $550 million.

Upon closing the debt refinancing, $100 million was borrowed under the new Revolving Credit Facility.

The net proceeds of the new Term Loan A, Term Loan B, Senior Notes and $100 million of borrowing under the Revolving Credit Facility were used to repay the borrowings under the previous credit facilities that were outstanding on October 15, 2021.

This $100 million was repaid on February 11, 2022.

Refer to Note 11 – Debt to the Consolidated Financial Statements for definition of 2016 Credit Facilities and additional information on the debt refinancing.

• Global Labor Market Dynamics – To address the significant change in the labor market environment, we responded by strengthening our talent acquisition organization and processes and maintaining an appropriate mix of work-from-home and work-from-office roles, which has resulted in increasing hire rates and improved ratings on Comparably and Glassdoor.

Refer to Note 4 – Assets/Liabilities Held for Sale and Divestitures in the Consolidated Financial Statements for additional

CNDT 2023 Annual Report

During the fourth quarter of 2022, we concluded our long-range planning processes which included a full evaluation of our portfolio of solutions and identified incremental opportunities to streamline the portfolio.

• New Business Signings – In 2022 we introduced a new primary signings metric Annual Contract Value ("ACV" as defined in Metrics section below), which provides more focus on the near-term revenue generation of new business signings as compared to the traditional view of TCV.

This ACV metric increased sequentially each quarter in 2022, totaling $724 million in 2022, an increase of 16.8% versus 2021 excluding the impact of Government stimulus payments.

The results of this action started to become visible, for example, by the collaboration with a major bank to launch a Digital Payments Hub delivering faster, easier, and more secure payments.

• Operational Service Levels – We continued to make significant improvements with our operational and technology service levels, and while we will always believe there is room for improvement in these areas, we have reached a standard consistent with the markets that we operate in.

These operational improvements together with the significant progress being made in closing out major litigation cases, positioned us well with a solid foundation to embark on the next chapter of our journey.

Macroeconomic and Geopolitical Uncertainty

Given the nature of our business and our global operations, the effects of global macroeconomic and geopolitical uncertainty, including COVID-19 pandemic related factors (as discussed in more detail below) could have a materially adverse effect on our business, results of operations and financial condition.

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

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Interest expense 111 84 27 32 %

Loss on extinguishment of debt — 15 (15) n/m

Goodwill impairment 358 — 358 n/m

Goodwill impairment 287 358 (71) (20) %

(Gain) loss on divestitures and transaction costs, net 10 (158) 168 (106) %

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Net Income (Loss) $ (296) $ (182) $ (114)

Revenue for 2022 decreased 7%, compared to the prior year.

This is primarily due to lower federal stimulus revenue in the Government segment, lost business from prior years, the impact of the disposition of the Midas business, as well as negative foreign exchange translation impact, partially offset by higher interest rates positively impacting our BenefitWallet business, and the ramp of new business.

Cost of Services (excluding depreciation and amortization)

Cost of services for 2022 decreased 4%, compared to the prior year, mainly driven by lost business from prior years, the disposition of the Midas business, increased operational efficiency and favorable foreign exchange translation impact.

The decrease in cost was less than the decrease in revenue due to lower federal stimulus revenue which had a higher margin.

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Revenue for 2023 decreased 4%, compared to the prior year, 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.

Cost of Services (excluding depreciation and amortization)

Cost of services for 2023 decreased 4%, compared to the prior year, primarily driven by the impact of reduced revenue, increased operational efficiency and a $17 million reversal of liabilities due to the settlement of the Cognizant matter described in Note 16 – Contingencies and Litigation to the Consolidated Financial Statements.

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

SG&A for 2022 decreased 19%, compared to the prior year, driven by the recovery of $14 million of defense costs as part of the settlement with insurance carriers relating to the previously disclosed State of Texas matter, progress in our efficiency initiatives, most notably within shared technology infrastructure, as well as lower variable employee costs.

The prior year also included $32 million of costs related to an abandonment of an internal project initiated in 2018.

Refer to Note 6 – Land, Buildings, Equipment and Software, Net for additional information on the abandonment of the internal project and Note 16 – Contingencies and Litigation for additional information on the State of Texas matter.

SG&A for 2023 increased 4%, compared to the prior year, primarily driven by the absence of the recovery of $14 million of defense costs as part of the settlement with insurance carriers relating to the previously disclosed State of Texas matter that occurred in 2022.

Depreciation and Amortization

Depreciation and amortization for 2022 decreased 35%, compared to the prior year, primarily due to a portion of certain customer relationship intangible assets being fully amortized in the first quarter of 2022.

Depreciation and amortization for 2023 increased 15% compared to the prior year.

This increase was primarily 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

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Severance and related costs $ 29 $ 14

Data center consolidation 10 23

Termination and asset impairment costs 13 10

Data center consolidation costs 9 10

Termination, insourcing and asset impairment costs (1)

Total Net Current Period Charges 62 37

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Reduction in headcount (3)

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

(1) 2023 costs represent costs incurred for disengagement from a significant IT outsourcing provider.

(2) 2022 costs represent professional support costs associated with certain strategic transformation programs.

(3) Relates to approximate headcount reductions worldwide associated with Severance and related costs.

Severance and related costs for 2023 include costs related to the closure of one of our Commercial segment operations in Europe.

Refer to Note 9 – Restructuring Programs and Related Costs to the Consolidated Financial Statements for additional information regarding our restructuring programs.

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Interest Expense

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

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

The increase in Interest expense for 2022, compared to the prior year, was driven primarily by higher interest rates on our refinanced credit facilities, partially offset by a lower total outstanding debt balance.

The increase in Interest expense for 2023, compared to the prior year, was driven primarily by higher interest rates on our variable rate debt, including finance leases and other debt.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information.

Goodwill Impairment

The goodwill impairment for 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.

The goodwill impairment for 2022 related to the write-down of the carrying value of the Commercial reporting unit.

Refer to Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information.

Refer to Note 8 – Goodwill and Intangible Assets, Net to the Consolidated Financial Statements for additional information on these impairments.

(Gain) Loss on Divestitures and Transaction Costs

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

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

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Additionally, this financial statement line item also includes professional fees and other costs associated with both consummated and non-consummated transactions considered by us.

Litigation Settlements (Recoveries), Net

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

Refer to Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information.

Litigation settlements (recoveries), net for 2023 primarily consisted of a $26 million reversal of reserves due to the settlement of the Cognizant matter and an $8 million reversal of reserves related to our former student loan business.

The amount for 2022 primarily consisted of $24 million of insurance recoveries recorded in the first quarter of 2022 related to the previously disclosed State of Texas matter.

Refer to Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information on these matters.

Other (Income) Expenses, Net

Other (income) expenses, net for 2022 and 2021 primarily includes interest income on cash investments and foreign currency transaction losses (gains).

2021 also included an impairment loss on an equity investment.

Other (income) expenses, net for 2023 and 2022 primarily includes interest income on cash investments, accounts receivable factoring fees and foreign currency transaction losses (gains).

The 2023 effective tax rate was 10.7%, compared to (43.9)% for 2022.

The 2022 rate was negative and lower than the U.S.

statutory rate of 21% due to pre-tax book loss and an increase in taxes due to the geographic mix of income, and non-deductible expenses primarily driven by book and tax basis differences in the Midas divestiture goodwill and the Commercial reporting unit goodwill impairment.

The 2023 rate was lower than the U.S.

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

Excluding the impact of amortization, restructuring, the divestiture of the Midas business, insurance recoveries, goodwill impairment and discrete tax items, the normalized effective tax rate for 2022 was 34.3%.

The 2021 rate was 26.6% excluding the impact of amortization, restructuring and discrete tax items.

The increase in the normalized effective tax rate is primarily due to the mix of book pre-tax income weighted more heavily in 2022 towards foreign jurisdictions with higher tax rates and losses in jurisdictions with valuation allowances.

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

During 2021, following a framework agreement reached between almost all member countries of the Organization for Economic Co-operation and Development (OECD) the OECD released rules around global taxation of the digital services businesses and a global minimum tax rate, commonly referred to as Pillar 1 and Pillar 2 of the Base Erosion and Profit Shifting (BEPS) initiative, respectively.

Pillar 1 addresses the broader challenge of a digitalized economy and focuses on the allocation of group profits among taxing jurisdictions based on a market-based concept rather than historical “permanent establishment” concepts.

Pillar 1 is directed at companies with revenues greater than 20 billion Euro and is not applicable to Conduent.

Pillar 2 addresses the remaining BEPS risk of profit shifting to entities in low-tax jurisdictions by introducing a global minimum tax rate and a proposed withholding tax on certain base eroding payments.

Pillar 2 may have limited application to Conduent, but we do not anticipate a material impact based on current guidance.

On December 15, 2022, EU member states unanimously adopted the Minimum Tax Directive of Pillar 2.

Member states have until December 31, 2023 to transpose the Minimum Tax Directive into national legislation.

statutory rate of 21% due to non-deductible expenses, primarily the non-deductible Commercial reporting unit goodwill impairment, geographic mix of income and return to provision adjustments, partially offset by tax benefits related to tax settlements and reversal of reserves.

The 2022 rate was negative and lower than the U.S.

statutory rate of 21%, primarily due to pre-tax book loss, an increase in taxes due to the geographic mix of income and non-deductible expenses, primarily driven by book and tax basis difference in the Midas divestiture goodwill and the Commercial reporting unit goodwill impairment.

Excluding the impact of the goodwill impairment, amortization of intangible assets, restructuring, litigation reserve releases and certain discrete tax items, the normalized effective tax rate for 2023 was 107.3%.

The rate is anomalous due to small adjusted pre-tax income 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 2022 rate was 34.3% excluding the impact of amortization, restructuring, the divestiture of the Midas business, insurance recoveries, goodwill impairment and discrete tax items.

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 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.

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Operations Review of Segments

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

Our financial performance is based on Segment Profit (Loss) and Segment Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") for the following three segments:

• Commercial,

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• Transportation.

Other includes our divestitures and our Student Loan business, which the Company exited in the third quarter of 2018.

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

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

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MD&A - Operations Review of Segments in our Annual Report on Form 10-K for the year ended December 31, 2022 for a comparative discussion of our consolidated results of operations by segment between 2022 and 2021.

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Segment Performance Review

(in millions) Commercial Government Transportation Other Unallocated Costs Total

Year Ended Dec 31, 2022 Divestitures Other

(in millions) Commercial Government Transportation Divestitures Unallocated Costs Total

Year Ended Dec 31, 2023

Total Revenue $ 1,932 $ 1,094 $ 696 $ — $ — $ 3,722

Segment profit (Loss) $ 134 $ 284 $ (2) $ — $ (304) $ 112

Segment depreciation and amortization $ 140 $ 41 $ 43 $ — $ 36 $ 260

Adjusted EBITDA (1)

$ 274 $ 325 $ 41 $ — $ (262) $ 378

% of Total Revenue 51.9 % 29.4 % 18.7 % — % — % 100.0 %

Adjusted EBITDA Margin (1)(2)

14.2 % 29.7 % 5.9 % — % — % 10.2 %

Year Ended Dec 31, 2022

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Segment profit (Loss) $ 124 $ 294 $ 49 $ 2 $ (293) $ 176

Segment depreciation and amortization $ 102 $ 37 $ 35 $ — $ 46 $ 220

Adjusted EBITDA (1)

$ 226 $ 331 $ 84 $ 2 $ (247) $ 396

% of Total Revenue 51.6 % 29.8 % 18.4 % 0.2 % — % 100.0 %

Adjusted EBITDA Margin (1)(2)

11.3 % 28.8 % 11.8 % 28.6 % — % 10.3 %

(1) Refer to "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure.

(2) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue.

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(in millions) Year Ended December 31,

Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) 2022 2021 2020

Segment Profit (Loss) Reconciliation to Pre-tax Income (Loss) and Adjusted EBITDA 2023 2022 2021

Income (Loss) Before Income Taxes $ (332) $ (127) $ (25)

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Segment depreciation and amortization 260 220 218

CA MMIS charge (credit) — — (7)

Abandonment of internal project — — 32

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Adjusted EBITDA $ 378 $ 396 $ 487

(1) Represents a termination for convenience fee related to the termination of a contract with a significant IT outsourcing provider, which is reported in Cost of Services on the Consolidated Statements of Income.

Commercial Segment

Commercial revenue for 2022 decreased, compared to the prior year, due to the impact of our largest client normalizing to lower post pandemic call volumes, the merger of two of our clients resulting in lower volumes as well as unfavorable exchange rate movement, partially offset by higher interest rates positively impacting our BenefitWallet business, recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client and strong net new business ramp.

CNDT 2022 Annual Report

Commercial segment revenue for 2023 decreased, compared to the prior year, driven by lost business, lower volumes in certain industries within our client base and non-repeating items in the prior year, partially offset by new business ramp and higher interest rates positively impacting our BenefitWallet business.

Segment Profit and Adjusted EBITDA

Increases in the Commercial segment profit and adjusted EBITDA for 2022, compared to the prior year, were mainly driven by higher interest rates positively impacting our BenefitWallet business, recognition of the revenue benefit associated with a minimum annual volume commitment contract with a large client, increased operational efficiency and expense reductions resulting from progress in our efficiency initiatives more than offsetting the dynamics of a challenging labor market in certain geographies.

Revenue mix also had a slightly negative impact on segment margin where we had strong signings in our Customer Experience Management service solution, which has slightly lower margins.

Commercial segment profit for 2023 increased compared to the prior year and was positively impacted by higher interest rates positively impacting our BenefitWallet business and cost efficiency, partially offset 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 2023 also increased compared to the prior year primarily driven by the segment profit drivers mentioned above, partially offset by the impact of reduced revenue and the non-repeating items in the prior year.

Government Segment

Government revenue for 2022 decreased, compared to the prior year, primarily driven by significantly lower federal stimulus revenue, while increases in volume, price and new business substantially offset lost business from prior years.

Government segment revenue for 2023 decreased, compared to the prior year, 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 of $7 million in the first quarter of 2023.

These were partially offset by the ramping of new business in Government Healthcare solutions, higher volumes in Government services solutions and a contractual change to a client implementation positively impacting revenue recognition.

Segment Profit and Adjusted EBITDA

Decreases in the Government segment profit and adjusted EBITDA for 2022, compared to the prior year, were mainly driven by lower Federal stimulus revenue.

Government segment profit for 2023 decreased slightly compared to the prior year and was impacted 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 as well as by higher depreciation driven by the deployment of our new modularized CMdS platform in our Government Healthcare Solutions business.

CNDT 2023 Annual Report

Government segment adjusted EBITDA for 2023 decreased slightly compared to the prior year due to the Government segment profit drivers, excluding depreciation, mentioned above.

These were partially offset by the $17 million reversal of reserves due to the settlement of the Cognizant matter, a contractual change to a client implementation positively impacting revenue recognition and cost efficiency.

Government segment adjusted EBITDA margin for 2023 increased compared to the prior year mainly due to the mix of adjusted EBITDA variances mentioned above on lower revenue.

Transportation Segment

Transportation revenue for 2022 decreased, compared to the prior year, driven by unfavorable exchange rate movement, particularly the Euro, slower implementation of new business contracts, and a one-time revenue benefit in the prior year period.

Transportation revenue for 2023 decreased compared to the prior year, primarily driven by extended completion timelines on our larger implementations 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 and favorable exchange rate movement, particularly the Euro.

Segment Profit and Adjusted EBITDA

Transportation segment profit and adjusted EBITDA for 2022 decreased, compared to the prior year, driven by a one-time item benefiting the prior year period, the impact of net new and lost business, as well as the impact of unfavorable exchange rate movement.

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

Revenue, Segment Profit (Loss) and Adjusted EBITDA

The decline in revenue, segment profit and Adjusted EBITDA for 2022 was primarily due to the sale of the Midas business.

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

The decline in revenue, segment profit and Adjusted EBITDA for 2023 was primarily due to the sale of the Midas Suite of products in 2022.

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

Unallocated Costs

The decrease in segment loss is primarily due to a portion of the recovery of defense costs as part of the settlement with insurance carriers relating to the previously disclosed State of Texas and shareholder matters which was allocated to SG&A, progress with our efficiency initiatives and lower variable employee costs, as well as $32 million of costs related to the abandonment of an internal project recorded in the prior year.

Unallocated Costs for 2023 increased compared to the prior year primarily due to the prior year reflecting 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, and expense credits in the prior year.

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

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

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

Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts.

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TCV signings is defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts.

Due to the inconsistency of when existing contracts end, quarterly and yearly comparisons are not a good measure of renewal performance.

New business ACV is calculated as TCV divided by the contract term, in months, multiplied by 12 for an annual measure.

Due to the inconsistency of when existing contracts end, quarterly and yearly comparisons may not provide an accurate measure of renewal performance.

The Annual Contract Value ("ACV") for new business is calculated by dividing the TCV by the contract term, in months, and then multiplying by 12 to obtain an annual measure.

For the year ended December 31, 2023, the Company signed $639 million of new business ACV, including the May 2023 award of a significant contract in the Transportation segment.

CNDT 2023 Annual Report

For the year ended December 31, 2022, the Company signed $732 million of new business ACV, up 1% from the prior year, primarily due to strong signings in Government Healthcare Solutions and Customer Experience Management being partially offset by $106 million of federal stimulus signings in the prior year.

For the year ended December 31, 2023, the Company signed $2,257 million of new business TCV, representing a 20% increase compared to the prior year.

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(3) Adjusted to remove Midas new business signings.

In addition, 2021 amounts have been revised to exclude a large client we no longer consider in these metrics.

The total new business pipeline at the end of December 31, 2023 and 2022 was $24.8 billion and $22.6 billion, respectively.

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December 31, 2022 114

CNDT 2022 Annual Report

Capital Resources and Liquidity

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On February 11, 2022, we repaid the then-outstanding borrowing under the Revolving Credit Facility of $100 million.

CNDT 2023 Annual Report

As of December 31, 2023, there was a total of $1,263 million of outstanding borrowings under our Term Loan A, Term Loan B and Senior Notes, of which $18 million was due within one year.

Additionally, as of December 31, 2023, we had $16 million of finance lease and other debt due within one year.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information regarding our debt.

In February 2019, we reached a settlement agreement and release with the State of Texas (State) and the Texas Department of Health and Human Services, which was amended in May 2019 (Texas Agreement).

Pursuant to the terms of the Texas Agreement, the Company was required to pay the State $236 million, of which $118 million was paid in 2019 and the remaining $118 million was paid in January 2020.

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

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

However, we believe that our cash on hand, projected cash flow from operations, sound balance sheet and our Revolving Credit Facility will continue to provide sufficient financial resources to meet our expected business obligations for at least the next twelve months.

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Operating Activities

The net decline in cash flow provided by operating activities of $99 million was primarily attributable to lower Adjusted EBITDA, increases in equipment to support new business in our Transportation segment, higher income tax payments and higher cash interest payments, partially offset by improved accounts receivable Days Sales Outstanding (DSO) and the insurance recovery related to the previously disclosed State of Texas matter.

The net decrease in cash flow provided by operating activities of $55 million was primarily related to the absence of the $38 million of insurance recoveries related to the State of Texas matter in 2022, higher net cash interest payments, the negative impact of the sales of accounts receivable as described below and higher restructuring payments, all partially offset by lower cash income taxes.

Investing Activities

The increase in cash provided by investing activities of $315 million was primarily due to the proceeds from the divestiture of the Midas business, partially offset by slightly increased spending related to modernizing our infrastructure and productivity tools.

The decrease in cash provided by investing activities of $266 million was primarily due to the proceeds from the divestiture of the Midas business in the prior year.

This was partially offset by planned decreased capital spending in the current year.

Financing Activities

Financing activities for 2022 primarily reflect the repayment of the $100 million borrowed under the Revolving Credit Facility, normal scheduled debt repayments and dividends on our Series A Preferred Stock.

Financing activities for 2021 primarily reflect the net activity related to our 2021 debt refinancing, payment of the previously outstanding $34 million of Senior Notes due 2024 and dividends on our Series A Preferred Stock, partially offset by the $100 million borrowed from the Revolving Credit Facility.

CNDT 2022 Annual Report

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 the purchase of treasury stock under our share repurchase program of $27 million, higher scheduled debt repayments and higher taxes paid for settlement of stock-based compensation.

Sales of Accounts Receivable

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At December 31, 2023, our material cash requirements include the following contractual and other obligations.

As of December 31, 2022, we had total outstanding debt with floating and fixed rates totaling $1,335 million, of which $35 million was due within 12 months.

CNDT 2023 Annual Report

As of December 31, 2023, we had total outstanding debt, including Finance leases, with floating and fixed rates totaling $1,300 million, of which $34 million was due within 12 months.

Future interest payments associated with this debt, which has maturities through 2029, are forecast to be $559 million, of which $103 million is due within 12 months.

Refer to Note 11 – Debt to the Consolidated Financial Statements for additional information.

In the normal course of business, we enter lease arrangements for certain equipment and facilities.

Operating Leases

In the ordinary course of business, we enter into operating lease arrangements for certain equipment and facilities.

As of December 31, 2023, total fixed lease payables were $251 million, of which $69 million was due within 12 months.

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The total of these commitments was $312 million as of December 31, 2023, of which $104 million is due within the next 12 months.

Additionally, subsequent to December 31, 2022, we have entered into certain long-term purchase commitments with a third-party technology vendor totaling approximately $309 million over the next 5 years, of which $62 million is due within the next 12 months.

Other Contingencies and Commitments

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Refer to Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information.

CNDT 2022 Annual Report

Off-Balance Sheet Arrangements

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In addition, refer to the preceding discussion of the Company's contractual cash obligations and other commercial commitments and Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding contingencies, guarantees and indemnifications.

CNDT 2023 Annual Report

Critical Accounting Estimates and Policies

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Upon determining that a long-lived asset (disposal group) meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group in the line items Assets held for sale and Liabilities held for sale, respectively, in the Consolidated Balance Sheets.

CNDT 2022 Annual Report

On December 29, 2021, the Company signed a definitive agreement to sell its Midas Suite of Solutions (Midas business) to Symplr Software, Inc.

This action was taken because of the Company's strategy to streamline its portfolio and its consideration of divestitures of select businesses to enhance shareholder and client value.

As of December 31, 2021, the Company determined that this business met the conditions above to be classified as held for sale.

Refer to Note 4 – Assets/Liabilities Held for Sale and Divestiture to the Consolidated Financial Statements for additional information.

Refer to Note 4 – Assets/Liabilities Held for Sale and Divestitures to the Consolidated Financial Statements for additional information.

Revenue Recognition

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Refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies and Note 2 – Revenue to the Consolidated Financial Statements for additional information regarding our revenue recognition policies.

CNDT 2023 Annual Report

Goodwill is not amortized but rather tested for impairment annually, or more frequently if an event or circumstance indicates that impairment may have been incurred.

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Commercial, Government and Transportation.

As of January 1, 2022, we underwent an internal reorganization in our Commercial reportable segment resulting in the previous four Commercial operating segments being combined into one single operating segment and reporting unit, led by a single segment manager.

We considered the reorganization in the first quarter of 2022 a triggering event and performed an interim qualitative goodwill impairment assessment of the reporting units before and after the reorganization and concluded no impairment existed at the time of the change.

Additionally, as part of the reorganization in the first quarter of 2022, certain clients were reassigned from the Government reportable segment to the Commercial reportable segment.

This change resulted in less than 1% of goodwill being reallocated between the reporting units within the two reportable segments.

Interim Goodwill Impairment Evaluation

In September 2023, we entered into the Purchase Agreement to transfer our BenefitWallet health savings account and medical savings account portfolio (collectively, the "Portfolio"), which is reported within our 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.

Consequently, the Purchase Agreement was identified as a triggering event for the Commercial reporting unit that required us 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.

The most significant assumptions used in the goodwill analysis relate to revenue growth rates, discount rate and long-term organic growth rate.

Annual Goodwill Impairment Evaluation

Our annual quantitative impairment test of goodwill was performed as of October 1, 2023.

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In addition, we are required to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses.

CNDT 2022 Annual Report

When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions.

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We believe these assumptions are appropriate and reflect our forecasted long-term business model and consider our historical results as well as the current economic environment and markets that we serve.

The most significant assumptions used in the goodwill analysis relate to revenue growth rates, discount rate and long-term organic growth rate for the Commercial reporting unit and discount rates and long-term organic growth rates for the Government and Transportation reporting units.

Based on our quantitative assessments, we concluded that the fair value of our reporting units exceeded their respective carrying values and, accordingly, we did not record any goodwill impairment charge as a result of our annual quantitative impairment test of goodwill as of October 1, 2022.

If we used different assumptions for revenue growth rates, discount rates or long-term organic growth rates in these annual assessments, our calculated fair values of our reporting units could be higher or lower which could result in a goodwill impairment.

After completing the annual impairment test, the Commercial reporting unit experienced lower than expected new customer contract signings (all subsequent to November 1, 2022), and an unexpected softening of the future business pipeline for certain solutions.

Management believed these were driven by macroeconomic conditions present in the fourth quarter of 2022.

The combination of these factors led management, in December 2022, to review the Commercial reporting unit and further evaluate the portfolio.

These factors triggered the need for management to perform a goodwill impairment assessment for this reporting unit as of December 31, 2022, which resulted in a pre-tax impairment charge of $358 million.

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

The most significant assumptions used in the goodwill analysis relate to discount rates and long-term organic growth rates.

CNDT 2023 Annual Report

Based on our quantitative assessments, we concluded that the fair value of our Government and Transportation reporting units exceeded their respective carrying values and, accordingly, we did not record any goodwill impairment charge as a result of our annual quantitative impairment test of goodwill as of October 1, 2023.

If we used different assumptions for discount rates or long-term organic growth rates in these annual assessments, our calculated fair values of our reporting units could be higher or lower which could result in a goodwill impairment.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

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In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances and other factors, that may not be predictable.

If there is a significant unusual or one-time item recognized in our operating results, the taxes attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item.

In the event there is a significant unusual or one-time item recognized in our operating results, the taxes attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item.

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards.

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Unrecognized tax benefits were $10 million, $12 million and $23 million at December 31, 2023, 2022 and 2021, respectively.

CNDT 2022 Annual Report

Refer to Note 15 – Income Taxes to the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.

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Refer to Note 16 – Contingencies and Litigation to the Consolidated Financial Statements for additional information regarding loss contingencies.

CNDT 2023 Annual Report

Recent Accounting Changes

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To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A.

Non-GAAP Financial Measures

We reported our financial results in accordance with accounting principles generally accepted in the U.S.

In addition, within this Form 10-K Part II Item 7 we have discussed our financial results using non-GAAP measures.

We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results.

Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with U.S.

GAAP, to exclude the effects of certain items as well as their related tax effects.

Management believes that these non-GAAP financial measures provide an additional means of analyzing the results of the current period against the corresponding prior period.

However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with U.S.

Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable U.S.

GAAP measures and should be read only in conjunction with our Consolidated Financial Statements prepared in accordance with U.S.

Our management regularly uses our non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions, and providing such non-GAAP financial measures to investors allows for a further level of transparency as to how management reviews and evaluates our business results and trends.

These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods.

Compensation of our executives is based in part on the performance of our business based on certain of these non-GAAP measures.

A reconciliation of the non-GAAP financial measures Adjusted EBITDA and EBITDA Margin to the most directly comparable financial measures calculated and presented in accordance with U.S.

GAAP are provided in the Segment Performance Review above.

Adjusted EBITDA and EBITDA Margin

We use Adjusted EBITDA and Adjusted EBITDA Margin as an additional way of assessing certain aspects of our operations that, when viewed with the U.S.

GAAP results and the accompanying reconciliations to corresponding U.S.

GAAP financial measures, provide a more complete understanding of our on-going business.

Adjusted EBITDA Margin is Adjusted EBITDA divided by revenue.

Adjusted EBITDA represents income (loss) before interest, income taxes, depreciation and amortization and contract inducement amortization adjusted for the following items:

• Amortization of acquired intangible assets.

The amortization of acquired intangible assets is driven by acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period.

• Restructuring and related costs.

Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program.

• Goodwill impairment.

This represents goodwill impairment charges related to entering the agreement to transfer the BenefitWallet portfolio.

• (Gain) loss on divestitures and transaction costs.

Represents (gain) loss on divested businesses and transaction costs.

• Litigation settlements (recoveries), net represents settlements or recoveries for various matters subject to litigation.

• Other charges (credits).

This includes Other (income) expenses, net on the Consolidated Statements of Income (loss) and other insignificant (income) expenses and other adjustments.

• Abandonment of Cloud Computing Project.

This includes charges in connection with the abandonment of a cloud computing project.

The costs include writing off previously capitalized costs and accruing remaining hosting fees that continue to be incurred without any economic benefit.

CNDT 2023 Annual Report

Adjusted EBITDA is not intended to represent cash flows from operations, operating income (loss) or net income (loss) as defined by U.S.

GAAP as indicators of operating performance.

Management cautions that amounts presented in accordance with Conduent's definition of Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similar measures disclosed by other companies because not all companies calculate Adjusted EBITDA and Adjusted EBITDA Margin in the same manner.

CNDT 2023 Annual Report

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis