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 seven sections: • Overview; • Financial Information and Analysis of Results of Operations; • Metrics; • Capital Resources and Liquidity; • Critical Accounting Estimates and Policies; • Recent Accounting Changes; and • Non-GAAP Financial Measures. 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 We deliver digital business solutions and services to streamline and manage enterprise processes on behalf of commercial, government and transportation organizations – creating valuable outcomes for our clients and the millions of people who count on them. Our solutions combine innovative technology platforms with automation, artificial intelligence, process expertise and services that improve quality, efficiency and productivity. With a dedicated global team of approximately 55,000 associates, our solutions span customer service, business administration and operations, healthcare administration and payment management. Across many industries and government agencies, we reduce costs, improve end-user experiences and enable digital transformation for our global clients. Headquartered in Florham Park, New Jersey, we have operations in 24 countries. Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate. These three segments are: • Commercial – Our Commercial segment provides business process solutions and services 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 enhance performance for our clients and deliver better experiences for their consumers and employees. • Government – Our Government segment provides government-centric business process services to U.S. federal, state and local government agencies and foreign governments for public assistance, healthcare programs and administration, transaction processing and payment services. The solutions in this segment help governments provide constituents access and delivery of benefits, respond to changing rules for eligibility and keep pace with increasing citizen expectations. • Transportation – Our Transportation segment provides systems, support, and revenue-generating solutions, to government transportation agencies. We deliver mission-critical mobility and digital payment solutions for public transit and road usage charging that streamline operations, increase revenue and reduce congestion while creating safe, seamless travel experiences for consumers while reducing impact on the environment. CNDT Q3 2024 Form 10-Q 22 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. 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 focus on solutions where we believe we have competitive advantages or higher growth expectations. We believe this 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. During the third quarter of 2024 we achieved the following: • Completed the sale of the Casualty Claims Solutions business on September 1, 2024 and received $224 million of cash consideration. • Used the proceeds from the divested businesses to voluntarily prepay the entire remaining outstanding balance of $38 million of the Term Loan B and voluntarily prepaid $37 million of the Term Loan A. • Repurchased 3.9 million shares of common stock during the quarter as part of the previously approved $75 million share repurchase program, which has now been completed. • Appointed a new Group President of the Commercial segment and a new Head of Government Solutions. Financial Information and Analysis of Results of Operations Three Months Ended September 30, 2024 vs. 2023 (in millions) 2024 2023 $ Change % Change Revenue $ 807 $ 932 $ (125) (13) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 656 724 (68) (9) % Selling, general and administrative (excluding depreciation and amortization) 115 115 — — % Research and development (excluding depreciation and amortization) 1 2 (1) (50) % Depreciation and amortization 44 81 (37) (46) % Restructuring and related costs 4 7 (3) (43) % Interest expense 16 28 (12) (43) % Goodwill impairment — 287 (287) n/m (Gain) loss on divestitures and transaction costs, net (188) 3 (191) n/m Litigation settlements (recoveries), net 1 — 1 n/m Loss on extinguishment of debt 1 — 1 n/m Other (income) expenses, net (2) (2) — — % Total Operating Costs and Expenses 648 1,245 (597) Income (Loss) Before Income Taxes 159 (313) 472 Income tax expense (benefit) 36 (24) 60 Net Income (Loss) $ 123 $ (289) $ 412 CNDT Q3 2024 Form 10-Q 23 Table of Contents Nine Months Ended September 30, 2024 vs. 2023 (in millions) 2024 2023 $ Change % Change Revenue $ 2,556 $ 2,769 $ (213) (8) % Operating Costs and Expenses Cost of services (excluding depreciation and amortization) 2,068 2,148 (80) (4) % Selling, general and administrative (excluding depreciation and amortization) 346 344 2 1 % Research and development (excluding depreciation and amortization) 4 5 (1) (20) % Depreciation and amortization 157 199 (42) (21) % Restructuring and related costs 21 49 (28) (57) % Interest expense 62 82 (20) (24) % Goodwill impairment — 287 (287) n/m (Gain) loss on divestitures and transaction costs, net (696) 8 (704) n/m Litigation settlements (recoveries), net 6 (22) 28 (127) % Loss on extinguishment of debt 6 — 6 n/m Other (income) expenses, net (4) (3) (1) 33 % Total Operating Costs and Expenses 1,970 3,097 (1,127) Income (Loss) Before Income Taxes 586 (328) 914 Income tax expense (benefit) 148 (26) 174 Net Income (Loss) $ 438 $ (302) $ 740 Revenue Revenue for the three months ended September 30, 2024 decreased compared to the prior year period, approximately two thirds of which was due to the impact of the Benefit Wallet Transfer and the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses. Excluding the divestitures impact, lost business and lower volumes contributed to the decrease and were partially offset by new business ramp, particularly in our Commercial and Transportation segments. Revenue for the nine months ended September 30, 2024 decreased, compared to the prior year period, approximately three quarters of which was due to the impact of the Benefit Wallet Transfer and the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses. Excluding the divestitures impact, lost business across our three segments was partially offset by new business ramp, including the State of Victoria contract. Cost of Services (excluding depreciation and amortization) Cost of services for the three months ended September 30, 2024 decreased, compared to the prior year period, primarily due to the impact of the Benefit Wallet Transfer and the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses. Excluding the divestitures impact, lower expenses on lower revenues and cost optimizations contributed to the decline. Cost of services for the nine months ended September 30, 2024 decreased, compared to the prior year period, over half of which was primarily driven by the impact of the Benefit Wallet Transfer and the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses. Excluding the divestitures impact, lower expenses on lower revenues and cost optimizations contributed to the decrease and were partially offset by the absence of a $17 million reversal of liabilities due to the settlement of the Cognizant matter in the prior year period described in Note 16 – Contingencies and Litigation to the Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K. Selling, General and Administrative ("SG&A") (excluding depreciation and amortization) SG&A for the three months ended September 30, 2024 was unchanged, compared to the prior year period. CNDT Q3 2024 Form 10-Q 24 Table of Contents SG&A for the nine months ended September 30, 2024 increased, compared to the prior year periods, primarily driven by costs to transition away from a technology vendor, partially offset by the impact of the sales of the Curbside Management and Public Safety Solutions business. Depreciation and Amortization Depreciation and amortization for the three months ended September 30, 2024 decreased, compared to the prior year period due to the impact of the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses and a prior year write-off of an abandoned internal use software asset in our Commercial segment 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. Depreciation and amortization for the nine months ended September 30, 2024 decreased, compared to the prior year period due to the impact of the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses, the prior year write-off of an internal use software asset in our Commercial segment as noted above and lower capital investments. 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) 2024 2023 2024 2023 Severance and related costs $ 2 $ 1 $ 9 $ 24 Data center consolidation costs 1 3 4 7 Termination, insourcing and asset impairment costs 1 3 8 18 Restructuring and related costs $ 4 $ 7 $ 21 $ 49 Restructuring and related costs for the nine months ended September 30, 2024 decreased compared to the prior year period. The decrease is primarily driven by severance and related costs due to the closure of one of our Commercial segment operations in Europe in the prior year period as well as lower facilities downsizing costs in the current year. Refer to Note 6 – 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. Interest expense for the three and nine months ended September 30, 2024 decreased, compared to the prior year periods primarily due to voluntary prepayments of the entire Term Loan B balance outstanding and a portion of the Term Loan A balance with proceeds from divestitures. (Gain) Loss on Divestitures and Transaction Costs The completion of the BenefitWallet Transfer resulted in a gain of $425 million for the nine months ended September 30, 2024. The completion of the sale of the Curbside Management and Public Safety businesses in the second quarter of 2024 resulted in a gain of $108 million for the nine months ended September 30, 2024. The completion of the sale of the Casualty Claims Solutions business in the third quarter of 2024 resulted in a gain of $195 million for the three and nine months ended September 30, 2024. Additionally, professional fees and other costs related to these consummated and certain other non-consummated transactions considered by the Company are included in this financial statement line item for all periods. Litigation Settlements (Recoveries), Net Litigation settlements (recoveries), net for the nine months ended September 30, 2023 primarily consisted of a $26 million reversal of reserves due to the settlement of the Cognizant matter. CNDT Q3 2024 Form 10-Q 25 Table of Contents Income Taxes The effective tax rate for the three months ended September 30, 2024 was 22.2%, compared to 7.8% for the three months ended September 30, 2023. The September 30, 2024 rate was higher than the U.S. statutory rate of 21%, primarily due to state and local taxes, geographic mix of income, and other discrete tax items, partially offset by a favorable permanent difference on gains from divestitures. The effective tax rate for the three months ended September 30, 2023 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. Excluding the impact of the gains from divestitures, restructuring costs, amortization of intangibles, valuation allowance and other discrete tax adjustments, the normalized effective tax rate for the three months ended September 30, 2024 was 12.5%. The normalized effective tax rate for the three months ended September 30, 2023 was (6.1)%, primarily due to excluding the impact of restructuring costs, amortization of intangible assets and goodwill impairment. The normalized effective tax rate for the three months ended September 30, 2024 was higher than the rate for the three months ended September 30, 2023 primarily due to higher pre-tax loss and the geographic mix of income. The effective tax rate for the nine months ended September 30, 2024 was 25.2%, compared to 7.8% for the nine months ended September 30, 2023. The September 30, 2024 rate was higher than the U.S. statutory rate of 21%, primarily due to state and local taxes and geographic mix of income, partially offset by favorable permanent difference on gain from divestitures, tax benefit from valuation allowances and audit settlement reserve releases. The effective tax rate for the nine months ended September 30, 2023 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. Excluding the impact of the gains from divestitures, restructuring costs, amortization of intangible assets, litigation reserve, audit settlement reserve release, valuation allowance and other discrete tax items, the normalized effective tax rate for the nine months ended September 30, 2024 was 19.7%. The normalized effective tax rate for the nine months ended September 30, 2023 was (158.4)%, primarily due to excluding the impact of goodwill impairment, amortization of intangible assets, restructuring costs, litigation reserve releases and certain discrete tax items. The September 30, 2023 rate was anomalous due to the small adjusted pre-tax loss and tax, which was 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, 2024 was higher than the rate for the nine months ended September 30, 2023 primarily due to the geographic mix of income and higher pre-tax loss. In 2021, the Organization for Economic Cooperation and Development released model rules for a 15% global minimum tax, known as Pillar Two. This alternative minimum tax is treated as a period cost beginning in 2024 and does not have a material impact on the Company's financial results of operations for the current period. The Company continues to monitor legislative developments, as well as additional guidance from countries that have enacted legislation. Operations Review of Segment Revenue and Profit 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; • Government; and • Transportation. Divestitures includes our BenefitWallet and Casualty Claims Solutions businesses (both of which were reclassified from our Commercial segment) and our Curbside Management and Public Safety Solutions businesses (which was reclassified from our Transportation segment). Unallocated Costs includes IT infrastructure costs that are shared by multiple reportable segments, enterprise application costs and certain corporate overhead expenses not directly attributable or allocated to our reportable segments. CNDT Q3 2024 Form 10-Q 26 Table of Contents Results of financial performance by segment were: Three Months Ended September 30, (in millions) Commercial Government Transportation Divestitures Unallocated Costs Total 2024 Revenue $ 385 $ 255 $ 141 $ 26 $ — $ 807 Segment profit (loss) $ 15 $ 50 $ (6) $ 3 $ (70) $ (8) Segment depreciation and amortization $ 20 $ 10 $ 6 $ 1 $ 7 $ 44 Adjusted EBITDA $ 35 $ 60 $ — $ 4 $ (63) $ 36 % of Total Revenue 47.7 % 31.6 % 17.5 % 3.2 % — % 100.0 % Adjusted EBITDA Margin 9.1 % 23.5 % — % 15.4 % — % 4.5 % 2023 Revenue $ 397 $ 290 $ 144 $ 101 $ — $ 932 Segment profit (loss) $ (19) $ 84 $ (5) $ 26 $ (75) $ 11 Segment depreciation and amortization $ 48 $ 11 $ 8 $ 6 $ 8 $ 81 Adjusted EBITDA $ 29 $ 95 $ 3 $ 32 $ (67) $ 92 % of Total Revenue 42.6 % 31.1 % 15.5 % 10.8 % — % 100.0 % Adjusted EBITDA Margin 7.3 % 32.8 % 2.1 % 34.0 % — % 9.9 % Nine Months Ended September 30, (in millions) Commercial Government Transportation Divestitures Unallocated Costs Total 2024 Revenue $ 1,192 $ 758 $ 426 $ 180 $ — $ 2,556 Segment profit (loss) $ 48 $ 130 $ (15) $ 35 $ (213) $ (15) Segment depreciation and amortization $ 68 $ 34 $ 19 $ 13 $ 21 $ 155 Adjusted EBITDA $ 116 $ 164 $ 4 $ 48 $ (192) $ 140 % of Total Revenue 46.6 % 29.7 % 16.7 % 7.0 % — % 100.0 % Adjusted EBITDA Margin 9.7 % 21.6 % 0.9 % 26.7 % — % 5.5 % 2023 Revenue $ 1,245 $ 824 $ 400 $ 300 $ — $ 2,769 Segment profit (loss) $ 13 $ 224 $ (11) $ 76 $ (224) $ 78 Segment depreciation and amortization $ 99 $ 31 $ 20 $ 20 $ 27 $ 197 Adjusted EBITDA $ 112 $ 255 $ 9 $ 96 $ (197) $ 275 % of Total Revenue 45.0 % 29.8 % 14.4 % 10.8 % — % 100.0 % Adjusted EBITDA Margin 9.0 % 30.9 % 2.3 % 32.0 % — % 9.9 % CNDT Q3 2024 Form 10-Q 27 Table of Contents (in millions) Three Months Ended September 30, Nine Months Ended September 30, Segment Profit (Loss) Reconciliation to Income (Loss) Before Income Taxes 2024 2023 2024 2023 Income (Loss) Before Income Taxes $ 159 $ (313) $ 586 $ (328) Reconciling items: Amortization of acquired intangible assets 1 1 4 5 Restructuring and related costs 4 7 21 49 Interest expense 16 28 62 82 Goodwill impairment — 287 — 287 (Gain) loss on divestitures and transaction costs (188) 3 (696) 8 Litigation settlements (recoveries) 1 — 6 (22) Loss on extinguishment of debt 1 — 6 — Other (income) expenses, net (2) (2) (4) (3) Segment Profit (Loss) $ (8) $ 11 $ (15) $ 78 Segment depreciation and amortization (including contract inducements) 44 81 $ 155 $ 197 Adjusted EBITDA $ 36 $ 92 $ 140 $ 275 Commercial Segment Revenue Commercial revenue for the three months ended September 30, 2024 declined compared to the prior year period, driven by lower volumes, partially offset by new business ramp outpacing lost business. Commercial revenue for the nine months ended September 30, 2024 declined compared to the prior year period, driven by lost business and lower volumes, partially offset by new business ramp. Segment Profit and Adjusted EBITDA Commercial segment profit and adjusted EBITDA for the three and nine months ended September 30, 2024 increased compared to the prior year periods primarily due to new business ramp and cost efficiencies, partially offset by the impact of lost business and lower volumes. Commercial segment profit also benefited from the impact of lower depreciation due to the prior year write-off of internal use software and fully amortized assets. Government Segment Revenue Government revenue for the three and nine months ended September 30, 2024 decreased, compared to the prior year periods, primarily driven by lost business in our Government Healthcare business and lower volumes in our Government Services business due to the change in funding mechanism for the Electronic Benefits Transfer ("EBT") programs. Segment Profit and Adjusted EBITDA Government segment profit and adjusted EBITDA for the three months ended September 30, 2024 decreased compared to the prior year period primarily due to lost business and the lower volumes mentioned above. Government segment profit and adjusted EBITDA for the nine months ended September 30, 2024 decreased compared to the prior year periods primarily due to the impact of lost business, lower volumes and the absence of a $17 million reversal of liabilities due to the settlement of the Cognizant matter in the prior year period and unfavorable revenue mix. CNDT Q3 2024 Form 10-Q 28 Table of Contents Transportation Segment Revenue Transportation revenue for the three months ended September 30, 2024 declined slightly compared to the prior year period, primarily due to lower small project activity. New business ramp outpaced losses and a Tolling customer price decline. In addition, operational performance improved with less impact from extended implementation timelines compared to the prior year period. Transportation revenue for the nine months ended September 30, 2024 increased compared to the prior year period, primarily driven by the ramp of new business and improved operational performance with fewer delays from extended implementation timelines compared to the prior year period, partially offset by lost business, the price decline noted above and lower volumes. Segment Profit and Adjusted EBITDA Transportation segment profit and adjusted EBITDA for the three and nine months ended September 30, 2024 were slightly lower due to the non-retained portion of a Tolling contract, partially offset by improved operational performance and reduced impact from extended implementation timelines compared to the prior year period. Divestitures Revenue, Segment Profit and Adjusted EBITDA The decrease in revenue, segment profit and Adjusted EBITDA for the three and nine months ended September 30, 2024 was due to the BenefitWallet portfolio, the Curbside Management and Public Safety Solutions businesses and Casualty Claims Solutions businesses being included in the full three and nine months of the prior year period whereas their results were only included until the date of their transfer and sale, as applicable, in 2024. Unallocated Costs Unallocated Costs for the three and nine months ended September 30, 2024 decreased compared to the prior year periods primarily due to lower technology costs. 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 present certain key metrics, including Signings and Net ARR Activity below. The metrics for all periods presented below have been recast to remove the activity related to the BenefitWallet Portfolio and the Curbside Management and Public Safety Solutions businesses. 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. CNDT Q3 2024 Form 10-Q 29 Table of Contents Signing information for the three and nine months ended September 30, 2024 and 2023 is as follows: Three Months Ended September 30, 2024 vs. 2023 ($ in millions) 2024 (3) 2023 (3) $ Change % Change New business ACV $ 111 $ 141 $ (30) (21) % New business TCV $ 235 $ 266 $ (31) (12) % Renewals TCV 659 434 225 52 % Total Signings $ 894 $ 700 $ 194 28 % Annual recurring revenue signings (1) $ 63 $ 53 $ 10 19 % Non-recurring revenue signings (2) $ 50 $ 96 $ (46) (48) % Nine Months Ended September 30, 2024 vs. 2023 ($ in millions) 2024 (3) 2023 (3) $ Change % Change New business ACV $ 348 $ 468 $ (120) (26) % New business TCV $ 651 $ 1,847 $ (1,196) (65) % Renewals TCV 1,296 1,249 47 4 % Total Signings $ 1,947 $ 3,096 $ (1,149) (37) % Annual recurring revenue signings (1) $ 155 $ 219 $ (64) (29) % Non-recurring revenue signings (2) $ 230 $ 515 $ (285) (55) % ___________ (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 Curbside Management and Public Safety Solutions businesses and Casualty Claims Solutions business new business signings. The total new business pipeline at the end of September 30, 2024 and 2023 was $21.2 billion and $21.4 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 that is defined as Projected Annual Recurring Revenue ("ARR") 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 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, 2024 $ 46 June 30, 2024 (47) March 31, 2024 6 December 31, 2023 49 September 30, 2023 91 CNDT Q3 2024 Form 10-Q 30 Table of Contents Capital Resources and Liquidity As of September 30, 2024 and December 31, 2023, total cash and cash equivalents were $393 million and $498 million, respectively. We also have a $550 million revolving line of credit for our various cash needs, of which $11 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, 2024, was $539 million. As of September 30, 2024, our total principal debt outstanding was $753 million, of which $26 million was due within one year. Refer to Note 7 – 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) 2024 2023 Better (Worse) Net cash provided by (used in) operating activities $ (91) $ (33) $ (58) Net cash provided by (used in) investing activities $ 761 $ (64) 825 Net cash provided by (used in) financing activities $ (781) $ (48) (733) Operating activities The net increase in cash used in operating activities of $58 million, compared to the prior year period, was primarily due to lower Adjusted EBITDA and a decrease in days payable outstanding, partially offset by lower interest payments. We expect significant cash tax payments in the fourth quarter of 2024 due to gains on divestitures. Investing activities Investing cash flow increased by $825 million mainly due to $823 million of proceeds received from the divestitures. Financing activities The increase in cash used in financing activities was due to the voluntary prepayment of $539 million of debt using the proceeds received from the recent divestitures, as well as the repurchase of $182 million of treasury stock, including the $132 million purchased from the Icahn Parties. 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, 2024 and 2023 was $(4) million and $(14) million, respectively. Material Cash Requirements from Contractual Obligations We believe our balances of cash and cash equivalents, which totaled $393 million as of September 30, 2024, along with cash generated by operations and amounts available for borrowing under our 2021 Revolving Credit Facility, will be sufficient to satisfy our cash requirements over the next 12 months and beyond. CNDT Q3 2024 Form 10-Q 31 Table of Contents At September 30, 2024, 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, 2023 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. There have been no significant changes during the nine months ended September 30, 2024 to our critical accounting estimates and policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. 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. Non-GAAP Financial Measures We report our financial results in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). In addition, within this Form 10-Q Part I Item 2 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 compared to 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. GAAP. 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. GAAP. 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 Adjusted 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. CNDT Q3 2024 Form 10-Q 32 Table of Contents • 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. • Loss on extinguishment of debt. This represents write-off of debt issuance costs related to prepayments of debt. • Other charges (credits). This includes Other (income) expenses, net on the Consolidated Statements of Income (loss) and other insignificant (income) expenses and other adjustments. 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.