None of our executive officers is related to any other executive officer or to any of our Directors. Our executive officers are electedappointed annually by the Board of Directors and generally serve until their successors are duly electedappointed and qualified.
We began our IT development and maintenance services business in early 1994 as an in-house technology development center for The Dun & Bradstreet Corporation and its operating units. In 1996, we along with certain other entities, were spun-off from The Dun & Bradstreet Corporation to form a new company, Cognizant Corporation. On June 24,and, in 1998, we completed an initial public offering of our Class A common stock. On June 30, 1998,to become a majority interest in us, and certain other entities were spun-off from Cognizant Corporation to form IMS Health. Subsequently, Cognizant Corporation was renamed Nielsen Media Research, Incorporated.
our Current Reports on Form 8-K and any amendments thereto.
No information on our website is incorporated by reference into this Form 10-K or any other public filing made by us with the SEC.
Item 1A. Risk Factors
Factors That May Affect Future Results
We face various important risks and uncertainties, including those described below, that could adversely affect our business, results of operations and financial condition and, as a result, cause a decline in the trading price of our common stock.
Risks Relating to our Business
We face intense competition from other service providers.
We operate in intensely competitive industries that experience rapid technological developments, changes in industry standards, and changes in customer requirements. The intensely competitive information technology, consulting and business process services markets include a large number of participants and are subject to rapid change. These markets include participants from a variety of market segments, including:
systems integration firms;
contract programming companies;
application software companies;
internet solutions providers;
large or traditional consulting companies;
professional services groups of computer equipment companies; and
infrastructure management and outsourcing companies.
These markets also include numerous smaller local competitors in the various geographic markets in which we operate which may be able to provide services and solutions at lower costs or on terms more attractive to clients than we can. Our direct competitors include, among others, Accenture, Capgemini, Computer Sciences Corporation, Genpact, HCL Technologies, HP Enterprise, IBM Global Services, Infosys Technologies, Tata Consultancy Services and Wipro. In certain markets, our competitors may have greater financial, technical and marketing resources and greater name recognition and, therefore, may be better able to compete for new work and skilled professionals. There is a risk that increased competition could put downward pressure on the prices we can charge for our services and, in turn, our operating margins. Similarly, if our competitors develop and implement processes and methodologies that yield greater efficiency and productivity, they may be able to offer services similar to ours at lower prices without adversely affecting their profit margins. If we are unable to provide our clients with superior services and solutions at competitive prices or successfully market those services to current and prospective clients, our business, results of operations and financial condition may suffer.
Our international expansion plans may not be successful if we are unable to compete effectively in other countries. We may face competition in other countries from companies that may have more experience with operations in such countries or with international operations. Additionally, such companies may have long-standing or well-established relationships with desired clients, which may put us at a competitive disadvantage. If we fail to compete effectively in the new markets we enter, our ability to continue to grow our business could be adversely affected. In addition, if we cannot compete effectively, we may be required to reconsider our strategy to expand internationally as well as our intent not to repatriate our non-U.S. earnings.
We may also face competition from companies that increase in size or scope as the result of strategic mergers or acquisitions. These transactions may include consolidation activity among hardware manufacturers, software companies and vendors, and service providers, which could result in the convergence of products and services. If buyers of products and services in the markets we serve favor using a single provider of integrated products and services, such buyers may direct more business to such providers, which could have a variety of negative effects on our competitive position and, in turn, adversely affect our business, results of operations and financial condition.
Our operating margin may decline and we may not be able to sustain our current level of profitability.
Our operating margin may decline if we experience declines in demand and pricing for our services, an increase in our operating costs, including imposition of new non-income related taxes, or adverse fluctuations in foreign currency exchange rates. In addition, wages in India have historically increased at a faster rate than in the United States, which has in the past and may in the future put pressure on our operating margins due to our offshore delivery model. Additionally, the number and type of equity-based compensation awards and the assumptions used in valuing equity-based compensation awards may change resulting in increased stock-based compensation expense and lower margins.
Further, our operating margin, and therefore our profitability, is dependent on the rates we are able to recover for our services. If we are not able to maintain favorable pricing for our services, our operating margin and our profitability could suffer. The rates we are able to recover for our services are affected by a number of factors, including:
our clients’ perceptions of our ability to add value through our services;
introduction of new services or products by us or our competitors;
our competitors’ pricing policies;
our ability to accurately estimate, attain and sustain contract revenues, margins and cash flows over increasingly longer contract periods;
bid practices of clients and their use of third-party advisors;
the use by our competitors and our clients of offshore resources to provide lower-cost service delivery capabilities;
our ability to charge premium prices when justified by market demand or the type of service; and
general economic and political conditions.
In addition, if we are not able to maintain an appropriate utilization rate for our professionals, our profitability may suffer. Our utilization rates are affected by a number of factors, including:
our ability to efficiently transition employees from completed projects to new assignments;
our ability to hire and assimilate new employees;
our ability to accurately forecast demand for our services and thereby maintain an appropriate headcount in each of our geographies and workforces;
our ability to effectively manage attrition; and
our need to devote time and resources to training, professional development and other non-chargeable activities.
If we are unable to control our costs and operate our business in an efficient manner, our operating margin, and therefore our profitability, may decline.
We could be held liable for damages or our reputation could suffer from security breaches or disclosure of confidential information or personal data.
We are dependent on information technology networks and systems to process, transmit and securely store electronic information and to communicate among our locations around the world and with our clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information or data, including personal data. In addition, many of our engagements involve projects that are critical to the operations of our customers’ businesses. The theft and/or unauthorized use or publication of our, or our clients’, confidential information or other proprietary business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our services. Any failure in the networks or computer systems used by us or our customers could result in a claim for substantial damages against us and significant reputational harm, regardless of our responsibility for the failure.
In addition, we often have access to or are required to manage, utilize, collect and store sensitive or confidential client or employee data, including personal data. As a result, we are subject to numerous U.S. and non-U.S. laws and regulations designed to protect this information, such as the European Union Directive on Data Protection and various U.S. federal and state laws governing the protection of personal data. If any person, including any of our employees, negligently disregards or intentionally breaches controls or procedures with which we are responsible for complying with respect to such data or otherwise mismanages or misappropriates that data, or if unauthorized access to or disclosure of data in our possession or control occurs, we could be subject to liability and penalties in connection with any violation of applicable privacy laws and/or criminal prosecution, as well as significant liability to our clients or our clients’ customers for breaching contractual confidentiality and security provisions or privacy laws. These risks will increase as we continue to grow our cloud-based offerings and services and store and process increasingly large amounts of our customers’ confidential information and data and host or manage parts of our customers’ businesses, especially in industries involving particularly sensitive data such as the financial services industry and the healthcare industry. Unauthorized disclosure of sensitive or confidential client or employee data, including personal data, whether through breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems and networks or those we develop or manage for our clients, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation, which could in turn have a material adverse effect on our business, results of operations and financial condition.
Healthcare-related data protection, privacy and similar laws restrict access, use, and disclosure of information, and failure to comply with or adapt to changes in these laws could materially adversely affect our business, results of operations and financial condition.
As a service provider in the healthcare industry, we are subject to data privacy and security regulation by both the federal government and the states in which we conduct our business, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH, which are federal laws that apply to firms that provide services to certain entities in the healthcare industry.
A portion of the data that we obtain and handle for or on behalf of our healthcare clients is subject to HIPAA, and we are required to maintain the privacy and security of individually identifiable health information in accordance with HIPAA and the terms of our agreements with clients. HITECH increased the civil and criminal penalties that may be imposed against us, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal court to enforce HIPAA’s requirements. We have incurred, and will continue to incur, significant costs to establish and maintain HIPAA-required safeguards and, if additional safeguards are required to comply with HIPAA or our healthcare clients' requirements, our costs could increase further, which would negatively affect our results of operations. Furthermore, if we fail to maintain adequate safeguards, or we inappropriately use or disclose individually identifiable health information, we could be subject to significant liabilities and consequences, including, without limitation:
breach of our contractual obligations to our healthcare clients, which may cause these clients to terminate their relationship with us and may result in potentially significant financial obligations to them;
investigation by the federal regulatory authorities empowered to enforce HIPAA and by the state attorneys general empowered to enforce comparable state laws, and the possible imposition of civil and criminal penalties;
private litigation by individuals adversely affected by any violation of HIPAA, HITECH or comparable state laws to which we are subject; and
negative publicity, which may decrease the willingness of current and potential future clients in the healthcare industry to work with us.
Laws and expectations relating to privacy, security and data protection continue to evolve, and we continue to adapt to changing needs. Nevertheless, changes in these laws may limit our data access, use, and disclosure, and may require increased expenditures by us or may dictate that we not offer certain types of services. Any of the foregoing may have a material adverse effect on our ability to provide services to our healthcare clientsconditions globally and in turn, on our business, results of operations and financial condition.
Our revenues and operating results may experience significant quarterly fluctuations.
We may experience significant quarterly fluctuations in our revenues and results of operations. Among the factors that could cause these variations are:
the nature, number, timing, scope and contractual terms of the projects in which we are engaged;
delays incurred in the performance of those projects;
the accuracy of estimates of resources and time required to complete ongoing projects;
changes to the financial condition of our clients;
changes in pricing in response to customer demand and competitive pressures;
longer sales cycles and ramp-up periods for our larger, more complex projects;
volatility and seasonality of our software sales;
the mix of on-site and offshore staffing;
the ratio of fixed-price contracts versus time-and-materials contracts;
employee wage levels and utilization rates;
changes in foreign exchange rates, including the Indian rupee versus the U.S. dollar;
the timing of collection of accounts receivable;
enactment of new taxes;
changes in domestic and international income tax rates and regulations;
changes to levels and types of stock-based compensation awards and assumptions used to determine the fair value of such awards; and
general economic conditions.
As a result of these factors, it is possible that in some future periods, our revenues and results of operations may be significantly below the expectations of public market analysts and investors. In such an event, the price of our common stock would likely be materially and adversely affected.
We rely on a few customers for a large portion of our revenues.
Our top five and top ten customers generated approximately 11.0% and 18.6%, respectively, of our revenues for the year ended December 31, 2015. The volume of work performed for specific customers is likely to vary from year to year, and a major customer in one year may not use our services in a subsequent year. The loss of one of our large customers could have a material adverse effect on our business, results of operations and financial condition.
Our business, results of operations and financial condition will suffer if we fail to enhance our existing services and solutions and develop new services and solutions that allow us to keep pace with rapidly evolving technological developments.
The information technology, consulting and business process services markets are characterized by rapid technological change, evolving industry standards, changing customer preferences and new product and service introductions. Our future success will depend on our ability to develop services and solutions that keep pace with changesparticular in the markets in which we operate. We cannot be sure that we will be successful in developing new servicesour customers and solutions addressing evolving technologies in a timely or cost-effective manner or that any services and solutions we do develop will be successful in the marketplace. Our failure to address the demands of the rapidly evolving technological environment couldoperations are concentrated.
Global macroeconomic conditions have a material adverse effect on our ability to retain and attract clients and our competitive position, which could in turn have a material adversesignificant effect on our business resultsas well as the businesses of operationsour customers. Volatile, negative or uncertain economic conditions could cause our customers to reduce, postpone or cancel spending on projects with us and financial condition.could make it more difficult for us to accurately forecast customer demand and have available the right resources to profitably address such customer demand. The short-term nature of contracts in our industry means that actions by customers may occur quickly and with little warning, which may cause us to incur extra costs where we have employed more professionals than customer demand supports.
Our business results of operationsis particularly susceptible to economic and financial condition may be affected by the rate of growthpolitical conditions in the use of technology in business and the type and level of technology spending by our clients.
Our business depends, in part, upon continued growth in the use of technology in business by our clients and prospective clients as well as their customers and suppliers. In challenging economic environments, our clients may reduce or defer their spending on new technologies in order to focus on other priorities, or may choose to use their own internal resources rather than engage an outside firm to perform the types of services and solutions we provide. In addition, many companies have already invested substantial resources in their current means of conducting commerce and exchanging information, and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel, processes and infrastructures. If the growth of technology usage in business, or our clients’ spending on technology in business, declines, or if we cannot convince our clients or potential clients to embrace new technological solutions, our business, results of operations and financial condition could be adversely affected.
Most of our contracts withmarkets where our customers or operations are short-term, and our business, results of operations and financial condition could be adversely affected if our clients terminate their contracts on short notice.
Consistent with industry practice, most of our contracts with our customers are short-term. A majority of our contracts can be terminated by our clients with short notice and without significant early termination cost. Terminations may result from factors that are beyond our control and unrelated to our work product or the progress of the project, including the business or financial condition of a client, changes in ownership, management or the strategy of a client or economic or market conditions generally or specific to a client’s industry. When contracts are terminated, we lose the anticipated revenues and might not be able to eliminate our associated costs in a timely manner. Consequently, our operating margins in subsequent periods could be lower than expected. If we are unable to replace the lost revenue with other work on terms we find acceptable or effectively eliminate costs, our business, results of operations and financial condition could be adversely affected.
If our pricing structures are based on inaccurate expectations and assumptions regarding the cost and complexity of performing our work, then our contracts could be unprofitable.
We negotiate pricing terms with our clients utilizing a range of pricing structures and conditions. We predominantly contract to provide services either on a time-and-materials basis or on a fixed-price basis. Fixed-price contracts accounted for approximately 36.5% of our revenues for the year ended December 31, 2015, and we expect that an increasing number of our future projects will be contracted on a fixed-price basis. Our pricing is highly dependent on our internal forecasts and predictions about our projects and the marketplace, which might be based on limited data and could turn out to be inaccurate. We face a number of risks when pricing our contracts, as many of our projects entail the coordination of operations and workforces in multiple locations and utilizing workforces with different skill sets and competencies across geographically diverse service locations. Our pricing, cost and operating margin estimates for the work that we perform frequently include anticipated long-term cost savings from transformational and other initiatives that we expect to achieve and sustain over the life
of the contract. There is a risk that we will underprice our projects, fail to accurately estimate the costs of performing the work or fail to accurately assess the risks associated with potential contracts. In particular, any increased or unexpected costs, delays, failures to achieve anticipated cost savings, or unexpected risks we encounter in connection with the performance of this work, including those caused by factors outside our control, could make these contracts less profitable or unprofitable, which could have an adverse effect on our business, results of operations and financial condition.
If we fail to maintain appropriate internal controls in the future, we may not be able to report our financial results accurately, which may adversely affect our stock price and our business.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations require our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. We have committed and will be required to continue to commit significant financial and managerial resources in order to comply with these requirements.
Further, we are required to integrate any acquired businesses into our system of disclosure controls and procedures and internal control over financial reporting. Companies we acquire may not be required to implement or maintain the disclosure controls and procedures or internal control over financial reporting that are required of public companies, prior to being acquired by us and we cannot provide assurance as to how long the integration process may take.
Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, and fraud. If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations as a publicly traded company or comply with the requirements of the SEC or the Sarbanes-Oxley Act of 2002. This could result in a restatement of our financial statements, the imposition of sanctions, or investigation by regulatory authorities, and could cause investors to lose confidence in our reported financial information. Any such consequence or other negative effect of our inability to meet our reporting requirements or comply with legal and regulatory requirements, as well as any disclosure of an accounting, reporting or control issue, could adversely affect the trading price of our common stock and our business.
We may not be able to successfully acquire target companies or integrate acquired companies or technologies into our company, and we may become subject to certain liabilities assumed or incurred in connection with our acquisitions that could harm our business, results of operations and financial condition.
If we are unable to complete the number and kind of acquisitions for which we plan, or if we are inefficient or unsuccessful at integrating any acquired businesses, including TriZetto, into our operations, we may not be able to achieve our planned rates of growth or improve our market share, profitability or competitive position in specific markets or services. The process of integrating an acquired company, business, or technology has created, and will continue to create, operating difficulties. The risks we face include:
Diversion of management time and focus from operating our core business to acquisition integration challenges;
Failure to successfully integrate the acquired business into our operations, including cultural challenges associated with integrating and retaining employees; and
Failure to achieve anticipated efficiencies and/or benefits, realize our strategic objectives or further develop the acquired business.
Although we conduct due diligence in connection with each of our acquisitions, there may be liabilities that we fail to discover, that we inadequately assess or that are not properly disclosed to us. In particular, to the extent that any acquired business (or any assets thereof) (i) failed to comply with or otherwise violated applicable laws or regulations, (ii) failed to fulfill contractual obligations to customers or (iii) incurred material liabilities or obligations to customers that are not identified during the diligence process, we, as the successor owner, may be financially responsible for these violations, failures and liabilities and may suffer financial and/or reputational harm or otherwise be adversely affected. In addition, as part of an acquisition, we may assume responsibilities and obligations of the acquired business pursuant to the terms and conditions of agreements entered by the acquired entity that are not consistent with the terms and conditions that we typically accept and require. We also have been and may in the future be subject to litigation or other claims in connection with an acquired company, including claims from terminated employees, customers, former stockholders, or other third parties. Any material liabilities associated with our acquisitions could harm our business, results of operations and financial condition.
We cannot predict or guarantee that we will successfully identify suitable acquisition candidates, consummate any acquisition or integrate any acquired business. Any failure to do so could have an adverse impact on our business, results of operations and financial condition.
System failures, system outages or operational disruptions in our communications or information technology systems and infrastructure could negatively impact our operations and ability to provide our services and solutions, which would have an adverse effect on our business, results of operations and financial condition.
To deliver our services and solutions to our customers, we must maintain a high speed network of satellite, fiber optic and land lines and active voice and data communications 24 hours a day between our main operating offices in India, our other development and delivery centers and the offices of our customers worldwide. Any systems failure or outage or a significant disruption in our ability to transmit voice and data through satellite and telephone communications or in our information technology systems and infrastructure could result in curtailed operations and a loss of customers, which would have an adverse effect on our business, results of operations and financial condition.
Our business, results of operations and financial condition could be impaired if we lose key members of our management team.
Our future performance depends upon the continued service of the key members of our management team. Competition for experienced executive officers and other key employees in the industries in which we compete is intense, and there can be no assurance that we will be able to retain key persons, or that we will be successful in attracting and retaining replacements in the future. The loss of any one or more of our executive officers or significant employees, or the failure to attract, integrate and retain additional talent, could have a material adverse effect on our business, results of operations and financial condition. We do not maintain key man life insurance on any of our executive officers or significant employees.
In addition, our business could be harmed if any key member of our management team leaves our employment and joins one of our competitors. Currently we have entered into non-competition agreements with the majority of our executive officers. We cannot be certain, however, that the restrictions in these agreements prohibiting such executive officers from engaging in competitive activities are enforceable. Any defection by a key member of our management team could have a material adverse effect on our business, results of operations and financial condition.
Competition for highly-skilled technical personnel is intense, and our ability to compete for and manage client engagements depends on our ability to attract and retain such personnel.
Our ability to maintain and renew existing client engagements and obtain new business depends to a significant extent on our ability to attract, train and retain highly-skilled technical personnel so as to keep our supply of skills and resources in balance with client demand. In particular, in order to serve client needs and grow our business, we must attract, train and retain appropriate numbers of talented people, including project managers, IT engineers and other senior technical personnel, who are able to keep pace with continuing changes in information technology, evolving industry standards and changing customer preferences. We cannot guarantee that we will be able to train and assimilate new employees successfully. In addition, we believe there is a shortage of, and significant competition for, professionals with the advanced technological skills necessary to perform the services we offer. We have subcontracted in the past, and may continue to subcontract in the future, with other service providers in order to meet our obligations to our customers. If we are unable to attract and retain highly-skilled technical personnel, our ability to effectively lead our current projects and develop new business could be jeopardized, and our business, results of operations and financial condition could be adversely affected.
Our business could be negatively affected if we incur legal liability in connection with providing our services and solutions.
If we fail to meet our contractual obligations or otherwise breach obligations to our clients, we could be subject to legal liability. We may enter into non-standard agreements because we perceive an important financial opportunity by doing so or because our personnel did not adequately adhere to our guidelines. In addition, the contracting practices of our competitors may cause contract terms and conditions that are unfavorable to us to become standard in the marketplace. If we cannot, or do not, meet our contractual obligations to provide services and solutions, and if our exposure is not adequately limited through the enforceable terms of our agreements, we might face significant legal liability and our business, results of operations and financial condition could be adversely affected.
In the normal course of business and in conjunction with certain client engagements, we have entered into contractual arrangements through which we may be obligated to indemnify clients or other parties with whom we conduct business with respect to certain matters. These arrangements can include provisions whereby we agree to hold the indemnified party and certain of their affiliated entities harmless with respect to third-party claims, including matters such as our breach of certain representations or covenants, our infringement of the intellectual property of others or our gross negligence or willful misconduct. Payments by us under any of these arrangements are generally conditioned on the client making a claim and providing us with full control over the defense and settlement of such claim. It is not possible to determine our maximum potential exposure under these indemnification agreements due to the unique facts and circumstances involved in each
particular agreement. If events arise requiring us to make payment for indemnification claims under our contractual indemnification obligations, such payments could have a material impact on our business, results of operations and financial condition.
Additionally, our clients may perform audits or require us to perform audits and provide audit reports with respect to the controls and procedures that we use in the performance of services for such clients, especially when we process data belonging to them. Our ability to acquire new clients and retain existing clients may be adversely affected and our reputation could be harmed if we receive a qualified opinion, or if we cannot obtain an unqualified opinion, with respect to our controls and procedures in connection with any such audit in a timely manner. We could also incur liability if our controls and procedures, or the controls and procedures we manage for a client, were to result in an internal control failure or impair our client’s ability to comply with its own internal control requirements.
We may face difficulties in providing end-to-end business solutions or delivering complex and large projects for our clients that could cause clients to discontinue their work with us, which in turn could harm our business, results of operations and financial condition.
We have been expanding the nature and scope of our engagements and have added new service offerings, such as consulting, business process services, systems integration and outsourcing of entire portions of IT infrastructure across the industries we serve. The success of these service offerings depends, in part, upon continued demand for such services by our existing and prospective clients and our ability to meet this demand in a cost-competitive and effective manner. To obtain engagements for such end-to-end solutions, we also are more likely to compete with large, well-established international consulting firms, resulting in increased competition and pricing pressure. Accordingly, we cannot be certain that our new service offerings will effectively meet client needs or that we will be able to attract existing and prospective clients to these service offerings.
The increased breadth of our service offerings has resulted and may continue to result in larger and more complex projects with our clients. This requires us to establish closer relationships with our clients and achieve a thorough understanding of their operations. Our ability to establish such relationships depends on a number of factors, including the proficiency of our professionals and our management personnel. Our failure to understand our client requirements or our failure to deliver services that meet the requirements specified by our clients could result in termination of client contracts, and we could be liable to our clients for significant penalties or damages, which could have a material adverse effect on our business, results of operations and financial condition.
Larger projects often involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or delay additional planned engagements. These terminations, cancellations or delays may result from factors that have little or nothing to do with the quality of our services, such as the business or financial condition of our clients or the economy generally. Such cancellations or delays make it difficult to plan for project resource requirements and inaccuracies in such resource planning and allocation may have a negative impact on our business, results of operations and financial condition.
If we are unable to collect our receivables from, or bill our unbilled services to, our clients, our business, results of operations and financial condition could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables and unbilled services. Actual losses on client balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic conditions could also result in financial difficulties for our clients, including limited access to the credit markets, insolvency or bankruptcy, and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
If our clients are not satisfied with our services and solutions or if our reputation in the marketplace is damaged, our business, results of operations and financial condition could be adversely affected.
Our business model depends in large part on our ability to attract additional work from our base of existing clients. Our business model also depends on our account teams’ ability to develop relationships with our clients that enable us to understand
our clients’ needs and deliver services and solutions that are tailored to those needs. If a client is not satisfied with the quality of work performed by us, or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired, and the client’s dissatisfaction with our services could damage our ability to obtain additional work from that client. In particular, clients that are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date and could direct future business to our competitors.
In addition, negative publicity related to our client services or relationships, regardless of its accuracy, could adversely affect our business by inhibiting our ability to compete for new contracts with current and prospective clients. Our corporate reputation is potentially susceptible to damage due to actions or statements made by current or former clients that are dissatisfied with our services or work product, as well as competitors, vendors, adversaries in legal proceedings, government regulators, former and current employees, members of the investment community and the media. Damage to our reputation could be difficult and time-consuming to repair, make potential or existing clients reluctant to select us for new engagements and, in turn, result in a loss of business, adversely affect our recruitment and retention efforts, reduce the value and effectiveness of the Cognizant brand name and reduce investor confidence in us, any one of which could adversely affecting our business, results of operations and financial condition.
We rely on third parties for certain software products.
Certain of our software products contain components that are developed by third parties. In addition, we resell certain software products of third parties and we use third-party software products to deliver our services and solutions. We may not be able to replace the functions provided by these third-party software components or products if they become obsolete, defective, or incompatible with future versions of our products or with our services and solutions, or if they are not adequately maintained or updated. Any defects in or significant interruption in the availability of these third-party software products or components could harm the sale of our products and our delivery of services and solutions to our clients unless and until we can secure or develop an alternative source. In addition, third-party suppliers of software or other intellectual property assets could be unwilling to permit us to use their intellectual property and this could impede or disrupt use of their products or services by us and our clients. If our ability to provide services and solutions to our clients is impaired as a result of any such denial, our business, results of operations and financial condition could be adversely affected.
Alternate sources for the technology currently licensed to us may not be available to us in a timely manner, may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use. Further, our success depends on our ability to maintain our existing relationships with third-party software providers and build new relationships with other providers in order to enhance our services and remain competitive. If we are unable to maintain such existing relationships or successfully build new relationships, our business, results of operations, and financial condition could suffer.
We are exposed to credit risk and fluctuations in the market values of our investment portfolio.
Any deterioration of the credit and capital markets in the United States, Europe or other regions of the world could result in volatility of our investment earnings and impairments to our investment portfolio, which could negatively impact our financial condition and reported income. Any decline in economic activity could adversely affect the ability of counterparties to use certain financial instruments such as marketable securities and derivatives to meet their obligations to us.
concentrated. Our revenues are highly dependent on clients concentrated in certain industries, including the financial services and healthcare industries. Consolidation and factors that negatively affect these industries may adversely affect our business, results of operations and financial condition.
During the year ended December 31, 2015, we earned approximately 40.3% of our revenues from the financial services industry, which includes insurance, and 29.5% from the healthcare industry. Significant consolidation or a decrease in growth in the financial services industry or the healthcare industry may reduce the demand for our services and negatively affect our business, financial condition and results of operations. For example, two or more of our current clients may merge or consolidate and combine their operations, which may cause us to lose work or lose the opportunity to gain additional work. The increased market power of larger companies may also increase pricing and competitive pressures on us. Any of these possible results of industry consolidation could adversely affect our business, financial condition and results of operations. In addition, if we are unable to successfully anticipate changing regulatory, economic and political conditions affecting the industries in which we operate, we may be unable to effectively plan for or respond to those changes, and our business, results of operations and financial condition could be negatively affected.
Our revenues are highly dependent on clientscustomers located in the United States and Europe. Any weakeningEurope, and any adverse economic, political or legal uncertainties or adverse developments, including due to the anticipated exit of economic conditionsthe United Kingdom from the European Union as a result of the 2016 United Kingdom referendum to exit the European Union (the "Brexit Referendum") may cause customers in these markets maygeographies to reduce their spending and materially adversely affectimpact our business, results of operations and financial condition.
Approximately 78.6%business. Many of our revenues during the year ended December 31, 2015 were derived from clients located in North America. In the same period, approximately 16.2% of our revenues were derived from clients located in Europe. Any weakening of economic conditionscustomers are in the United States or European economies could depress the pricing for ourfinancial services and cause our customers tohealthcare industries, so any decrease in growth or significant consolidation in these industries or regulatory policies that restrict these industries may reduce or postpone their technology spending significantly, which may in turn lower the demand for our servicesservices. Economic and negatively affect our business, results of operations and financial condition.
If we do not continue to improve our operational, financial and other internal controls and systems to manage our rapid growth and size, our business, results of operations and financial condition could be adversely affected.
Our recent and anticipated growth, including our acquisition of TriZetto, will continue to place significant demands on our management and other resources, and will require us to continue to develop and improve our operational, financial and other internal controls. In particular, our growth will increase the challenges involved in:
recruiting, training and retaining technical, finance, marketing and management personnel with the knowledge, skills and experience that our business model requires;
maintaining high levels of client satisfaction;
developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal systems;
preserving our culture, values and entrepreneurial environment; and
effectively managing our personnel and operations and effectively communicating to our personnel worldwide our core values, strategies and goals.
In addition, the increasing size and scope of our operations increase the possibility that a member of our personnel will engage in unlawful or fraudulent activity, breach our contractual obligations, or otherwise expose us to unacceptable business risks, despite our efforts to train our people and maintain internal controls to prevent such instances. If we do not continue to develop and implement the right processes and tools to manage our enterprise, our business, results of operations and financial condition could be adversely affected.
There can be no assurance that our business, results of operations and financial condition will not be adversely affected by our incurrence of indebtedness.
On November 20, 2014, in conjunction with our acquisition of TriZetto, we entered into a credit agreement with a bank syndicate providing for a $1.0 billion unsecured term loan and a $750.0 million unsecured revolving credit facility, both of which mature on November 20, 2019. We may incur additional indebtedness in the future, which may be significant. We will be required to have sufficient cash available in the United States to pay scheduled installments of principal, accrued interest and fees from time to time and at maturity. If we do not have sufficient cash available in the United States, we may be required to repatriate earnings held by our foreign subsidiaries. Any such repatriation would cause us to accrue the applicable amount of taxes associated with such earnings at that time, which could have a material adverse effect on our results of operations. In addition, we may not have sufficient cash in the United States or abroad to make payments on our debt obligations, which could cause us to seek additional debt or equity capital or restructure or refinance our existing indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.
In addition, the credit agreement contains certain covenants including a requirement that we maintain a debt to total stockholders' equity ratio not in excess of 0.40 to 1.00 as of the last day of any fiscal quarter. Failure to comply with this covenant or other provisions of the credit agreement could result in a default under the credit agreement, requiring us to either cure such default, receive a waiver, or in the absence of such cure or waiver, refinance any outstanding indebtedness under the credit agreement. There is no assurance that we would be able to refinance our debt on acceptable terms and conditions.
Risks Relating to our International Operations
Our global operations are subject to complex risks, some of which might be beyond our control.
We have offices and operations in various countries around the world and provide services to clients globally. In 2015, approximately 78.6% of our revenues were attributable to the North American region, 16.2% were attributable to the European region, and the remainder was attributable to the rest of the world, primarily the Asia Pacific region. We anticipate that revenues from customers outside North America will continue to account for a material portion of our revenues in the
foreseeable future and may increase as we expand our international presence, particularly in Europe, the Asia Pacific region and the Latin America region.
In addition, the majority of our employees, along with our development and delivery centers, are located in India. As a result, we may be subject to risks inherently associated with international operations, including risks associated with foreign currency exchange rate fluctuations, difficulties in enforcing intellectual property and/or contractual rights, the burdens of complying with a wide variety of foreign laws and regulations, potentially adverse tax consequences, tariffs, quotas and other barriers, potential difficulties in collecting accounts receivable, international hostilities, terrorism and natural disasters. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we are unable to manage the risks of our global operations, our business, results of operations and financial condition could be adversely affected.
A substantial portion of our assets and operations are located in India and we are subject to regulatory, economic, political and other uncertainties in India.
We intend to continue to develop and expand our offshore facilitiesdevelopments in India, where a significant majority of our operations and technical professionals are located. While wage costs are lowerlocated, or in India than in the United States and other developed countries for comparably skilled professionals, wages in India have historically increased at a faster rate than in the United States and other countries in whichwhere we operate. If this trend continues in the future, it would result in increasedmaintain delivery operations, may also have a significant impact on our business and costs for our skilled professionals and thereby potentially reduce our operating margins. Also, there is no assurance that, in future periods, competition for skilled professionals will not drive salaries higher in India, thereby resulting in increased costs for our technical professionals and reduced operating margins.
of operations. As a developing country, India has also recently experienced civil unrest and terrorism and has been involved in conflicts with neighboring countries. In recent years, there have been military confrontations between India and Pakistan that have occurred in the region of Kashmir and along the India-Pakistan border. The potential for hostilities between the two countries has been high in light of tensions relatedmay continue to recent terrorist incidents in India and the unsettled nature of the regional geopolitical environment, including events in and related to Afghanistan, Iraq and Syria. If India becomes engaged in armed hostilities, particularly if these hostilities are protracted or involve the threat of or use of weapons of mass destruction, it is likely that our business, results of operations and financial condition would be materially adversely affected.
In the past, the Indian economy has experienced many of the problems that commonly confront the economies of developing countries, includingexperience high inflation erraticand wage growth, fluctuations in gross domestic product growth and shortagesvolatility in currency exchange rates, any of which could materially adversely affect our cost of operations. Additionally, we benefit from governmental policies in India that encourage foreign exchange. The Indian government has exercised,investment and continues to exercise, significant influence over many aspectspromote the ease of the Indian economy and Indian government actions concerning the economy could have a material adverse effect on private sector entities like us. In the past, the Indian government has provided significantdoing business, such as tax incentives, and relaxed certain regulatory restrictions in order to encourage foreign investment in specified sectors of the economy, including the software development services industry. Changes in government leadership in India or aany change in policies of the existing government in Indiapolicy or circumstances that results in the elimination of anysuch benefits or degradation of the benefits realized by us from our Indian operationsrule of law, or the imposition of new taxes applicable to suchadverse restrictions or costs on our operations could have a material adverse effect on our business, results of operations and financial condition.
Our operatingIf we are unable to attract, train and retain skilled professionals, including highly skilled technical personnel to satisfy customer demand and senior management to lead our business globally, our business and results of operations may be materially adversely affected by fluctuationsaffected.
Our success is dependent, in large part, on our ability to keep our supply of skilled professionals, including project managers, IT engineers and senior technical personnel, in balance with customer demand around the Indian rupeeworld and on our ability to attract and retain senior management with the knowledge and skills to lead our business globally. Each year, we must hire tens of thousands of new professionals and retrain, retain, and motivate our workforce of hundreds of thousands of professionals with diverse skills and expertise in order to serve customer demands across the globe, respond quickly to rapid and ongoing technological, industry and macroeconomic developments and grow and manage our business. We also must continue to maintain an effective senior leadership team. The loss of senior executives, or the failure to attract, integrate and retain new senior executives as the needs of our business require, could have a material adverse effect on our business and results of operations.
Competition for skilled labor is intense and, in some jurisdictions in which we operate, there are more jobs for IT professionals than qualified persons to fill these jobs. Our business has experienced significant employee attrition, which may cause us to incur increased costs to hire new professionals with the desired skills. Costs associated with recruiting and training professionals are significant. If we are unable to hire or deploy professionals with the needed skillsets or if we are unable to adequately equip our professionals with the skills needed, this could materially adversely affect our business. Additionally, if we are unable to maintain an employee environment that is competitive and contemporary, it could have an adverse effect on engagement and retention, which may materially adversely affect our business.
We face challenges related to growing our business organically as well as inorganically through acquisitions, and we may not be able to achieve our targeted growth rates.
Achievement of our targeted growth rates requires continued significant organic growth of our business as well as inorganic growth through acquisitions. To achieve such growth, we must, among other foreign currency exchange rates, restrictions on the deployment of cash acrossthings, continue to significantly expand our global operations, increase our product and service offerings and scale our use of derivative financial instruments.
Although we report our operating results in U.S. dollars, a portioninfrastructure to support such business growth. Continued business growth increases the complexity of our revenuesbusiness and expensesplaces significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions, which we will have to continue to develop and improve to sustain such growth. We must continually recruit, train and retain technical, finance, marketing and management personnel with the knowledge, skills and experience that our business model requires and effectively manage our personnel worldwide to support our culture, values, strategies and goals. Additionally, we expect to continue pursuing strategic and targeted acquisitions, investments and joint ventures to enhance our offerings of services and solutions or to enable us to expand in certain geographic and other markets. We may not be successful in identifying suitable opportunities, completing targeted transactions or achieving the desired results, and such opportunities may divert our management's time and focus away from our core business. We may face challenges in effectively integrating acquired businesses into our ongoing operations and in assimilating and retaining employees of those businesses into our culture and organizational structure. If we are denominatedunable to manage our growth effectively, complete acquisitions of the number, magnitude and nature we have targeted, or successfully integrate any acquired businesses into our operations, we may not be able to achieve our targeted growth rates or improve our market share, profitability or competitive position generally or in currenciesspecific markets or services.
We may not be able to achieve our profitability and capital return goals.
Our goals for profitability and capital return rely upon a number of assumptions, including our ability to improve the efficiency of our operations and make successful investments to grow and further develop our business. Our profitability depends on the efficiency with which we run our operations and the cost of our operations, especially the compensation and benefits costs of the professionals we employ. We may not be able to efficiently utilize our professionals if increased regulation, policy changes or administrative burdens of immigration, work visas or outsourcing prevents us from deploying our professionals globally on a timely basis, or at all, to fulfill the needs of our customers. Wage and other than the U.S. dollar.cost pressures may put pressure on our profitability. Fluctuations in foreign currency exchange rates can also have a number of adverse effects on us. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, expenses and income, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, changes in the value of the U.S. dollar against other currencies will affect our revenues, income from operations and net income and the value of balance sheetwhen items originally denominated in other currencies. There is no guarantee that our financial results will not be adversely affected by currency exchange rate fluctuations. In addition, in some countries we could be subject to strict restrictions on the movement of cash and the exchange of foreign currencies which could limit our ability to use these funds across our global operations. Further, as we continue to leverage our global delivery model, moreare translated or remeasured into U.S. dollars for presentation of our expenses are incurred in currencies other than those in which we bill for the related services. An increase in the value of certain currencies, such as the Indian rupee, against the U.S. dollar could increase costs for delivery of services at offshore sites by increasing labor and other costs that are denominated in local currency.
consolidated financial statements. We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of certain rupee denominated payments in India. These contracts are intended to partially offset the impact of the movement of the exchange rates on future operating costs. In addition, we have also entered into foreign exchange forward contracts in ordercosts and to
mitigate foreign currency risk on foreign currency denominated net monetary assets. TheHowever, the hedging strategies that we have implemented, or may in the future implement, to mitigate foreign currency exchange rate risks may not reduce or completely offset our exposure to foreign exchange rate fluctuations and may expose our business to unexpected market, operational and counterparty credit risks. Accordingly,We are particularly susceptible to wage and cost pressures in India and the exchange rate of the Indian rupee relative to the currencies of our customer contracts due to the fact that the substantial majority of our employees are in India while our contracts with customers are typically in the local currency of the country where our customers are located. If we are unable to improve the efficiency of our operations, our operating margin may decline and our business, results of operations and financial condition may be materially adversely affected. Failure to achieve our profitability goals could adversely affect our business, financial condition and results of operations.
With respect to capital return, our ability and decisions to pay dividends and repurchase shares consistent with our announced goals or at all depend on a variety of factors, including our cash flow generated from operations, the amount and geographic location of our cash and investment balances, our net income, our overall liquidity position, potential alternative uses of cash, such as acquisitions, and anticipated future economic conditions and financial results. Failure to achieve our capital return goals may adversely impact our reputation with shareholders and shareholders’ perception of our business and the value of our common stock.
Our failure to meet specified service levels required by certain of our contracts may result in our contracts being less profitable, potential liability for penalties or damages or reputational harm.
Many of our contracts include clauses that tie our compensation to the achievement of agreed-upon performance standards or milestones. Failure to satisfy these measures could significantly reduce or eliminate our fees under the contracts, increase the cost to us of meeting performance standards or milestones, delay expected payments, subject us to potential damage claims under the contract terms or harm our reputation. Customers also often have the right to terminate a contract and pursue damage claims for serious or repeated failure to meet these service commitments. Some of our contracts provide that a portion of our compensation depends on performance measures such as cost-savings, revenue enhancement, benefits produced, business goals attained and adherence to schedule. These goals can be complex and may depend on our customers’ actual levels of business activity or may be based on assumptions that are later determined not to be achievable or accurate. As such, these provisions may increase the variability in revenues and margins earned on those contracts.
We face intense and evolving competition in the rapidly changing markets we compete in.
The markets we serve and operate in are highly competitive, subject to rapid change and characterized by a large number of participants, as described in “Part I, Item 1. Business-Competition.” In addition to large, global competitors, we face competition from numerous smaller, local competitors in many geographic markets that may have more experience with operations in these markets, have well-established relationships with our desired customers, or be able to provide services and solutions at lower costs or on terms more attractive to customers than we can. Consolidation activity may also result in new competitors with greater scale, a broader footprint or vertical integration that makes them more attractive to customers as a single provider of integrated products and services. In addition, the short-term nature of contracts in our industry and the long-term concurrent use by many customers of multiple professional service providers means that we are required to be continually competitive on the quality, scope and pricing of our offerings or face a reduction or elimination of our business. Our success depends on our ability to continue to develop and implement services and solutions that anticipate and respond to rapid and continuing changes in technology to serve the evolving needs of our customers. If we do not sufficiently invest in new technologies, successfully adapt to industry developments and changing demand, and evolve and expand our business at sufficient speed and scale to keep pace with the demands of the markets we serve, we may be unable to develop and maintain a competitive advantage and execute on our growth strategy, which would materially adversely affect our business, results of operations and financial condition.
Our relationships with our third party alliance partners, who supply us with necessary components to the services and solutions we offer our customers, are also critical to our ability to provide many of our services and solutions that address customer demands. There can be no assurance that we will be able to maintain such relationships. Among other things, such alliance partners may in the future decide to compete with us, form exclusive or more favorable arrangements with our competitors or otherwise reduce our access to their products impairing our ability to provide the services and solutions demanded by customers.
We face legal, reputational and financial risks if we fail to protect customer and/or Cognizant data from security breaches or cyberattacks.
In order to provide our services and solutions, we depend on global information technology networks and systems, including those of third parties, to process, transmit, host and securely store electronic information (including our confidential information and the confidential information of our customers) and to communicate among our locations around the world and with our customers, suppliers and partners. Security breaches, employee malfeasance, or human or technological error could lead to shutdowns or disruptions of our operations and potential unauthorized disclosure of our or our customers’ sensitive data, which in turn could jeopardize projects that are critical to our operations or the operations of our customers’ businesses. Like other global companies, we and the businesses we interact with have experienced threats to data and systems, including by perpetrators of random or targeted malicious cyberattacks, computer viruses, malware, worms, bot attacks or other destructive or disruptive software and attempts to misappropriate customer information and cause system failures and disruptions.
A security compromise of our information systems or of those of businesses with whom we interact that results in confidential information being accessed by unauthorized or improper persons could harm our reputation and expose us to regulatory actions, customer attrition, remediation expenses, disruption of our business, and claims brought by our customers or others for breaching contractual confidentiality and security provisions or data protection laws. Monetary damages imposed on us could be significant and not covered by our liability insurance. Techniques used by bad actors to obtain unauthorized access, disable or degrade service, or sabotage systems evolve frequently and may not immediately produce signs of intrusion, and we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, a security breach could require that we expend substantial additional resources related to the security of our information systems, diverting resources from other projects and disrupting our businesses. If we experience a data security breach, our reputation could be damaged and we could be subject to additional litigation, regulatory risks and business losses.
We are required to comply with increasingly complex and changing data security and privacy regulations in the United States, the European Union and in other jurisdictions in which we operate that regulate the collection, use and transfer of personal data, including the transfer of personal data between or among countries. In the United States, for example, the Health Insurance Portability and Accountability Act imposes extensive privacy and security requirements governing the transmission, use and disclosure of protected health information by participants in the health care industry. The European Union’s General Data Protection Regulation, which became effective in May 2018, imposes new compliance obligations regarding the handling of personal data and has significantly increased financial penalties for noncompliance. Additionally, the Digital Information Security in Healthcare Act is under consideration in India, which proposed legislation includes significant penalties related to disclosure of healthcare data. Other countries have enacted or are considering enacting data localization laws that require certain data to stay within their borders. We may also face audits or investigations by one or more domestic or foreign government agencies or our customers pursuant to our contractual obligations relating to our compliance with these regulations. Complying with changing regulatory
requirements requires us to incur losses fromsubstantial costs, exposes us to potential regulatory action or litigation, and may require changes to our usebusiness practices in certain jurisdictions, any of derivative financial instruments thatwhich could materially adversely affect our business operations and operating results.
If our business continuity and disaster recovery plans are not effective and our global delivery capability is impacted, our business and results of operations may be materially adversely affected and we may suffer harm to our reputation.
Our business model is dependent on our global delivery capability, which includes coordination between our main operating offices in India, our other global delivery centers, the offices of our customers and our associates worldwide. System failures, outages and operational disruptions may be caused by factors outside of our control such as hostilities, political unrest, terrorist attacks, natural disasters or pandemics affecting the geographies where our operations and transmission equipment is located. Our business continuity and disaster recovery plans may not be effective at preventing or mitigating the effects of such disruptions, particularly in the case of a catastrophic event. Any such disruption may result in lost revenues, a loss of customers and reputational damage, which would have a materialan adverse effect on our business, results of operations and financial condition.
Our global operations expose usA substantial portion of our employees in the United States, United Kingdom, European Union and other jurisdictions rely on visas to numerouswork in those areas such that any restrictions on such visas or immigration more generally may affect our ability to compete for and sometimes conflicting legal and regulatory requirements, and violations ofprovide services to customers in these regulationsjurisdictions, which could harmmaterially adversely affect our business, results of operations and financial condition.
Because we provide servicesA substantial portion of our employees in the United States and in many other jurisdictions, including countries in Europe, rely upon temporary work authorization or work permits, which makes our business particularly vulnerable to clients throughoutchanges and variations in immigration laws and regulations, including written changes and policy changes to the world, wemanner in which the laws and regulations are subject to numerous,interpreted or enforced. The political environment in the United States, the United Kingdom and sometimes conflicting, legal rules on matters as diverse as import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, government affairs, internalother countries in recent years has included significant support for anti-immigrant legislation and disclosure control obligations, data privacy and labor relations. Violationsadministrative changes. Many of these recent changes have made it more difficult to obtain timely visas and increased the costs of obtaining visas. The governments of these countries may also tighten adjudication standards for labor market tests. For example, in the United States, the current administration has implemented policy changes to increase scrutiny of the issuance of new and the renewal of existing H-1B visa applications and the placement of H-1B visa workers on third party worksites, and has issued executive orders designed to limit immigration. Recently, there has been an increase in the number of visa application rejections and delays in processing such applications. This has affected and may continue to affect our ability to timely obtain visas and staff projects. Additionally, many countries in the European Union ("EU") continue to implement new regulations to move into compliance with the EU Directive of 2014 to harmonize immigration rules for intracompany transferees in most EU member states and to facilitate the transfer of managers, specialists and graduate trainees both into and within the region. The changes have had significant impacts on mobility programs and have led to new notification and documentation requirements for companies sending professionals to EU countries. Recent changes or any additional adverse revisions to immigration laws orand regulations in the conduct of our business could result in fines, criminal sanctions against us or our officers, prohibitions on doing business, damage to our reputation and other unintended consequences such as liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to process information and allegations by our clients that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countriesjurisdictions in which we operate local laws might be insufficientmay cause us delays, staffing shortages, additional costs or an inability to protect our rights. Our failure to comply with applicable legal and regulatory requirements could have a material adverse effect on our business, results of operations and financial condition.
Among other anti-corruption laws and regulations, we are subject to the United States Foreign Corrupt Practices Act,bid for or FCPA, which prohibits improper payments or offers of improper payments to foreign officials to obtain business or any other benefit, and the U.K. Bribery Act. Violations of these laws or regulations could subject us to criminal or civil enforcement actions, including fines and suspension or disqualification from government contracting or contracting with private entities in certain highly regulated industries,fulfill projects for customers, any of which could have a material adverse effect on our business, results of operations and financial condition.
International hostilities, terrorist activities, other violence or war, natural disasters, pandemics and infrastructure disruptions, could delay or reduce the number of new service orders we receive and impair our ability to service our customers, thereby adversely affecting our business, results of operations and financial condition.
Hostilities involving acts of terrorism, violence or war, natural disasters, global health risks or pandemics or the threat or perceived potential for these events could materially adversely affect our operations and our ability to provide services to our customers. Such events may cause customers to delay their decisions on spending for information technology, consulting, and business process services and give rise to sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our personnel and to our and our clients’ physical facilities and operations around the world. Additionally, by disrupting communications and travel, giving rise to travel restrictions, and increasing the difficulty of obtaining and retaining highly-skilled and qualified personnel, these events could make it difficult or impossible for us to deliver services to some or all of our clients. The majority of our employees are located in India, and the vast majority of our technical professionals in the United States and Europe are Indian nationals who are able to work in the United States and Europe only because they hold current visas and work permits. Any inability to travel could cause us to incur additional unexpected costs and expenses or could impair our ability to retain the skilled professionals we need for our operations. In addition, any extended disruptions of electricity, other public utilities or network services at our facilities could also adversely affect our ability to serve our clients.
Hostilities involving the United States, the United Kingdom, India and other countries in which we provide services to our clients, and other acts of terrorism, violence or war, natural disasters, global health risks or pandemics may reduce the demand for our services and negatively affect our revenues. If we fail to defend against any of these occurrences, we might be unable to protect our people, facilities and systems. If these disruptions prevent us from effectively serving our clients, our business, results of operations and financial condition could be adversely affected.
Risks Relating to Taxes
Our earnings and financial condition may be negatively impacted by certain tax related matters.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our provision for income taxes and cash tax liability could be adversely affected by numerous factors including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact our results of operations and financial condition in future periods. In addition, our income tax returns are subject to examination in the jurisdictions in which we operate. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for
income taxes. An unfavorable outcome of one or more of these examinations may have an adverse effect on our business, results of operations and financial condition.
Our earnings may be adversely affected if we change our intent not to repatriate foreign earnings or if such earnings become subject to U.S. tax on a current basis.
We earn a significant amount of our earnings outside of the United States. Other than amounts for which we have already accrued U.S. taxes, we consider foreign earnings to be indefinitely reinvested outside of the United States. While we have no plans to do so, events may occur that could effectively force us to change our intent not to repatriate such earnings. If such earnings are repatriated in the future or are no longer deemed to be indefinitely reinvested outside of the United States, or if legislation is enacted in the United States providing for a tax on foreign earnings or profits prior to their repatriation, we may have to accrue taxes associated with such earnings or profits at a substantially higher rate, which could have a material adverse effect on our business, results of operations and financial condition.
Our earnings may be negatively impacted by the loss of certain tax benefits provided by India to companies in our industry as well as by possible changes in Indian tax laws.
Our Indian subsidiaries, collectively referred to as Cognizant India, are primarily export-oriented and are eligible for certain income tax holiday benefits granted by the Indian government for export activities conducted within Special Economic Zones, or SEZs, for periods of up to 15 years. Recently, the Indian government announced a proposal which includes, among other items, phasing out of certain tax exemptions and deductions, discontinuation of tax holiday for new SEZs commencing activity from April 1, 2017, and a phased reduction of the current Indian corporate income tax rate. If enacted, these changes or any changes that would reduce or deny SEZ tax benefits could have a material adverse effect on our business, results of operations and financial condition. In addition, all Indian profits, including those generated within SEZs, are subject to the Minimum Alternative Tax, or MAT, at the rate of 21.3%. Any MAT paid is creditable against future corporate income tax, subject to limitations. Currently, we anticipate utilizing our existing MAT balances against future corporate income tax. Our ability to fully do so may be influenced by possible changes to the Indian tax laws as well as the future financial results of Cognizant India. Our potential inability to fully utilize our deferred income tax assets related to the MAT could have a material adverse effect on our business, results of operations and financial condition.
Risks Relating to Intellectual Property
We may not be able to enforce or protect our intellectual property rights, which may harm our ability to compete and harm our business.
Our future success will depend, in part, on our ability to protect our proprietary methodologies and other valuable intellectual property. We presently hold a limited number of issued patents, and we have filed and intend to file patent applications. There is no guarantee that any patents will issue in the United States or in any other country we may seek protection or that they will serve as a barrier from competition from other organizations. Additionally, the protection afforded by international patent laws as well as the enforcement actions differ from country to country. There is no guarantee that we will be able to maintain adequate protection or enforcement of our intellectual property rights.
We also rely upon a combination of copyright and trade secret laws, non-disclosure and related contractual arrangements, and other security measures to protect our intellectual property rights. We believe that laws, rules, regulations and treaties in effect in the United States, India and other countries in which we operate are adequate to protect us from misappropriation or unauthorized use of our intellectual property. However, there can be no assurance that these laws will not change in ways that may prevent or restrict the transfer of software components, libraries, toolsets and other technology or data we use in the performance of our services, and existing laws of some countries in which we provide services, such as China, might offer only limited protection of our intellectual property rights. There also can be no assurance that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation, or that we will be able to detect unauthorized use of our intellectual property.
Unauthorized use of our intellectual property may result in development of technology, products or services that compete with our products and services and unauthorized parties may infringe upon or misappropriate our products, services or proprietary information. If we are unable to protect our intellectual property, our business may be adversely affected and our ability to compete may be impaired.
Depending on the circumstances, we might need to grant a specific client greater rights in intellectual property developed or used in connection with a contract than we normally do. In certain situations, we might forego all rights to the use of intellectual property we create and intend to reuse across multiple client engagements, which would limit our ability to reuse that intellectual property for other clients. Any limitation on our ability to provide a service or solution could cause us to lose
revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future projects.
Our ability to enforce our software license agreements, service agreements, and other intellectual property rights is subject to general litigation risks, as well as uncertainty as to the enforceability of our intellectual property rights in various countries. To the extent that we seek to enforce our rights, we could be subject to claims that an intellectual property right is invalid, otherwise not enforceable, or is licensed to the party against whom we are pursuing a claim. In addition, our assertion of intellectual property rights may result in the other party seeking to assert alleged intellectual property rights or assert other claims against us, which could harm our business. If we are not successful in defending such claims in litigation, we may not be able to sell or license a particular service or solution due to an injunction, or we may have to pay damages that could, in turn, harm our results of operations. In addition, governments may adopt regulations, or courts may render decisions, requiring compulsory licensing of intellectual property to others, or governments may require that products meet specified standards that serve to favor local companies. Our inability to enforce our intellectual property rights under these circumstances may harm our competitive position and our business.
Our services or solutions could infringe upon the intellectual property rights of others and we may be subject to claims of infringement of third-party intellectual property rights.
We cannot be sure that our services and solutions, or the solutions of others that we offer to our clients, do not infringe on the intellectual property rights of others. Third parties may assert against us or our customers claims alleging infringement of patent, copyright, trademark, or other intellectual property rights to technologies or services that are important to our business. Infringement claims could harm our reputation, cost us money and prevent us from offering some services or solutions. In our contracts, we generally agree to indemnify our clients for certain expenses or liabilities resulting from potential infringement of the intellectual property rights of third parties. In some instances, the amount of our liability under these indemnities could be substantial. Any claims that our products, services or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, may result in significant costs in defending and resolving such claims, and may divert the efforts and attention of our management and technical personnel from our business. In addition, as a result of such intellectual property infringement claims, we could be required or otherwise decide that it is appropriate to:
pay third-party infringement claims;
discontinue using, licensing, or selling particular products subject to infringement claims;
discontinue using the technology or processes subject to infringement claims;
develop other technology not subject to infringement claims, which could be costly or may not be possible; and/or
license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms.
The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of our assets and increase expenses. In addition, if we alter or discontinue our offering of affected items or services, our revenue could be affected. If a claim of infringement were successful against us or our clients, an injunction might be ordered against our client or our own services or operations, causing further damages.
We expect that the risk of infringement claims against us will increase if our competitors are able to obtain patents or other intellectual property rights for software products and methods, technological solutions, and processes. We may be subject to intellectual property infringement claims from certain individuals or companies that have acquired patent portfolios for the primary purpose of asserting such claims against other companies. The risk of infringement claims against us may also increase as we continue to develop and license our intellectual property to our clients and other third parties. Any infringement claim or litigation against us could have a material adverse effect on our business, results of operations and financial condition.
Risks Relating to Legislation and Government Regulation
Anti-outsourcing legislation, if adopted, and negative perceptions associated with offshore outsourcing could impair our ability to serviceserve our customers and materially adversely affect our business, results of operations and financial condition.
The issuepractice of companies outsourcing services to organizations operating in other countries is a topic of political discussion in the United States, which is our largest market, as well as in Europe, the Asia Pacific and other regions in which we have clients.customers. For example, measures aimed at limiting or restricting outsourcing by United StatesU.S. companies are periodically considered inhave been put forward for consideration by the U.S. Congress and in numerous state legislatures to address concerns over the perceived association between offshore outsourcing and the loss of jobs domestically. If enacted,any such measures may broaden existing restrictions on outsourcing by federal and state government agencies and on government contracts with firms that outsource
services directly or indirectly, or impact private industry with measures that include, but are not limited to, tax disincentives, fees or penalties, intellectual property transfer restrictions, mandatory government audit requirements, and new standards that have the effect of restricting the use of certain business and/or work visas. In the event that any of these measures become law,measure is enacted, our ability to provide services to our customers could be impaired, which could adversely affect our business, results of operations and financial condition. Existing and future legislative and administrative/regulatory policies restricting the performance of business process services from an offshore location in jurisdictions in Europe, the Asia Pacific or any other region in which we have clients could also have a material adverse effect on our business, results of operations and financial condition.impaired.
In addition, from time to time there has been publicity about purported negative experiences associated with offshore outsourcing, such as alleged domestic job loss and theft and misappropriation of sensitive clientcustomer data, particularly involving service providers in India. Current or prospective clientscustomers may elect to perform certain services themselves or may be discouraged from utilizing global service delivery providers like us due to negative perceptions that may be associated with using global service delivery models or firms. Any slowdown or reversal of existing industry trends toward global service delivery would seriously harm our ability to compete effectively with competitors that provide the majority of their services from within the country in which our clientscustomers operate.
Restrictions on immigration may affectWe are subject to numerous and evolving legal and regulatory requirements in the many jurisdictions in which we operate, and violations of or unfavorable changes in such requirements could harm our ability to compete for andbusiness.
We provide services to clients, which could hamper our growthcustomers and cause our revenuehave operations in many parts of the world and in a wide variety of different industries, subjecting us to decline.numerous, and sometimes conflicting, laws and regulations on matters as diverse as import and export controls,
Our future success continues to depend on our ability to attract and retain employees with technical and project management skills, including those from developing countries, especially India. The ability of foreign nationals to
temporary work in the United States, Europe, the Asia Pacific and other regions in which we have clients depends on their and our ability to obtain the necessary visas and work permits for our personnel who need to travel internationally. If we are unable to obtain such visasauthorizations or work permits, content requirements, trade restrictions, tariffs, taxation, anti-corruption laws (including the U.S. Foreign Corrupt Practices Act ("FCPA") and the U.K. Bribery Act), government affairs, internal and disclosure control obligations, data privacy, intellectual property and labor relations. We are subject to a wide range of potential enforcement actions, audits or if their issuance is delayedinvestigations regarding our compliance with these laws or if their length is shortened, we may not be ableregulations in the conduct of our business, and any finding of a violation could subject us to provide servicesa wide range of civil or criminal penalties, including fines, debarment, or suspension or disqualification from government contracting, prohibitions or restrictions on doing business, loss of customers and business, legal claims by customers and damage to our clientsreputation.
We face significant regulatory compliance costs and risks as a result of the size and breadth of our business. For example, we commit significant financial and managerial resources to comply with our internal control over financial reporting requirements, but we have in the past and may in the future identify material weaknesses or deficiencies in our internal control over financial reporting that causes us to continueincur incremental remediation costs in order to provide servicesmaintain adequate controls. As another example, we had to spend significant resources on a timelyconducting an internal investigation and cost-effective basis, receive revenues as early as expected or manage our delivery centers as efficiently as we otherwise could, anycooperating with investigations by the U.S. Department of Justice ("DOJ") and the SEC, each of which is now concluded, focused on whether certain payments relating to Company-owned facilities in India were made in violation of the FCPA and other applicable laws.
Changes in tax laws or in their interpretation or enforcement, failure by us to adapt our corporate structure and intercompany arrangements to achieve global tax efficiencies or adverse outcomes of tax audits, investigations or proceedings could have a material adverse effect on our business, results of operations and financial condition.
Immigration and work permit laws and regulations in the countries in which we have clients are subject to legislative and administrative changes as well as changes in the application of standards and enforcement. For example, the United States Congress has recently considered and may consider in the future extensive changes to U.S. immigration laws regarding the admission of high-skilled temporary and permanent workers. If such provisions are signed into law, our cost of doing business in the United States would increase and that may discourage customers from seeking our services. Our international expansion strategy and our business, results of operations and financial condition may be materially adversely affected if changes in immigration and work permit laws and regulations or the administration or enforcement of such laws or regulations impair our ability to staff projects with professionals who are not citizens of the country where the work is to be performed.
Increased regulation of the financial services industry, healthcare industry or other industries in which our clients operate could harm our business,effective tax rate, results of operations and financial condition.
The industriesinterpretation of tax laws and regulations in which our clients are concentrated, such as the financial services industry and the healthcare industry, are, or may be, increasingly subject to governmental regulation and intervention. For instance, the financial services industry is subject to extensive and complex federal and state regulation. As a provider of services to financial institutions, portions of our operations are examined by a number of regulatory agencies. These agencies regulate the services we provide and mannermany jurisdictions in which we operate. For example, some financial services regulators have imposed guidelines for use of cloud computing services that mandate specific controls oroperate and the related tax accounting principles are complex and require financial services enterprisesconsiderable judgment to obtain regulatory approval prior to outsourcing certain functions. If we are unable to comply with these guidelines or controls, or ifdetermine our income taxes and other tax liabilities worldwide. Tax laws and regulations affecting us and our customers, are unable to obtain regulatory approval to use our services where required, our business may be harmed. In addition, clients inincluding applicable tax rates, and the financial services sector have beeninterpretation and enforcement of such laws and regulations are subject to increased regulation following the enactmentchange as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States. New or changing regulations under Dodd-Frank, as well as other regulations or legislation affecting our customers in the financial services industry, may reduce demand for our services or cause us to incur costly changes in our processes or personnel, thereby negatively affecting our business, results of operations and financial condition.
The healthcare industry is highly regulated at the federal, state and local levels and is subject to changing legislative, regulatory,economic, political and other influences. Many healthcare laws,factors, and any such as the Affordable Care Act, are complex, subject to frequent change,changes or changes in tax accounting principles could increase our effective worldwide income tax rate and dependent on interpretation and enforcement decisions from government agencies with broad discretion. The application of these laws to us, our clients or the specific services and relationships we have with our clients is not always clear. Our failure to anticipate accurately the application of the Affordable Care Act and similar or future laws and regulations,
or our failure to comply with them, could create liability for us, result in adverse publicity and negatively affect our business, results of operations and financial condition. Further, the growth of our business, results of operations and financial condition rely, in part, on clients in the healthcare industry that receive substantial revenues from governmental and other third-party payor programs. A reduction or less than expected increase in government funding for these programs, a change in allocation methodologies or the termination of our clients’ government contracts could negatively affect our clients’ businesses and, in turn, negatively impact our business, results of operations and financial condition. In addition, as a service provider to clients who are government contractors, we may in the future become involved in governmental investigations to evaluate our or our clients’ compliance with government healthcare programs, which could result in the assessment of damages, civil or criminal fines or penalties, or other sanctions, any of which could have a material adverse effect on our net earnings and financial condition. We routinely review and update our corporate structure and intercompany arrangements, including transfer pricing policies, consistent with applicable laws and regulations, to align with our evolving business operations and provide global tax efficiencies across the numerous jurisdictions, such as the United States, India and the United Kingdom, in which we operate. Failure to successfully adapt our corporate structure and intercompany arrangements to align with our evolving business operations and achieve global tax efficiencies may increase our worldwide effective tax rate and have a material adverse effect on our earnings and financial condition. For example, the Tax Cuts and Jobs Reform Act ("Tax Reform Act") was enacted in December 2017 and made a number of significant changes to the corporate tax regime in the United States. Among other things, the Tax Reform Act introduced two new minimum taxes: the “base erosion anti-abuse tax” which requires U.S. corporations to make an alternative determination of taxable income without regard to tax deductions for certain payments to non-U.S. affiliates, and a tax on certain earnings of non-U.S. subsidiaries considered to be “global intangible low taxed income”. In addition, the Organization for Economic Co-operation and Development recently published the Base Erosion and Profit Shifting action plans that are being adopted and implemented in various forms by countries where we do business. Our worldwide effective income tax rate may increase as a result of these recent developments, changes in interpretations and assumptions made and additional guidance that may be issued, and the successful implementation of ongoing and future actions the Company has or may take with respect to our corporate structure and intercompany arrangements.
Additionally, we are subject from time to time to tax audits, investigations and proceedings. Tax authorities have disagreed, and may in the future disagree, with our judgments, and are taking increasingly aggressive positions, including with respect to our intercompany transactions. For example, we are currently involved in an ongoing dispute with the Indian Income Tax Department ("ITD") in which the ITD asserts that we owe additional taxes for two transactions by which our principal operating subsidiary in India ("CTS India") repurchased shares from its shareholders, as more fully described in Note 11 to the consolidated financial statements. Adverse outcomes in any such audits, investigations or proceedings could increase our tax exposure and cause us to incur increased expense, which could materially adversely affect our results of operations and financial condition. Increased regulation, changes in existing regulationOur business subjects us to considerable potential exposure to litigation and legal claims and could be materially adversely affected if we incur legal liability.
We are subject to, and may become a party to, a variety of litigation or increased government interventionother claims and suits that arise from time to time in the conduct of our business. Our business is subject to the risk of litigation involving current and former employees, clients, alliance partners, subcontractors, suppliers, competitors, shareholders, government agencies or others through private actions, class actions, whistleblower claims, administrative proceedings, regulatory actions or other industries in which our clients operate also may adversely affect the growthlitigation. While we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of their respective businessespotential liabilities and therefore negatively impact our business, results of operations and financial condition.is subject to various exclusions as well as caps on amounts recoverable.
Risks Relating to our Common Stock and Governing Documents
Our stock price continuescustomer engagements expose us to be volatile.
Our stock has at times experienced substantial price volatility as a result of variations between our actualsignificant potential legal liability and anticipated financial results, announcements by us and our competitors, projections or speculation about our business or that of our competitors by the media or investment analysts or uncertainty about current global economic conditions. The stock market, as a whole, also has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in ways that may have been unrelated to these companies’ operating performance. Furthermore, we believe our stock price should reflect future growth and profitability expectations and,litigation expense if we fail to meet these expectations, our stock price may significantly decline.
Provisionscontractual obligations or otherwise breach obligations to third parties or if our subcontractors breach or dispute the terms of our agreements with them and impede our ability to meet our obligations to our customers. For example, third parties could claim that we or our customers, whom we typically contractually agree to indemnify with respect to the services and solutions we provide, infringe upon their intellectual property rights. Any such claims of intellectual property infringement could harm our reputation, cause us to incur substantial costs in our charter and by-laws and provisions under Delaware law may discourage unsolicited takeover proposals.
Provisionsdefending ourselves, expose us to considerable legal liability or prevent us from offering some services or solutions in our charter and by-laws, each as amended, and Delaware General Corporate Law, or DGCL,the future. We may have to engage in legal action to protect our own intellectual property rights, and enforcing our rights may require considerable time, money and oversight, and existing laws in the effect of deterring unsolicited takeover proposals or delaying or preventing changes in our control or management, including transactionsvarious countries in which we provide services or solutions may offer only limited protection.
We also face considerable potential legal liability from a variety of other sources. Our acquisition activities have in the past and may in the future be subject to litigation or other claims, including claims from professionals, customers, stockholders, might otherwise receiveor other third parties. We have also been the subject of a premium for their shares over then-current market prices. These provisions include:
Authoritynumber of putative securities class action complaints and putative shareholder derivative complaints relating to the matters that were the subject of our now concluded internal investigation into potential violations of the
boardFCPA and other applicable laws, and may be subject to such legal actions for these or other matters in the future. See "Part I, Item 3. Legal Proceedings" for more information. We establish reserves for these and other matters when a loss is considered probable and the amount can be reasonably estimated; however, the estimation of directors, without further action bylegal reserves and possible losses involves significant judgment and may not reflect the stockholders,full range of uncertainties and unpredictable outcomes inherent in litigation, and the actual losses arising from particular matters may exceed our estimates and materially adversely affect our results of operations.Our earnings may be adversely affected if we change our intent not to fix the rights and preferences, and issue shares of preferred stock;repatriate Indian accumulated undistributed earnings.
The classificationA significant portion of our boardaccumulated earnings are held and ongoing earnings are derived from our operations in India. We consider our Indian accumulated undistributed earnings to be indefinitely reinvested in India. While we have no plans to do so, we may change our intent not to repatriate such earnings, including as a result of directors until the 2016 annual meeting of stockholders, at which point the board of directors will be declassified and each director will be elected on an annual basis. While our board of directors remains classified, a change of controlcapital requirements in other parts of our boardbusiness that may necessitate such repatriation. As of directors cannot occurDecember 31, 2018, the amount of unrepatriated Indian earnings was estimated at a single meeting of stockholders;
The inabilityapproximately $4,679 million. If all of our stockholdersaccumulated unrepatriated Indian earnings were to act by written consent and the restrictions imposedbe repatriated, based on our stockholders’ ability to call a special meeting. As a result, any action by our stockholders may be delayed until annual meetings or until a special meetingcurrent interpretation of India tax law, we estimate that we would incur an additional income tax expense of approximately $980 million. This estimate is called by our chairman or chief executive officer or our board of directors;
The supermajority-voting requirement for specified amendments to our charter and by-laws, which allows a minority of our stockholders to block those amendments; and
Provisions in the DGCL preventing stockholders from engaging in business combinations with us, subject to certain exceptions.
These provisions could also discourage bids for our common stock at a premiumchange based on legislative developments in India and other jurisdictions as well as create a depressive effect on the market pricejudicial and interpretive developments of the shares of our common stock.applicable tax laws.
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Item 1B. | Unresolved Staff Comments |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
To support our planned growth, we are continually expanding our developmentWe have major sales and delivery center capacity through the construction of new facilities, supplemented by additional leasing of non-owned facilities. As presentedmarketing offices, innovation labs, and digital design and consulting centers in the table below, as of December 31, 2015, we leased 11.7 million square feetmajor business markets, including New York, London, Paris, Melbourne, Singapore, and owned 13.0 million square feet in 24 countries,Sao Paulo, among others, which are used to deliver services to our customers across all four of our business segments.
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| | | | | | | | | | | | |
Geographic Area | | Number of Locations | | Square Footage Leased (in millions) | | Square Footage Owned (in millions) | | Total Square Footage (in millions) |
India | | 45 |
| | 9.8 |
| | 12.8 |
| | 22.6 |
|
North America | | 35 |
| | 1.1 |
| | 0.2 |
| | 1.3 |
|
Europe | | 15 |
| | 0.3 |
| | — |
| | 0.3 |
|
Rest of World1 | | 20 |
| | 0.5 |
| | — |
| | 0.5 |
|
Total | | 115 |
| | 11.7 |
| | 13.0 |
| | 24.7 |
|
| |
1
| Includes our operations in Asia Pacific, Middle East and Latin America. Substantially all of this square footage is located in the Philippines, China and Argentina. |
We operate out of our Teaneck, New Jersey executive office where we lease 0.1 million square feet.feet of office space for our worldwide headquarters in Teaneck, NJ. In addition to our executive officetotal, we have offices and operations in more than 74 cities in 37 countries around the above development andworld.
We utilize a global delivery model with delivery centers weworldwide, including in-country, regional and global delivery centers. We have business development officesover 26 million square feet of owned and leased facilities for our delivery centers. Our largest delivery center presence is in approximately 68 citiesIndia: Chennai (10 million square feet); Pune (4 million square feet); Kolkata (3 million square feet); Bangalore (2 million square feet); and 35Hyderabad (2 million square feet). Our India delivery centers represent more than two-thirds of our total delivery centers on a square-foot basis. We also have a significant number of delivery centers in other countries, acrossincluding the globe.
United States, Philippines, Canada, Mexico and countries throughout Europe.
We believe that our current facilities are adequate to support our existing operations. We also believeoperations in the immediate future, and that we will be able to obtain suitable additional facilities on commercially reasonable terms on an “as needed basis.”as needed.
Item 3. Legal Proceedings
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion ofSee Note 15 to our management, the outcome of such claims and legal actions, if decided adversely, is not expected to have a material adverse effect on our quarterly or annual operating results, cash flows or consolidated financial position.statements.Item 4. Mine Safety Disclosures
Not applicable.
PART II
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Item 5. | Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our Class A common stock trades on the NASDAQNasdaq Global Select Market (NASDAQ)("Nasdaq") under the symbol “CTSH”.
The following table shows the per share range of high and low sale prices for shares of our Class A common stock, as listed for quotation on the NASDAQ, for the quarterly periods indicated.
|
| | | | | | |
Quarter Ended | | High | | Low |
March 31, 2014 | | 54.00 |
| | 44.96 |
|
June 30, 2014 | | 53.40 |
| | 45.73 |
|
September 30, 2014 | | 51.38 |
| | 41.51 |
|
December 31, 2014 | | 54.89 |
| | 42.94 |
|
March 31, 2015 | | 64.69 |
| | 50.71 |
|
June 30, 2015 | | 65.96 |
| | 58.35 |
|
September 30, 2015 | | 69.35 |
| | 57.50 |
|
December 31, 2015 | | 69.80 |
| | 58.15 |
|
As of December 31, 2015,2018, the approximate number of holders of record of our Class A common stock was 156125 and the approximate number of beneficial holders of our Class A common stock was 50,200.376,500.
Cash Dividends
We have never declared orDuring 2018, we paid a quarterly cash dividend of $0.20 per share. Beginning in 2019, our new capital return plan anticipates the deployment of approximately 50% of our global free cash flow1 for dividends and share repurchases and approximately 25% of our global free cash flow1 for acquisitions, as needed. Accordingly, we intend to continue to pay quarterly cash dividends during 2019. Our ability and decisions to pay future dividends depend on a variety of factors, including our Class A common stock. We currently intend to retain any future earnings to financecash flow generated from operations, the growthamount and location of our businesscash and therefore, do not currently anticipate paying anyinvestment balances, our net income, our overall liquidity position, potential alternative uses of cash, dividends in the foreseeable future.such as acquisitions, and anticipated future economic conditions and financial results.
Issuer Purchases of Equity Securities
Our existing
In November 2018, the Board of Directors approved an amendment to our stock repurchase program. Under our stock repurchase program, as amended, and approved by our Board of Directors, allows for thewe are authorized to repurchase of $2.0$5.5 billion, of our outstanding shares of Class A common stock, excluding fees and expenses, through December 31, 2017. Under the stock repurchase program, the Company is authorized to repurchase itsof our Class A common stock through open market purchases, including under a trading plan adopted pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or in private transactions, including through accelerated stock repurchase agreements entered into with financial institutions, in accordance with applicable federal securities laws.laws through December 31, 2020. The timing of repurchases and the exact number of shares to be purchased are determined by the Company's management, in its discretion, or pursuant to a Rule 10b5-1 trading plan, and will depend upon market conditions and other factors.
During the three months ended December 31, 2015, we repurchased $42.1 million of our Class A common stock under our stock repurchase program. These stock repurchases were funded from working capital and borrowings under our revolving credit facility. As of December 31, 2015,2018, the remaining available balance under the Board authorizationof Directors' authorized stock repurchase program was $437.9 million.$2.5 billion. The stock repurchase activity under our stock repurchase program during the fourth quarter of 2018 was as follows:
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| | | | | | | | | | | | | | |
Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in millions) |
October 1, 2015 - October 31, 2015 | | — |
| | $ | — |
| | — |
| | $ | 480.0 |
|
November 1, 2015 - November 30, 2015 | | 400,000 |
| | 64.82 |
| | 400,000 |
| | 454.1 |
|
December 1, 2015 - December 31, 2015 | | 250,000 |
| | 64.65 |
| | 250,000 |
| | $ | 437.9 |
|
Total | | 650,000 |
| | $ | 64.76 |
| | 650,000 |
| | |
|
| | | | | | | | | | | | | | |
Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in millions) |
October 1, 2018 - October 31, 2018 | | | | | | | | |
Open market purchases | | 1,649,171 |
| | $ | 71.56 |
| | 1,649,171 |
| | $ | 657 |
|
November 1, 2018 - November 30, 2018 | | | | | | | | |
Open market purchases | | 1,175,683 |
| | 69.70 |
| | 1,175,683 |
| | 2,575 |
|
December 1, 2018 - December 31, 2018 | | | | | | | | |
Open market purchases | | 776,935 |
| | 64.34 |
| | 776,935 |
| | 2,525 |
|
Total | | 3,601,789 |
| | $ | 69.39 |
| | 3,601,789 |
| | |
In addition, during the three months ended December 31, 2015, we purchased additionalWe regularly purchase shares in connection with our stock-based compensation plans wherebyas shares of our Class A common stock wereare tendered by employees for payment of applicable statutory tax withholdings. For the three months ended December 31, 2015,2018, we purchased 554,160234,127 shares at an aggregate cost of $34.7$17 million in connection with employee tax withholding obligations.
______________
Performance Graph
The following graph compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the S&P 500 Index, NASDAQ-100Nasdaq-100 Index and a Peer Group Index (capitalization weighted) for the period beginning December 31, 20102013 and ending on the last day of our last completed fiscal year. The stock performance shown on the graph below is not indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN(1)(2)
Among Cognizant, the S&P 500 Index, the NASDAQ-100Nasdaq-100 Index
And a Peer Group Index(3) (Capitalization Weighted)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Company / Index | | Base Period 12/31/10 | | 12/31/11 | | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 |
COGNIZANT TECHNOLOGY SOLUTIONS CORP | | $ | 100 |
| | $ | 87.75 |
| | $ | 100.81 |
| | $ | 137.78 |
| | $ | 143.70 |
| | $ | 163.79 |
|
S&P 500 INDEX | | 100 |
| | 102.11 |
| | 118.45 |
| | 156.82 |
| | 178.29 |
| | 180.75 |
|
NASDAQ-100 | | 100 |
| | 102.70 |
| | 119.98 |
| | 161.96 |
| | 191.01 |
| | 207.10 |
|
PEER GROUP | | 100 |
| | 78.87 |
| | 83.24 |
| | 115.16 |
| | 122.45 |
| | 139.40 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Company / Index | | Base Period 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 | | 12/31/17 | | 12/31/18 |
Cognizant Technology Solutions Corp | | $ | 100 |
| | $ | 104.30 |
| | $ | 118.88 |
| | $ | 110.97 |
| | $ | 141.57 |
| | $ | 127.87 |
|
S&P 500 Index | | 100 |
| | 113.69 |
| | 115.26 |
| | 129.05 |
| | 157.22 |
| | 150.33 |
|
Nasdaq-100 | | 100 |
| | 117.94 |
| | 127.88 |
| | 135.40 |
| | 178.07 |
| | 176.22 |
|
Peer Group | | 100 |
| | 107.07 |
| | 123.24 |
| | 126.80 |
| | 161.82 |
| | 153.76 |
|
| |
(1) | Graph assumes $100 invested on December 31, 20102013 in our Class A common stock, the S&P 500 Index, the NASDAQ-100Nasdaq-100 Index, and the Peer Group Index (capitalization weighted). |
| |
(2) | Cumulative total return assumes reinvestment of dividends. |
| |
(3) | We have constructed a Peer Group Index of other information technology consulting firms consistingfirms. Our peer group consists of Accenture plc., Computer Sciences Corporation, Computer Task Group,DXC Technology, EPAM Systems Inc., ExlService Holdings Inc., Genpact Limited, Infosys Ltd., Syntel Inc., Wipro Ltd. and WNS (Holdings) Limited. Sapient Corp. and iGate Corp. were removed fromIn 2018, we elected to change the composition of our peer groupgroup. We removed Syntel Inc., as it is no longer a publicly traded company, and added EPAM Systems, Inc. as they were acquired by private companies during 2015.are a peer information technology services firm. The total return for the former peer group is not presented separately as it is not materially different from the new peer group information. |
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Item 6. | Item 6. Selected Financial Data |
The following table sets forth our selected consolidated historical financial data as of the dates and for the periods indicated. Our selected consolidated financial data set forth below as of December 31, 20152018 and 20142017 and for each of the years ended December 31, 2015, 20142018, 2017 and 20132016 have been derived from the audited consolidated financial statements included elsewhere herein. Our selected consolidated financial data set forth below as of December 31, 2013, 20122016, 2015 and 20112014 and for each of the years ended December 31, 20122015 and 20112014 are derived from our audited consolidated financial statements not included elsewhere herein. Our selected consolidated financial information for 2015, 20142018, 2017 and 20132016 should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements and the Notesaccompanying notes and “ItemItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations, which are included elsewhere in this Annual Report on Form 10-K. | | | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | 2018(1) | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in millions, except per share data) | | (in millions, except per share data) |
For the Year Ended December 31: | | | | | | | | | | | |
For the year ended December 31: | | | | | | | | | | | |
Revenues | | $ | 12,416.0 |
| | $ | 10,262.7 |
| | $ | 8,843.2 |
| | $ | 7,346.5 |
| | $ | 6,121.2 |
| | $ | 16,125 |
| | $ | 14,810 |
| | $ | 13,487 |
| | $ | 12,416 |
| | $ | 10,263 |
|
Income from operations | | 2,142.0 |
| | 1,884.9 |
| | 1,677.9 |
| | 1,361.5 |
| | 1,136.5 |
| | 2,801 |
| | 2,481 |
| | 2,289 |
| | 2,142 |
| | 1,885 |
|
Net income(2) | | $ | 1,623.6 |
| | $ | 1,439.3 |
| | $ | 1,228.6 |
| | $ | 1,051.3 |
| | $ | 883.6 |
| | 2,101 |
| | 1,504 |
| | 1,553 |
| | 1,624 |
| | 1,439 |
|
| | | | | | | | | | | | | | | | | | | | |
Basic earnings per share(2) | | $ | 2.67 |
| | $ | 2.37 |
| | $ | 2.03 |
| | $ | 1.74 |
| | $ | 1.46 |
| | $ | 3.61 |
| | $ | 2.54 |
| | $ | 2.56 |
| | $ | 2.67 |
| | $ | 2.37 |
|
Diluted earnings per share(2) | | $ | 2.65 |
| | $ | 2.35 |
| | $ | 2.02 |
| | $ | 1.72 |
| | $ | 1.42 |
| | $ | 3.60 |
| | $ | 2.53 |
| | $ | 2.55 |
| | $ | 2.65 |
| | $ | 2.35 |
|
Cash dividends declared per common share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.80 |
| | $ | 0.45 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Weighted average number of common shares outstanding-Basic | | 609.1 |
| | 608.1 |
| | 604.0 |
| | 602.6 |
| | 606.6 |
| | 582 |
| | 593 |
| | 607 |
| | 609 |
| | 608 |
|
Weighted average number of common shares outstanding-Diluted | | 613.3 |
| | 612.5 |
| | 609.7 |
| | 611.7 |
| | 620.7 |
| | 584 |
| | 595 |
| | 610 |
| | 613 |
| | 613 |
|
| | | | | | | | | | | | | | | | | | | | |
As of December 31: | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and short-term investments(3) | | $ | 4,949.5 |
| | $ | 3,774.7 |
| | $ | 3,747.5 |
| | $ | 2,863.8 |
| | $ | 2,432.3 |
| | $ | 4,511 |
| | $ | 5,056 |
| | $ | 5,169 |
| | $ | 4,949 |
| | $ | 3,775 |
|
Working capital(2)(3) | | 5,194.9 |
| | 3,828.5 |
| | 4,117.1 |
| | 3,235.5 |
| | 2,766.8 |
| | 5,900 |
| | 6,272 |
| | 6,182 |
| | 5,195 |
| | 3,829 |
|
Total assets(2)(3) | | 13,065.4 |
| | 11,479.0 |
| | 8,129.2 |
| | 6,454.8 |
| | 5,480.8 |
| | 15,913 |
| | 15,221 |
| | 14,262 |
| | 13,061 |
| | 11,473 |
|
Total debt | | 1,287.5 |
| | 1,637.5 |
| | — |
| | — |
| | — |
| | 745 |
| | 873 |
| | 878 |
| | 1,283 |
| | 1,632 |
|
Stockholders’ equity | | 9,278.1 |
| | 7,740.2 |
| | 6,135.8 |
| | 4,854.4 |
| | 3,952.9 |
| | 11,424 |
| | 10,669 |
| | 10,728 |
| | 9,278 |
| | 7,740 |
|
______________________
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(1) | In July 2013, the FinancialOn January 1, 2018, we adopted Accounting Standards Board,Codification ("ASC") Topic 606, “Revenue from Contracts with Customers” ("New Revenue Standard") using the modified retrospective method. Results for reporting periods beginning on or FASB, issued new guidance which requires the netting of any unrecognized tax benefits against all available same-jurisdiction deferred income tax carryforward assets that would apply if the uncertain tax positions were settled. We adopted this standard onafter January 1, 20142018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and conformed prior years' presentation.continue to be reported in accordance with our historic accounting policies. During 2018, the adoption of the New Revenue Standard had a positive impact on revenue of $96 million, income from operations of $134 million and diluted earnings per share of $0.19 per share. See Note 3 to our consolidated financial statements for additional information. |
| |
(2) | In November 2015,March 2016, the FASBFinancial Accounting Standards Board ("FASB") issued an update related to the standard on income taxes pertaining to the balance sheet classification of deferred income taxes.stock compensation. The update requires that all deferredsimplified the accounting for excess tax benefits and deficiencies related to employee stock-based payment transactions. We adopted this standard prospectively on January 1, 2017. For the years ended December 31, 2018 and 2017, we recognized net excess tax benefits on stock-based compensation awards in our income tax assets and liabilities, along with any related valuation allowance, within each tax jurisdiction be classified as noncurrent on the balance sheet. As a result, each tax jurisdiction will only have one net noncurrent deferred income tax asset or liability. We have adopted this guidance retrospectivelyprovision in the fourth quarteramount of 2015$20 million or $0.03 per share and conformed$40 million or $0.07 per share, respectively. In prior years' presentation to current year's presentation.periods, such net excess tax benefits were recorded in additional paid in capital. |
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(3) | Includes $423 million in restricted time deposits as of December 31, 2018. See Note 11 in our consolidated financial statements. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
Executive Summary
We are a leading providerCognizant is one of information technology (IT), consulting and business process services, dedicated to helping the world’s leading professional services companies, transforming clients’ business, operating and technology models for the digital era. Our industry-based, consultative approach helps customers envision, build strongerand run more innovative and efficient businesses. Our clients engage us to help them operate more efficiently, provideservices include digital services and solutions, for critical business and technology problems, and to help them drive technology-based innovation and growth. Our core competencies include: business, process, operations and IT consulting, application development, and systems integration, enterprise information management, application testing, application maintenance, IT infrastructure services and business process services. Digital services are becoming an increasingly important part of our portfolio of services and solutions and are often integrated or delivered along with our other services. We tailor our services and solutions to specific industries and utilizeuse an integrated global delivery model. This seamless global sourcing model combines industry-specific expertise, clientthat employs customer service teams based on-site at the clientcustomer locations and delivery teams located at customer locations and dedicated near-shoreglobal and offshore globalregional delivery centers.
The following table sets forth key financial results
In 2018, we executed on our strategy to grow revenues and expand operating margins while completing our previously announced capital return plan. Revenues for the year ended December 31, 2018 increased to $16,125 million from $14,810 million for the year ended December 31, 2017, representing growth of 8.9%, or 8.5% on a constant currency basis1. Going forward, we expect to continue to invest in our digital capabilities, including the extensive training and re-skilling of our technical teams and the expansion of our local workforces in the United States and other markets around the world. We expect these investments to contribute significantly to our organic revenue growth. Additionally, we plan to supplement our organic growth through select strategic acquisitions, joint ventures, investments and alliances that can expand our digital capabilities, geographic footprint or industry capabilities. In 2018, we completed five acquisitions: Bolder Healthcare Solutions ("Bolder"), a provider of revenue cycle management solutions to the healthcare industry in the United States; Hedera Consulting, a business advisory and data analytics service provider in Belgium and the Netherlands; Softvision, a digital engineering and consulting company with significant operations in Romania and India that focuses on agile development of custom cloud-based software and platforms for customers primarily in the United States; ATG, a United States based consulting company that helps companies plan, implement, and optimize automated cloud-based quote-to-cash business processes and technologies; and SaaSfocus, a Salesforce services provider in Australia.
We are focused on driving margin enhancement while continuing to invest in our business. In 2018, our operating margin increased to 17.4% as compared to 16.8% in 2017, as we continued to target higher margin digital services customer contracts and improve our cost structure through our realignment program and other margin enhancement initiatives, primarily by optimizing our resource pyramid, improving utilization and containing our corporate spend.
As part of our capital return plan, we returned $3.7 billion to our stockholders through share repurchases and dividend payments over the two years ended December 31, 2015 and 2014:2018, exceeding our previously announced target of $3.4 billion as shown below.
|
| | | | | | | | | | | | | | |
| | | | | | Increase |
| | 2015 | | 2014 | | $ | | % |
| | (Dollars in millions, except per share data) |
Revenue | | $ | 12,416.0 |
| | $ | 10,262.7 |
| | $ | 2,153.3 |
| | 21.0 |
Net Income | | 1,623.6 |
| | 1,439.3 |
| | 184.3 |
| | 12.8 |
Diluted earnings per share | | 2.65 |
| | 2.35 |
| | 0.30 |
| | 12.8 |
Non-GAAP diluted earnings per share1 | | 3.07 |
| | 2.60 |
| | 0.47 |
| | 18.1 |
|
| | | | | | | | | | | |
| 2017 Capital Return Plan |
| 2018 | | 2017 | | Total |
| (in millions) |
Dividends paid(1) | $ | 468 |
| | $ | 265 |
| | $ | 733 |
|
Share repurchases under our Board authorized stock repurchase plan | 1,175 |
| | 1,800 |
| | 2,975 |
|
Total | $ | 1,643 |
| | $ | 2,065 |
| | $ | 3,708 |
|
The key drivers of our revenue growth in 2015 were as follows:
Our November 2014 acquisition of TZ US Parent Inc., or TriZetto, contributed revenue of approximately $724.5 million in 2015 compared to $80.6 million in 2014;
Solid performance across all of our business segments with revenue growth of 16.7% for Financial Services, 36.4% for Healthcare (inclusive of TriZetto revenue), 12.0% for Manufacturing/Retail/Logistics and 17.4% for Other;
Sustained strength in the North American market where revenues grew 23.9% (inclusive of TriZetto revenue) as compared to 2014;
Continued penetration of the European and Rest of World (primarily the Asia Pacific) markets. Revenue from our customers outside the United States was negatively affected by the recent strength of the U.S. dollar against the British pound, the Euro and other currencies. In Europe, we experienced revenue growth of 6.6%, after a negative currency impact of 10.2%, as compared to 2014. Revenue from our Rest of World customers increased 29.9%, after a negative currency impact of 9.2%, as compared to 2014;
Increased customer spending on discretionary projects;
Expansion of our service offerings, including consulting, infrastructure services, and business process services, which enabled us to cross-sell new services to our customers and meet the rapidly growing demand for complex large-scale outsourcing solutions;
Increased penetration at existing customers, including strategic clients; and
Continued expansion of the market for global delivery of IT and business process services.
In December 2015, Chennai, India experienced heavy rains that caused unprecedented flooding. This event did not materially impact our financial results for the three months and year ended December 31, 2015 and we do not expect it to materially affect our 2016 financial results.
________________________________
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1(1) | Non-GAAP diluted earningsIn 2018, we paid quarterly dividends of $0.20 per share. In 2017, we paid quarterly dividends of $0.15 per share isfor the quarters ended June 30, September 30 and December 31, 2017. |
Beginning in 2019, our new capital return plan anticipates the deployment of approximately 50% of our global free cash flow1 for dividends and share repurchases and approximately 25% of our global free cash flow1 for acquisitions, as needed. For the year ended December 31, 2018, our cash flows from operating activities were $2,592 million while our global free cash flow1 was $2,215 million. We review our capital return plan on an on-going basis, considering our financial performance and liquidity position, investments required to execute our strategic plans and initiatives, acquisition opportunities, the economic outlook, regulatory changes and other relevant factors. As these factors may change over time, the actual amounts expended on stock repurchase activity, dividends and acquisitions, if any, during any particular period cannot be predicted and may fluctuate from time to time.
______________
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1 | Constant currency revenue growth and free cash flow are not a measurementmeasurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and a reconciliation to the most directly comparable GAAP financial measures.measures, as applicable. |
We sawIn 2018, we announced a continued demand fromplan to modify our customers for a broad range of services, including IT strategy and business consulting, application development and systems integration, enterprise information management, application testing, application maintenance, infrastructure services, and business process services. In addition, we are seeing continued customer interest in digital solutions, including our social, mobile, analytics and cloud-based services and increased demand for mobility, data and security services. We are also seeing an increase in demand for larger, more complex projects that are transformational for our customers. Such contracts may have longer sales cycles and ramp-up periods and could lead to greater variability in our period-to-period operating results. We increased the number of strategic clients by 29 during the year, bringing the total number of our strategic clients to 300. We define a strategic client as one offering the potential to generate at least $5 million to $50 million or more in annual revenues at maturity.
In 2015, our operating margin decreased to 17.3% from 18.4% in 2014. The decrease in our operating margin was due to increases in compensation and benefit costs (inclusive of the impact of higher incentive-based compensation) and increases in depreciation and amortization due to recent acquisitions, partially offset by the impact of the depreciation of the Indian rupee against the U.S. dollar, lower realized losses on our cash flow hedges and decreases in certain operating expenses, including travel, in 2015 compared to 2014.
non-GAAP financial measures. Our historical non-GAAP financial measures, non-GAAP operating margin in 2015 decreased to 19.7%2, non-GAAP income from operations2 from 20.2%and non-GAAP diluted earnings per share2 ("non-GAAP diluted EPS")2, excluded stock-based compensation expense, acquisition-related charges and unusual items, and our non-GAAP diluted EPS2 in 2014. The decrease in ouradditionally excluded net non-operating foreign currency exchange gains or losses and the tax impacts of all applicable adjustments. Our new non-GAAP operating margin was due to increases in compensationfinancial measures, Adjusted Operating Margin2, Adjusted Income From Operations2 and benefit costs (inclusive ofAdjusted Diluted Earnings Per Share2 ("Adjusted Diluted EPS")2,exclude only unusual items and Adjusted Diluted EPS2 additionally excludes net non-operating foreign currency exchange gains or losses and the tax impact of higher incentive-based compensation), partially offset byall applicable adjustments. We are also introducing two new non-GAAP financial measures, free cash flow2 and constant currency revenue growth2. Free cash flow2 is defined as cash flow from operating activities net of purchases of property and equipment. Constant currency revenue growth2 is defined as revenues for a given period restated at the impact of the depreciation of the Indian rupeecomparative period’s foreign currency exchange rates measured against the U.S. dollar, lower realized losses on our cash flow hedges and decreases in certain operating expenses, including travel, in 2015 compared to 2014. Historically, we have invested our profitability above the 19% to 20% non-GAAP operating margin level back into our business, which we believe iscomparative period's reported revenues. See “Non-GAAP Financial Measures” for more information.
2018 Financial Results
The following table sets forth a significant contributing factor to our strong revenue growth. This investment is primarily focused in the areas of hiring client partners and relationship personnel with specific industry experience or domain expertise, training our technical staff in a broader range of service offerings, strengthening our business analytics and digital technology capabilities, strengthening and expanding our portfolio of services, continuing to expand our geographic presence for both sales and delivery, as well as recognizing and rewarding employee performance by means of enhanced incentive-based compensation. In addition, this investment includes maintaining a level of resources, trained in a broad range of service offerings, to be well positioned to respond to our customer requests to take on additional projects. We expect to continue to invest amounts in excesssummary of our targeted operating margin levels back into the business.
We finished the year with approximately 221,700 employees, which is an increase of approximately 10,200 over the prior year. The increase in the number of our service delivery staff and the related infrastructure costs to meet the demand for our services is the primary driver of the increase in our operating expenses in 2015. Annualized turnover, including both voluntary and involuntary, was approximately 19.1%financial results for the three monthsyears ended December 31, 2015. The majority of our turnover occurs in India. As a result, annualized attrition rates on-site at clients are below our global attrition rate. In addition, attrition is weighted towards the more junior members of our staff. We have experienced increases in compensation2018 and benefit costs, including incentive-based compensation costs, in India, which may continue in the future; however, historically, this has not had a material impact on our results of operations as we have been able to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, the mix of our professional staff as well as utilization levels, and achieving other operating efficiencies.2017:
At December 31, 2015, we had cash, cash equivalents and short-term investments of $4,949.5 million, working capital of $5,194.9 million and debt outstanding of $1,287.5 million. We believe our cash from operations and capital resources on hand provide sufficient liquidity to continue to make investments to expand and grow our business, and meet our debt repayment obligations. |
| | | | | | | | | | | | | | |
| | | | | | Increase |
| | 2018(1) | | 2017 | | $ | | % |
| | (Dollars in millions, except per share data) |
Revenues | | $ | 16,125 |
| | $ | 14,810 |
| | $ | 1,315 |
| | 8.9 |
Income from operations | | 2,801 |
| | 2,481 |
| | 320 |
| | 12.9 |
Net income | | 2,101 |
| | 1,504 |
| | 597 |
| | 39.7 |
Diluted earnings per share | | 3.60 |
| | 2.53 |
| | 1.07 |
| | 42.3 |
Other Financial Information2 | | | | | | | | |
Non-GAAP income from operations | | $ | 3,345 |
| | $ | 2,912 |
| | $ | 433 |
| | 14.9 |
Adjusted Income From Operations | | 2,920 |
| | 2,553 |
| | 367 |
| | 14.4 |
Non-GAAP diluted EPS | | 4.57 |
| | 3.77 |
| | 0.80 |
| | 21.2 |
Adjusted Diluted EPS | | 4.02 |
| | 3.42 |
| | 0.60 |
| | 17.5 |
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(1) | On January 1, 2018, we adopted the New Revenue Standard using the modified retrospective method. Results for reporting periods beginning on or after January 1, 2018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. During 2018, the adoption of the New Revenue Standard had a positive impact on revenue of $96 million, income from operations of $134 million and diluted earnings per share of $0.19 per share. See Note 3 to our consolidated financial statements for additional information. |
The following charts set forth revenues and revenue growth by business segment and geography for the years ended December 31, 2017 and 2018:
______________
| |
2 | Non-GAAP income from operations, Adjusted Income From Operations, non-GAAP operating margin, isAdjusted Operating Margin, non-GAAP diluted EPS, Adjusted Diluted EPS, free cash flow and constant currency revenue growth are not a measurementmeasurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable. |
The following factors impacted our revenue growth during the year ended December 31, 2018 as compared to the year ended December 31, 2017:
Solid performance in our Communications, Media and Technology, Products and Resources and Healthcare segments;
Revenues in our Financial Services segment grew below Company average as certain banking customers continue to optimize the cost of supporting their legacy systems and operations, including moving a portion of their services to captives, as they shift their spend to transformation and digital services;
Sustained strength in the North American market;
| |
• | Revenues from our customers in Europe grew 18.3%, or 15.2% on a reconciliationconstant currency3 basis; |
| |
◦ | Revenues from our Rest of Europe customers increased 25.2%, or 22.2% on a constant currency basis3; |
| |
◦ | Revenues from our United Kingdom customers increased 10.8%, or 7.6% on a constant currency basis3. Revenue growth in the United Kingdom continues to be negatively affected by weakness in the banking sector in that region; |
| |
• | Revenues from our customers in our Rest of World region grew 3.4%, or 6.1% on a constant currency basis3; |
Increased customer spending on discretionary projects;
Expansion of our service offerings, including consulting and digital services, next-generation IT solutions and platform-based solutions;
Continued expansion of the market for global delivery of technology and business process services; and
Increased penetration of existing customers.
The following chart sets forth our GAAP operating margin, Adjusted Operating Margin3 andnon-GAAP operating margin3 for the years ended December 31, 2017 and 2018:
The increases in our GAAP operating margin, Adjusted Operating Margin3 and non-GAAP operating margin3 were attributable to our margin enhancement initiatives, which targeted the optimization of our resource pyramid, improvement of utilization and the containment of our corporate spend, as well as the depreciation of the Indian Rupee against the U.S. dollar, net of lower gains on settlement of our cash flow hedges in 2018 compared to 2017. Our GAAP operating margin was negatively impacted by the initial funding of the Cognizant U.S. Foundation. Our GAAP operating margin and our Adjusted Operating Margin were both negatively impacted by the increase in amortization expense due to recent acquisitions.
In 2017, the United States enacted the Tax Cuts and Jobs Act ("Tax Reform Act") which significantly revised the U.S. corporate income tax law for tax years beginning after December 31, 2017. As a result of this enactment, in 2017, we recorded a one-time provisional net income tax expense of $617 million. During 2018, we recognized a $5 million reduction to the provision for income taxes as we finalized our calculation of this one-time net income tax expense, bringing the one-time cost to $612 million. Our effective income tax rate for 2018 was 25.0% as compared to 43.4% in 2017. The decrease in our effective tax rate in 2018 was primarily driven by the one-time net income tax expense of $617 million that was recorded in 2017 as a result of the enactment of the Tax Reform Act and the reduction of the U.S. federal statutory corporate income tax rate in 2018 from 35% to 21%.
_____________
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3 | Constant currency revenue growth, non-GAAP operating margin and Adjusted Operating Margin are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures. |
Other Matters
36
TableWe are involved in an ongoing dispute with the Indian Income Tax Department ("ITD") in connection with which we received a notice in March 2018 asserting that the ITD is owed additional taxes on our previously disclosed 2016 India Cash Remittance, which was the transaction undertaken by our principal operating subsidiary in India ("CTS India") to repurchase shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion. As a result of Contentsthat transaction, undertaken pursuant to a plan approved by the Madras High Court in Chennai, India, we previously paid $135 million in Indian income taxes, which we believe are all the applicable taxes owed for this transaction under Indian law. The ITD is asserting that we owe an additional 33 billion Indian rupees ($475 million at the December 31, 2018 exchange rate) related to the 2016 India Cash Remittance. In addition to the dispute on the 2016 India Cash Remittance, we are involved in another ongoing dispute with the ITD relating to a 2013 transaction undertaken by CTS India to repurchase shares from its shareholders valued at $523 million (the two disputes collectively referred to as the "ITD Dispute"), for which we also believe we have paid all applicable taxes owed. Accordingly, we have not recorded any reserves for these matters as of December 31, 2018. The ITD Dispute is currently pending before the Madras High Court, and no final decision has been reached. While we believe that we have paid all applicable taxes related to the transactions underlying the ITD Dispute, if it is ultimately determined that we are liable for the full amount of additional taxes the ITD alleges we owe, there could be a material adverse effect on our results of operations, cash flows and financial condition.In March 2018, the ITD placed an attachment on certain of our India bank accounts, relating to the 2016 India Cash Remittance. In April 2018, the Madras High Court granted our application for a stay of the actions of the ITD and lifted the ITD’s attachment of our bank accounts. As part of the interim stay order, we have deposited 5 billion Indian rupees ($71 million at the December 31, 2018 exchange rate), representing 15% of the disputed tax amount related to the 2016 India Cash Remittance, with the ITD. This amount is presented in "Other current assets" on our consolidated statement of financial position. In addition, the court has placed a lien on certain time deposits of CTS India in the amount of 28 billion Indian rupees ($404 million at the December 31, 2018 exchange rate), which is the remainder of the disputed tax amount related to the 2016 India Cash Remittance. The affected time deposits are considered restricted assets and we have reported them in “Short-term investments” on our consolidated statement of financial position. As of December 31, 2018, the restricted time deposits balance was $423 million, including accumulated interest.
In February 2019, we completed our internal investigation focused on whether certain payments relating to Company-owned facilities in India were made improperly and in violation of the U.S. Foreign Corrupt Practices Act ("FCPA") and other applicable laws. The investigation was conducted under the oversight of the Audit Committee, with the assistance of outside counsel. During the year ended December 31, 2016, we recorded out-of-period corrections related to $4 million of potentially improper payments between 2009 and 2016 that had been previously capitalized when they should have been expensed. These out-of-period corrections were not material to any previously issued financial statements. There were no adjustments recorded during 2018 or 2017 related to the amounts then under investigation.
On February 15, 2019, we announced a resolution of the previously disclosed investigations by the U.S. Department of Justice ("DOJ") and the U.S. Securities and Exchange Commission ("SEC") into the matters that were the subject of our internal investigation. The resolution required the Company to pay approximately $28 million to the DOJ and SEC, an amount consistent with the Company’s accrual ("FCPA Accrual") recorded during the quarter ended September 30, 2018.
During the years ended December 31, 2018, 2017 and 2016, we incurred $16 million (not including the FCPA Accrual), $36 million and $27 million, respectively, in costs related to the above investigations and the legal matters described in Note 15 to our consolidated financial statements. We expect to continue to incur legal fees and other expenses, including indemnification and expense advancement obligations, related to stockholder litigation and other legal proceedings pertaining to the matters that were the focus of the now completed FCPA investigations described above. 2019 Business Considerations
During 2016,2019, barring any unforeseen events, we expect the following factors to affect our business and our operating results:
Demand from our customers to help them meet theirfor digital services and industry-specific changes driven by evolving digital technologies;
Our customers' dual mandate of simultaneously achieving cost savings while investing in transformation and innovation;
Continued focus by customers on directing ITtechnology spending towards cost containment projects, suchprojects;
Discretionary spending by our customers may be negatively affected by international trade policies as application maintenance, infrastructure services and business process services;well as other macroeconomic factors;
Secular changes driven by evolving digital technologiesUncertainty related to the potential economic and regulatory changes;impacts of the 2016 United Kingdom referendum to exit the European Union (the "Brexit Referendum");
Demand from certain banking customers may continue to be negatively affected by their ongoing efforts to optimize the cost of supporting their legacy systems and operations, including moving a portion of their services to captives, as they shift their spend to transformation and digital services;
Demand from our healthcare customers may continue to be affected by the uncertainty in the regulatory environment and industry-specific trends, including industry consolidation and convergence;
Demand among our technology customers may be affected by uncertainty in the regulatory environment while significant merger and acquisition activity continues to impact our customers in the communications and media industry;
Uncertainty regarding regulatory changes, including potential regulatory changes with respect to immigration and taxes;
Legal fees and other expenses, including indemnification and expense advancement obligations, related to stockholder litigation and other legal proceedings pertaining to the matters that were the focus of now completed FCPA investigations described above; and
Volatility in foreign currency rates; and
Continued uncertainty in the world economy.rates.
In response to this environment, we plan to:
Continue to invest in our digital capabilities across industries and geographies;
Continue to invest in our talent base, including through local hiring and re-skilling, and new service offerings, including digital technologies and new delivery models;
Partner with our existing customers to garner an increased portion of our customers’ overall IT spend by providing innovative solutions;
Focus on growing our business in Europe, the Middle East, the Asia Pacific and Latin America, regions, where we believe there are opportunities to gain market share;
Increase ourPursue strategic customer base across all of our business segments;
Opportunistically look for acquisitions that maywe believe add new technologies, including digital technologies, or platforms that complement our existing services, improve our overall service delivery capabilities, or expand our geographic presence and/or enable us to enter new areas of technology;presence; and
Focus on operating discipline in order to appropriately manage our cost structure; andstructure.
Locate most of our new development center facilities in tax incentivized areas.
Our four reportable business segments are:
Financial Services, which includes customers providing banking/transaction processing, capital marketsconsists of our banking and insurance services;operating segments;
Healthcare, which includesconsists of our healthcare providers and payers as well as life sciences customers including pharmaceutical, biotechoperating segments;
Products and medical device companies;Resources, which consists of our retail and consumer goods, manufacturing and logistics, travel and hospitality, and energy and utilities operating segments; and
Manufacturing/Retail/Logistics,Communications, Media and Technology, which includes consumer goods manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services; and
Other, which is an aggregation of industry operating segments each of which, individually, represents less than 10.0% of consolidated revenues and segment operating profit. The Other segment includes information, media and entertainment services,our communications and highmedia operating segment and our technology operating customers.segment.
Our chief operating decision maker evaluates Cognizant’sthe Company’s performance and allocates resources based on segment revenues and operating profit. Segment operating profit is defined as income from operations before unallocated costs. Generally, operating expenses for each operating segment have similar characteristics and are subject to the same factors, pressures and challenges. However, the economic environment and its effects on industries served by our operating groupssegments may affect revenuerevenues and operating expenses to differentdiffering degrees. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as a per seat charge for use of the development and delivery centers. Certain selling, general and administrative expenses, excess or shortfall of incentive compensation for delivery personnel as compared to target, stock-based compensation expense, a portion of depreciation and amortization and the impact of the settlements of our cash flow hedges are not allocated to individual segments in internal management reports used by the chief operating decision maker. Accordingly, such expenses are excluded from segment operating profit.
We provide a significant volume of services to many customers in each of our business segments. Therefore, a loss of a significant customer or a few significant customers in a particular segment could materially reduce revenues for that segment. However, no individual customer accounted for sales in excess of 10% of our consolidated revenues during 2015, 2014 or 2013. In addition, the services we provide to our larger customers are often critical to the operations of such customers and we believe that a termination of our services would require an extended transition period with gradually declining revenues.
Results of OperationsSee Note 19 to our consolidated financial statements for the Three Years Ended December 31, 2015additional information on our business segments.
|
| | | | |
Results of Operations for the Three Years Ended December 31, 2018 |
The following table sets forth certain financial data for the three years ended December 31, 2015:2018:
| | | | 2015 | | % of Revenues | | 2014 | | % of Revenues | | 2013 | | % of Revenues | | Increase (Decrease) | | 2018(1) | | % of Revenues | | 2017 | | % of Revenues | | 2016 | | % of Revenues | | Increase/Decrease |
2015 | | 2014 | 2018 | | 2017 |
| | (Dollars in millions, except per share data) | | (Dollars in millions, except per share data) |
Revenues | | $ | 12,416.0 |
| | 100.0 | | $ | 10,262.7 |
| | 100.0 | | $ | 8,843.2 |
| | 100.0 | | $ | 2,153.3 |
| | $ | 1,419.5 |
| | $ | 16,125 |
| | 100.0 | | $ | 14,810 |
| | 100.0 | | $ | 13,487 |
| | 100.0 | | $ | 1,315 |
| | $ | 1,323 |
|
Cost of revenues(1)(2) | | 7,440.2 |
| | 59.9 | | 6,141.1 |
| | 59.8 | | 5,265.5 |
| | 59.5 | | 1,299.1 |
| | 875.6 |
| | 9,838 |
| | 61.0 | | 9,152 |
| | 61.8 | | 8,108 |
| | 60.1 | | 686 |
| | 1,044 |
|
Selling, general and administrative(1) | | 2,508.6 |
| | 20.2 | | 2,037.0 |
| | 19.8 | | 1,727.6 |
| | 19.5 | | 471.6 |
| | 309.4 |
| |
Selling, general and administrative expenses(2) | | | 3,026 |
| | 18.8 | | 2,769 |
| | 18.7 | | 2,731 |
| | 20.2 | | 257 |
| | 38 |
|
Depreciation and amortization expense | | 325.2 |
| | 2.6 | | 199.7 |
| | 1.9 | | 172.2 |
| | 1.9 | | 125.5 |
| | 27.5 |
| | 460 |
| | 2.9 | | 408 |
| | 2.8 | | 359 |
| | 2.7 | | 52 |
| | 49 |
|
Income from operations | | 2,142.0 |
| | 17.3 | | 1,884.9 |
| | 18.4 | | 1,677.9 |
| | 19.0 | | 257.1 |
| | 207.0 |
| | 2,801 |
| | 17.4 | | 2,481 |
| | 16.8 | | 2,289 |
| | 17.0 | | 320 |
| | 192 |
|
Other income (expense), net | | 21.6 |
| | 39.1 |
| | 10.0 |
| | (17.5 | ) | | 29.1 |
| | (4 | ) | | 174 |
| | 68 |
| | (178 | ) | | 106 |
|
Income before provision for income taxes | | | 2,797 |
| | 17.3 | | 2,655 |
| | 17.9 | | 2,357 |
| | 17.5 | | 142 |
| | 298 |
|
Provision for income taxes | | 540.0 |
| | 484.7 |
| | 459.3 |
| | 55.3 |
| | 25.4 |
| | (698 | ) | | (1,153 | ) | | (805 | ) | | 455 |
| | (348 | ) |
Income from equity method investment | | | 2 |
| | 2 |
| | 1 |
| | — |
| | 1 |
|
Net income | | $ | 1,623.6 |
| | 13.1 | | $ | 1,439.3 |
| | 14.0 | | $ | 1,228.6 |
| | 13.9 | | $ | 184.3 |
| | $ | 210.7 |
| | $ | 2,101 |
| | 13.0 | | $ | 1,504 |
| | 10.2 | | $ | 1,553 |
| | 11.5 | | $ | 597 |
| | $ | (49 | ) |
Diluted earnings per share | | $ | 2.65 |
| | $ | 2.35 |
| | $ | 2.02 |
| | $ | 0.30 |
| | $ | 0.33 |
| |
Other Financial Information (2) | | | | | | | | | |
Diluted EPS | | | $ | 3.60 |
| | $ | 2.53 |
| | $ | 2.55 |
| | $ | 1.07 |
| | $ | (0.02 | ) |
Other Financial Information (3) | | Other Financial Information (3) | | | | | | | | |
Non-GAAP income from operations and non-GAAP operating margin | | $ | 2,449.8 |
| | 19.7 | | $ | 2,068.1 |
| | 20.2 | | $ | 1,820.7 |
| | 20.6 | | $ | 381.7 |
| | $ | 247.4 |
| | $ | 3,345 |
| | 20.7 | | $ | 2,912 |
| | 19.7 | | $ | 2,636 |
| | 19.5 | | 433 |
| | $ | 276 |
|
Non-GAAP diluted earnings per share | | $ | 3.07 |
| | $ | 2.60 |
| | $ | 2.27 |
| | $ | 0.47 |
| | $ | 0.33 |
| |
Adjusted Income From Operations and Adjusted Operating Margin | | | $ | 2,920 |
| | 18.1 | | $ | 2,553 |
| | 17.3 | | $ | 2,289 |
| | 17.0 | | 367 |
| | 264 |
|
Non-GAAP diluted EPS | | | $ | 4.57 |
| | $ | 3.77 |
| | $ | 3.39 |
| | 0.80 |
| | 0.38 |
|
Adjusted Diluted EPS | | | $ | 4.02 |
| | $ | 3.42 |
| | $ | 2.98 |
| | $ | 0.60 |
| | $ | 0.44 |
|
______________________________________
| |
(1) | Results for 2018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. See Note 3 to our consolidated financial statements for additional information. |
| |
(2) | Exclusive of depreciation and amortization expense. |
| |
(2)(3) | Non-GAAP income from operations, Adjusted Income from Operations, non-GAAP operating margin, andAdjusted Operating Margin, non-GAAP diluted earnings per shareEPS and Adjusted Diluted EPS are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and a reconciliationreconciliations to the most directly comparable GAAP financial measure.measures. |
RevenueRevenues - Overall. Revenue increased by 21.0% to $12,416.0 million during 2015 as compared to an increase of 16.1% to $10,262.7 million in 2014. In 2015, revenue includes $724.5 million from TriZetto, which we acquired in the fourth quarter of 2014, as compared to $80.6 million in 2014. The increase in TriZetto revenue represented 29.9% of the year over year
Our revenue growth in 2015. In both years, the remaining increase2018 and 2017 was primarily attributed to greater acceptanceservices related to the integration of digital technologies that are reshaping our global delivery model among an increasing number of industries,customers' business and operating models, increased customer spending on discretionary projects, continued interest in using our global delivery model as a means to reduce overall ITtechnology and operations costs increased customer spending on discretionary projects, and continued penetration in all our geographic markets. Revenues from new customers contributed $195.4$305 million and $298.1$208 million, representing 9.1%23.2% and 21.0%15.7% of the year-over-year revenue growth for 20152018 and 2014,2017, respectively. In 2015,
On January 1, 2018, we adopted the New Revenue Standard using the modified retrospective method. For the year ended December 31, 2018, adoption of the New Revenue Standard had a positive impact on revenue of $96 million. See Note 3 to our consulting and technology services revenues increased by 31.8% and represented 57.6% of total 2015 revenues, while our outsourcing services revenue increased by 8.9% and constituted 42.4% of total revenues. In 2014, consulting and technology services revenue increased by 22.1% and represented 52.8% of total 2014 revenues, while our outsourcing services revenue increased by 10.0% and constituted 47.2% of total 2014 revenues. While both consulting and technology services revenue and outsourcing services revenue grew in 2015 and 2014, we saw a shift in customer spending from legacy application maintenance toward project-based work, including digital and other transformational programs.consolidated financial statements for additional information.
Revenues from our top five customers as a percentage of total revenues were 11.0%, 12.2% and 13.2% in 2015, 2014 and 2013, respectively. Revenues from our top ten customers as a percentage of total revenues were 18.6%, 21.3% and 22.6% in 2015, 2014 and 2013, respectively. follows:
|
| | | | | | | | | |
| | For the years ended December 31, |
| | 2018 | | 2017 | | 2016 |
Top five customers | | 8.6 | % | | 8.9 | % | | 10.0 | % |
Top ten customers | | 15.4 | % | | 14.9 | % | | 16.7 | % |
As we continue to add new customers and increase our penetration at existing customers, we expect the percentage of revenues from our top five and top ten customers to continue to decline over time.
RevenueRevenues - Reportable Segments. Business Segments
Revenues by reportable business segment were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 | | Increase |
2015 | | 2014 |
$ | | % | | $ | | % |
| | (Dollars in millions) |
Financial Services | | $ | 5,002.9 |
| | $ | 4,285.6 |
| | $ | 3,717.6 |
| | $ | 717.3 |
| | 16.7 | | $ | 568.0 |
| | 15.3 |
Healthcare | | 3,667.5 |
| | 2,689.4 |
| | 2,264.8 |
| | 978.1 |
| | 36.4 | | 424.6 |
| | 18.7 |
Manufacturing/Retail/Logistics | | 2,343.9 |
| | 2,093.6 |
| | 1,868.3 |
| | 250.3 |
| | 12.0 | | 225.3 |
| | 12.1 |
Other | | 1,401.7 |
| | 1,194.1 |
| | 992.5 |
| | 207.6 |
| | 17.4 | | 201.6 |
| | 20.3 |
Total revenue | | $ | 12,416.0 |
| | $ | 10,262.7 |
| | $ | 8,843.2 |
| | $ | 2,153.3 |
| | 21.0 | | $ | 1,419.5 |
| | 16.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018(1) | | 2017 | | 2016 | | Increase |
2018 | | 2017 |
$ | | % | | $ | | % |
| | (Dollars in millions) |
Financial Services | | $ | 5,845 |
| | $ | 5,636 |
| | $ | 5,366 |
| | $ | 209 |
| | 3.7 | | $ | 270 |
| | 5.0 |
Healthcare | | 4,668 |
| | 4,263 |
| | 3,871 |
| | 405 |
| | 9.5 | | 392 |
| | 10.1 |
Products and Resources | | 3,415 |
| | 3,040 |
| | 2,660 |
| | 375 |
| | 12.3 | | 380 |
| | 14.3 |
Communications, Media and Technology | | 2,197 |
| | 1,871 |
| | 1,590 |
| | 326 |
| | 17.4 | | 281 |
| | 17.7 |
Total revenues | | $ | 16,125 |
| | $ | 14,810 |
| | $ | 13,487 |
| | $ | 1,315 |
| | 8.9 | | $ | 1,323 |
| | 9.8 |
_____________________
| |
(1) | Results for 2018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. See Note 3 to our consolidated financial statements for additional information. |
Financial Services
RevenueRevenues from our Financial Services segment grew 16.7% or $717.33.7% in 2018. In 2018, growth was stronger among our insurance customers, where revenues increased by $163 million in 2015, as compared to 2014. Ouran increase of $46 million from our banking and insurance customers contributed $403.6 million and $313.7 million, respectively, to the year over year revenue increase.customers. In this segment, revenuerevenues from customers added during 2015 was $57.32018 were $40 million and represented 8.0%19.1% of the year-over-year revenues increase in this segment. Demand in this segment was driven by our customers' focus on cost optimization in the face of profitability pressures, the need to be compliant with significant regulatory requirements and adaptable to regulatory change, and their adoption and integration of digital technologies that are reshaping our customers' business and operating models, including customer experience enhancement, robotic process automation and analytics and artificial intelligence. Demand from certain banking customers has been and may continue to be negatively affected as they focus on optimizing the cost of supporting their legacy systems and operations, including moving a portion of their services to captives, as they shift their spend to transformation and digital services.
Revenues from our Financial Services segment grew 5.0% in 2017. In 2017, growth was stronger among our insurance customers, where revenues increased by $191 million as compared to an increase of $79 million from our banking customers. In 2017, revenues from customers added during that year over yearwere $56 million and represented 20.7% of the year-over-year revenues increase in this segment. In 2017, demand from certain banking customers was negatively affected by their continued focus on optimizing their cost structure and managing their discretionary spending.
Healthcare
Revenues from our Healthcare segment grew 9.5% in 2018. In 2018, revenues in this segment increased by $342 million from our healthcare customers as compared to an increase of $63 million among our life sciences customers. Revenue growth from our healthcare customers includes revenues from Bolder, which we acquired in 2018, partially offset by a ramp down of a customer relationship in which we were a subcontractor to a third party for the purpose of delivering healthcare-related systems implementation services to local government. Revenues from customers added during 2018, including Bolder's customers, were $139 million and represented 34.3% of the year-over-year revenue increase in this segment. KeyDemand in this segment was driven by emerging industry trends, including enhanced compliance, integrated health management, claims investigative services, as well as services that drive operational improvements in areas of focus for our Financial Services customers included cost optimization, regulatorysuch as claims processing, enrollment, membership and compliance driven initiatives, cyber security andbilling, in addition to the adoption and integration of digital technologies, such as artificial intelligence, personalized care plans and predictive data
analytics to align with shifts in consumer preferences. Revenueimprove patient outcomes. Demand from our Financial Services segment grew 15.3% or $568.0 million in 2014, as compared to 2013. In 2014, our banking and insurance customers contributed $344.1 million and $223.9 million, respectively, to the year over year revenue growth. In 2014, revenue from customers added during that year was $49.6 million and represented 8.7% of the year over year revenue increase in this segment. We believe future demand from certain of our banking customers may be negatively affected by the current macroeconomic conditions affecting the industry.
Revenue from our Healthcare segment grew 36.4% or $978.1 million in 2015, as compared to 2014. During 2015, our healthcare customers contributed $824.0 millionhas been and may continue to the year over year revenue growth, including a $643.9 million increase in year over year revenue from TriZetto. Revenue from our life sciences customers increased by $154.1 million. Revenue from customers added during 2015 was $51.3 million and represented 5.2% of the year over year revenue increase in this segment. The demand among our healthcare payer customers was partially driven by cost optimization initiatives. Revenue from our Healthcare segment grew 18.7% or $424.6 million in 2014, as compared to 2013 and included $80.6 million from TriZetto. In 2014, growth over 2013 was driven by an increase in discretionary spending and was negatively affected by uncertainty created by regulatory changes, including the Affordable Care Act initiatives in the U.S. In 2014, revenue from customers added during that year, including new TriZetto customers, was $158.1 million and represented 37.2% of the year over year revenue increase in this segment. The demand for our services may also be affected by the recent trend towardsuncertainty in the regulatory environment and industry-specific trends, including industry consolidation within the healthcare payer industry.and convergence. We believe that in the long term the health carehealthcare industry continues to present a significant growth opportunity due to factors that are transforming the industry, including the changing regulatory environment, increasing focus on medical costs and the consumerization of healthcare.
RevenueRevenues from our Manufacturing/Retail/LogisticsHealthcare segment grew 12.0% or $250.310.1% in 2017. In 2017, revenues in this segment increased by $279 million in 2015,from our healthcare customers as compared to 2014. During 2015,an increase of $113 million for our life sciences customers. Revenues from customers added during 2017 were $40 million and represented 10.2% of the year-over-year revenues increase in this segment. The increase in revenues from our life sciences customers was driven by a growing demand for a broader range of services, including business process services, advanced data analytics and solutions that span multiple service lines while leveraging cloud technologies and platforms. In 2017, the demand for our services among our healthcare customers was affected by uncertainty in the regulatory environment.
Products and Resources
Revenues from our Products and Resources segment grew 12.3% in 2018. In 2018, revenue growth in this segment was strongest among our energy and utilities customers and our manufacturing and logistics customers, contributed $130.3 million to the year over year revenue growth as compared to $120.0 million forwhere revenues increased by a combined $220 million. Revenues from our retail and consumer goods customers and travel and hospitality customers. Revenuecustomers increased by a combined $155 million. Revenues from customers added during 2015 was $63.32018 were $93 million and represented 25.3%24.8% of the year-over-year revenues increase in this segment. Demand in this segment was driven by our customers’ focus on improving the efficiency of their operations, the enablement and integration of mobile platforms to support sales and other omni channel commerce initiatives, and their adoption and integration of digital technologies, such as the application of intelligent systems to manage supply chain and enhance overall customer experiences.
Revenues from our Products and Resources segment grew 14.3% in 2017. In 2017, revenue growth in this segment was strongest among our energy and utilities customers and manufacturing and logistic customers, where revenue increased by a combined $326 million, including revenues from a new strategic customer acquired in the fourth quarter of 2016. Revenue from our retail and consumer goods customers and travel and hospitality customers increased by a combined $54 million. Revenues from customers added during 2017 were $85 million and represented 22.4% of the year over year revenue increase in this segment. DemandIn 2017, demand within this segment continues to bewas driven by omnichannel commerce implementation and integration efforts, analytics, supply chain consulting and implementation initiatives, andthe increased adoption of digital technologies to align with shiftsas well as growing demand for analytics, supply chain consulting, implementation initiatives, smart products, transformation of business models, internet of things and omni channel commerce implementation and integration services. In 2017, discretionary spending by our retail customers was affected by weakness in consumer preferences. Revenuethe retail sector.
Communications, Media and Technology
Revenues from our Manufacturing/Retail/LogisticsCommunications, Media and Technology segment grew 12.1% or $225.317.4% in 2018. In 2018, growth was stronger among our technology customers where revenues increased $259 million in 2014, as compared to 2013.an increase of $67 million for our communications and media customers. Revenues from customers added during 2018 were $33 million and represented 10.1% of the year-over-year revenues increase in this segment. Demand in this segment was driven by our customers’ need to manage their digital content, create differentiated user experiences, expand their range of services, including business process services, transition to agile development methodologies, enhance their network and adopt and integrate digital technologies, such as cloud enablement and interactive and connected products. Additionally, demand among our technology customers may be affected by uncertainty in the regulatory environment while significant merger and acquisition activity continues to impact our customers in the communications and media industry.
Revenues from our Communications, Media and Technology segment grew 17.7% in 2017. In 2014,2017, revenue growth was $154 million among our communications and media customers and $127 million among our technology customers. Revenues from customers added during 2017 were $27 million and represented 9.6% of the year-over-year revenues increase in this segment. In 2017, demand within this segment was stronger amongdriven by the increased adoption of digital technologies, digital content operations, services to help our manufacturingcustomers balance rationalizing costs while creating a differentiated user experience and logistics customers, where revenue increased by $124.4 million, while revenue for our retail and hospitality customers increased by $100.8 million. In 2014, revenue from customers added during that year was $59.6 million and represented 26.5%an expanded range of the year over year revenue increase in this segment.
Revenue from our Other segment grew 17.4% or $207.6 million in 2015,services, such as compared to 2014. In 2015, growth within Other was due primarily to increased demand for digital services and was strong among our information, media and entertainment customers, where revenue increased by $85.0 million, and our technology customers, where revenue increased by $88.8 million. Revenue from customers added during 2015 was $23.4 million and represented 11.3% of the year over year revenue increase in this segment. Revenue from our Other segment grew 20.3% or $201.6 million in 2014, as compared to 2013. In 2014, growth within Other was particularly strong among our telecommunication and high technology customers, where revenue increased by $93.3 million and $71.0 million, respectively, due to an increase in discretionary spending. In 2014, revenue from customers added during that year was $30.8 million and represented 15.3% of the year over year revenue increase in this segment.business process services.
Revenue
Revenues - Geographic Locations.
Revenues by geographic market, as determined by customer location, were as follows:
| | | | 2015 | | 2014 | | 2013 | | Increase | | 2018(1) | | 2017 | | 2016 | | Increase (Decrease) |
2015 | | 2014 | 2018 | | 2017 |
$ | | % | | $ | | % | $ | | % | | $ | | % |
| | (Dollars in millions) | | (Dollars in millions) |
North America | | $ | 9,759.4 |
| | $ | 7,879.8 |
| | $ | 6,860.1 |
| | $ | 1,879.6 |
| | 23.9 | | $ | 1,019.7 |
| | 14.9 | | $ | 12,293 |
| | $ | 11,450 |
| | $ | 10,546 |
| | $ | 843 |
| | 7.4 | | $ | 904 |
| | 8.6 |
|
United Kingdom | | 1,188.5 |
| | 1,099.2 |
| | 942.6 |
| | 89.3 |
| | 8.1 | | 156.6 |
| | 16.6 | | 1,274 |
| | 1,150 |
| | 1,176 |
| | 124 |
| | 10.8 | | (26 | ) | | (2.2 | ) |
Rest of Europe | | 819.7 |
| | 784.4 |
| | 636.6 |
| | 35.3 |
| | 4.5 | | 147.8 |
| | 23.2 | | 1,563 |
| | 1,248 |
| | 969 |
| | 315 |
| | 25.2 | | 279 |
| | 28.8 |
|
Europe - Total | | 2,008.2 |
| | 1,883.6 |
| | 1,579.2 |
| | 124.6 |
| | 6.6 | | 304.4 |
| | 19.3 | | 2,837 |
| | 2,398 |
| | 2,145 |
| | 439 |
| | 18.3 | | 253 |
| | 11.8 |
|
Rest of World | | 648.4 |
| | 499.3 |
| | 403.9 |
| | 149.1 |
| | 29.9 | | 95.4 |
| | 23.6 | | 995 |
| | 962 |
| | 796 |
| | 33 |
| | 3.4 | | 166 |
| | 20.9 |
|
Total revenue | | $ | 12,416.0 |
| | $ | 10,262.7 |
| | $ | 8,843.2 |
| | $ | 2,153.3 |
| | 21.0 | | $ | 1,419.5 |
| | 16.1 | |
Total revenues | | | $ | 16,125 |
| | $ | 14,810 |
| | $ | 13,487 |
| | $ | 1,315 |
| | 8.9 | | $ | 1,323 |
| | 9.8 |
|
_____________________
| |
(1) | Results for 2018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. See Note 3 to our consolidated financial statements for additional information. |
North America continues to be our largest market, representing 78.6%76.2% of total 2015 revenue2018 revenues and accounting for $1,879.6 million64.1% of the $2,153.3 million revenue increase in 2015. Revenue growth among our North America customers includes $643.9 million year over year growth in TriZetto revenue.
In 2015, revenue from Europe grew 6.6%, after a negative currency impact of 10.2%, driven by the increasing acceptance of our global delivery model, partially offset by the recent strength of the U.S. dollar against the British pound, the Euro and other currencies. In 2014, revenue from Europe grew 19.3%, which included the full-year benefit of our acquisition of Equinox Consulting, which closed in the fourth quarter of 2013. The 2014total revenue growth in 2018. Revenues from our customers in Europe was driven bygrew 18.3%, or 15.2% on a constant currency4 basis. Specifically, revenues from our Rest of Europe customers increased 25.2%, or 22.2% on a constant currency4 basis, while within the strengthUnited Kingdom we experienced an increase in revenues of Europe's economy and the increasing acceptance of our global delivery model. In 2015, revenue10.8%, or 7.6% on a constant currency4 basis. Revenues from our Rest of World customers grew 29.9%was 3.4%, afteror 6.1% on a negativeconstant currency impact of 9.2%. In 2014, revenue from our4 basis. Revenue growth in the United Kingdom and Rest of World was negatively affected by weakness in our Financial Services segment as certain banking customers grew 23.6%. In 2015in those regions focus on optimizing the cost of supporting their legacy systems and 2014, growth was primarily driven by the India, Singapore, Australia, Japanoperations, including moving a portion of their services to captives, as they shift their spend to transformation and Hong Kong markets.digital services. We believe that Europe, theIndia, Middle East, the Asia Pacific and Latin America regions will continue to be areas of significant investment for us as we see these regions as long term growth opportunities.
In 2017, North America represented 77.3% of total revenues and 68.3% of total revenue growth. In 2017, the increase in revenues in this region was primarily attributed to services related to the integration of digital technologies that are reshaping our customers' business and operating models to align with shifts in consumer preferences, increased customer spending on discretionary projects and continued interest in using our global delivery model as a means to reduce overall technology and operations costs. In 2017, revenue growth in Europe and Rest of World markets was driven by an increase in demand for an expanded range of services, such as business process services and customer adoption and integration of digital technologies. Revenues from our customers in Europe grew 11.8%, or 13.0% on a constant currency4 basis. Specifically, revenues from our Rest of Europe customers, increased 28.8%, or 26.8% on a constant currency4 basis, while within the United Kingdom we experienced a decrease in revenues of 2.2%, or an increase of 1.6% on a constant currency4 basis. Revenue growth in the United Kingdom was negatively affected by weakness in the banking sector in that country. In 2017, revenues from our Rest of World customers grew 20.9%, primarily driven by the Australia and India markets.
Cost of Revenues (Exclusive of Depreciation and Amortization Expense).
Our cost of revenues consists primarily of salaries, incentive-based compensation, stock-based compensation expense, payroll taxes, employee benefits, project-related immigration and project-related travel for technical personnel and subcontracting and sales commissions relatedcosts relating to revenues. Our cost of revenues increased by 21.2% or $1,299.1 million7.5% during 20152018 as compared to an increase of 16.6% or $875.6 million12.9% during 2014.2017, decreasing as a percentage of revenue to 61.0% during 2018 compared to 61.8% in 2017. In both 2015 and 2014,2018, the increasedecrease in cost of revenues was due primarily to a decrease, as a percentage of revenues, in compensation and benefits costs due to the optimization of our resource pyramid, improved utilization and the depreciation of the Indian rupee against the U.S. dollar, partially offset by an increase in fees paid to strategic partners and other vendors in our digital operations, platform and infrastructure services and increases in certain professional service costs. In 2017, cost of revenues increased, as a percentage of revenue, to 61.8% as compared to 60.1% in 2016, primarily due to an increase in compensation and benefits costs (inclusive of the impact of higher incentive-based compensation costs), partially offset by the impact of the depreciation of the Indian rupee versus the U.S. dollar, and lower realized losses on our cash flow hedges in 2015 compared to 2014. In 2015, compensation and benefit costs increased by $1,112.1 million as a result of thean increase in the number of our service delivery personnel, including new TriZetto employees, and higher incentive-based compensation costs in 2015 as compared to 2014. In 2014, the increase in compensation and benefit costs was $650.6 million as a result of the increase in the number of our service delivery personnel, partially offset by lower incentive-based compensation costs in 2014 as compared to 2013.certain professional services costs.
_____________
| |
4 | Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information. |
Selling, General and Administrative Expenses
. Selling, general and administrative expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, payroll taxes, employee benefits, immigration, travel, marketing, communications, management, finance, administrative and occupancy costs. Selling, general and administrative expenses, including depreciation and amortization, increased by 26.7% or $597.1 million9.7% during 20152018 as compared to an increase of 17.7% or $336.9 million2.8% during 2014.2017. Selling, general and administrative expenses, including depreciation and amortization, increasedremained relatively flat as a percentage of revenue to 22.8%revenues at 21.6% in 20152018 as compared to 21.8% in 2014 and 21.5% in 2013.2017 and decreased from 22.9% in 2016. In 2015,2018, selling, general and administrative expense included the increase asinitial funding of the Cognizant U.S. Foundation and the FCPA Accrual, collectively representing 0.8% of revenues. This was partially offset by a percentage of revenue was due primarily to an increasedecrease in compensation and benefit costs (inclusivedue to our efforts to contain corporate spend. In 2017, the decrease as a percentage of the impact of higher incentive-basedrevenues was due primarily to a decrease in compensation costs)and benefit costs and a decrease in immigration expense, partially offset by increases in certain operating and professional service costs and increases in depreciation and amortization due to recent acquisitions, partially offset by the impact of the depreciation of the Indian rupee versus the U.S. dollar, and lower realized losses on our cash flow hedges in 2015 compared to 2014. In 2014, the increase as a percentage of revenue was due primarily to increases in compensation and benefit costs (net of the impact of lower incentive-based compensation), professional services, including acquisition-related costs, and investments to grow our business, partially offset by the favorable impact of the depreciation of the Indian rupee against the U.S. dollar and lower realized losses on our cash flow hedges in 2014 compared to 2013.acquisitions.
Income from Operations and Operating Margin - Overall
. Income from operations increased 13.6%, or $257.1 millionThe following charts set forth our GAAP operating margin, Adjusted Operating Margin5 andnon-GAAP operating margin5 for the years ended December 31, 2018 and 2017:
The increases in 2015our GAAP operating margin, Adjusted Operating Margin5 and non-GAAP operating margin5 were attributable to our margin enhancement initiatives, which targeted the optimization of our resource pyramid, improvement of utilization and the containment of our corporate spend, as well as the depreciation of the Indian Rupee against the U.S. dollar, net of lower gains on settlement of our cash flow hedges in 2018 compared to an increase of 12.3% or $207.0 million in 2014. Our2017. In 2018, our GAAP operating margin decreased to 17.3% of revenues in
2015 from 18.4% of revenues in 2014, due to increases in compensation and benefit costs (inclusive of the impact of higher incentive-based compensation) and increases in depreciation and amortization due to recent acquisitions, partially offsetwas negatively impacted by the impact of the depreciationinitial funding of the Indian rupee against theCognizant U.S. dollar, lower realized losses onFoundation. Further, our cash flow hedges and decreases in certain operating expenses, including travel, in 2015 compared to 2014. In 2014,GAAP operating margin decreased to 18.4% of revenues from 19.0% of revenuesand our Adjusted Operating Margin for 2018 were both negatively impacted by the increase in 2013,amortization expense due to increases in compensation and benefit costs (net of the impact of lower incentive-based compensation), subcontractor expense, professional fees and investments to grow our business, partially offset by the impact of the depreciation of the Indian rupee against the U.S. dollar and lower realized losses on our cash flow hedges in 2014 compared to 2013.recent acquisitions.
Excluding the impact of applicable designated cash flow hedges, the depreciation of the Indian rupee against the U.S. dollar positively impacted our operating margin by approximately 9889 basis points or 0.980.89 percentage points in 2015 and 862018, while in 2017 the appreciation of the Indian rupee against the U.S. dollar negatively impacted our operating margin by approximately 58 basis points or 0.860.58 percentage points in 2014.points. Each additional 1.0% change in exchange rate between the Indian rupee and the U.S. dollar will have the effect of moving our operating margin by approximately 1918 basis points or 0.190.18 percentage points.
We enteredenter into foreign exchange forward contracts to hedge certain Indian rupee denominated payments in India. These hedges are intended to mitigate the volatility of the changes in the exchange rate between the U.S. dollar and the Indian rupee. During the yearsyear ended December 31, 2015, 2014 and 2013,2018, the settlement of certain cash flow hedges negativelypositively impacted our operating margin by approximately 5744 basis points or 0.570.44 percentage points 133as compared to a positive impact of approximately 87 basis points or 1.330.87 percentage points in 2017 and 184a positive impact of approximately 13 basis points or 1.840.13 percentage points respectively.
For the years ended December 31, 2015, 2014 and 2013, our non-GAAP operating margins were 19.7%3, 20.2%3 and 20.6%3, respectively. As set forth in the “Non-GAAP Financial Measures” section below, our non-GAAP operating margin excludes stock-based compensation expense and acquisition-related charges.
Segment Operating Profit. Segment operating profits were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Increase |
| | | | | | | 2015 | | 2014 |
| 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| (Dollars in millions) |
Financial Services | $ | 1,641.9 |
| | $ | 1,320.1 |
| | $ | 1,212.1 |
| | $ | 321.8 |
| | 24.4 | | $ | 108.0 |
| | 8.9 |
Healthcare | 1,200.0 |
| | 851.0 |
| | 829.9 |
| | 349.0 |
| | 41.0 | | 21.1 |
| | 2.5 |
Manufacturing/Retail/Logistics | 802.7 |
| | 685.7 |
| | 630.3 |
| | 117.0 |
| | 17.1 | | 55.4 |
| | 8.8 |
Other | 453.7 |
| | 391.9 |
| | 318.3 |
| | 61.8 |
| | 15.8 | | 73.6 |
| | 23.1 |
Total segment operating profit | 4,098.3 |
| | 3,248.7 |
| | 2,990.6 |
| | 849.6 |
| | 26.2 | | 258.1 |
| | 8.6 |
Less: unallocated costs | 1,956.3 |
| | 1,363.8 |
| | 1,312.7 |
| | 592.5 |
| | 43.4 | | 51.1 |
| | 3.9 |
Income from operations | $ | 2,142.0 |
| | $ | 1,884.9 |
| | $ | 1,677.9 |
| | $ | 257.1 |
| | 13.6 | | $ | 207.0 |
| | 12.3 |
In our Financial Services, Healthcare, and Manufacturing/Retail/Logistics segments, segment operating profit increased as a percentage of revenues primarily due to revenue growth outpacing headcount growth and the favorable impact of the depreciation of the Indian rupee versus the U.S. dollar, partially offset by an increase in compensation and benefits costs and continued investments to grow our business. In our Other segment, segment operating profit decreased as a percentage of revenues due to continued investments to grow our business, partially offset by the favorable impact of the depreciation of the Indian rupee versus the U.S. dollar. In 2015, the unallocated costs increased when compared to 2014 due to continued investments to grow our business, higher incentive-based compensation accrual rates in 2015 compared to 2014 and increases in selling, general and administrative expenses (including depreciation and amortization) due to recent acquisitions.
The 2014 increase in segment operating profit within our reportable segments was attributable primarily to increased revenues and the favorable impact of the depreciation of the Indian rupee versus the U.S. dollar, partially offset by an increase in compensation and benefit costs resulting primarily from additional headcount to support our revenue growth and continued investments to grow our business. In 2014, the unallocated costs increased when compared to 2013 due to continued investments to grow our business, partially offset by the impact of lower incentive-based compensation accrual rates in 2014.2016.
_____________________________
| |
35 | Non-GAAP operating margin isand Adjusted Operating Margin are not a measurementmeasurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and a reconciliationreconciliations to the most directly comparable GAAP financial measure.measures. |
Our most significant costs are the salaries and related benefits for our employees. In certain regions, competition for professionals with the advanced technical skills necessary to perform our services has caused wages to increase at a rate greater than the general rate of inflation. As with other service providers in our industry, we must adequately anticipate wage increases, particularly on our fixed-price and transaction- or volume-based priced contracts. Historically, we have experienced increases in compensation and benefit costs in India; however, this has not had a material impact on our results of operations as we have been able to absorb such cost increases through cost management strategies, such as managing discretionary costs, the mix of professional staff and utilization levels, and achieving other operating efficiencies. There can be no assurance that we will be able to offset such cost increases in the future.
We finished the year with approximately 281,600 employees, which is an increase of approximately 21,600 over the prior year end. For the three months ended December 31, 2018, annualized turnover, including both voluntary and involuntary, was approximately 18.9%. Turnover for the years ended December 31, 2018, 2017 and 2016, including both voluntary and involuntary, was approximately 20.8%, 19.6% and 16.0%, respectively. The higher than usual annual turnover rate in 2018 reflects the highly competitive labor market in our industry in the geographies in which we compete for talent, including India. Annual attrition rates at on-site customer locations are generally below our global attrition rate. In addition, attrition is weighted more towards the junior members of our staff.
Segment Operating Profit and Margin
In 2018, we made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The primary reason for the changes was to charge to our business segments costs that are directly managed and controlled by them. Specifically, segment operating profit now includes the stock-based compensation expense of sales managers, account executives, account managers and project teams, which was previously included in "unallocated costs." In addition, we have changed the methodology of allocating costs to our business segments for the use of our global delivery centers and infrastructure from a fixed per employee charge to a variable per employee charge that differs depending on location and assets deployed.
Segment operating profit and margin were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Increase / (Decrease) |
| 2018 | | Operating Margin % | | 2017 | | Operating Margin % | | 2016(1) | | Operating Margin % | | 2018 | | 2017(1) |
| (Dollars in millions) |
Financial Services | $ | 1,757 |
| | 30.1 | | $ | 1,771 |
| | 31.4 | | $ | 1,707 |
| | 31.8 | | $ | (14 | ) | | $ | 64 |
|
Healthcare | 1,431 |
| | 30.7 | | 1,301 |
| | 30.5 | | 1,153 |
| | 29.8 | | 130 |
| | 148 |
|
Products and Resources | 1,043 |
| | 30.5 | | 923 |
| | 30.4 | | 851 |
| | 32.0 | | 120 |
| | 72 |
|
Communications, Media and Technology | 700 |
| | 31.9 | | 601 |
| | 32.1 | | 488 |
| | 30.7 | | 99 |
| | 113 |
|
Total segment operating profit and margin | 4,931 |
| | 30.6 | | 4,596 |
| | 31.0 | | 4,199 |
| | 31.1 | | 335 |
| | 397 |
|
Less: unallocated costs | 2,130 |
| |
| | 2,115 |
| |
| | 1,910 |
| |
| | 15 |
| | 205 |
|
Income from operations | $ | 2,801 |
| | 17.4 | | $ | 2,481 |
| | 16.8 | | $ | 2,289 |
| | 17.0 | | $ | 320 |
| | $ | 192 |
|
| |
(1) | As described above, in 2018 we made changes to the internal measurement of segment operating profits. While we have restated the 2017 results to conform to the new methodology, it is impracticable for us to restate our 2016 segment operating results as the detailed information required for the allocation of such costs to the segments is not reasonably available. |
In 2018, our Financial Services segment operating margin decreased due to investments in our digital platform and infrastructure services as well as costs incurred to re-skill service delivery personnel, partially offset by the depreciation of Contentsthe Indian rupee against the U.S. dollar. In our Healthcare, Products and Resources and Communications, Media and Technology segments, operating margins remained relatively flat.
In 2017, prior to giving effect to the changes in the measurement of our segment operating profit as described above, our operating margins for our Financial Services, Healthcare, Products and Resources and Communications, Media and Technology segments were 29.0%, 30.6%, 28.6% and 30.2%, respectively. Our Financial Services, Products and Resources and Communications, Media and Technology segments operating margins decreased due to increases in compensation and benefits costs, investments to accelerate our shift to digital, including re-skilling of service delivery personnel, and the negative impact of the appreciation of various currencies, including the Indian rupee, against the U.S. dollar. Our Financial Services segment’s operating profit was negatively impacted by weakness in the banking sector as certain customers focused on optimizing their cost
structure and managing their discretionary spending. In 2017, our Healthcare segment operating margin increased, benefiting from lower losses on certain fixed-price contracts with customers.
Other Income (Expense), Net.
Total other income (expense), net consists primarily of foreign currency exchange gains and (losses),losses, interest income and interest expense. The following table sets forth for the periods indicated, total other income (expense), net:net for the years ended December 31:
| |
|
|
|
|
|
|
|
|
| Increase / Decrease |
|
|
|
|
|
|
|
| Increase / Decrease |
| 2015 |
| 2014 |
| 2013 |
| 2015 |
| 2014 | 2018 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| (in millions) | (in millions) |
Foreign currency exchange (losses) | $ | (42.9 | ) | | $ | (16.5 | ) | | $ | (55.2 | ) | | $ | (26.4 | ) | | $ | 38.7 |
| |
Foreign currency exchange (losses) gains | | $ | (183 | ) | | $ | 90 |
| | $ | (27 | ) | | $ | (273 | ) | | $ | 117 |
|
Gains (losses) on foreign exchange forward contracts not designated as hedging instruments | 0.3 |
| | (3.9 | ) | | 14.1 |
| | 4.2 |
| | (18.0 | ) | 31 |
| | (23 | ) | | (3 | ) | | 54 |
| | (20 | ) |
Net foreign currency exchange (losses) | (42.6 | ) | | (20.4 | ) | | (41.1 | ) | | (22.2 | ) | | 20.7 |
| |
Foreign currency exchange gains (losses), net | | (152 | ) | | 67 |
| | (30 | ) | | (219 | ) | | 97 |
|
Interest income | 83.7 |
| | 62.4 |
| | 48.9 |
| | 21.3 |
| | 13.5 |
| 177 |
| | 133 |
| | 115 |
| | 44 |
| | 18 |
|
Interest expense | (17.7 | ) | | (2.5 | ) | | — |
| | (15.2 | ) | | (2.5 | ) | (27 | ) | | (23 | ) | | (19 | ) | | (4 | ) | | (4 | ) |
Other, net | (1.8 | ) | | (0.4 | ) | | 2.2 |
| | (1.4 | ) | | (2.6 | ) | (2 | ) | | (3 | ) | | 2 |
| | 1 |
| | (5 | ) |
Total other income (expense), net | $ | 21.6 |
| | $ | 39.1 |
| | $ | 10.0 |
| | $ | (17.5 | ) | | $ | 29.1 |
| $ | (4 | ) | | $ | 174 |
| | $ | 68 |
| | $ | (178 | ) | | $ | 106 |
|
The foreign currency exchange gains and losses in all the years presented were primarily attributable to the remeasurement of the Indian rupee denominated net monetary assets and liabilities in our U.S. dollar functional currency India subsidiaries as well asand, to a lesser extent, the remeasurement of other net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. The gains (losses)and losses on foreign exchange forward contracts not designated as hedging instruments relate to the realized and unrealized gains and losses on foreign exchange forward contracts entered into primarily to partially offset foreign currency exposure to the British pound, Euro, Indian rupee and other non-U.S. dollar denominated net monetary assets.assets and liabilities. As of December 31, 2015,2018, the notional value of our undesignated hedges was $165.5$507 million. The increases in interest income in 20152018 and 20142017 were primarily attributed to the increaseincreases in average invested balances. The 2015balances and 2014 increases in interest expense are primarily attributable to the interest on debt originated in the fourth quarter of 2014.higher yields.
Provision for Income Taxes.
The provision for income taxes was $540.0$698 million in 2015, $484.72018, $1,153 million in 20142017 and $459.3$805 million in 2013.2016. The effective income tax rate decreased to 25.0% in 20152018 from 25.2%43.4% in 20142017 and 34.2% in 2016. The decrease in our effective tax rate in 2018 was primarily driven by the one-time net income tax expense of $617 million that was recorded in 2017 as a result of the enactment of the Tax Reform Act and the reduction of the U.S. federal statutory corporate income tax rate in 2018 from 35% to 21%. In 2016, we incurred an incremental income tax expense of $238 million related to the India Cash Remittance.
Net Income
Net income was $2,101 million in 2018, $1,504 million in 2017 and $1,553 million in 2016. Net income as a percentage of revenues increased to 13.0% in 2018 from 10.2% in 2017 primarily due to discrete tax benefits recordedthe decrease in 2015,the provision for income taxes and an increase in income from operations, partially offset by changesthe fluctuation in the geographic mixvalue of our current year taxable income. The effective income tax rate decreasedthe Indian rupee which generated foreign currency exchange losses in 2018 compared to 25.2%foreign currency exchange gains in 2014 from 27.2% in 2013, primarily due to changes in the geographic mix of taxable income and discrete tax benefits recorded in 2014, partially offset by a scheduled reduction of certain income tax holiday benefits in India in 2014.
Net Income. Net income increased to $1,623.6 million in 2015 from $1,439.3 million in 2014 and $1,228.6 million in 2013. Net2017. In 2017, net income as a percentage of revenues decreased to 13.1%10.2% from 11.5% in 2015 from 14.0% in 20142016 primarily as a result ofdue to the decrease in the operating margin, partially offset by the decrease in the effectiveincremental income tax rate. In 2014, net income as a percentage of revenues increased slightlyexpense related to 14.0% from 13.9%the Tax Reform Act in 2013.2017.
Non-GAAP Financial Measures
Portions of our disclosure including the following table, include non-GAAP income from operations, non-GAAP operating margin, and non-GAAP diluted earnings per share.financial measures. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of Cognizant’sour non-GAAP financial measures to the corresponding GAAP measures, set forth in the following table, should be carefully evaluated.
We seekIn 2018, we announced a plan to manage the Company to a targetedmodify our non-GAAP financial measures. Our historical non-GAAP financial measures, non-GAAP operating margin, non-GAAP income from operations and non-GAAP diluted EPS, excluded stock-based compensation expense, acquisition-related charges and unusual items, such as realignment charges and in 2018, the initial funding of 19%the Cognizant
U.S. Foundation. Our non-GAAP diluted EPS additionally excluded net non-operating foreign currency exchange gains or losses and unusual items, such as the effect of the net income tax expense and benefit related to 20%the enactment of the Tax Reform Act in 2018 and 2017, respectively, the effect of the recognition of an income tax benefit previously unrecognized in our consolidated financial statements related to a specific uncertain tax position in 2017, the effect of an incremental income tax expense related to the India Cash Remittance in 2016, and the tax impacts of all applicable adjustments. Our new non-GAAP financial measures, Adjusted Operating Margin and Adjusted Income From Operations, exclude only unusual items and Adjusted Diluted EPS additionally excludes net non-operating foreign currency exchange gains or losses and the tax impact of all applicable adjustments. The income tax impact of each item is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Additionally, we are introducing two new non-GAAP financial measures, free cash flow and constant currency revenue growth. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period’s foreign currency exchange rates measured against the comparative period's reported revenues.
We believe providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into theour operating results of the Company.results. For our internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial information that does not include stock-based compensation expense, acquisition-related charges and net non-operating foreign currency exchange gains or lossesmeasures for financial and operational decision making,decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for our executive officers and for making comparisons of our operating results to those of our competitors. Therefore, it is our belief that the use of non-GAAP financial measures excluding thesecertain costs provides a meaningful supplemental measure for investors to evaluate our financial performance. Accordingly,We believe that changing our historical non-GAAP financial measures, as discussed above, will result in non-GAAP financial measures that more closely align with how we intend to manage the Company. We believe that the presentation of our new non-GAAP financial measures (Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Diluted EPS, free cash flow and constant currency revenue growth) as well as our historical non-GAAP financial measures (non-GAAP income from operations, non-GAAP operating margin and non-GAAP diluted earnings per share, when read in conjunctionEPS) along with our reportedreconciliations to the most comparable GAAP results,measure, as applicable, can
provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations.
A limitation of using non-GAAP financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and may exclude costs that are recurring, namely stock-based compensation expense, certain acquisition-related charges, and net non-operating foreign currency exchange gains or losses. In addition, other companies may calculate non-GAAP financial measures differently than us, thereby limiting the usefulness of these non-GAAP financial measures as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from our non-GAAP income from operations, non-GAAP operating margin and non-GAAP diluted earnings per sharefinancial measures to allow investors to evaluate such non-GAAP financial measures.
The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the years ended December 31:
|
| | | | | | | | | | | | | | | | | |
| 2015 | | % of Revenues | | 2014 | | % of Revenues | | 2013 | % of Revenues |
| (Dollars in millions, except per share data) |
GAAP income from operations and operating margin | $ | 2,142.0 |
| | 17.3 | | $ | 1,884.9 |
| | 18.4 | | $ | 1,677.9 |
| 19.0 |
|
Add: Stock-based compensation expense | 192.0 |
| | 1.5 | | 134.8 |
| | 1.3 | | 118.8 |
| 1.3 |
|
Add: Acquisition-related charges (1) | 115.8 |
| | 0.9 | | 48.4 |
| | 0.5 | | 24.0 |
| 0.3 |
|
Non-GAAP income from operations and non-GAAP operating margin | $ | 2,449.8 |
| | 19.7 | | $ | 2,068.1 |
| | 20.2 | | $ | 1,820.7 |
| 20.6 |
|
| | | | | | | | | | |
GAAP diluted earnings per share | $ | 2.65 |
| | | | $ | 2.35 |
| | | | $ | 2.02 |
| |
Effect of above operating adjustments, net of tax | 0.35 |
| | | | 0.23 |
| | | | 0.17 |
| |
Effect of non-operating foreign currency exchange gains and losses, net of tax (2) | 0.07 |
| | | | 0.02 |
| | | | 0.08 |
| |
Non-GAAP diluted earnings per share | $ | 3.07 |
| | | | $ | 2.60 |
| | | | $ | 2.27 |
| |
|
| | | | | | | | | | | | | | | | | | | | |
| 2018 | | % of Revenues | | 2017 | | % of Revenues | | 2016 | | % of Revenues |
| (Dollars in millions, except per share data) |
GAAP income from operations and operating margin | $ | 2,801 |
| | 17.4 | % | | $ | 2,481 |
| | 16.8 | % | | $ | 2,289 |
| | 17.0 | % |
Realignment charges (1) | 19 |
| | 0.1 |
| | 72 |
| | 0.5 |
| | — |
| | — |
|
Initial funding of Cognizant U.S. Foundation (2) | 100 |
| | 0.6 |
| | — |
| | — |
| | — |
| | — |
|
Adjusted Income From Operations and Adjusted Operating Margin | 2,920 |
| | 18.1 |
| | 2,553 |
| | 17.3 |
| | 2,289 |
| | 17.0 |
|
Stock-based compensation expense (3) | 267 |
| | 1.6 |
| | 221 |
| | 1.5 |
| | 217 |
| | 1.6 |
|
Acquisition-related charges (4) | 158 |
| | 1.0 |
| | 138 |
| | 0.9 |
| | 130 |
| | 0.9 |
|
Non-GAAP income from operations and non-GAAP operating margin | $ | 3,345 |
| | 20.7 | % | | $ | 2,912 |
| | 19.7 | % | | $ | 2,636 |
| | 19.5 | % |
| | | | | | | | | | | |
GAAP diluted EPS | $ | 3.60 |
| | | | $ | 2.53 |
| | | | $ | 2.55 |
| | |
Effect of realignment charges and initial funding of Cognizant U.S. Foundation, as applicable, pre-tax | 0.20 |
| | | | 0.12 |
| | | | — |
| | |
Effect of non-operating foreign currency exchange losses (gains), pre-tax (5) | 0.26 |
| | | | (0.12 | ) | | | | 0.04 |
| | |
Tax effect of above adjustments (6) | (0.03 | ) | | | | (0.06 | ) | | | | — |
| | |
Effect of net incremental income tax expense related to the Tax Reform Act (7) | (0.01 | ) | | | | 1.04 |
| | | | — |
| | |
Effect of recognition of income tax benefit related to an uncertain tax position (8) | — |
| | | | (0.09 | ) | | | | — |
| | |
Effect of incremental income tax expense related to the India Cash Remittance (9) | — |
| | | | — |
| | | | 0.39 |
| | |
Adjusted Diluted EPS | 4.02 |
| | | | 3.42 |
| | | | 2.98 |
| | |
Effect of stock-based compensation expense and acquisition-related charges, pre-tax | 0.73 |
| | | | 0.60 |
| | | | 0.57 |
| | |
Tax effect of stock-based compensation expense and acquisition-related charges (6) | (0.18 | ) | | | | (0.25 | ) | | | | (0.16 | ) | | |
Non-GAAP diluted EPS | $ | 4.57 |
| | | | $ | 3.77 |
| | | | $ | 3.39 |
| | |
| | | | | | | | | | | |
Net cash provided by operating activities | $ | 2,592 |
| | | | $ | 2,407 |
| | | | $ | 1,645 |
| | |
Purchases of property and equipment | (377 | ) | | | | (284 | ) | | | | (300 | ) | | |
Free cash flow | $ | 2,215 |
| | | | $ | 2,123 |
| | | | $ | 1,345 |
| | |
_____________________
| |
(1) | Realignment charges include severance costs, lease termination costs, and advisory fees related to non-routine shareholder matters and to the development of our realignment and return of capital programs, as applicable. The total costs related to the realignment are reported in Selling, general and administrative expenses in our consolidated statements of operations. See Note 5 to our consolidated financial statements for additional information. |
| |
(2) | In 2018, we provided $100 million of initial funding to Cognizant U.S. Foundation, which is focused on science, technology, engineering and math education in the United States. |
| |
(3) | Stock-based compensation expense reported in: |
|
| | | | | | | | | | | |
| For the years ended December 31, |
| 2018 | | 2017 | | 2016 |
| (in millions) |
Cost of revenues | $ | 62 |
| | $ | 55 |
| | $ | 53 |
|
Selling, general and administrative expenses | 205 |
| | 166 |
| | 164 |
|
| |
(4) | Acquisition-related charges include when applicable, amortization of purchased intangible assets included in the depreciation and amortization expense line on our consolidated statements of operations, external deal costs, acquisition-related retention bonuses, integration costs, changes in the fair value of contingent consideration liabilities, charges for impairment of acquired intangible assets and other acquisition-related costs.costs, as applicable. |
| |
(2)(5) | Non-operating foreign currency exchange gains and losses, are inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes.purposes, are reported in Foreign currency exchange gains (losses), net in our consolidated statements of operations. |
| |
(6) | Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income: |
|
| | | | | | | | | | | |
| For the years ended December 31, |
| 2018 | | 2017 | | 2016 |
| (in millions) |
Non-GAAP income tax benefit (expense) related to: | | | | | |
Realignment charges | $ | 5 |
| | $ | 25 |
| | $ | — |
|
Initial funding of Cognizant U.S. Foundation | 28 |
| | — |
| | — |
|
Foreign currency exchange gains and losses | (12 | ) | | 10 |
| | 5 |
|
Stock-based compensation expense | 66 |
| | 101 |
| | 49 |
|
Acquisition-related charges | 38 |
| | 48 |
| | 46 |
|
The effective income tax rate related to each of our non-GAAP adjustments varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions.
| |
(7) | In 2017, in connection with the enactment of the Tax Reform Act, we recorded a one-time provisional net income tax expense of $617 million. In 2018, we finalized our calculation of the one-time net income tax expense related to the enactment of the Tax Reform Act and recognized a $5 million income tax benefit, which reduced our provision for income taxes. |
| |
(8) | In 2017, we recognized an income tax benefit previously unrecognized in our consolidated financial statements related to a specific uncertain tax position of $55 million. The recognition of the benefit in 2017 was based on management’s reassessment regarding whether this unrecognized tax benefit met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefit. |
| |
(9) | In 2016, as a result of the India Cash Remittance, we incurred an incremental income tax expense of $238 million. |
|
| | | | |
Liquidity and Capital Resources |
Our cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. In addition, as of December 31, 2015,2018, we had cash, cash equivalents and short-term investments of $4,949.5$4,511 million, of which $423 million was restricted and additionalnot available for use as a result of our dispute with the ITD with respect to our 2016 India Cash Remittance. See Note 11 of our consolidated financial statements for more information. As of December 31, 2018, we had available capacity under our revolving credit facility of approximately $400.0$1,750 million. We have used and plan to continue to use a combination of our cash flow from operations, cash on hand and capacity available under our revolving credit facility for expansion of existing operations, including our offshore development and delivery centers, continued development of new service lines, acquisitions of related businesses, formation of joint ventures, stock repurchases and general corporate purposes, including funding working capital requirements.
The following table provides a summary of our cash flows for the three years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Increase / Decrease |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 |
| | (in millions) |
Net cash from operating activities | | $ | 2,153.3 |
| | $ | 1,473.0 |
| | $ | 1,423.8 |
| | $ | 680.3 |
| | $ | 49.2 |
|
Net cash (used in) investing activities | | (1,370.6 | ) | | (3,160.7 | ) | | (730.8 | ) | | 1,790.1 |
| | (2,429.9 | ) |
Net cash (used in) provided by financing activities | | (648.1 | ) | | 1,503.4 |
| | (30.9 | ) | | (2,151.5 | ) | | 1,534.3 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Increase / Decrease |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (in millions) |
Net cash provided by (used in): | | | | | | | | | | |
Operating activities | | $ | 2,592 |
| | $ | 2,407 |
| | $ | 1,645 |
| | $ | 185 |
| | $ | 762 |
|
Investing activities | | (1,627 | ) | | (582 | ) | | (963 | ) | | (1,045 | ) | | 381 |
|
Financing activities | | (1,693 | ) | | (1,985 | ) | | (743 | ) | | 292 |
| | (1,242 | ) |
Operating activities. activities
The increase in cash generated from operating cash flowactivities for 20152018 compared to 20142017 was primarily attributable to the increase in net income further impactedfrom operations offset by the increase in non-cash expensesa higher days sales outstanding ("DSO"). Our DSO was 75 days as of December 31, 2018, 71 days as of December 31, 2017 and higher incentive-based compensation accruals that will be paid in the first quarter72 days as of December 31, 2016. The increase in cash generated from operating cash flowactivities for 20142017 compared to 2016 was primarily attributedattributable to the increase in net income. Trade accounts receivable increased to $2,252.6 million at December 31, 2015 as compared to $1,968.7 million at December 31, 2014 and $1,648.8 million at December 31, 2013. Unbilled accounts receivable increased to $369.0 million at December 31, 2015 from $324.6 million at December 31, 2014 and $226.5 million at December 31, 2013. The increase in trade accounts receivable and unbilled accounts receivable during 2015 was primarily due to increased revenues. pre-tax earnings.
We monitor turnover, aging and the collection of accounts receivable throughby customer. On January 1, 2018, we adopted the useNew Revenue Standard using the modified retrospective method. Upon adoption, we reclassified (i) balances representing receivables,
as defined by the New Revenue Standard, from Unbilled accounts receivable to Trade accounts receivable, net and (ii) balances representing contract assets, as defined by the New Revenue Standard, from Unbilled accounts receivable to Other current assets. Balances as of management reports thatDecember 31, 2018 are prepared on a customer basispresented under the New Revenue Standard, while prior period balances are not adjusted and evaluated bycontinue to be reported in accordance with our finance staff. Our days sales outstandinghistoric accounting policies. See Note 3 of our consolidated financial statements for more information. Historically, our DSO calculation includesincluded billed and unbilled accounts receivable, net of allowance for doubtful accounts, reduced by the uncollected portion of our deferred revenue. Our days sales outstanding was 70 daysTo reflect the adoption of the New Revenue Standard and maintain the comparability of the calculation, in 2018 we adjusted the definition to include receivables, as defined by the New Revenue Standard, net of December 31, 2015, 2014allowance for doubtful accounts, and 2013.contract assets, reduced by the uncollected portion of our deferred revenue.
Investing activities.activities
The reductionincrease in net cash used in investing activities in 20152018 compared to 20142017 is primarily related to an increase in cash used for acquisitions. In 2017, the decrease in net cash used when compared to 2016 was primarily due to lower payments for acquisitions, as we acquired TriZetto in 2014, partially offset by greater net purchases of investments and a decrease in cash used for acquisitions.
Financing activities
The decrease in cash used in financing activities in 2018 compared to 2017 is primarily attributable to lower repurchases of common stock, partially offset by an increase in dividend payments and higher outflows for capital expenditures in 2015.net repayments of debt. In 2014,2017, the increase in investing outflows,cash used when compared to 2013,2016 was primarily relatedattributable to our payment forrepurchases of common stock under the acquisition of TriZetto.
Financing activities. In 2015, we had net outflows from financing activities primarily due to ouraccelerated stock repurchase agreements and dividend payments, partially offset by lower net repayments of debt and greater stock repurchases as compared to net cash inflows from financing activities in 2014 driven by our net borrowings under the credit agreement. In 2014, the increase in net cash provided by financing activities when compared to 2013, was primarily related to proceeds from borrowings under the 2014 credit agreement.debt.
On November 20,In 2014, we entered into a credit agreement with a commercial bank syndicate, (as amended, the "Credit Agreement") providing for a $1,000.0$1,000 million unsecured term loan and a $750.0$750 million revolving credit facility. The term loan was used to pay a portion of the cash consideration in connection with our acquisition of TriZetto. Theunsecured revolving credit facility is availablewhich were due to mature in November 2019. In November 2018, we completed a debt refinancing in which we entered into a credit agreement with a new commercial bank syndicate (the "New Credit Agreement") providing for general corporate purposes. Thea $750 million unsecured term loan (the "New Term Loan") and thea $1,750 million unsecured revolving credit facility, bothwhich are due to mature onin November 20, 2019. As of December 31, 2015, we had $937.5 million outstanding2023. We are required under the term loan and $350.0 million outstanding underNew Credit Agreement to make scheduled quarterly principal payments on the revolving credit facility.
New Term Loan beginning in December 2019.
The credit agreementNew Credit Agreement requires interest to be paid, at our option, at either the base rateABR or the Eurocurrency rate,Rate (each as defined in the New Credit Agreement), plus, a margin. The margin overin each case, an Applicable Margin (as defined in the base rateNew Credit Agreement). Initially, the Applicable Margin is 0.00%,0.875% with respect to Eurocurrency Rate loans and 0.00% with respect to ABR loans. Subsequently, the margin over theApplicable Margin with respect to Eurocurrency rate rangesRate loans may range from 0.75% to 1.125%, depending on our public debt ratings (or, if we have not received public debt ratings, from 0.875% to 1.00%1.125%, depending on our debtLeverage Ratio, which is the ratio of indebtedness for borrowed money to total stockholders' equity ratio). Thus, our debt exposes us to market risk from changesConsolidated EBITDA, as defined in interest rates.the New Credit Agreement). Under the credit agreement,New Credit Agreement, we are required to pay commitment fees on the unused portion of the revolving credit facility, which vary based on our public debt ratings (or, if we have not received public debt ratings, our debt to total stockholders' equity ratio). Additionally, we are required to make scheduled quarterly principal payments on the term loan.Leverage Ratio).
The credit agreementNew Credit Agreement contains certaincustomary affirmative and negative covenants including limitations on liens, mergers, consolidations and acquisitions, subsidiary indebtedness and affiliate transactions, as well as certain affirmative covenants. In addition,a financial covenant. The financial covenant is tested at the credit agreementend of each fiscal quarter and requires us to maintain a debt to total stockholders' equity ratioLeverage Ratio not in excess of 0.403.50 to 1.00, or for a period of up to four quarters following certain material acquisitions, 3.75 to 1.00. As of December 31, 2015, we areWe were in compliance with ourall debt covenants and have provided a quarterly certification to our lenders to that effect.representations of the New Credit Agreement as of December 31, 2018. We believe that we currently meet all conditions set forth in the credit agreementNew Credit Agreement to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the revolving credit facility as of December 31, 20152018 and through the date of this filing.
We intend to continue to use a portion
As part of our available capital resourcesreturn plan, we returned $3.7 billion to our stockholders through $2,975 million in share repurchases and $733 million in dividend payments over the two years ended December 31, 2018, exceeding our previously announced target of $3.4 billion. Beginning in 2019, our new capital return plan anticipates the deployment of approximately 50% of our global free cash flow6 for stockdividends and share repurchases during 2016. The numberand approximately 25% of shares ultimately repurchased underglobal free cash flow6 for acquisitions, as needed. For the year ended December 31, 2018, our open-market share purchase program may vary dependingcash flows from operating activities were $2,592 million while our global free cash flow6 was $2,215 million. We review our capital return plan on numerous factors, including, without limitation,an on-going basis, considering our stock pricefinancial performance and liquidity position, investments required to execute our strategic plans and initiatives, acquisition opportunities, the economic outlook, regulatory changes and other market conditions, our ongoing capital allocation planning, the levels of cash and debt balances, other demands for cash, such as acquisition activity, general economic and/or business conditions, and
board and management discretion. Additionally, asrelevant factors. As these factors may change over time, the course of the year, the amount ofactual amounts expended on stock repurchase activity, dividends, and acquisitions, if any, during any particular period cannot be predicted and may fluctuate from time to time. Stock repurchases may be made from time to time through open-market purchases
Other Liquidity and through the use of Rule 10b5-1 plans and/or by other means. The stock repurchase program may be accelerated, suspended, delayed or discontinued at any time, without notice.
We believe our U.S. cash flows continue to be sufficient to fund our current domestic operations and obligations, including debt service. The amount of funds held in U.S. tax jurisdictions can fluctuate due to the timing of receipts and payments in the ordinary course of business, including debt repayments, and due to other reasons, such as acquisition-related activities. The Company’s U.S. operations historically have generated and are expected to continue to generate substantial cash flows. In circumstances where the Company has additional cash requirements in the United States, we have several additional liquidity options available to meet those requirements. These options may include borrowing additional funds, including borrowings under our committed revolving credit facility, temporarily utilizing inter-company loans with certain foreign subsidiaries on a limited basis, and, while we currently do not have plans to do so, repatriating certain of our foreign earnings. We also believe we have access to the credit and equity markets and could borrow additional funds under acceptable terms and conditions or raise additional capital through an equity transaction.Capital Resources Information
Many of our operations are conducted outside the United States and significant portions of our cash, cash equivalents and short-term investments are held internationally. As of December 31, 2015, $4,505.7 million of our cash, cash equivalents and short-term investments was held outside the United States. As part of our ongoing liquidity assessments, we regularly monitor the mix of domestic and international cash flows and cash balances. We utilize certain strategies in an effortseek to ensure that our worldwide cash is available in the locations in which it is needed. MostAs part of our ongoing liquidity assessments, we regularly monitor the amountsmix of our domestic and international cash flows and cash balances. As of December 31, 2018, the amount of our cash, cash equivalents and short-term investments held outside of the United States could be repatriated to the United States but, under current law, would be subject to income taxes in the United States, less applicable foreign tax credits. Other than amounts for which we have already accrued U.S. taxes, we intend to indefinitely reinvest these funds outside the United States was $2,704 million, of which $1,776 million was in India. As further described in Note 11 of our consolidated financial statements, $423 million of our short-term investment balances held in India were classified as restricted as of December 31, 2018.
As a result of the enactment of the Tax Reform Act, our historical and our current plans do not demonstrate a need to repatriate these amounts to fund our liquidity needs in the United States. If suchfuture foreign earnings are repatriated in the future, or are no longer deemedsubject to U.S. federal income tax upon repatriation beyond the one-time transition tax accrued in 2017. As such, in 2018, we reevaluated our assertion that our foreign earnings would be indefinitely reinvested and concluded that our Indian earnings will continue to be indefinitely reinvested we will accrue the applicable amountwhile historical accumulated undistributed earnings of taxes associated with such earnings at that time. Dueour foreign subsidiaries other than our Indian subsidiaries, are available for repatriation to the various methods by whichUnited States. We evaluate on an ongoing basis what portion of the non-U.S. cash, cash equivalents and short-term investments held outside India is needed locally to execute our strategic plans and what amount is available for repatriation back to the United States. During 2018, we repatriated $2,414 million from our foreign subsidiaries.
Our assertion that our earnings in India continue to be indefinitely reinvested is consistent with our ongoing strategy to expand our Indian operations, including through infrastructure investments. However, future events may occur, such earnings could be repatriatedas material changes in cash estimates, discretionary transactions, including corporate restructurings, and changes in applicable laws, that may lead us to repatriate the future, it is not currently practicable to determineundistributed Indian earnings. As of December 31, 2018, the amount of unrepatriated Indian earnings was approximately $4,679 million. If all of our accumulated unrepatriated Indian earnings were to be repatriated, based on our current interpretation of India tax law, we estimate that we would incur an additional income tax expense of approximately $980 million. This estimate is subject to change based on tax legislation developments in India and other jurisdictions as well as judicial and interpretive developments of applicable taxes that would result from such repatriation.tax laws.
We expect our operating cash flow, cash and investment balances and(excluding the $423 million of India restricted assets), together with our available capacity under our revolving credit facility to be sufficient to meet our operating requirements, in India and globally, for the next twelve months. Our ability to expand and grow our business in accordance with current plans, to make acquisitions and form joint ventures, and to meet our long-term capital requirements beyond a twelve monthtwelve-month period and execute our capital return plan will depend on many factors, including the rate, if any, at which our cash flow increases, our ability and willingness to accomplishpay for acquisitions and joint ventures with capital stock our continued intent not to repatriate foreign earnings, and the availability of public and private debt and equity financing. We cannot be certain that additional financing, if required, will be available on terms and conditions acceptable to us, if at all.
As further described in Note 11 of our consolidated financial statements, certain short-term investment balances in India totaling $423 million were restricted in connection with our dispute with the ITD with respect to our 2016 India Cash Remittance. The ITD Dispute is currently pending before the Madras High Court, and no final decision has been reached. The affected balances may continue to remain restricted and unavailable for our use while the dispute is ongoing.
____________
| |
6 | Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and a reconciliation to the comparable GAAP financial measure. |
|
| | | | |
Commitments and Contingencies |
Commitments
As of December 31, 2015,2018, we had the following obligations and commitments to make future payments under contractual obligations and commercial commitments:
| | | | Payments due by period | | Payments due by period |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | (in millions) | | (in millions) |
Long-term debt obligations(1) | | $ | 937.5 |
| | $ | 56.3 |
| | $ | 181.2 |
| | $ | 700.0 |
| | $ | — |
| | $ | 750 |
| | $ | 9 |
| | $ | 75 |
| | $ | 666 |
| | $ | — |
|
Interest on long-term debt(2) | | 52.0 |
| | 15.0 |
| | 26.3 |
| | 10.7 |
| | — |
| | 114 |
| | 26 |
| | 48 |
| | 40 |
| | — |
|
Capital lease obligations | | 54.8 |
| | 5.4 |
| | 9.7 |
| | 8.2 |
| | 31.5 |
| | 71 |
| | 17 |
| | 23 |
| | 12 |
| | 19 |
|
Operating lease obligations | | 666.7 |
| | 134.2 |
| | 213.0 |
| | 154.6 |
| | 164.9 |
| | 988 |
| | 226 |
| | 354 |
| | 211 |
| | 197 |
|
Fixed capital commitments(3) | | 76.4 |
| | 76.4 |
| | — |
| | — |
| | — |
| |
Other purchase commitments(4) | | 175.6 |
| | 77.8 |
| | 92.8 |
| | 5.0 |
| | — |
| |
Other purchase commitments(3) | | | 207 |
| | 117 |
| | 69 |
| | 21 |
| | — |
|
Tax Reform Act transition tax(4) | | | 528 |
| | 51 |
| | 101 |
| | 222 |
| | 154 |
|
Total | | $ | 1,963.0 |
| | $ | 365.1 |
| | $ | 523.0 |
| | $ | 878.5 |
| | $ | 196.4 |
| | $ | 2,658 |
| | $ | 446 |
| | $ | 670 |
| | $ | 1,172 |
| | $ | 370 |
|
___________________________
| |
(1) | IncludesConsists of scheduled repayments of our term loan. |
| |
(2) | Interest on the term loan was calculated at interest rates in effect as of December 31, 2015.2018. |
| |
(3) | Relates to the expansion of our India development and delivery centers. |
| |
(4) | Other purchase commitments include, among other things, communications and information technology obligations, as well as other obligations in the ordinary course of business that we cannot cancel or where we would be required to pay a termination fee in the event of cancellation. |
| |
(4) | The Tax Reform Act transition tax on undistributed foreign earnings is payable in installments through the year 2024. See Note 11 to our consolidated financial statements. |
The above table does not include the $28 million FCPA Accrual. See Note 2 to our consolidated financial statements.
As of December 31, 2015,2018, we had $138.7$117 million of unrecognized tax benefits. This represents the tax benefits associated with certain tax positions on our domesticU.S. and internationalnon-U.S. tax returns that have not been recognized on our financial statements due to uncertainty regarding their resolution. The resolution of these income tax positions with the relevant taxing authorities is at various stages, and therefore we are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters.
We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of certain Indian rupee denominated payments in India. As of December 31, 2015, these contracts were in a net unrealized loss position of $14.4 million and have settlement dates in 2016, 2017 and 2018. The actual amounts at which these contracts will be settled may be significantly impacted by fluctuations in the Indian rupee to U.S. dollar foreign currency exchange rate prior to settlement. Therefore, we are unable to make a reliable estimate of the eventual cash flows by period related to the settlement of these foreign exchange forward contracts.Contingencies
We are involved in various claims and legal actions arising in the ordinary course of business. We accrue a liability when a loss is considered probable and the amount can be reasonably estimated. In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, if decided adversely, is not expected to have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, many of our engagements involve projects that are critical to the operations of our customers’ business and provide benefits that are difficult to quantify. Any failure in a customer’s systems or our failure to meet our contractual obligations
See Note 15 to our clients, including any breach involving a customer’s confidential information or sensitive data, or our obligations under applicable laws or regulations could result in a claimconsolidated financial statements for substantial damages against us, regardless of our responsibility for such failure. Although we attempt to contractually limit our liability for damages arising from negligent acts, errors, mistakes, or omissions in rendering our services, there can be no assurance that the limitations of liability set forth in our contracts will be enforceable in all instances or will otherwise protect us from liability for damages. Although we have general liability insurance coverage, including coverage for errors or omissions, there can be no assurance that such coverage will cover all types of claims, continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations, financial condition and cash flows.additional information. Foreign Currency Risk
Overall, we believe that we have limited revenue risk resulting from movement in foreign currency exchange rates as 78.6% of our revenues during 2015 were generated from customers located in North America. Revenue from our customers in the United Kingdom, Rest of Europe and Rest of World represented 9.6%, 6.6% and 5.2%, respectively, of our 2015 revenues. Accordingly, our operating results outside the United States may be affected by fluctuations in the exchange rates, primarily the British pound and the Euro, as compared to the U.S. dollar.
A portion of our costs in India, representing approximately 23.5% of our global operating costs during 2015, are denominated in the Indian rupee and are subject to foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations have an impact on our results of operations. In addition, a portion of our balance sheet is exposed to foreign currency exchange rate fluctuations, which may result in non-operating foreign currency exchange gains or losses upon remeasurement. In 2015, we reported foreign currency exchange losses, exclusive of hedging gains or losses, of approximately $42.9 million, which were attributable to the remeasurement of the Indian rupee denominated net monetary assets in our U.S. dollar functional currency India subsidiaries as well as the remeasurement of other net monetary assets denominated in currencies other than the functional currencies of our subsidiaries. On an ongoing basis, we manage a portion of this risk by limiting our net monetary asset exposure to certain currencies, primarily the Indian rupee, in our foreign subsidiaries.
We entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of certain Indian rupee denominated payments in India. Cognizant India converts U.S. dollar receipts from intercompany billings to Indian rupees to fund local expenses. These hedges to buy Indian rupees and sell U.S. dollars are intended to partially offset the impact of movement of exchange rates on future operating costs. In 2015, we reported net losses of $71.2 million on contracts that settled during the year. As of December 31, 2015, we have outstanding contracts with a notional value of $2,445.0 million and weighted average contract rate of 70.2 Indian rupees to the U.S. dollar. These contracts are scheduled to mature as follows:
|
| | | | | | |
| Notional Value (in millions) | | Weighted Average Contract Rate (Indian rupee to U.S. dollar) |
2016 | $ | 1,215.0 |
| | 68.2 |
|
2017 | 900.0 |
| | 71.4 |
|
2018 | 330.0 |
| | 74.1 |
|
Total | $ | 2,445.0 |
| | 70.2 |
|
Our foreign subsidiaries are exposed to foreign currency exchange rate risk for transactions denominated in currencies other than the functional currency of the respective subsidiary. We also use foreign exchange forward contracts to hedge balance sheet exposure to certain monetary assets and liabilities denominated in currencies other than the functional currency of the subsidiary. These contracts are not designated as hedges and are intended to offset the foreign currency exchange gains or losses upon remeasurement of these net monetary assets. We entered into a series of foreign exchange forward contracts scheduled to mature in 2016 which are used to hedge our foreign currency denominated net monetary assets. At December 31, 2015, the notional value of the outstanding contracts was $165.5 million and the related fair value was a liability of $0.8 million. During 2015, inclusive of gains of $0.3 million on our undesignated balance sheet hedges, we reported net foreign currency exchange losses of approximately $42.6 million.
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| | | | |
Off-Balance Sheet Arrangements |
Other than our foreign exchange forward contracts, there were no off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons in 2015, 20142018, 2017 and 20132016 that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Our most significant costs are the salaries and related benefits for our programming staff and other professionals. In certain regions, competition for professionals with advanced technical skills necessary to perform our services has caused wages to increase at a rate greater than the general rate of inflation. As with other service providers in our industry, we must adequately anticipate wage increases, particularly on our fixed-price contracts. Historically, we have experienced increases in compensation and benefit costs, including incentive-based compensation, in India; however, this has not had a material impact on our results of operations as we have been able to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, mix of professional staff and utilization levels and achieving other operating efficiencies. There can be no assurance that we will be able to offset such cost increases in the future.
|
| | | | |
Critical Accounting Estimates |
Management’s discussion and analysis of our financial condition and results of operations is based on our accompanying consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. We base our estimates on historical experience, current trends and on various other assumptions that are believed to be relevant at the time our consolidated financial statements are prepared. We evaluate our estimates on a continuous basis. However, the actual amounts may differ from the estimates used in the preparation of the accompanying consolidated financial statements.
We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported consolidated financial statements as they require the most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Changes to these estimates could have a material adverse
effect on our results of operations and financial condition. Our significant accounting policies are described in Note 1 to of the accompanying consolidated financial statements. Revenue Recognition. Revenues related to our highly complexfixed-price contracts for application development contracts, which are predominantly fixed-price contracts, and certainsystems integration services, consulting or other fixed-price contractstechnology services are recognized as the services areservice is performed using the percentagecost to cost method, under which the total value of completion method and the proportional performance method of accounting, respectively. Under the
percentage of completion method, total contract revenue during the term of an agreementrevenues is recognized based on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized using the cost (cost to cost method). Undermethod, if the proportional performanceright to invoice is not representative of the value being delivered. The cost to cost method total contract revenuerequires estimation of future costs, which is recognized based onupdated as the levelproject progresses to reflect the latest available information. Such estimates and changes in estimates involve the use of effort to datejudgment. The cumulative impact of any revision in relation to total expected efforts provided to the customer. Management reviews the assumptions related to these methods on an ongoing basis. Revisions to our estimates may result in increases or decreases to revenues and income and areis reflected in the consolidated financial statements in the periods in which they are first identified. If our estimates indicate that a contract loss will be incurred, a loss provision is recorded in thereporting period in which the loss firstchange in estimate becomes probableknown and reasonably estimable. Contractany anticipated losses on contracts are determined to be the amount by which the estimated costs of the contract exceed the estimated total revenues that will be generated by the contract and such losses are included in cost of revenues in our consolidated statement of operations.recognized immediately. Changes in estimates related to our revenue contractsof such future costs and contract losses were immaterial to the consolidated results of operations for the periods presented.
Allowance for Doubtful Accounts. We maintain
Further, we include in the transaction price variable consideration only to the extent it is probable that a significant reversal of revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price may involve judgment and are based largely on an allowance for doubtful accounts for estimated losses resulting from the inabilityassessment of our customersanticipated performance and all information that is reasonably available to make required payments. We estimate an allowanceus. Our estimates of variable consideration were immaterial to the consolidated results of operations for doubtful accounts by evaluating the financial condition and relative credit-worthiness of each customer, historical collections experience and other information, including the aging of the receivables.periods presented.
Income Taxes. Determining the consolidated provision for income tax expense, deferred income tax assets (and related valuation allowance, if any) and liabilities requires significant judgment. We are required to calculate and provide for income taxes in each of the jurisdictions where we operate. Changes in the geographic mix of income before taxes or estimated level of annual pre-tax income can affect our overall effective income tax rate. In addition, transactions between our affiliated entities are arranged in accordance with applicable transfer pricing laws, regulations and relevant guidelines. As a result, and due to the interpretive nature of certain aspects of these laws and guidelines, we have pending before the taxing authorities in some of our most significant jurisdictions applications for Advance Pricing Agreements ("APAs"). It could take years for the relevant taxing authorities to negotiate and conclude these applications. The consolidated provision for income taxes may also change period to period based on non-recurring events,changes in facts and circumstances, such as the settlementsettlements of income tax audits and changes in tax laws, regulations, or accounting principles.finalization of our applications for APAs.
Our provision for income taxes also includes the impact of reserves established for uncertain income tax positions, as well as the related interest, which may require us to apply judgment to complex issues and may require an extended period of time to resolve. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final outcome of these matters will not differ from our recorded amounts. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. To the extent that the final outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
Significant judgment is also required in determining any valuation allowance recorded against deferred income tax assets. In assessing the need for a valuation allowance, we consider all available evidence for each jurisdiction including past operating results, estimates of future taxable incomeBusiness Combinations, Goodwill and the feasibility of tax planning strategies. If it is determined that it is more likely than not that future tax benefits associated with a deferred income tax asset will not be realized, a valuation allowance is provided. In the event we change our determination as to the amount of deferred income tax assets that can be realized, we will adjust the valuation allowance with a corresponding impact recorded to our provision for income taxes in the period in which such determination is made.
Our Indian subsidiaries, collectively referred to as Cognizant India, are primarily export-oriented companies and are eligible for certain income tax holiday benefits granted by the government of India for export activities conducted within SEZs for periods of up to 15 years. A majority of our SEZ income tax holiday benefits are currently scheduled to expire in whole or in part during the years 2016 to 2025 and may be extended on a limited basis for an additional five years per unit if certain reinvestment criteria are met. We have constructed and expect to continue to operate most of our newer development facilities in SEZs. Our Indian profits ineligible for SEZ benefits are subject to corporate income tax at the rate of 34.6%. In addition, all Indian profits, including those generated within SEZs, are subject to the MAT, at the rate of 21.3%. Any MAT paid is creditable against future Indian corporate income tax, subject to limitations. Currently, we anticipate utilizing our existing MAT balances against our future corporate income tax obligations in India. However, our ability to do so could be impacted by possible changes to the Indian tax laws as well as the future financial results of Cognizant India. Additionally, the Indian government recently announced a proposal which includes, among other items, phasing out of certain tax exemptions and deductions, discontinuation of tax holidays for new SEZs commencing activity from April 1, 2017, and a phased reduction of the current Indian corporate income tax rate. Upon enactment, we will evaluate the impact of these proposals on our effective income tax rate.
Stock-Based CompensationIntangible Assets. Stock-based compensation cost is measured atGoodwill and intangible assets, including indefinite-lived intangible assets, arise from the grant date fair value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term over which the stock awards will be outstanding before they are exercised, the expected volatility of our stock and the number of stock-based awards that are expected to be forfeited. In addition, for performance stock units, we are required to estimate the most probable outcome of the performance conditions in order to
determine the amount of stock compensation costs to be recorded over the vesting period. To the extent that actual results differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted.
Derivative Financial Instruments. Derivative financial instruments are accounted for in accordance with the authoritative guidance which requires that each derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value as of the reporting date. Our derivative financial instruments consist of foreign exchange forward contracts. We estimate the fair value of each foreign exchange forward contract by using a present value of expected cash flows model. This model utilizes various assumptions, including, but not limited to timing and amounts of cash flows, discount rates, and credit risk factors. The use of different assumptions could have a positive or negative effect on our results of operations and financial condition.
Investments. Our investment portfolio is comprised primarily of time deposits, mutual funds invested in fixed income securities and U.S. dollar denominated corporate bonds, municipal bonds, certificates of deposit, commercial paper, debt issuances by the U.S. government, U.S. government agencies, foreign governments and supranational entities and asset-backed securities. The asset-backed securities included Government National Mortgage Association (GNMA) mortgage backed securities and securities backed by auto loans, credit card receivables, and other receivables. The years of issuance of our asset-backed securities fall in the 2005 to 2015 range.
We utilize various inputs to determine the fair value of our investment portfolio. To the extent they exist, unadjusted quoted market prices for identical assets in active markets (Level 1) or quoted prices on similar assets (Level 2) are utilized to determine the fair value of each investment in our portfolio. In the absence of quoted prices or liquid markets, valuation techniques would be used to determine fair value of any investments that require inputs that are both significant to the fair value measurement and unobservable (Level 3). Valuation techniques are based on various assumptions, including, but not limited to timing and amounts of cash flows, discount rates, rate of return, and adjustments for nonperformance and liquidity. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on our results of operations and financial condition. See Note 10 to our consolidated financial statements for additional information related to our security valuation methodologies.
We periodically evaluate if unrealized losses, as determined based on the security valuation methodologies discussed above, on individual securities classified as available-for-sale in the investment portfolio are considered to be other-than-temporary. The analysis of other-than-temporary impairment requires the use of various assumptions, including, but not limited to, the length of time an investment’s book value is greater than fair value, the severity of the investment’s decline, any credit deterioration of the investment, whether management intends to sell the security and whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is generally recorded to income and a new cost basis in the investment is established.
Business Combinations. Accountingaccounting for business combinations requires the use of significant estimates and assumptions.combinations. We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired, liabilities assumed, including any contingent consideration, and any noncontrolling interest in the acquiree to properly allocate purchase price consideration to the individual assets acquired and liabilities assumed. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. The significant estimates and assumptions include but are not limited to, the timing and amount of future revenueforecasted revenues and cash flows, based on, among other things, anticipated growth rates, and customer attrition rates, and the discount rate reflecting the risk inherent in future cash flows as well asand the determination of useful lives for finite-lived assets.
Long-lived Assets and Finite-lived Intangibles. We review long-lived assets and certain finite-lived identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recognize an impairment loss when the sum of the undiscounted expected future cash flows is less than the carrying amount of such assets. The impairment loss would equal the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assessing the fair value of assets involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows and discount rates reflecting the risk inherent in future cash flows. If such assets were determinedexercise judgment to be impaired, it could have a material adverse effect on our business, results of operations and financial condition.
Goodwill and Indefinite-lived Intangibles. We allocate goodwill to reporting units based on the reporting unitunits expected to benefit from theeach business combination. Reporting units are our operating segments or one level below the operating segments. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, regulatory environment, established
business plans, operating performance indicators or competition. Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit. To better align our annual goodwill impairment assessment with the timing of our budget process, we elected to change the date of our annual goodwill impairment assessment from December 31st to October 31st.
We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. Under the income approach, we need to estimate projected future cash flows, the timing of such cash flows and long term growth rates, and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on our weighted-average cost of capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s
ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenuerevenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit.
The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.
We also evaluate indefinite-lived intangible assets for impairment at least annually, or as circumstances warrant. Our 20152018 qualitative assessment included the review of relevant macroeconomic factors and entity-specific qualitative factors to determine if it was more-likely-than-not that the fair value of our indefinite-lived intangible assets was below carrying value.
Based on our most recent evaluation of goodwill and indefinite-lived intangible assets which was performed asduring the fourth quarter of December 31, 2015, none2018, we concluded the goodwill and indefinite-lived intangible asset balances in each of our reporting units or indefinite-lived intangible assets was considered to bewere not at risk of impairment. As of December 31, 2015,2018, our goodwill and indefinite-lived intangible asset balances were $2,404.7$3,481 million and $63.0$72 million, respectively.
We review our finite-lived assets, including our finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recognize an impairment loss when the sum of the undiscounted expected future cash flows is less than the carrying amount of such assets. The impairment loss is determined as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assessing the fair value of assets involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows and discount rates reflecting the risk inherent in future cash flows.
Contingencies. Loss contingencies are recorded as liabilities when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, we do not record a liability, but instead disclose the nature and amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Significant judgment is required in the determination of both probability and whether an exposure is reasonably estimable. Our judgments are subjective and based on the information available from the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. As additional information becomes available, we reassess any potential liability related to any pending litigation and may revise our estimates. Such revisions in estimates of any potential liabilities could have a material impact on our results of operations and financial position.
Recently Adopted and New Accounting Pronouncements |
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Recently Adopted and New Accounting Pronouncements |
See Note 1 to our audited consolidated financial statements for additional information.
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Forward Looking Statements |
The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believe,” “expect,” “may,” “could,” “would,” “plan,” “intend,” “estimate,” “predict,” “potential,”�� “continue,” “should” or “anticipate” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing.
Such forward-looking statements may be included in various filings made by us with the Securities and Exchange Commission, orSEC, in press releases or in oral statements made by or with the approval of one of our authorized executive officers. These forward-looking statements, such as statements regarding our anticipated future revenues or operating margins, contract percentage completions, earnings, capital expenditures, anticipated effective tax rates and tax expense, liquidity, access to capital, capital return plan, investment strategies, cost management, realignment program, plans and objectives, including those related to our digital practice areas, investment in our business, potential acquisitions, industry trends, customer behaviors and trends, the outcome of regulatory and litigation matters and other statements regarding matters that are not historical facts, are based on our current expectations, estimates and projections, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Our actualActual results, performance, or achievements and outcomes could differ materially from the results expressed in, or anticipated or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including:
economic and political conditions globally and in particular in the markets in which our customers and operations are concentrated;
our ability to attract, train and retain skilled professionals, including but not limited to:highly skilled technical personnel to satisfy customer demand and senior management to lead our business globally;
Competitionchallenges related to growing our business organically as well as inorganically through acquisitions, and our ability to achieve our targeted growth rates;
our ability to achieve our profitability and capital return goals;
our ability to meet specified service levels required by certain of our contracts;
intense and evolving competition in the rapidly changing markets we compete in;
legal, reputational and financial risks if we fail to protect customer and/or Cognizant data from other service providers;security breaches or cyberattacks;
The riskthe effectiveness of our business continuity and disaster recovery plans and the potential that our operating margin may decline and we may notglobal delivery capacity could be able to sustain our current level of profitability;impacted;
The risk of liability or damage to our reputation resulting from security breaches;
Any possible failure to comply with or adapt to changesrestrictions on visas, in healthcare-related data protection and privacy laws;
The loss of customers, especially as a few customers account for a large portion of our revenues;
The risk that we may not be able to keep pace with the rapidly evolving technological environment;
The rate of growth in the use of technology in business and the type and level of technology spending by our clients;
Mispricing of our services, especially as an increasing percentage of our revenues are derived from fixed-price contracts;
The risk that we might not be able to maintain effective internal controls, including as we acquire and integrate other companies;
Our inability to successfully acquire or integrate target companies;
System failure or disruptions in our communications or information technology;
The risk that we may lose key executives and not be able to enforce non-competition agreements with them;
Competition for hiring highly-skilled technical personnel;
Possible failure to provide end-to-end business solutions and deliver complex and large projects for our clients;
The risk of reputational harm to us;
Our revenues being highly dependent on clients concentrated in certain industries, including financial services and healthcare, and located primarilyparticular in the United States, United Kingdom and Europe;
Risks relatingEuropean Union, or immigration more generally, which may affect our ability to compete for and provide services to our global operations, includingcustomers;
risks related to anti-outsourcing legislation, if adopted, and negative perceptions associated with offshore outsourcing, both of which could impair our operations in India;ability to serve our customers;
The effects of fluctuationsrisks related to complying with the numerous and evolving legal and regulatory requirements to which we are subject in the Indian rupeemany jurisdictions in which we operate;
potential changes in tax laws, or in their interpretation or enforcement, failure by us to adapt our corporate structure and other currency exchange rates;intercompany arrangements to achieve global tax efficiencies or adverse outcomes of tax audits, investigations or proceedings;
The effectpotential exposure to litigation and legal claims in the conduct of our use of derivative instruments;business;
The risk of war, terrorist activities, pandemics and natural disasters;
The possibilitypotential significant expense that would occur if we may be required, as a result ofchange our indebtedness, or otherwise chooseintent not to repatriate foreign earnings or that our foreign earnings or profits may become subject to U.S. taxes;
The possibility that we may lose certain tax benefits provided to companies in our industry by the Indian government;
The risk that we may not be able to enforce or protect our intellectual property rights, or that we may infringe upon the intellectual property rights of others;
Changes in domestic and international regulations and legislation relating to immigration and anti-outsourcing;
Increased regulation of the financial services and healthcare industries, as well as other industries in which our clients operate;accumulated undistributed earnings; and
The factors set forth in Part I, in the section entitled “Item 1A. Risk Factors” in this report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.Risk
Foreign Currency Risk
We are exposed to foreign currency exchange rate risk in the ordinary course of doing business as we transact or hold a portion of our funds in foreign currencies, particularly the Indian rupee. Additionally, the Brexit Referendum and its effect on the British pound may subject us to increased volatility in foreign currency exchange rate movements. Accordingly, we periodically evaluate the need for hedging strategies, including the use of derivative financial instruments, to mitigate the effect of foreign currency exchange rate fluctuations and expect to continue to use such instruments in the future to reduce foreign currency exposure to appreciation or depreciation in the value of certain foreign currencies. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures.
Revenues from our customers in the United Kingdom, Rest of Europe and Rest of World represented 7.9%, 9.7% and 6.2%, respectively, of our 2018 revenues, and are typically denominated in currencies other than the U.S. dollar. Accordingly, our operating results may be affected by fluctuations in the exchange rates, primarily the Indian rupee, the British pound and the Euro, as compared to the U.S. dollar.
A significant portion of our costs in India are denominated in the Indian rupee, representing approximately 21.5% of our global operating costs during 2018, and are subject to foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations have an impact on our results of operations.
We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of certain Indian rupee denominated payments in India. Cognizant India converts U.S. dollar receipts from intercompany billings to Indian rupees to fund local expenses. These U.S. dollar / Indian rupee hedges are intended to partially offset the impact of movement of exchange rates on future operating costs. As of December 31, 2015,2018, the notional value and weighted average contract rates of these contracts were as follows:
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| Notional Value (in millions) | | Weighted Average Contract Rate (Indian rupee to U.S. dollar) |
2016 | $ | 1,215.0 |
| | 68.2 |
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2017 | 900.0 |
| | 71.4 |
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2018 | 330.0 |
| | 74.1 |
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Total | $ | 2,445.0 |
| | 70.2 |
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| Notional Value (in millions) | | Weighted Average Contract Rate (Indian rupee to U.S. dollar) |
2019 | $ | 1,388 |
| | 70.4 |
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2020 | 780 |
| | 74.5 |
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Total | $ | 2,168 |
| | 71.8 |
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As of December 31, 2015,2018, the net unrealized loss on our outstanding foreign exchange forward contracts designated as cash flow hedges was $14.4$4 million. Based upon a sensitivity analysis of our foreign exchange forward contracts at December 31, 2015,2018, which estimates the
fair value of the contracts based upon market exchange rate fluctuations, a 10.0% change in the foreign currency exchange rate against the U.S. dollar with all other variables held constant would have resulted in a change in the fair value of our foreign exchange forward contracts designated as cash flow hedges of approximately $227.7$207 million.
Our foreign subsidiaries areA portion of our balance sheet is exposed to foreign currency exchange rate risk for transactionsfluctuations, which may result in non-operating foreign currency exchange gains or losses upon remeasurement. In 2018, we reported foreign currency exchange losses, exclusive of hedging gains, of approximately $183 million, which were primarily attributed to the remeasurement of net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. As of December 31, 2018, we had $1,782 million in cash, cash equivalents and investments denominated in Indian rupees. Based upon a sensitivity analysis, a 10.0% change in the Indian rupee exchange rate against the U.S. dollar, with all other variables held constant, would have resulted in a change in the U.S. dollar reported value of these balances and a corresponding non-operating foreign currency exchange gain or loss of the respective subsidiary. approximately $180 million.
We also use foreign exchange forward contracts to provide an economic hedge against balance sheet exposure to certain monetary assets and liabilities denominated in currencies other than the functional currency of the subsidiary. These contracts are not designated as hedges and are intended to offset the foreign currency exchange gains or losses upon remeasurement of these net monetary assets. We entered into a series of foreign exchange forward contracts scheduled to mature in 2016 which are used to hedge our foreign currency denominated net monetary assets.2019. At December 31, 2015,2018, the notional value of thethese outstanding contracts was $165.5$507 million and the related fair valuenet unrealized loss was a liability of $0.8$3 million. Based upon a sensitivity analysis of our foreign exchange forward contracts at December 31, 2015,2018, which estimates the fair value of the contracts based upon market exchange rate fluctuations, a 10.0% change in the foreign currency exchange rate against the U.S. dollar with all other variables held constant would have resulted in a change in the fair value of approximately $16.5$45 million.
Interest Rate Risk
In the fourth quarter of 2014, we entered into a credit agreement, providing for a $1,000 million unsecured term loan and a $750.0$750 million unsecured revolving credit facility. The term loanfacility, which were due to mature in November 2019. In November 2018, we completed a debt refinancing in which we entered into the New Credit Agreement, providing for the New Term Loan, and thea $1,750 million unsecured revolving credit facility, bothwhich are due to mature onin November 20, 2019.2023. As of December 31, 2015,2018, we have $350.0$750 million outstanding under our New Term Loan and no outstanding notes under the revolving credit facility.
The credit agreementNew Credit Agreement requires interest to be paid, at our option, at either the base rateABR or the Eurocurrency rate,Rate (each as defined in the New Credit Agreement), plus, a margin. The margin overin each case, an Applicable Margin (as defined in the base rateNew Credit Agreement). Initially, the Applicable Margin is 0.00%,0.875% with respect to Eurocurrency Rate loans and 0.00% with respect to ABR loans. Subsequently, the margin over theApplicable Margin with respect to Eurocurrency rate rangesRate loans may range from 0.75% to 1.125%, depending on our public debt ratings (or, if we have not received public debt ratings, from 0.875% to 1.00%1.125%, depending on our Leverage Ratio, which is the ratio of indebtedness for borrowed money to Consolidated EBITDA, as defined in the New Credit Agreement). Under the New Credit Agreement, we are required to pay commitment fees on the unused portion of the revolving credit facility, which vary based on our public debt to total stockholders' equity ratio)ratings (or, if we have not received public debt ratings, on the Leverage Ratio). Thus, our debt exposes us to market risk from changes in interest rates. We performed a sensitivity analysis to determine the effect of interest rate fluctuations on our interest expense. A 10%10.0% change in interest rates, with all other variables held constant, would have resulted in an approximately $0.3 million change toimmaterial effect on our reported interest expense for 2015.expense.
In addition, our cash, cash equivalentsavailable-for-sale and short-term investmentsheld-to-maturity fixed income securities are subject to market risk from changes in interest rates. As of December 31, 2015,2018, the fair market values of our available-for-sale and held-to-maturity portfolios were $1,760 million and $1,070 million, respectively. As of December 31, 2018, a 10% change in interest rates, with all other variables held constant, would result in a change inhave an immaterial effect on the fair market value of our available-for-sale and held-to-maturity investment securities of approximately $2.5 million.
Information provided by the sensitivity analysis does not necessarily represent the actual changes that would occur under normal market conditions.
securities. We typically invest in highly-ratedhighly rated securities and our policy generally limits the amount of credit exposure to any one
issuer. Our investment policy requires investments to be investment grade with the objective of minimizing the potential risk of principal loss. We may sell our available-for-sale investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration or for duration management. As of December 31, 2015, our short-term investments totaled $2,824.3 million. Our investment portfolio is comprised primarily of time deposits, mutual funds invested in fixed income securities, Indian rupee denominated commercial paper, Indian rupee denominated international corporate bonds and government debt securities, U.S. dollar denominated corporate bonds, municipal bonds, certificates of deposit, commercial paper, debt issuances by the U.S. government, U.S. government agencies, foreign governments and supranational entities, and asset-backed securities. The asset-backed securities included Government National Mortgage Association (GNMA) mortgage backed securities and securities backed by auto loans, credit card receivables and other receivables.
Information provided by the sensitivity analysis of foreign currency risk and interest rate risk does not necessarily represent the actual changes that would occur under normal market conditions.
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Item 8. | Item 8. Financial Statements and Supplementary Data |
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Item 9. | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.None.
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Item 9A. | Item 9A. Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or the Exchange Act)(the "Exchange Act")) as of December 31, 2015.2018. Based on this evaluation, our chief executive officer and our chief financial officer concluded that, as of December 31, 2015,2018, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.effective.
Changes in Internal Control over Financial Reporting
Our internal control over financial reporting in 2015 includes certain additional internal controls relating to TriZetto, which we acquired in the fourth quarter of 2014. Other than such changes with respect to TriZetto,There has been no changeschange in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 20152018 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
Management’s Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the Company’s independent registered public accounting firm and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accounting firm. The independent registered public accounting firm has free access to the Audit Committee.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act and is a process designed by, or under the supervision of, our chief executive and chief financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015.2018. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on its evaluation, our management has concluded that, as of December 31, 2015,2018, our internal control over financial reporting was effective. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this annual report, has issued an attestation report on our internal control over financial reporting, as stated in their report which is included on page F-2.
Inherent Limitations of Internal Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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| |
Item 9B. | Other Information |
Item 9B. Other Information
On February 15, 2019, we announced a resolution of the previously disclosed investigations by the DOJ and SEC focused on whether certain payments relating to Company-owned facilities in India were made in violation of the FCPA and other applicable laws. The resolution required the Company to pay approximately $28 million to the DOJ and SEC, an amount consistent with the FCPA Accrual recorded during the quarter ended September 30, 2018.
See Note 2 to our consolidated financial statements for additional information on the completion of our internal investigation and the resolution of the investigations by the DOJ and SEC in February 2019.
None.
PART III
|
| |
Item 10. | Item 10. Directors, Executive Officers and Corporate Governance |
The information relating to our executive officers in response to this item is contained in part under the caption “Our Executive Officers” in Part I of this Annual Report on Form 10-K. We have adopted a written code of business conduct and ethics, entitled “Cognizant’s Core“Core Values and StandardsCode of Business Conduct,Ethics,” that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. We make available our code of business conduct and ethics free of charge through our website which is located at www.cognizant.com. We intend to post on our website all disclosures that are required by law or NASDAQNasdaq Stock Market listing standards concerning any amendments to, or waivers from, any provision of our code of business conduct and ethics.
The remaining information required by this item will be included in our definitive proxy statement for the 20162019 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
|
| |
Item 11. | Item 11. Executive Compensation |
The information required by this item will be included in our definitive proxy statement for the 20162019 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
|
| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in our definitive proxy statement for the 20162019 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
|
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our definitive proxy statement for the 20162019 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
|
| |
Item 14. | Principal Accountant Fees and Services |
Item 14. Principal Accountant Fees and Services
The information required by this item will be included in our definitive proxy statement for the 20162019 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
PART IV
|
| |
Item 15. | Item 15. Exhibits, Financial Statement Schedules |
|
| |
(a) | (1) Consolidated Financial Statements. Reference is made to the Index to Consolidated Financial Statements on Page F-1. |
| |
| (2) Consolidated Financial Statement Schedule. Reference is made to the Index to Financial Statement Schedule on Page F-1. |
| |
| (3) Exhibits. Reference is made to the Index to Exhibits on Page 58.
|
Schedules other than as listed above are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXHIBIT INDEX
|
| | |
| | |
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION |
| |
By: | | /S/ FRANCISCO D’SOUZA
|
| | Francisco D’Souza, |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: | | February 25, 2016 |
|
| | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Date | | Filed or Furnished Herewith |
3.1 | | | | 8-K | | 000-24429 | | 3.1 |
| | 6/7/2018 | | |
3.2 | | | | 8-K | | 000-24429 | | 3.1 |
| | 9/20/2018 | | |
4.1 | | | | S-4/A | | 333-101216 | | 4.2 |
| | 1/30/2003 | | |
10.1† | | | | 10-Q | | 000-24429 | | 10.1 |
| | 8/7/2013 | | |
10.2† | | Form of Amended and Restated Executive Employment and Non-Disclosure, Non-Competition, and Invention Assignment Agreement, between the Company and each of the following Executive Officers: Francisco D'Souza, Rajeev Mehta, Karen McLoughlin, Ramakrishna Prasad Chintamaneni, Matthew Friedrich, James Lennox, Allen Shaheen, Dharmendra Kumar Sinha and Robert Telesmanic | | 10-K | | 000-24429 | | 10.3 |
| | 2/27/2018 | | |
10.3† | | | | 10-K | | 000-24429 | | 10.4 |
| | 2/26/2013 | | |
10.4† | | | | | | | | | | | | Filed |
10.5† | | | | | | | | | | | | Filed |
10.6† | | | | 10-Q | | 000-24429 | | 10.1 |
| | 8/2/2018 | | |
10.7† | | | | | | | | | | | | Filed |
10.8† | |
| | 8-K | | 000-24429 | | 10.1 |
| | 6/7/2018 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | | |
Signature | | Title | | Date |
| | |
/s/ FRANCISCO D’SOUZA
| | Chief Executive Officer and Director
(Principal Executive Officer)
| | February 25, 2016 |
Francisco D’Souza | | |
| | |
/s/ KAREN MCLOUGHLIN
| | Chief Financial Officer
(Principal Financial and Accounting Officer)
| | February 25, 2016 |
Karen McLoughlin | | |
| | |
/s/ JOHN E. KLEIN
| | Chairman of the Board and Director | | February 25, 2016 |
John E. Klein | | |
| | |
/s/ LAKSHMI NARAYANAN
| | Vice Chairman of the Board and Director | | February 25, 2016 |
Lakshmi Narayanan | | | |
| | |
/s/ THOMAS M. WENDEL
| | Director | | February 25, 2016 |
Thomas M. Wendel | | | |
| | |
/s/ ROBERT E. WEISSMAN
| | Director | | February 25, 2016 |
Robert E. Weissman | | | |
| | |
/s/ JOHN N. FOX, JR.
| | Director | | February 25, 2016 |
John N. Fox, Jr. | | | |
| | |
/s/ MAUREEN BREAKIRON-EVANS
| | Director | | February 25, 2016 |
Maureen Breakiron-Evans | | | |
| | |
/s/ MICHAEL PATSALOS-FOX
| | Director | | February 25, 2016 |
Michael Patsalos-Fox | | | |
| | |
/s/ LEO S. MACKAY, JR.
| | Director | | February 25, 2016 |
Leo S. Mackay, Jr. | | | |
| | | | |
/s/ ZEIN ABDALLA
| | Director | | February 25, 2016 |
Zein Abdalla | | | |
EXHIBIT INDEX
|
| | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Date | | Filed or Furnished Herewith |
2.1 | | Stock Purchase Agreement, by and among TZ Holdings, L.P., TZ US Parent, Inc. and Cognizant Domestic Holdings Corporation, dates as of September 14, 2014 | | 8-K | | 000-24429 | | 2.1 |
| | 9/15/2014 | | |
3.1 | | Restated Certificate of Incorporation | | 8-K | | 000-24429 | | 3.2 |
| | 9/17/2013 | | |
3.2 | | Amended and Restated By-laws of the Company, as amended and restated on January 28, 2016 | | 8-K | | 000-24429 | | 3.2 |
| | 2/1/2016 | | |
4.1 | | Specimen Certificate for shares of Class A common stock | | S-4/A | | 333-101216 | | 4.2 |
| | 1/30/2003 | | |
10.1† | | Form of Indemnification Agreement for Directors and Officers | | 10-Q | | 000-24429 | | 10.1 |
| | 8/7/2013 | | |
10.2† | | Form of Amended and Restated Executive Employment and Non-Disclosure, Non-Competition, and Invention Assignment Agreement, between the Company and each of the following Executive Officers: Francisco D'Souza, Gordon Coburn, Karen McLoughlin, Ramakrishnan Chandrasekaran, Rajeev Mehta, Malcolm Frank, Steven Schwartz, Sridhar Thiruvengadam | | 10-K | | 000-24429 | | 10.4 |
| | 2/26/2013 | | |
10.3† | | Amended and Restated 1999 Incentive Compensation Plan (as Amended and Restated Through April 26, 2007) | | 8-K | | 000-24429 | | 10.1 |
| | 6/8/2007 | | |
10.4† | | 2004 Employee Stock Purchase Plan (as amended and restated effective as of April 1, 2013) | | 8-K | | 000-24429 | | 10.1 |
| | 6/5/2013 | | |
10.5† | | Form of Stock Option Certificate | | 10-Q | | 000-24429 | | 10.1 |
| | 11/8/2004 | | |
10.6 | | Distribution Agreement between IMS Health Incorporated and the Company, dated January 7, 2003 | | S-4/A | | 333-101216 | | 10.13 |
| | 1/9/2003 | | |
10.7† | | Amended and Restated Key Employees’ Stock Option Plan Amendment No. 1, which became effective on March 2, 2007 | | 10-Q | | 000-24429 | | 10.2 |
| | 5/10/2007 | | |
10.8† | | Amended and Restated Non-Employee Directors’ Stock Option Plan Amendment No. 1, which became effective on March 2, 2007 | | 10-Q | | 000-24429 | | 10.3 |
| | 5/10/2007 | | |
10.9† | | Form of Performance Unit Award for grants to certain executive officers | | 8-K | | 000-24429 | | 10.1 |
| | 12/7/2007 | | |
10.10† | | Form of Stock Unit Award Agreement pursuant to the Cognizant Technology Solutions Corporation Amended and Restated 1999 Incentive Compensation Plan | | 8-K | | 000-24429 | | 10.1 |
| | 9/5/2008 | | |
10.11† | | The Cognizant Technology Solutions Executive Pension Plan, as amended and restated | | 8-K | | 000-24429 | | 10.2 |
| | 12/5/2008 | | |
10.12† | | Cognizant Technology Solutions Corporation Amended and Restated 2009 Incentive Compensation Plan, effective March 9, 2015 | | 10-Q | | 000-24429 | | 10.1 |
| | 5/4/2015 | | |
10.13† | | Form of Cognizant Technology Solutions Corporation Stock Option Agreement | | 8-K | | 000-24429 | | 10.1 |
| | 7/6/2009 | | |
|
| | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Date | | Filed or Furnished Herewith |
10.9† | | | | 10-Q | | 000-24429 | | 10.1 |
| | 11/8/2004 | | |
10.10† | | | | 10-Q | | 000-24429 | | 10.1 |
| | 5/4/2015 | | |
10.11† | | | | 8-K | | 000-24429 | | 10.1 |
| | 7/6/2009 | | |
10.12† | | | | 8-K | | 000-24429 | | 10.2 |
| | 7/6/2009 | | |
10.13† | | | | 8-K | | 000-24429 | | 10.3 |
| | 7/6/2009 | | |
10.14† | | | | 8-K | | 000-24429 | | 10.4 |
| | 7/6/2009 | | |
10.15† | | | | 8-K | | 000-24429 | | 10.5 |
| | 7/6/2009 | | |
10.16† | | | | 8-K | | 000-24429 | | 10.6 |
| | 7/6/2009 | | |
10.17† | | | | 8-K | | 000-24429 | | 10.7 |
| | 7/6/2009 | | |
10.18† | | | | 8-K | | 000-24429 | | 10.8 |
| | 7/6/2009 | | |
10.19† | | | | 8-K | | 000-24429 | | 10.1 |
| | 6/7/2017 | | |
10.20† | | | | 10-Q | | 000-24429 | | 10.2 |
| | 8/3/2017 | | |
10.21† | | | | 10-Q | | 000-24429 | | 10.3 |
| | 8/3/2017 | | |
10.22† | | | | 10-Q | | 000-24429 | | 10.4 |
| | 8/3/2017 | | |
10.23† | | | | 10-Q | | 000-24429 | | 10.5 |
| | 8/3/2017 | | |
10.24 | | | | 8-K | | 000-24429 | | 10.1 |
| | 3/14/2017 | | |
10.25 | | | | 8-K | | 000-24429 | | 10.1 |
| | 11/9/2018 | | |
10.26 | | | | | | | | | | | | Filed |
10.27 | | | | | | | | | | | | Filed |
21.1 | | | | | | | | | | | | Filed |
|
| | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Date | | Filed or Furnished Herewith |
10.14† | | Form of Cognizant Technology Solutions Corporation Notice of Grant of Stock Option | | 8-K | | 000-24429 | | 10.2 |
| | 7/6/2009 | | |
10.15† | | Form of Cognizant Technology Solutions Corporation Restricted Stock Unit Award Agreement Time-Based Vesting | | 8-K | | 000-24429 | | 10.3 |
| | 7/6/2009 | | |
10.16† | | Form of Cognizant Technology Solutions Corporation Notice of Award of Restricted Stock Units Time-Based Vesting | | 8-K | | 000-24429 | | 10.4 |
| | 7/6/2009 | | |
10.17† | | Form of Cognizant Technology Solutions Corporation Restricted Stock Unit Award Agreement Performance-Based Vesting | | 8-K | | 000-24429 | | 10.5 |
| | 7/6/2009 | | |
10.18† | | Form of Cognizant Technology Solutions Corporation Notice of Award of Restricted Stock Units Performance-Based Vesting | | 8-K | | 000-24429 | | 10.6 |
| | 7/6/2009 | | |
10.19† | | Form of Restricted Stock Unit Award Agreement Non-Employee Director Deferred Issuance | | 8-K | | 000-24429 | | 10.7 |
| | 7/6/2009 | | |
10.20† | | Form of Cognizant Technology Solutions Corporation Notice of Award of Restricted Stock Units Non-Employee Director Deferred Issuance | | 8-K | | 000-24429 | | 10.8 |
| | 7/6/2009 | | |
10.21† | | Credit Agreement, dated as of November 20, 2014 among Cognizant Technology Solutions Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent for the Lenders | | 8-K | | 000-24429 | | 10.1 |
| | 11/20/2014 | | |
21.1 | | List of subsidiaries of the Company | | | | | | | | | | Filed |
23.1 | | | | | | | | | | | | Filed |
31.1 | | | | | | | | | | | | Filed |
31.2 | | | | | | | | | | | | Filed |
32.1 | | | | | | | | | | | | Furnished |
32.2 | | | | | | | | | | | | Furnished |
101.INS | | XBRL Instance Document | | | | | | | | | | Filed |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | Filed |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | Filed |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | Filed |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | Filed |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | Filed |
|
| |
† | A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | |
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION |
| |
By: | | /S/ FRANCISCO D’SOUZA |
| | Francisco D’Souza, |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: | | February 19, 2019 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | | |
Signature | | Title | | Date |
| | |
/s/ FRANCISCO D’SOUZA | | Chief Executive Officer, Vice Chairman of the Board and Director (Principal Executive Officer) | | February 19, 2019 |
Francisco D’Souza | | |
| | |
/s/ KAREN MCLOUGHLIN | | Chief Financial Officer (Principal Financial Officer) | | February 19, 2019 |
Karen McLoughlin | | |
| | |
/s/ ROBERT TELESMANIC | | Controller and Chief Accounting Officer (Principal Accounting Officer) | | February 19, 2019 |
Robert Telesmanic | | |
| | | |
/s/ MICHAEL PATSALOS-FOX | | Chairman of the Board and Director | | February 19, 2019 |
Michael Patsalos-Fox | | |
| | |
/s/ ZEIN ABDALLA | | Director | | February 19, 2019 |
Zein Abdalla | | | |
| | |
/s/ MAUREEN BREAKIRON-EVANS | | Director | | February 19, 2019 |
Maureen Breakiron-Evans | | | |
| | |
/s/ JONATHAN CHADWICK | | Director | | February 19, 2019 |
Jonathan Chadwick | | | |
| | |
/s/ JOHN M. DINEEN | | Director | | February 19, 2019 |
John M. Dineen | | | |
| | |
/s/ JOHN N. FOX, JR. | | Director | | February 19, 2019 |
John N. Fox, Jr. | | | |
| | |
/s/ JOHN E. KLEIN | | Director | | February 19, 2019 |
John E. Klein | | | |
| | | | |
/s/ LEO S. MACKAY, JR. | | Director | | February 19, 2019 |
Leo S. Mackay, Jr. | | | |
| | | | |
/s/ JOSEPH M. VELLI | | Director | | February 19, 2019 |
Joseph M. Velli | | | |
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
|
| | | |
| | | |
| | Page |
| |
Consolidated Financial Statements: | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Financial Statement Schedule: | | | |
| | | F-37 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cognizant Technology Solutions Corporation:Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion, the consolidated financial statements listed inWe have audited the accompanying indexappearing under Item 15(a)(1) present fairly, in all material respects, theconsolidated statements of financial position of Cognizant Technology Solutions Corporation (the "Company") and its subsidiaries at(the “Company”) as of December 31, 20152018 and December 31, 2014,2017, and the resultsrelated consolidated statements of their operations, of comprehensive income, of stockholders’ equity and theirof cash flows for each of the three years in the period ended December 31, 20152018, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December, 31 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofCOSO.
Change in Accounting Principle
As discussed in Note 3 to the Treadway Commission (COSO). consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control overOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it presents deferred income taxes in 2015.Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 25, 201619, 2019
F-2We have served as the Company’s auditor since 1997.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions, except par values)
| | | At December 31, | At December 31, |
| 2015 | | 2014 | 2018 | | 2017 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 2,125.2 |
| | $ | 2,010.1 |
| $ | 1,161 |
| | $ | 1,925 |
|
Short-term investments | 2,824.3 |
| | 1,764.6 |
| 3,350 |
| | 3,131 |
|
Trade accounts receivable, net of allowances of $39.0 and $36.9, respectively | 2,252.6 |
| | 1,968.7 |
| |
Trade accounts receivable, net of allowances of $78 and $65, respectively | | 3,257 |
| | 2,865 |
|
Unbilled accounts receivable | 369.0 |
| | 324.6 |
| — |
| | 357 |
|
Other current assets | 337.5 |
| | 352.6 |
| 909 |
| | 833 |
|
Total current assets | 7,908.6 |
| | 6,420.6 |
| 8,677 |
| | 9,111 |
|
Property and equipment, net | 1,271.4 |
| | 1,247.2 |
| 1,394 |
| | 1,324 |
|
Goodwill | 2,404.7 |
| | 2,413.6 |
| 3,481 |
| | 2,704 |
|
Intangible assets, net | 864.3 |
| | 953.7 |
| 1,150 |
| | 981 |
|
Deferred income tax assets, net | 347.8 |
| | 234.2 |
| 442 |
| | 418 |
|
Long-term investments | | 80 |
| | 235 |
|
Other noncurrent assets | 268.6 |
| | 209.7 |
| 689 |
| | 448 |
|
Total assets | $ | 13,065.4 |
| | $ | 11,479.0 |
| $ | 15,913 |
| | $ | 15,221 |
|
Liabilities and Stockholders’ Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 165.3 |
| | $ | 145.7 |
| $ | 215 |
| | $ | 210 |
|
Deferred revenue | 323.7 |
| | 224.1 |
| 286 |
| | 383 |
|
Short-term debt | 406.3 |
| | 700.0 |
| 9 |
| | 175 |
|
Accrued expenses and other current liabilities | 1,818.4 |
| | 1,522.3 |
| 2,267 |
| | 2,071 |
|
Total current liabilities | 2,713.7 |
| | 2,592.1 |
| 2,777 |
| | 2,839 |
|
Deferred revenue, noncurrent | 49.3 |
| | 81.0 |
| 62 |
| | 104 |
|
Deferred income tax liabilities, net | 3.3 |
| | 11.8 |
| 183 |
| | 146 |
|
Long-term debt | 881.2 |
| | 937.5 |
| 736 |
| | 698 |
|
Long-term income taxes payable | | 478 |
| | 584 |
|
Other noncurrent liabilities | 139.8 |
| | 116.4 |
| 253 |
| | 181 |
|
Total liabilities | 3,787.3 |
| | 3,738.8 |
| 4,489 |
| | 4,552 |
|
Commitments and contingencies (See Note 12) |
| |
| |
Stockholders’ Equity: | | | | |
Commitments and contingencies (See Note 15) | |
|
| |
|
|
Stockholders’ equity: | | | | |
Preferred stock, $0.10 par value, 15.0 shares authorized, none issued | — |
| | — |
| — |
| | — |
|
Class A common stock, $0.01 par value, 1,000.0 shares authorized, 609.0 and 609.4 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | 6.1 |
| | 6.1 |
| |
Class A common stock, $0.01 par value, 1,000 shares authorized, 577 and 588 shares issued and outstanding at December 31, 2018 and 2017, respectively | | 6 |
| | 6 |
|
Additional paid-in capital | 453.0 |
| | 555.6 |
| 47 |
| | 49 |
|
Retained earnings | 8,925.2 |
| | 7,301.6 |
| 11,485 |
| | 10,544 |
|
Accumulated other comprehensive income (loss) | (106.2 | ) | | (123.1 | ) | (114 | ) | | 70 |
|
Total stockholders’ equity | 9,278.1 |
| | 7,740.2 |
| 11,424 |
| | 10,669 |
|
Total liabilities and stockholders’ equity | $ | 13,065.4 |
| | $ | 11,479.0 |
| $ | 15,913 |
| | $ | 15,221 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 |
Revenues | | $ | 12,416.0 |
| | $ | 10,262.7 |
| | $ | 8,843.2 |
| | $ | 16,125 |
| | $ | 14,810 |
| | $ | 13,487 |
|
Operating expenses: | | | | | | | | | | | | |
Cost of revenues (exclusive of depreciation and amortization expense shown separately below) | | 7,440.2 |
| | 6,141.1 |
| | 5,265.5 |
| | 9,838 |
| | 9,152 |
| | 8,108 |
|
Selling, general and administrative expenses | | 2,508.6 |
| | 2,037.0 |
| | 1,727.6 |
| | 3,026 |
| | 2,769 |
| | 2,731 |
|
Depreciation and amortization expense | | 325.2 |
| | 199.7 |
| | 172.2 |
| | 460 |
| | 408 |
| | 359 |
|
Income from operations | | 2,142.0 |
| | 1,884.9 |
| | 1,677.9 |
| | 2,801 |
| | 2,481 |
| | 2,289 |
|
Other income (expense), net: | | | | | | | | | | | | |
Interest income | | 83.7 |
| | 62.4 |
| | 48.9 |
| | 177 |
| | 133 |
| | 115 |
|
Interest expense | | (17.7 | ) | | (2.5 | ) | | — |
| | (27 | ) | | (23 | ) | | (19 | ) |
Foreign currency exchange gains (losses), net | | (42.6 | ) | | (20.4 | ) | | (41.1 | ) | | (152 | ) | | 67 |
| | (30 | ) |
Other, net | | (1.8 | ) | | (0.4 | ) | | 2.2 |
| | (2 | ) | | (3 | ) | | 2 |
|
Total other income (expense), net | | 21.6 |
| | 39.1 |
| | 10.0 |
| | (4 | ) | | 174 |
| | 68 |
|
Income before provision for income taxes | | 2,163.6 |
| | 1,924.0 |
| | 1,687.9 |
| | 2,797 |
| | 2,655 |
| | 2,357 |
|
Provision for income taxes | | 540.0 |
| | 484.7 |
| | 459.3 |
| | (698 | ) | | (1,153 | ) | | (805 | ) |
Income from equity method investments | | | 2 |
| | 2 |
| | 1 |
|
Net income | | $ | 1,623.6 |
| | $ | 1,439.3 |
| | $ | 1,228.6 |
| | $ | 2,101 |
| | $ | 1,504 |
| | $ | 1,553 |
|
Basic earnings per share | | $ | 2.67 |
| | $ | 2.37 |
| | $ | 2.03 |
| | $ | 3.61 |
| | $ | 2.54 |
| | $ | 2.56 |
|
Diluted earnings per share | | $ | 2.65 |
| | $ | 2.35 |
| | $ | 2.02 |
| | $ | 3.60 |
| | $ | 2.53 |
| | $ | 2.55 |
|
Weighted average number of common shares outstanding—Basic | | 609.1 |
| | 608.1 |
| | 604.0 |
| | 582 |
| | 593 |
| | 607 |
|
Dilutive effect of shares issuable under stock-based compensation plans |
| 4.2 |
|
| 4.4 |
| | 5.7 |
|
| 2 |
|
| 2 |
| | 3 |
|
Weighted average number of common shares outstanding—Diluted | | 613.3 |
| | 612.5 |
| | 609.7 |
| | 584 |
| | 595 |
| | 610 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
Net income | | $ | 1,623.6 |
| | $ | 1,439.3 |
| | $ | 1,228.6 |
|
Other comprehensive income (loss), net of tax: | | | | | | |
Foreign currency translation adjustments | | (55.1 | ) | | (58.8 | ) | | 12.5 |
|
Change in unrealized losses on cash flow hedges, net of taxes | | 75.0 |
| | 213.3 |
| | (47.2 | ) |
Change in unrealized losses on available-for-sale investment securities, net of taxes | | (3.0 | ) | | (1.3 | ) | | (1.9 | ) |
Other comprehensive income (loss) | | 16.9 |
| | 153.2 |
| | (36.6 | ) |
Comprehensive income | | $ | 1,640.5 |
| | $ | 1,592.5 |
| | $ | 1,192.0 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| | Shares | | Amount | |
Balance, December 31, 2012 | | 603.4 |
| | $ | 6.0 |
| | $ | 454.4 |
| | $ | 4,633.7 |
| | $ | (239.7 | ) | | $ | 4,854.4 |
|
Net income | | — |
| | — |
| | — |
| | 1,228.6 |
| | — |
| | 1,228.6 |
|
Other comprehensive (loss) | | — |
| | — |
| | — |
| | — |
| | (36.6 | ) | | (36.6 | ) |
Common stock issued, stock-based compensation plans and other | 9.6 |
| | 0.1 |
| | 117.4 |
| | — |
| | — |
| | 117.5 |
|
Tax benefit, stock-based compensation plans | | — |
| | — |
| | 32.1 |
| | — |
| | — |
| | 32.1 |
|
Stock-based compensation expense | | — |
| | — |
| | 118.8 |
| | — |
| | — |
| | 118.8 |
|
Repurchases of common stock | | (5.3 | ) | | — |
| | (179.0 | ) | | — |
| | — |
| | (179.0 | ) |
Balance, December 31, 2013 | | 607.7 |
| | 6.1 |
| | 543.7 |
| | 5,862.3 |
| | (276.3 | ) | | 6,135.8 |
|
Net income | | — |
| | — |
| | — |
| | 1,439.3 |
| | — |
| | 1,439.3 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 153.2 |
| | 153.2 |
|
Common stock issued, stock-based compensation plans and other | 6.7 |
| | 0.1 |
| | 101.3 |
| | — |
| | — |
| | 101.4 |
|
Tax benefit, stock-based compensation plans | | — |
| | — |
| | 24.0 |
| | — |
| | — |
| | 24.0 |
|
Stock-based compensation expense | | — |
| | — |
| | 134.8 |
| | — |
| | — |
| | 134.8 |
|
Repurchases of common stock | | (5.0 | ) | | (0.1 | ) | | (248.2 | ) | | — |
| | — |
| | (248.3 | ) |
Balance, December 31, 2014 | | 609.4 |
| | 6.1 |
| | 555.6 |
| | 7,301.6 |
| | (123.1 | ) | | 7,740.2 |
|
Net income | | — |
| | — |
| | — |
| | 1,623.6 |
| | — |
| | 1,623.6 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 16.9 |
| | 16.9 |
|
Common stock issued, stock-based compensation plans and other | 6.9 |
| | 0.1 |
| | 131.5 |
| | — |
| | — |
| | 131.6 |
|
Tax benefit, stock-based compensation plans | | — |
| | — |
| | 33.8 |
| | — |
| | — |
| | 33.8 |
|
Stock-based compensation expense | | — |
| | — |
| | 192.0 |
| | — |
| | — |
| | 192.0 |
|
Repurchases of common stock | | (7.3 | ) | | (0.1 | ) | | (459.9 | ) | | — |
| | — |
| | (460.0 | ) |
Balance, December 31, 2015 | | 609.0 |
| | $ | 6.1 |
| | $ | 453.0 |
| | $ | 8,925.2 |
| | $ | (106.2 | ) | | $ | 9,278.1 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Net income | | $ | 2,101 |
| | $ | 1,504 |
| | $ | 1,553 |
|
Other comprehensive income (loss), net of tax: | | | | | | |
Foreign currency translation adjustments | | (65 | ) | | 111 |
| | (59 | ) |
Change in unrealized gains and losses on cash flow hedges | | (118 | ) | | 76 |
| | 51 |
|
Change in unrealized losses on available-for-sale investment securities | | — |
| | (3 | ) | | — |
|
Other comprehensive income (loss) | | (183 | ) | | 184 |
| | (8 | ) |
Comprehensive income | | $ | 1,918 |
| | $ | 1,688 |
| | $ | 1,545 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Shares | | Amount | |
Balance, December 31, 2015 | | 609 |
| | $ | 6 |
| | $ | 453 |
| | $ | 8,925 |
| | $ | (106 | ) | | $ | 9,278 |
|
Net income | | — |
| | — |
| | — |
| | 1,553 |
| | — |
| | 1,553 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (8 | ) |
Common stock issued, stock-based compensation plans | 8 |
| | — |
| | 176 |
| | — |
| | — |
| | 176 |
|
Tax benefit, stock-based compensation plans | | — |
| | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
Stock-based compensation expense | | — |
| | — |
| | 217 |
| | — |
| | — |
| | 217 |
|
Repurchases of common stock | | (9 | ) | | — |
| | (512 | ) | | — |
| | — |
| | (512 | ) |
Balance, December 31, 2016 | | 608 |
| | 6 |
| | 358 |
| | 10,478 |
| | (114 | ) | | 10,728 |
|
Net income | | — |
| | — |
| | — |
| | 1,504 |
| | — |
| | 1,504 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | 184 |
| | 184 |
|
Common stock issued, stock-based compensation plans | | 9 |
| | — |
| | 189 |
| | — |
| | — |
| | 189 |
|
Stock-based compensation expense | | — |
| | — |
| | 221 |
| | — |
| | — |
| | 221 |
|
Repurchases of common stock | | (29 | ) | | — |
| | (719 | ) | | (1,170 | ) | | — |
| | (1,889 | ) |
Dividends declared, $0.45 per share | | — |
| | — |
| | — |
| | (268 | ) | | — |
| | (268 | ) |
Balance, December 31, 2017 | | 588 |
| | 6 |
| | 49 |
| | 10,544 |
| | 70 |
| | 10,669 |
|
Cumulative effect of changes in accounting principle (1) | | — |
| | — |
| | — |
| | 122 |
| | (1 | ) | | 121 |
|
Net income | | — |
| | — |
| | — |
| | 2,101 |
| | — |
| | 2,101 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | (183 | ) | | (183 | ) |
Common stock issued, stock-based compensation plans | | 6 |
| | — |
| | 181 |
| | — |
| | — |
| | 181 |
|
Stock-based compensation expense | | — |
| | — |
| | 267 |
| | — |
| | — |
| | 267 |
|
Repurchases of common stock | | (17 | ) | | — |
| | (450 | ) | | (811 | ) | | — |
| | (1,261 | ) |
Dividends declared, $0.80 per share | | — |
| | — |
| | — |
| | (471 | ) | | — |
| | (471 | ) |
Balance, December 31, 2018 | | 577 |
| | $ | 6 |
| | $ | 47 |
| | $ | 11,485 |
| | $ | (114 | ) | | $ | 11,424 |
|
(1) Reflects the adoption of Contentsaccounting standards as described in Note 1 and Note 3.
The accompanying notes are an integral part of the consolidated financial statements.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | Year Ended December 31, | Year Ended December 31, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Cash flows from operating activities: | | | | | | | | | | |
Net income | $ | 1,623.6 |
| | $ | 1,439.3 |
| | $ | 1,228.6 |
| $ | 2,101 |
| | $ | 1,504 |
| | $ | 1,553 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | 330.0 |
| | 208.1 |
| | 179.9 |
| 498 |
| | 443 |
| | 379 |
|
Provision for doubtful accounts | 10.2 |
| | 4.7 |
| | 3.6 |
| 13 |
| | 15 |
| | 12 |
|
Deferred income taxes | (126.1 | ) | | (99.6 | ) | | (88.2 | ) | 8 |
| | 124 |
| | (91 | ) |
Stock-based compensation expense | 192.0 |
| | 134.8 |
| | 118.8 |
| 267 |
| | 221 |
| | 217 |
|
Excess tax benefits on stock-based compensation plans | (33.7 | ) | | (23.6 | ) | | (30.6 | ) | |
Other | 48.6 |
| | 30.3 |
| | 52.6 |
| 112 |
| | (86 | ) | | 46 |
|
Changes in assets and liabilities: | | | | | | | | | | |
Trade accounts receivable | (322.4 | ) | | (259.3 | ) | | (258.5 | ) | (365 | ) | | (249 | ) | | (330 | ) |
Other current assets | (32.5 | ) | | (118.6 | ) | | (74.7 | ) | 216 |
| | (181 | ) | | (104 | ) |
Other noncurrent assets | (38.6 | ) | | 19.1 |
| | (24.3 | ) | (224 | ) | | (89 | ) | | (59 | ) |
Accounts payable | 19.4 |
| | 25.7 |
| | (12.1 | ) | (4 | ) | | 16 |
| | 6 |
|
Deferred revenues, current and noncurrent | 49.7 |
| | 70.6 |
| | 15.2 |
| |
Deferred revenue, current and noncurrent | | (86 | ) | | 18 |
| | (38 | ) |
Other current and noncurrent liabilities | 433.1 |
| | 41.5 |
| | 313.5 |
| 56 |
| | 671 |
| | 54 |
|
Net cash provided by operating activities | 2,153.3 |
| | 1,473.0 |
| | 1,423.8 |
| 2,592 |
| | 2,407 |
| | 1,645 |
|
Cash flows from investing activities: | | | | | | | | | | |
Purchases of property and equipment | (272.8 | ) | | (212.2 | ) | | (261.6 | ) | (377 | ) | | (284 | ) | | (300 | ) |
Purchases of investments | (3,003.7 | ) | | (2,497.3 | ) | | (1,848.8 | ) | |
Proceeds from maturity or sale of investments | 1,907.6 |
| | 2,240.2 |
| | 1,573.4 |
| |
Business combinations, net of cash acquired | (1.7 | ) | | (2,691.4 | ) | | (193.8 | ) | |
Purchases of available-for-sale investment securities | | (1,630 | ) | | (3,120 | ) | | (4,231 | ) |
Proceeds from maturity or sale of available-for-sale investment securities | | 1,838 |
| | 3,404 |
| | 3,982 |
|
Purchases of held-to-maturity investment securities | | (1,363 | ) | | (1,221 | ) | | (54 | ) |
Proceeds from maturity of held-to-maturity investment securities | | 1,164 |
| | 404 |
| | 15 |
|
Purchases of other investments | | (513 | ) | | (385 | ) | | (884 | ) |
Proceeds from maturity or sale of other investments | | 365 |
| | 836 |
| | 843 |
|
Payments for business combinations, net of cash acquired, and equity and cost method investments | | (1,111 | ) | | (216 | ) | | (334 | ) |
Net cash (used in) investing activities | (1,370.6 | ) | | (3,160.7 | ) | | (730.8 | ) | (1,627 | ) | | (582 | ) | | (963 | ) |
Cash flows from financing activities: | | | | | | | | | | |
Issuance of common stock under stock-based compensation plans | 131.6 |
| | 101.4 |
| | 117.5 |
| 181 |
| | 189 |
| | 176 |
|
Excess tax benefits on stock-based compensation plans | 33.7 |
| | 23.6 |
| | 30.6 |
| |
Repurchases of common stock | (460.0 | ) | | (248.3 | ) | | (179.0 | ) | (1,261 | ) | | (1,889 | ) | | (512 | ) |
Proceeds from term loan borrowings | — |
| | 1,000.0 |
| | — |
| |
Debt issuance costs | — |
| | (9.1 | ) | | — |
| |
Repayment of term loan borrowings and capital lease obligations | (53.4 | ) | | (14.2 | ) | | — |
| (91 | ) | | (95 | ) | | (57 | ) |
Net change in notes outstanding under the revolving credit facility | (300.0 | ) | | 650.0 |
| | — |
| (75 | ) | | 75 |
| | (350 | ) |
Net cash (used in) provided by financing activities | (648.1 | ) | | 1,503.4 |
| | (30.9 | ) | |
Proceeds from debt modification | | 25 |
| | — |
| | — |
|
Debt issuance costs | | (4 | ) | | — |
| | — |
|
Dividends paid | | (468 | ) | | (265 | ) | | — |
|
Net cash (used in) financing activities | | (1,693 | ) | | (1,985 | ) | | (743 | ) |
Effect of exchange rate changes on cash and cash equivalents | (19.5 | ) | | (18.6 | ) | | (19.2 | ) | (36 | ) | | 51 |
| | (30 | ) |
Increase (decrease) in cash and cash equivalents | 115.1 |
| | (202.9 | ) | | 642.9 |
| |
(Decrease) in cash and cash equivalents | | (764 | ) | | (109 | ) | | (91 | ) |
Cash and cash equivalents, beginning of year | 2,010.1 |
| | 2,213.0 |
| | 1,570.1 |
| 1,925 |
| | 2,034 |
| | 2,125 |
|
Cash and cash equivalents, end of period | $ | 2,125.2 |
| | $ | 2,010.1 |
| | $ | 2,213.0 |
| $ | 1,161 |
| | $ | 1,925 |
| | $ | 2,034 |
|
| | | | | | | | | | |
Supplemental information: | | | | | | | | | | |
Cash paid for income taxes during the year | $ | 578.6 |
| | $ | 558.6 |
| | $ | 481.0 |
| $ | 597 |
| | $ | 587 |
| | $ | 845 |
|
Cash interest paid during the year | $ | 14.4 |
| | $ | 0.1 |
| | $ | — |
| $ | 21 |
| | $ | 21 |
| | $ | 16 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
F-7
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
|
| | | | |
Note 1 — Business Description and Summary of Significant Accounting Policies |
The terms “Cognizant,” “we,” “our,” “us” and “the Company” refer to Cognizant Technology Solutions Corporation and its subsidiaries unless the context indicates otherwise.
Description of Business.We are a leading providerone of information technology (IT), consulting and business process services, dedicated to helping the world’s leading professional services companies, transforming clients’ business, operating and technology models for the digital era. Our industry-based, consultative approach helps customers envision, build strongerand run more innovative and efficient businesses. Our clients engage us to help them operate more efficiently, provideservices include digital services and solutions, to critical business and technology problems, and help them drive technology-based innovation and growth. Our core competencies include: business, process, operations and IT consulting, application development, and systems integration, enterprise information management, application testing, application maintenance, infrastructure services and business process services. Digital services are becoming an increasingly important part of our portfolio of services and solutions and are often integrated or delivered along with our other services. We tailor our services and solutions to specific industries and utilizeuse an integrated global delivery model. This seamless global sourcing model combines industry-specific expertise, clientthat employs customer service teams based on-site at the clientcustomer locations and delivery teams located at customer locations and dedicated near-shoreglobal and offshore globalregional delivery centers.
Basis of Presentation, and Principles of Consolidation and Use of Estimates.. The consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States of America or U.S. GAAP,("GAAP") and reflect the consolidated financial position, results of operations, comprehensive income and cash flows of our consolidated subsidiaries for all periods presented. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying disclosures. We evaluate our estimates on a continuous basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The actual amounts may vary from the estimates used in the preparation of the accompanying consolidated financial statements.
Cash and Cash Equivalents and Investments. Cash and cash equivalents consist of all cash balances, including money market funds and liquid instruments. Liquid instruments are classified as cash equivalents when their maturitiescertificates of deposits and commercial paper that have a maturity, at the date of purchase, are three monthsof 90 days or less and as short-term investments when their maturities at the date of purchase are greater than three months.less.
We determine the appropriate classification of our investments in marketable securities at the date of purchase and reevaluate such designation at each balance sheet date. We have classified and accounted for our marketable debt securities as available-for-sale.either available-for-sale or held-to-maturity. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell theseour available-for-sale securities prior to their stated maturities. As we viewWe classify these marketable securities as available to support current operations, we classify such securities with maturities at the date of purchase beyond twelve months90 days as short-term investments based on their highly liquid nature and because such investmentsmarketable securities represent an investment inof cash that is available for current operations. Our held-to-maturity investment securities are financial instruments for which we have the intent and ability to hold to maturity and we classify these securities with maturities less than one year as short-term investments. Any held-to-maturity investment securities with maturities beyond one year from the balance sheet date are classified as noncurrent.
Available-for-sale securities are reported at fair value with changes in unrealized gains and losses recorded as a separate component of accumulated other comprehensive income (loss) until realized. We determine the cost of the securities sold based on the specific identification method. Held-to-maturity securities are reported at amortized cost. Time deposits with financial institutions are valued at cost, which approximates fair value.
Interest and amortization of premiums and discounts for debt securities are included in interest income. We alsoOn a quarterly basis, we evaluate our available-for-sale and held-to-maturity investments periodically for possible other-than-temporary impairment by reviewing factors such asquantitative and qualitative factors. If we do not intend to sell the lengthsecurity or it is not more likely than not that we will be required to sell the security before recovery of timeour amortized cost, we evaluate quantitative and extentqualitative criteria to whichdetermine whether we expect to recover the amortized cost basis of the security. If we do not expect to recover the entire amortized cost basis of the security, we consider the security to be other-than-temporarily impaired and we record the difference between the security’s amortized cost basis and its recoverable amount in earnings and the difference between the security’s recoverable amount and fair value has been below cost basis, the financial condition of the issuer, whetherin other comprehensive income. If we intend to sell the security and whetheror it is more likely than not that we will be required to sell the security prior tobefore recovery of its amortized cost basis. Once a decline inbasis, the security is also considered other-than-temporarily impaired and we recognize the entire difference between the security’s amortized cost basis and its fair value is determined to be other-than-temporary, an impairment charge is generally recorded to income and a new cost basis in the investment is established.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is determined by evaluating the relative credit-worthiness of each customer, historical collections experience and other information, including the aging of the receivables. We evaluate the collectibility of our accounts receivable on an on-going basis and write-off accounts when they are deemed to be uncollectible.earnings.
Unbilled Accounts Receivable. Unbilled accounts receivable represent revenues recognized on contracts to be billed, in subsequent periods, as per the terms of the related contracts.
Short-term Financial Assets and Liabilities. Cash and certain cash equivalents, trade receivables, accounts payable and other accrued liabilities are short-term in nature and, accordingly, their carrying values approximate fair value.
Property and EquipmentEquipment.. Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease or the estimated useful life of the improvement. In India, leasehold
land is leased by us from the government of India with lease terms ranging up to 99 years. Lease payments are made at the inception of the lease agreement and amortized over the lease term. Maintenance and repairs are expensed as incurred, while renewals and betterments are capitalized. Deposits paid towards acquisition of long-lived assets and the cost of assets not put in use before the balance sheet date are disclosed under the caption
“capital work-in-progress”"Capital work-in-progress" in
Note 4.7.Internal Use SoftwareSoftware.. We capitalize certain costs that are incurred to purchase, develop and implement internal-use software during the application development phase, which primarily include coding, testing and certain data conversion activities. Capitalized costs are amortized on a straight-line basis over the useful life of the software. Costs incurred in performing activities associated with the preliminary project phaseplanning and the post-implementation phaseactivities are expensed as incurred.
Software to be Sold, Leased or Marketed. We capitalize costs incurred after technological feasibility is reached but before software is available for general release to customers, which primarily include coding and testing activities.Once the product is ready for general release, capitalized costs are amortized over the useful life of the software.
Business CombinationsCombinations.. We account for business combinations using the acquisition method, which requires the identification of the acquirer, the determination of the acquisition date and the allocation of the purchase price paid by the acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any noncontrolling interest in the acquiree at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
Equity Method Investments. Equity investments that give us the ability to exercise significant influence, but not control, over an investee are accounted for using the equity method of accounting and recorded in the caption "Long-term investments" on our consolidated statements of financial position. Equity method investments are initially recorded at cost. We periodically review the carrying value of our equity method investments to determine if there has been an other-than-temporary decline in carrying value. The Company's proportionate share of the net income or loss of the investee is recorded in the caption "Income from equity method investments" on our consolidated statements of operations. The investment balance is increased or decreased for cash contributions or distributions to or from these investees.
Long-lived Assets and Finite-lived IntangiblesIntangible Assets.. We review long-lived assets and certain finite-lived identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such assets. The impairment loss would equalis determined as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Intangible assets consist primarily of customer relationships and developed technology, which are being amortized on a straight-line basis over their estimated useful lives.
Goodwill and Indefinite-lived IntangiblesIntangible Assets.. We evaluate goodwill and indefinite-lived intangible assets for impairment at least annually, or as circumstances warrant. Goodwill is evaluated at the reporting unit level by comparing the fair value of the reporting unit with its carrying amount.amount including goodwill. An impairment of goodwill exists if the carrying amount of the reporting unit exceeds its fair value. The impairment loss is the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill allocated to that reporting unit. For indefinite-lived intangible assets, if our annual qualitative assessment indicates possible impairment,that it is more-likely-than-not that an indefinite-lived intangible asset is impaired, we test the assets for impairment by comparing the fair value of such assets to their carrying value. In determining the fair value, we utilize various estimates and assumptions, including discount rates and projections of future cash flows. If an impairment is indicated, a write down to the implied fair value of goodwill or fair value of indefinite-lived intangible asset is recorded.
Stock Repurchase Program. Our existingUnder the Board of Directors authorized stock repurchase program, as amended and approved by our Board of Directors, allows for the Company is authorized to repurchase of $2,000.0 million of our outstanding shares ofits Class A common stock and expires on December 31, 2017. Through December 31, 2015, we completedthrough open market purchases, including under a trading plan adopted pursuant to Rule 10b5-1 of the Exchange Act, or in private transactions, including through accelerated stock repurchases of 41.2 millionrepurchase agreements ("ASRs") entered into with financial institutions, in accordance with applicable federal securities laws. We account for the repurchased shares for $1,562.4 million, inclusive of fees and expenses, under this program. During 2015, 2014 and 2013, we repurchased 6.0 million, 3.8 million and 4.1 million shares respectively, at an aggregate cost of $376.0 million, $188.2 million and $131.6 million, respectively. Additional stock repurchases were made in connection with our stock-based compensation plans, whereby Company shares were tendered by employees for payment of applicable statutory tax withholdings. During 2015, 2014 and 2013 such repurchases totaled 1.3 million, 1.2 million and 1.2 million shares, respectively, at an aggregate cost of $84.0 million, $60.1 million and $47.4 million, respectively. At the time of repurchase, sharesas constructively retired. Shares are returned to the status of authorized and unissued shares.shares at the time of repurchase or in the periods they are delivered, if repurchased under an ASR. To reflect share repurchases in the consolidated statements of financial position, we (1) reduce common stock for the par value of the shares, (2) reduce additional paid-in capital for the amount in excess
of par during the period in which the shares are repurchased and (3) record any residual amount in excess of available additional paid-in capital to retained earnings. Upfront payments related to ASRs are accounted for as a reduction to stockholders’ equity in the consolidated statements of financial position in the period the payments are made.
Revenue Recognition. We recognize revenues as we transfer control of deliverables (products, solutions and services) to our customers in an amount reflecting the consideration to which we expect to be entitled. To recognize revenues, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenues when a performance obligation is satisfied. We account for a contract when it has approval and commitment from all parties, the repurchases as constructively retiredrights of the parties are identified, payment terms are identified, the contract has commercial substance and record such repurchases ascollectability of consideration is probable. We apply judgment in determining the customer’s ability and intention to pay based on a reductionvariety of Class A common stock and additional paid-in capital.factors including the customer’s historical payment experience.
Revenue Recognition. Revenues related to time-and-material contractsFor performance obligations where control is transferred over time, revenues are recognized asbased on the serviceextent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is performed and amounts are earned. Revenues from transaction-priced contracts are recognized as transactions are processed and amounts are earned. based on the nature of the deliverables to be provided.
Revenues related to fixed-price contracts for highly complex application development and systems integration services, consulting or other technology services are recognized as the service is performed using the percentage of completioncost to cost method, of accounting, under which the total value of revenuerevenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs (cost to cost method). Revenues related to fixed price outsourcing services are recognized on a straight-line basis unless revenues are earned and obligations are fulfilled in a different pattern.costs. Revenues related to fixed-price contracts for consulting or other ITapplication maintenance, testing and business process services are recognized asbased on our right to invoice for services are performed on a proportional performance basis based uponfor contracts in which the level of effort.
For all services, revenueinvoicing is earned and recognized only when allrepresentative of the following criteria are met: evidence of an arrangement exists, the pricevalue being delivered. If our invoicing is fixed or determinable, the services have been rendered and collectibility is reasonably assured. Contingent or incentivenot consistent with value delivered, revenues are recognized whenas the contingencyservice is satisfied and we conclude the amounts are earned.
Volume discounts are recorded as a reduction of revenue over the contract period as services are provided. Revenues also include the reimbursement of out-of-pocket expenses.
Costs to deliver services are expensed as incurred with the exception of specific costs directly related to transition or set-up activities for outsourcing contracts. Transition costs are deferred and expensed ratably over the period of service. Generally, deferred amounts are protected by collected cash or early termination penalty clauses and are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows of the related contract are not sufficient to recover the carrying amount of the contract assets. Deferred transition costs were approximately $137.4 million and $98.2 million as of December 31, 2015 and 2014, respectively, and are included in other noncurrent assets in our consolidated statements of financial position. Costs related to warranty provisions are accrued at the time the related revenues are recorded.
We may enter into arrangements that consist of multiple elements. Such arrangements may include any combination of our consulting and technology services and outsourcing services. For arrangements with multiple deliverables, we evaluate at the inception of each new arrangement all deliverables to determine whether they represent separate units of accounting. For arrangements with multiple units of accounting, other than arrangements that contain software licenses and software-related services, we allocate consideration among the units of accounting, where separable,performed based on their relative selling price. Relative selling pricethe cost to cost method described above. The cost to cost method requires estimation of future costs, which is determined based on vendor-specific objective evidence, or VSOE, if it exists. Otherwise, third-party evidence of selling price is used, when it is available, and in circumstances when neither VSOE nor third-party evidence of selling price is available, management’s best estimate of selling price is used. Revenue is recognized for each unit of accounting based on our revenue recognition policy described above.
Fixed-price contracts are generally cancelable subject to a specified notice period. All services provided by us throughupdated as the date of cancellation are due and payable under the contract terms. We issue invoices related to fixed-price contracts based upon achievement of milestones during a project or other contractual terms. Differences between the timing of billing, based on contract milestones or other contractual terms, and the recognition of revenue are recognized as either unbilled receivables or deferred revenue. Estimates of certain fixed-price contracts are subject to adjustment as a project progresses to reflect the latest available information; such estimates and changes in expected completion costs or efforts.estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately.
We also generate productRevenues related to fixed-price hosting and infrastructure services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered. If our invoicing is not consistent with value delivered, revenues are recognized on a straight-line basis unless revenues are earned and obligations are fulfilled in a different pattern. The revenue from licensingrecognition method applied to the types of contracts described above provides the most faithful depiction of performance towards satisfaction of our software. For perpetualperformance obligations; for example, the cost to cost method is used when the value of services provided to the customer is best represented by the costs expended to deliver those services.
Revenues related to our time-and-materials, transaction-based or volume-based contracts are recognized over the period the services are provided either using an output method such as labor hours, or a method that is otherwise consistent with the way in which value is delivered to the customer.
Revenues related to our non-hosted software license arrangements that do not require significant modification or customization of the underlying software revenue isare recognized when the software is delivered and all other software revenue recognition criteria are met.as control is transferred at a point in time. For software license arrangements that require significant functionality enhancements or modification of the software, revenuerevenues for the software license and thoserelated services isare recognized as thosethe services are performed. Forperformed in accordance with the methods applicable to application development and systems integration services described above. In software hosting arrangements, the rights provided to the customer, such as ownership of a license, arrangements that includecontract termination provisions and the feasibility of the client to operate the software, are considered in determining whether the arrangement includes a rightlicense or a service. Sales and usage-based fees promised in exchange for licenses of intellectual property are not recognized as revenue until the uncertainty related to use the product forvariable amounts is resolved. Revenues related to software maintenance and support are generally recognized on a defined period of time, we recognize revenue ratablystraight-line basis over the termcontract period.
Incentive revenues, volume discounts, or any other form of variable consideration is estimated using either the license.sum of probability weighted amounts in a range of possible consideration amounts (expected value), or the single most likely amount in a range of possible consideration amounts (most likely amount), depending on which method better predicts the amount of consideration to which we may be entitled. We include in the transaction price variable consideration only to the extent it is probable that a significant reversal of revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price may involve judgment and are based largely on an assessment of our anticipated performance and all information that is reasonably available to us.
Revenues also include the reimbursement of out-of-pocket expenses. Our warranties generally provide a customer with assurance that the related deliverable will function as the parties intended because it complies with agreed-upon specifications and is therefore not considered an additional performance obligation in the contract.
We may enter into arrangements with customers that purchase both software licenses and software-related services from us at the same time, or within close proximityconsist of one another (referred to as software-related multiple-element arrangements).multiple performance obligations. Such software related multiple-element arrangements may include software licenses, software license updates, product support contracts and other software-related services. For those software related multiple-element arrangements,any combination of our deliverables. To the extent a contract includes multiple promised deliverables, we apply the residual methodjudgment to determine whether promised deliverables are capable of being distinct and are distinct in the amountcontext of software license revenue. Under the residual method, if VSOE of fair value existscontract. If these criteria are not met, the promised deliverables are accounted for undelivered elements inas a multiple-element arrangement, revenue equalcombined performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price. Standalone selling price is the price at which we would sell a promised good or service separately to the fair value ofcustomer. When not directly observable, we typically estimate standalone selling price by using the undelivered elementsexpected cost plus a margin approach. We typically establish a standalone selling price range for our deliverables, which is deferred with the remaining portion of the arrangement consideration generally recognized upon delivery of the software license. For arrangements in which VSOE of fair value does not exist for each software-related undelivered element, revenue for the software license is deferredreassessed on a periodic basis or when facts and not recognized until VSOE of fair value is available for the undelivered element or delivery of each element has occurred. If the only undelivered element is a service, revenue from the delivered element is recognized over the service period.circumstances change.
We alsoassess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set up or transition fees paid upfront by our customers to represent a financing component, as such fees are required to encourage customer commitment to the project and protect us from early termination of the contract.
Our contracts may be modified to add, remove or change existing performance obligations. The accounting for modifications to our contracts involves assessing whether the services added to an existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are not distinct are accounted for on a cumulative catch up basis, while those that are distinct are accounted for prospectively, either as a separate contract if the additional services are priced at the standalone selling price, or as a termination of the existing contract and creation of a new contract if not priced at the standalone selling price. Services added to our application development and systems integration service contracts are typically not distinct, while services added to our other contracts, including application maintenance, testing and business process services contracts, are typically distinct.
From time to time, we may enter into multiple-element arrangements that may include a combination of software licenses and various software-related and non-software-relatedwith third party suppliers to resell products or services. In such arrangements,cases, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). In doing so, we first allocateevaluate whether we control the totalgood or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Determining whether we control the good or service before it is transferred to the customer may require judgment.
Prior to the adoption of ASC 606 on January 1, 2018, revenues were earned and recognized when all of the following criteria were met: evidence of an arrangement existed, the price was fixed or determinable, the services had been rendered and collectability was reasonably assured. Contingent or incentive revenues were recognized when the contingency was satisfied and we concluded the amounts were earned. Volume discounts were recorded as a reduction of revenues as services were provided. Revenues also included the reimbursement of out-of-pocket expenses.
Trade Receivables, Contract Assets and Contract Liabilities. We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e., only the passage of time is required before payment is due). For example, we recognize a receivable for revenues related to our time and materials and transaction or volume-based contracts when earned regardless of whether amounts have been billed. We present such receivables in "Trade accounts receivable, net" in our consolidated statements of financial position at their net estimated realizable value. A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are presented in "Other current assets" in our consolidated statements of financial position and primarily relate to unbilled amounts on fixed-price contracts utilizing the cost to cost method of revenue recognition. Our contract liabilities, or deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred revenue as current or noncurrent based on relative selling prices,the timing of when we expect to recognize the revenues. The noncurrent portion of deferred revenue is included in "Other noncurrent liabilities" in our consolidated statements of financial position.
Our contract assets and liabilities are reported on a net basis by contract at the end of each reporting period. The difference between the software groupopening and closing balances of elementsour contract assets and deferred revenues primarily results from the timing difference between our performance obligations and the non-software groupcustomer’s payment. We receive payments from customers based on the terms established in our contracts, which vary by contract type.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts to provide for the estimated amount of elements.receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors. We then further allocate consideration withinevaluate the software groupcollectability of our trade accounts receivable on an on-going basis and write off accounts when they are deemed to be uncollectable.
Cost to Fulfill. Recurring operating costs for contracts with customers are recognized as incurred. Certain eligible, nonrecurring costs incurred in the initial phases of our contracts (i.e., set-up or transition costs) are capitalized when such costs (1) relate directly to the respective elements withincontract, (2) generate or enhance resources of the Company that group followingwill be used in satisfying the software-related multiple-element arrangements policies described above. For the non-software group of elements, we further allocate consideration to the respective elements based on relative selling prices. After the arrangement consideration has been allocated to the individual elements, we account for each respective elementperformance obligation in the arrangement as described above.future, and (3) are expected to be recovered. These costs are expensed ratably over the estimated life of the customer relationship, including expected contract renewals. In determining the estimated life of the customer relationship, we evaluate the average contract term, on a portfolio basis by nature of the services to be provided, and apply judgment to evaluate the rate of technological and industry change. Capitalized amounts are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows are not sufficient to recover the carrying amount of the capitalized costs to fulfill.
Stock-Based Compensation. Stock-based compensation expense for awards of equity instruments to employees and non-employee directors is determined based on the grant-dategrant date fair value of those awards. We recognize these compensation costs net of an estimated forfeiture rate over the requisite service period of the award. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Foreign CurrencyCurrency.. The assets and liabilities of our foreign subsidiaries whose functional currency is not the U.S. dollar are translated into U.S. dollars from localfunctional currencies at current exchange rates andwhile revenues and expenses are translated from localfunctional currencies at average monthly exchange rates. The resulting translation adjustments are recorded in accumulatedthe caption "Accumulated other comprehensive income (loss)" on the accompanying consolidated statements of financial position.
Foreign currency transactions and balances are those that are denominated in a currency other than the subsidiary’s functional currency. The subsidiary's functional currency is the currency of the primary economic environment in which the subsidiary operates. The U.S. dollar is the functional currency for certainsome of our foreign subsidiaries who conduct business predominantly in U.S. dollars.subsidiaries. For these subsidiaries, transactions and balances denominated in the local currency are foreign currency transactions. Foreign currency transactions and balances related to non-monetary assets and liabilities are remeasured to the functional currency of the subsidiary at historical exchange rates while monetary assets and liabilities are remeasured to the functional currency of the subsidiary at current exchange rates. Foreign currency exchange gains or losses from remeasurement are included in the caption "Foreign currency exchange gain (losses), net" line on our consolidated statementstatements of operations together with gains or losses on our undesignated foreign currency hedges.
Derivative Financial Instruments. Derivative financial instruments are accounted for in accordance with the authoritative guidance which requires that each derivative instrument be recorded on the balance sheetour consolidated statements of financial position as either an asset or liability measured at its fair value as of the reporting date. Our derivative financial instruments consist of foreign exchange forward contracts. For derivative financial instruments to qualify for hedge accounting, the following criteria must be met: (1) the hedging instrument must be designated as a hedge; (2) the hedged exposure must be specifically identifiable and must expose us to risk; and (3) it ismust be expected that a change in fair value of the derivative financial instrument and an opposite change in the fair value of the hedged exposure will have a high degree of correlation. The authoritative guidance requires that changesChanges in our derivatives’ fair values beare recognized in net income unless specific hedge accounting and documentation criteria are met (i.e., the instruments are designated and accounted for as hedges). We record the effective portion of the unrealized gains and losses on our derivative financial instruments that are designated as cash flow hedges in accumulatedthe caption "Accumulated other comprehensive income (loss)" in the accompanying consolidated statements of financial position. Any ineffectiveness or excluded portion of a designated cash flow hedge is recognized in net income. Upon settlement or maturityoccurrence of the cash flow hedge contracts,hedged transaction, the realized gains and losses on the derivative are recognized in net income.
Use of Estimates. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the period. The most significant estimates relate to the recognition of revenue and profits based on the percentage of completion method of accounting for certain fixed-bid contracts, the allowance for doubtful accounts, income taxes, assumptions used in valuing stock-based compensation arrangements, valuation of derivative financial instruments and investments, business combinations, intangible assets and other long-lived assets, valuation of goodwill, contingencies and litigation. We evaluate our estimates on a continuous basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The actual amounts may vary from the estimates used in the preparation of the accompanying consolidated financial statements.
Risks and Uncertainties. The majority of our development and delivery centers and employees are located in India. As a result, we may be subject to certain risks associated with international operations, including risks associated with foreign currency exchange rate fluctuations and risks associated with the application and imposition of protective legislation and regulations relating to import and export or otherwise resulting from foreign policy or the variability of foreign economic or political conditions. Additional risks associated with international operations include difficulties in enforcing intellectual property rights, the burdens of complying with a wide variety of foreign laws, potential geo-political and other risks associated with terrorist activities and local or cross border conflicts and potentially adverse tax consequences, tariffs, quotas and other barriers.
Concentration of Credit Risk. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, time deposits, investments in securities, derivative financial instruments and billed and unbilled accounts receivable. We maintain our cash and cash equivalents, investments and derivative financial instruments with high credit quality financial institutions, invest in investment-grade debt securities and limit the amount of credit exposure to any one commercial issuer. Our accounts receivable are dispersed across many customers operating in different industries; therefore, concentration of credit risk is limited.
Income Taxes. We provide for income taxes utilizing the asset and liability method of accounting. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated with a deferred income tax asset will not be realized, a valuation allowance is provided. The effect of a change in tax rates on deferred income tax assets and liabilities of a change in the tax rates is recognized in the provision for income taxes in the period that includes the enactment date. TaxBeginning in 2017, the differences between actual tax benefits earnedrealized on employee stock awards and estimated tax benefits at date of grant are adjusted to our provision for income taxes upon vesting or exercise of employeethe stock options in excess of compensation charged to income are credited to additional paid-in capital. award.
Our provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as any related penalties and interest. We adjust these reserves in light of changing facts and circumstances, such as the related interest.closing of
a tax audit. To the extent that the final outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
Earnings Per Share or EPS.("EPS"). Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes all potential dilutive common stock in the weighted average shares outstanding. For purposes of computing diluted earnings per share for the years ended December 31, 2015, 2014 and 2013, respectively, 4.2 million, 4.4 million and 5.7 million shares were assumed to have been outstanding related to common share equivalents. We exclude from the calculation of diluted EPS options with exercise prices that are greater than the average market price and shares related to stock-based awards whose combined exercise price and unamortized fair value and excess tax benefits were greater in each of those periods than the average market price of our common stock for the period, because their effect would be anti-dilutive. We excluded 0.1less than 1 million of anti-dilutive shares in 2015, 2014each of 2018, 2017 and 20132016 from our diluted EPS calculation. We include performance stock unit awards in the dilutive potential common shares when they become contingently issuable per the authoritative guidance and exclude the awards when they are not contingently issuable.
Recently Adopted Accounting Pronouncement.Pronouncements
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Date Issued and Topic | Date Adopted and Method | Description | Impact |
May 2014
Revenue | January 1, 2018
Modified Retrospective | The new standard, as amended, sets forth a single comprehensive model for recognizing and reporting revenues. The standard also requires additional financial statement disclosures that enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. The standard allows for two methods of adoption: the full retrospective adoption, which requires the standard to be applied to each prior period presented, or the modified retrospective adoption, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. | See Note 3 for the impact of adoption of this standard. |
November 2016
Statement of Cash Flows | January 1, 2018
Retrospective
| This update requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. It also requires a reconciliation of such totals to the amounts on the statement of financial position and disclosure as to the nature of the restrictions. | There were no restricted cash balances as of December 31, 2018. The adoption of this update had no impact on our financial statements for the year ended December 31, 2018. |
February 2018
Income Statement - Reporting Comprehensive Income | January 1, 2018
In the period of adoption | This update provides an option for entities to reclassify stranded tax effects caused by the recently-enacted Tax Cuts and Jobs Act ("Tax Reform Act") from accumulated other comprehensive income to retained earnings. | We have early adopted this update as of January 1, 2018. The adoption resulted in a decrease of $1 million in accumulated other comprehensive income and a corresponding increase of $1 million to opening retained earnings. |
New Accounting Pronouncements
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Date Issued and Topic | Effective Date | Description | Impact |
February 2016
Leases
| January 1, 2019 | The new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use ("ROU") asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the ROU asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. The standard offers several practical expedients for transition and certain expedients specific to lessees or lessors. The standard allows for two methods of adoption: retrospective to each prior reporting period presented with the cumulative effect of adoption recognized at the beginning of the earliest period presented or retrospective to the beginning of the period of adoption through a cumulative-effect adjustment (the effective date method). | We expect to adopt the new standard on January 1, 2019 using the effective date method. Upon adoption, we expect to recognize additional lease assets and liabilities of approximately $750 million to $800 million. We intend to elect the package of practical expedients that permits us not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. We do not expect to elect the use of the hindsight practical expedient.
The new standard also provides practical expedients for an entity’s ongoing accounting. We expect to elect the short-term lease recognition exemption. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities in transition or on an ongoing basis. We also expect to elect the practical expedient that permits us not to separate lease and non-lease components for all of our leases. |
March 2017
Nonrefundable Fees and Other Costs | January 1, 2019 | This update shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount. Upon adoption, entities will be required to use a modified retrospective transition with the cumulative effect adjustment recognized to retained earnings as of the beginning of the period of adoption. | We do not expect the adoption of this update to have a material impact on our financial statements. |
August 2018
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement ("CCA") that is a Service Contract | January 1, 2020 | This update aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The update clarifies that a customer should capitalize certain implementation costs and subsequently amortize such costs over the term of the hosting arrangement as operating expenses.
| We do not expect the adoption of this update to have a material impact on our financial statements.
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Note 2 — Internal Investigation and Related Matters |
In November 2015,February 2019, we completed our internal investigation focused on whether certain payments relating to Company-owned facilities in India were made improperly and in violation of the FinancialU.S. Foreign Corrupt Practices Act ("FCPA") and other applicable laws. The investigation was conducted under the oversight of the Audit Committee, with the assistance of outside counsel. During the year ended December 31, 2016, we recorded out-of-period corrections related to $4 million of potentially improper payments between 2009 and 2016 that had been previously capitalized when they should have been expensed. These out-of-period corrections were not material to any previously issued financial statements. There were no adjustments recorded during 2018 and 2017 related to the amounts then under investigation.
On February 15, 2019, we announced a resolution of the previously disclosed investigations by the U.S. Department of Justice ("DOJ") and the U.S. Securities and Exchange Commission ("SEC") into the matters that were the subject of our internal investigation. The resolution required the Company to pay approximately $28 million to the DOJ and SEC, an amount
consistent with the Company’s accrual ("FCPA Accrual") recorded during the quarter ended September 30, 2018 and reflected in the caption "Accrued expenses and other current liabilities" in our consolidated statement of financial position.
Adoption of Accounting Standards Board, or FASB, issued an updateCodification ("ASC") Topic 606, “Revenue from Contracts with Customers” ("New Revenue Standard")
On January 1, 2018, we adopted the New Revenue Standard using the modified retrospective method applied to the standard on income taxes pertaining to the balance sheet classificationcontracts that were not completed as of deferred income taxes. The update requires that all deferred income tax assets and liabilities, along with any related valuation allowance, within each tax jurisdiction be classified as noncurrent on the balance sheet. As a result, each tax jurisdiction will only have one net noncurrent deferred income tax asset or liability. This guidance is effective on either a prospective or retrospective basisJanuary 1, 2018. Results for fiscal years, and interimreporting periods within those years, beginning on or after January 1, 20172018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and continue to be reported in accordance with earlyour historic accounting policies. For contracts that were modified before the effective date, the Company aggregated the effect of all contract modifications prior to identifying performance obligations and allocating transaction price in accordance with the practical expedient ASC 606-10-65-1-(f)-4. Upon adoption permitted. We electedof the New Revenue Standard on January 1, 2018, we recorded a net increase to early adopt this guidance retrospectivelyopening retained earnings of approximately $121 million, after a tax impact of $37 million. The impact of adoption primarily relates to (1) changes in the fourth quartermethod used to measure progress on our fixed-price application maintenance, consulting and business process services contracts, (2) the longer period of 2015. We conformed prior years' presentationamortization for costs to current year's presentationfulfill a contract, (3) the timing of revenue recognition and allocation of purchase price on our software license contracts, (4) the reclassification of balances representing receivables, as defined by the New Revenue Standard, from "Unbilled accounts receivable" to "Trade accounts receivable, net" in our consolidated statement of financial position. There is no impact onposition, (5) the reclassification of balances representing contract assets, as defined by the New Revenue Standard, from "Unbilled accounts receivable" to "Other current assets" in our consolidated statement of operations.financial position, as well as (6) the income tax impact of the above items, as applicable.
The following tables compare the financial statement line items materially affected by the adoption of the New Accounting Pronouncements.Revenue Standard as of and for the year ended December 31, 2018 to the pro-forma amounts had the previous guidance been in effect ("Pro-forma Amounts"):
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| | | | | | | | | | | | |
| | December 31, 2018 |
| | As Reported | | Pro-forma Amounts | | Impacts of the New Revenue Standard |
| | (in millions) |
Assets: | | | | | | |
Trade accounts receivable, net(1), (2) | | $ | 3,257 |
| | $ | 3,115 |
| | $ | 142 |
|
Unbilled accounts receivable(1), (3) | | — |
| | 485 |
| | (485 | ) |
Other current assets(2), (3) | | 909 |
| | 604 |
| | 305 |
|
Total current assets | | | | | | (38 | ) |
Other noncurrent assets(4) | | 689 |
| | 615 |
| | 74 |
|
Total assets | | | | | | $ | 36 |
|
Liabilities: | | | | | | |
Deferred revenue, current(2) | | $ | 286 |
| | $ | 498 |
| | $ | (212 | ) |
Total current liabilities | | | | | | (212 | ) |
Deferred revenue, noncurrent(2) | | 62 |
| | 108 |
| | (46 | ) |
Deferred income tax liabilities, net(5) | | 183 |
| | 118 |
| | 65 |
|
Total liabilities | | | | | | (193 | ) |
Stockholders’ equity: | | | | | | |
Retained earnings | | 11,485 |
| | 11,256 |
| | 229 |
|
Total stockholders’ equity | | | | | | 229 |
|
Total liabilities and stockholders’ equity | | | | | | $ | 36 |
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| | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | As Reported | | Pro-forma Amounts | | Impacts of the New Revenue Standard |
| | (in millions) |
Revenues(2) | | $ | 16,125 |
| | $ | 16,029 |
| | $ | 96 |
|
Cost of revenues (4) | | 9,838 |
| | 9,876 |
| | (38 | ) |
Selling, general and administrative expenses | | 3,026 |
| | 3,026 |
| | — |
|
Depreciation and amortization expense | | 460 |
| | 460 |
| | — |
|
Income from operations | | 2,801 |
| | 2,667 |
| | 134 |
|
Other income (expense), net | | (4 | ) | | (5 | ) | | 1 |
|
Income before provision for income taxes(5) | | 2,797 |
| | 2,662 |
| | 135 |
|
Provision for income taxes | | (698 | ) | | (671 | ) | | (27 | ) |
Income (loss) from equity method investment | | 2 |
| | 2 |
| | — |
|
Net income | | $ | 2,101 |
| | $ | 1,993 |
| | $ | 108 |
|
Basic earnings per share | | $ | 3.61 |
| | $ | 3.42 |
| | $ | 0.19 |
|
Diluted earnings per share | | $ | 3.60 |
| | $ | 3.41 |
| | $ | 0.19 |
|
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(1) | Reflects the reclassification of balances representing receivables, as defined by the New Revenue Standard, from Unbilled accounts receivable to Trade accounts receivable, net. |
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(2) | Reflects the impact of changes in the method used to measure progress on our fixed-price application maintenance, consulting and business process services contracts and the timing of revenue recognition and allocation of purchase price on our software license contracts. |
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(3) | Reflects the reclassification of balances representing contract assets, as defined by the New Revenue Standard, from Unbilled accounts receivable to Other current assets. |
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(4) | Reflects the impact of a longer period of amortization for costs to fulfill a contract as well as a change in the methodology of assessing the recoverability of such costs. |
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(5) | Reflects the income tax impact of the above items. |
In May 2014,Costs to Fulfill
The following table presents information related to the FASB issuedcapitalized costs to fulfill, such as set-up or transition activities, for the year ended December 31, 2018. Costs to fulfill are recorded in Other noncurrent assets in our consolidated statements of financial position and the amortization expense of costs to fulfill is included in Cost of revenues in our consolidated statements of operations. Costs to obtain contracts were immaterial for the periods disclosed.
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| | | | |
| | Costs to Fulfill |
| | (in millions) |
Balance - January 1, 2018 | | $ | 303 |
|
Amortization expense | | (70 | ) |
Costs capitalized | | 170 |
|
Other | | (3 | ) |
Balance - December 31, 2018 | | $ | 400 |
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Contract Balances
A contract asset is a standardright to consideration that is conditional upon factors other than the passage of time. Contract assets are presented in Other current assets in our consolidated statements of financial position and primarily relate to unbilled amounts on fixed-price contracts utilizing the cost to cost method of revenue recognition. The table below shows significant movements in contract assets:
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| | | | |
| | Contract Assets |
| | (in millions) |
Balance - January 1, 2018 | | $ | 306 |
|
Revenues recognized during the period but not billed | | 285 |
|
Amounts reclassified to accounts receivable | | (282 | ) |
Other | | (4 | ) |
Balance - December 31, 2018 | | $ | 305 |
|
The table below shows significant movements in the deferred revenue balances (current and noncurrent) for the period disclosed:
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| | | | |
| | Deferred Revenue |
| | (in millions) |
Balance - January 1, 2018 | | $ | 431 |
|
Amounts billed but not recognized as revenues | | 204 |
|
Revenues recognized related to the opening balance of deferred revenue | | (284 | ) |
Other | | (3 | ) |
Balance - December 31, 2018 | | $ | 348 |
|
Revenues recognized during the year ended December 31, 2018 for performance obligations satisfied or partially satisfied in previous periods were immaterial.
Remaining Performance Obligations
As of December 31, 2018, the aggregate amount of transaction price allocated to remaining performance obligations, was $1,852 million, of which approximately 68% is expected to be recognized as revenues within 2 years. Disclosure is not required for performance obligations that meet any of the following criteria:
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(1) | contracts with a duration of one year or less as determined under ASC 606, |
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(2) | contracts for which we recognize revenues based on the right to invoice for services performed, |
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(3) | variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met, or |
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(4) | variable consideration in the form of a sales-based or usage based royalty promised in exchange for a license of intellectual property. |
Many of our performance obligations meet one or more of these exemptions and therefore are not included in the remaining performance obligation amount disclosed above.
Disaggregation of Revenues
The table below presents disaggregated revenues from contracts with customers. The new standard sets forth a single comprehensive modelcustomers by customer location, service line and contract-type for recognizing and reporting revenue. The standard also requires additional financial statement disclosures that will enable users to understandeach of our business segments. We believe this disaggregation best depicts how the nature, amount, timing and uncertainty of revenueour revenues and cash flows relating to customer contracts. In July 2015, the FASB deferred the effective date of the standard by one year to periods beginning on or after January 1, 2018. Early adoption is permitted but not before the original effective date of periods beginning on or after January 1, 2017. The standard allows for two methods of adoption: the full retrospective adoption, which requires the standard to be applied to each prior period presented, or the modified retrospective adoption, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. We are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued an update to the standard on interest related to the presentation of debt issuance costs. The standard requires debt issuance costs, other than costs incurred to secure lines of credit, be presented in the balance sheet as a direct deduction from the carrying value of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by this standard. The standard is effective on a retrospective basis for fiscal years,industry, market and interim periods within those years, beginning on or after January 1, 2016. The adoption of this standard will affect financial statement presentation only and will have no effect on our financial condition or results of operations.
In April 2015, the FASB issued an update to the standard on internal-use software providing guidance to customers in evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the standard requires the customer to account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer is required to account for the arrangement as a service contract. The standard is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2016. A company can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We plan to adopt
the amendments to this standard prospectively beginning January 1, 2016. We do not expect the adoption of this amendment to have a material effect on our financial condition or results of operations.
In January 2016, the FASB issued an update to the standard on financial instruments. The update significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. Upon adoption, entities will be required to make a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value will apply prospectively to all equity investments that exist as of the date of adoption. Early adoption of certain sections of this update is permitted. We are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures.
Note 2 — Business Combinations
2015:
We did not complete any material business combinations in 2015.
2014 TriZetto acquisition:
On November 20, 2014, we completed the acquisition of TZ US Parent, Inc. ("TriZetto"), a private U.S. healthcare information technology company for an aggregate purchase price, after giving effect to various purchase price adjustments, of approximately $2,627.8 million (net of cash acquired of $170.5 million). The TriZetto acquisition positioned Cognizant to better serve a wider cross-section of clients with an integrated solution set, combining technology with our healthcare services business. In connection with the acquisition of TriZetto, we entered into a credit agreement with a commercial bank syndicate providing for a $1,000.0 million unsecured term loan and a $750.0 million unsecured revolving credit facility. The term loan was used to pay a portion of the cash consideration in connection with the TriZetto acquisition.
Our allocation of purchase price as of November 20, 2014 (the closing date of the TriZetto acquisition) to the fair value of assets acquired and liabilities assumed was as follows:economic factors.
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| | | | |
| | Amount |
| | (in millions) |
Cash | | $ | 170.5 |
|
Trade accounts receivable | | 83.1 |
|
Unbilled accounts receivable | | 32.5 |
|
Other current assets | | 11.2 |
|
Property and equipment | | 124.0 |
|
Identifiable intangible assets | | 849.0 |
|
Other noncurrent assets | | 14.8 |
|
Accounts payable | | (12.5 | ) |
Deferred revenue | | (48.3 | ) |
Accrued expenses and other current liabilities | | (118.3 | ) |
Other noncurrent liabilities | | (54.8 | ) |
Deferred income tax liabilities, net | | (209.0 | ) |
Goodwill | | 1,956.1 |
|
Total purchase price | | $ | 2,798.3 |
|
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| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2018 |
| | Financial Services | | Healthcare | | Products and Resources | | Communications, Media and Technology | | Total |
| | (in millions) |
Revenues | | | | | | | | | | |
Geography: | | | | | | | | | | |
North America | | $ | 4,162 |
| | $ | 4,254 |
| | $ | 2,397 |
| | $ | 1,480 |
| | $ | 12,293 |
|
United Kingdom | | 481 |
| | 91 |
| | 358 |
| | 344 |
| | 1,274 |
|
Rest of Europe | | 666 |
| | 270 |
| | 440 |
| | 187 |
| | 1,563 |
|
Europe - Total | | 1,147 |
| | 361 |
| | 798 |
| | 531 |
| | 2,837 |
|
Rest of World | | 536 |
| | 53 |
| | 220 |
| | 186 |
| | 995 |
|
Total | | $ | 5,845 |
| | $ | 4,668 |
| | $ | 3,415 |
| | $ | 2,197 |
| | $ | 16,125 |
|
| | | | | | | | | | |
Service line: | | | | | | | | | | |
Consulting and technology services (1) | | $ | 3,571 |
| | $ | 2,553 |
| | $ | 2,024 |
| | $ | 1,161 |
| | $ | 9,309 |
|
Outsourcing services (2) | | 2,274 |
| | 2,115 |
| | 1,391 |
| | 1,036 |
| | 6,816 |
|
Total | | $ | 5,845 |
| | $ | 4,668 |
| | $ | 3,415 |
| | $ | 2,197 |
| | $ | 16,125 |
|
| | | | | | | | | | |
Type of contract: | | | | | | | | | | |
Time and materials | | $ | 3,762 |
| | $ | 1,836 |
| | $ | 1,506 |
| | $ | 1,366 |
| | $ | 8,470 |
|
Fixed-price | | 1,859 |
| | 1,852 |
| | 1,521 |
| | 734 |
| | 5,966 |
|
Transaction or volume-based | | 224 |
| | 980 |
| | 388 |
| | 97 |
| | 1,689 |
|
Total | | $ | 5,845 |
| | $ | 4,668 |
| | $ | 3,415 |
| | $ | 2,197 |
| | $ | 16,125 |
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We allocated the purchase price to the identifiable assets acquired and liabilities assumed based on their fair values. The excess of purchase price over the estimated fair value of the underlying assets acquired and liabilities assumed was allocated to goodwill. Such goodwill principally represents the value of synergies expected to be realized between Cognizant and TriZetto and the acquired assembled workforce, neither of which qualify as a separate amortizable intangible asset. The goodwill is not deductible for tax purposes and has been allocated to our Healthcare reportable segment. The above allocation of the purchase price is based upon our analysis of the fair value of identifiable assets acquired and liabilities assumed as of the acquisition date. We finalized the purchase price allocation within the measurement period ended on November 20, 2015, resulting in no material adjustments.
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(1) | Our consulting and technology services include consulting, application development, systems integration, and application testing services as well as software solutions and related services. |
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(2) | Our outsourcing services include application maintenance, infrastructure and business process services. |
Acquired identifiable intangible assets were measured at fair value determined primarily using the income approach, which required a forecast of all expected future cash flows either through the use of the relief-from-royalty method or the excess earnings method. The fair value of the identifiable intangible assets and their weighted-average useful lives at the time of acquisition were as follows:
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| | | | | |
| | Fair Value | Weighted Average Useful Life |
| | (Dollars in millions) |
Corporate trademark | | $ | 63.0 |
| Indefinite |
Product trademarks | | 21.0 |
| 16.9 years |
Technology | | 328.0 |
| 7.7 years |
Customer relationships | | 437.0 |
| 15.8 years |
Total | | $ | 849.0 |
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| | | | |
Note 4 — Business Combinations |
TriZetto’s results of operations have been included in our financial statements for
All acquisitions completed during the period subsequent to the completion of the acquisition on November 20, 2014. The following unaudited pro forma information reflecting the combined operating results of Cognizant and TriZetto for thethree years ended December 31, 20142018, 2017 and 2013 assumes the TriZetto acquisition occurred on January 1, 2013. Such pro forma information does2016 were not reflect the potential realization of cost savings relating to the integration of TriZetto. Further, the pro forma information is not indicative of the combined results of operations that actually would have occurred had the TriZetto acquisition been completed on January 1, 2013 nor is it intended to be a projection of future operating results.
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| | | | | | | | |
| | Unaudited Pro Forma Information |
| | For the Years Ended |
| | December 31, 2014 | | December 31, 2013 |
| | (in millions) |
Revenues | | $ | 10,893.0 |
| | $ | 9,519.6 |
|
Income from operations | | 1,959.5 |
| | 1,253.2 |
|
These amounts have been calculated after adjusting for the additional amortization and depreciation expense that would have been recorded assuming the fair value adjustments to finite-lived intangible assets and property, plant and equipment had been applied on January 1, 2013.
The pro forma income from operations for the year ended December 31, 2014 was adjusted to exclude $40.6 million of transaction related professional services costs and $94.3 million of other costs incurred. Such costs were included in the pro forma income from operations for the year ended December 31, 2013.
Supplemental schedule of noncash investing activities:
In conjunction with the TriZetto acquisition, liabilities were assumed as follows:
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| | | |
| Year Ended December 31, 2014 |
| (in millions) |
Fair value of assets acquired | $ | 3,070.7 |
|
Purchase price paid in cash (net of cash acquired) | (2,627.8 | ) |
Liabilities assumed | $ | 442.9 |
|
Other 2014 and 2013 acquisitions:
During 2014, excluding the acquisition of TriZetto, we completed three other business combinations for total cash consideration of approximately $46.2 million (net of cash acquired). These transactions strengthened our digital business capabilities and expertise to further develop the portfolio of digital solutions and services we offer our customers. As part of these business combinations, we acquired customer relationship assets, assembled workforces, developed technology and other assets.
During 2013, we completed four business combinations business combinations for total cash consideration of approximately $184.2 million (net of cash acquired). These transactions strengthened our local presence in Germany, Switzerland and France, expanded our expertise in enterprise application services and high-end testing services, broadened our business process services capabilities within finance and accounting, and strengthened our financial services management and regulatory consulting practice. As part of these business combinations, we acquired customer relationship assets, assembled workforces, a software platform and other assets.
These acquisitions were included in our consolidated financial statements as of the date on which the businesses were acquired and were notindividually material to our operations financial position or cash flow. Accordingly, pro forma results have not been presented. We have allocated the purchase price related to these transactions to tangible and intangible assets and liabilities, including non-deductible goodwill, based on their estimated fair values on their respective dates of acquisition, as follows:
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| | | | | | | | | | | | |
| | 2014 | | 2013 |
| | Fair Value | | Useful Life | | Fair Value | | Useful Life |
| | (Dollars in millions) |
Total initial consideration, net of cash acquired | | $ | 46.2 |
| | | | $ | 184.2 |
| | |
Purchase price allocated to: | | | | | | | | |
Non-deductible goodwill | | 30.9 |
| | | | 129.9 |
| | |
Customer relationship intangible assets | | 12.1 |
| | 3-10 years | | 58.6 |
| | 5-10 years |
Other intangible assets | | 4.3 |
| | 1-4 years | | 7.2 |
| | 1-5 years |
values. The primary items that generated the aforementioned goodwill are the value of the acquired assembled workforces and synergies between the acquired companies and us, and the acquired assembled workforces, neither of which qualify as an amortizable intangible asset.
Note 32018
In 2018, we completed five business combinations for total consideration of approximately $1,122 million. These acquisitions were (a) Bolder Healthcare Solutions ("Bolder"), a provider of revenue cycle management solutions to the healthcare industry in the United States; (b) Hedera Consulting, a business advisory and data analytics service provider in Belgium and the Netherlands; (c) Softvision, a digital engineering and consulting company with significant operations in Romania and India that focuses on agile development of custom cloud-based software and platforms for customers primarily in the United States; (d) ATG, a United States based consulting company that helps companies plan, implement and optimize automated cloud-based quote-to-cash business processes and technologies; and (e) SaaSfocus, a Salesforce services provider in Australia.
The allocation of purchase price to the fair value of the aggregate assets acquired and liabilities assumed was as follows:
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| | | | | | | | | | | | | | | | | | |
| | Softvision | | Bolder | | Others | | Total | | Weighted Average Useful Life |
| | ( dollars in millions) | | |
Cash | | $ | 4 |
| | $ | 7 |
| | $ | 4 |
| | $ | 15 |
| | |
Current assets | | 54 |
| | 32 |
| | 15 |
| | 101 |
| | |
Property, plant and equipment and other noncurrent assets | | 7 |
| | 7 |
| | 1 |
| | 15 |
| | |
Non-deductible goodwill | | 385 |
| | 335 |
| | 76 |
| | 796 |
| | |
Customer relationship intangible assets | | 133 |
| | 113 |
| | 30 |
| | 276 |
| | 10.3 years |
Other intangible assets | | 9 |
| | 17 |
| | 1 |
| | 27 |
| | 3.7 years |
Trademark | | — |
| | 9 |
| | — |
| | 9 |
| | Indefinite |
Current liabilities | | (47 | ) | | (11 | ) | | (9 | ) | | (67 | ) | | |
Noncurrent liabilities | | (4 | ) | | (37 | ) | | (9 | ) | | (50 | ) | | |
Purchase price | | $ | 541 |
| | $ | 472 |
| | $ | 109 |
| | $ | 1,122 |
| | |
For acquisitions completed in 2018, the allocation is preliminary and will be finalized as soon as practicable within the measurement period, but in no event later than one year following the date of acquisition.
2017
In 2017, we completed five business combinations for total consideration of approximately $233 million. These acquisitions were (a) an intelligent products and solutions company based in Japan specializing in digital strategy, product design and engineering, the internet of things, and enterprise mobility that expands our digital transformation portfolio and capabilities, (b) a U.S. healthcare management consulting firm that strengthens our consulting service offerings within the healthcare consulting market, (c) a leading national provider of business process services to the U.S. government healthcare market that further strengthens our business process-as-a-service solutions for government and public health programs, (d) a provider of digital experience and marketing solutions for some of the world's most recognized brands and an independent Adobe partner in Europe that will enhance our ability to deliver business critical digital experience solutions, and (e) an independent full-service digital agency in the UK specializing in customer experience, digital strategy, technology and content creation that will enhance and expand our digital interactive expertise in experience design, human science-driven insights and analytics.
The allocation of purchase price to the fair value of the aggregate assets acquired and liabilities assumed was as follows:
|
| | | | | |
| Fair Value | | Weighted Average Useful Life |
| (in millions) | | |
Cash | $ | 8 |
| | |
Current assets | 47 |
| | |
Property, plant and equipment and other noncurrent assets | 19 |
| | |
Non-deductible goodwill | 125 |
| | |
Customer relationship intangible assets | 147 |
| | 10.6 years |
Other intangible assets | 4 |
| | 2.4 years |
Current liabilities | (50 | ) | | |
Noncurrent liabilities | (67 | ) | | |
Purchase price | $ | 233 |
| | |
2016
In 2016, we completed eight business combinations for total consideration of approximately $287 million. These transactions included (a) an acquisition of a global consulting and technology services company that strengthens and expands our digital capabilities to deliver cloud-based application services, (b) three acquisitions of delivery centers spanning several industries such as oil and gas services, steel and metal products, and banking and insurance to enhance our delivery capabilities across Europe along with multi-year service agreements, (c) an acquisition of tangible property, an assembled workforce and a multi-year service agreement which qualifies as a business combination under accounting guidance, (d) an acquisition of a global consulting company that offers digital innovation, strategy, design and technology services, (e) an acquisition of a digital marketing and customer
experience agency that expands our digital business capabilities across Europe, and (f) an acquisition of an Australia-based consulting, business transformation and technology services provider in the insurance industry.
The allocation of purchase price to the fair value of the aggregate assets acquired and liabilities assumed was as follows:
|
| | | | | |
| Fair Value | | Weighted Average Useful Life |
| (in millions) | | |
Cash | $ | 17 |
| | |
Current assets | 84 |
| | |
Property, plant and equipment and other noncurrent assets | 53 |
| | |
Non-deductible goodwill | 157 |
| | |
Customer relationship intangible assets | 199 |
| | 6.6 years |
Other intangible assets | 1 |
| | 3.3 years |
Current liabilities | (173 | ) | | |
Noncurrent liabilities | (51 | ) | | |
Purchase price | $ | 287 |
| | |
|
| | | | |
Note 5 — Realignment Charges |
In 2017, we began a realignment of our business to accelerate the shift to digital services and solutions while improving the overall efficiency of our operations. As part of this realignment, we incurred charges that included severance costs, lease termination costs and advisory fees related to non-routine shareholder matters and charges related to the development of our realignment and capital return plans. The total costs related to the realignment are reported in "Selling, general and administrative expenses" in our consolidated statements of operations. The accrued realignment costs as of December 31, 2018 and 2017 were immaterial.
Realignment charges were as follows:
|
| | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 |
| (in millions) |
Severance costs | $ | 18 |
| | $ | 53 |
|
Advisory fees | — |
| | 18 |
|
Lease termination costs | 1 |
| | 1 |
|
Total realignment costs | $ | 19 |
| | $ | 72 |
|
There were no realignment charges incurred in 2016.
|
| | | | |
Note 6 — Short-term Investments |
Our short-term investments were as follows as of December 31:
|
| | | | | | | |
| 2015 | | 2014 |
| (in millions) |
Available-for-sale investment securities: | | | |
U.S. Treasury and agency debt securities | $ | 527.1 |
| | $ | 544.7 |
|
Corporate and other debt securities | 360.5 |
| | 358.6 |
|
Certificates of deposit and commercial paper | 754.0 |
| | 4.6 |
|
Asset-backed securities | 229.6 |
| | 220.1 |
|
Municipal debt securities | 121.3 |
| | 112.8 |
|
Mutual funds | 22.3 |
| | 21.9 |
|
Total available-for-sale investment securities | 2,014.8 |
| | 1,262.7 |
|
Time deposits | 809.5 |
| | 501.9 |
|
Total short-term investments | $ | 2,824.3 |
| | $ | 1,764.6 |
|
|
| | | | | | | |
| 2018 | | 2017 |
| (in millions) |
Short-term investments: | | | |
Equity investment securities | $ | 25 |
| | $ | 25 |
|
Available-for-sale investment securities | 1,760 |
| | 1,972 |
|
Held-to-maturity investment securities | 1,065 |
| | 745 |
|
Time deposits | 500 |
| (1) | 389 |
|
Total short-term investments | $ | 3,350 |
| | $ | 3,131 |
|
|
| | | | | | | |
Long-term investments: | | | |
Equity and cost method investments | $ | 74 |
| | $ | 74 |
|
Held-to-maturity investment securities | 6 |
| | 161 |
|
Total long-term investments | $ | 80 |
| | $ | 235 |
|
| |
(1) | Includes $423 million in restricted time deposits as of December 31, 2018. See Note 11. |
Equity Investment Securities
Our equity investment securities consist of a U.S. dollar denominated investment in a fixed income mutual fund. Unrealized losses for the years ended December 31, 2018 and 2017 were immaterial. The value of the fixed income mutual fund is based on the net asset value ("NAV") of the fund, with appropriate consideration of the liquidity and any restrictions on disposition of our investment in the fund. There were no realized gains or losses on equity securities during the years ended December 31, 2018 and 2017.
Available-for-Sale Investment Securities
Our available-for-sale investment securities consist of U.S. dollar denominated investments primarily in U.S. Treasury notes, U.S. government agency debt securities, municipal debt securities, non-U.S. government debt securities, U.S. and international corporate bonds, certificates of deposit, commercial paper, debt securities issued by supranational institutions, mutual funds invested in fixed income securities, and asset-backed securities, including Government National Mortgage Association (GNMA) mortgage backed securities and securities backed by auto loans, credit card receivables, and other receivables. Our investment guidelines are to purchase securities which are investment grade at the time of acquisition. We monitor the credit ratings of the securities in our portfolio on an ongoing basis.
Available-for-Sale Investment Securities
The amortized cost, gross unrealized gains and losses and fair value of our available-for-sale investment securities were as follows at December 31:
| | | 2015 | 2018 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (in millions) | (in millions) |
U.S. Treasury and agency debt securities | $ | 528.9 |
| | $ | — |
| | $ | (1.8 | ) | | $ | 527.1 |
| $ | 630 |
| | $ | 1 |
| | $ | (6 | ) | | $ | 625 |
|
Corporate and other debt securities | 361.9 |
| | 0.1 |
| | (1.5 | ) | | 360.5 |
| 420 |
| | — |
| | (4 | ) | | 416 |
|
Certificates of deposit and commercial paper | 754.0 |
| | 0.1 |
| | (0.1 | ) | | 754.0 |
| 296 |
| | — |
| | — |
| | 296 |
|
Asset-backed securities | 230.3 |
| | 0.1 |
| | (0.8 | ) | | 229.6 |
| 336 |
| | — |
| | (2 | ) | | 334 |
|
Municipal debt securities | 121.2 |
| | 0.2 |
| | (0.1 | ) | | 121.3 |
| 90 |
| | — |
| | (1 | ) | | 89 |
|
Mutual funds | 25.3 |
| | 0.1 |
| | (3.1 | ) | | 22.3 |
| |
Total available-for-sale investment securities | $ | 2,021.6 |
| | $ | 0.6 |
| | $ | (7.4 | ) | | $ | 2,014.8 |
| $ | 1,772 |
| | $ | 1 |
| | $ | (13 | ) | | $ | 1,760 |
|
| | | 2014 | 2017 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (in millions) | (in millions) |
U.S. Treasury and agency debt securities | $ | 544.7 |
| | $ | 0.4 |
| | $ | (0.4 | ) | | $ | 544.7 |
| $ | 667 |
| | $ | — |
| | $ | (6 | ) | | $ | 661 |
|
Corporate and other debt securities | 359.0 |
| | 0.3 |
| | (0.7 | ) | | 358.6 |
| 439 |
| | — |
| | (2 | ) | | 437 |
|
Certificates of deposit and commercial paper | 4.6 |
| | — |
| | — |
| | 4.6 |
| 450 |
| | — |
| | — |
| | 450 |
|
Asset-backed securities | 220.4 |
| | 0.1 |
| | (0.4 | ) | | 220.1 |
| 297 |
| | — |
| | (2 | ) | | 295 |
|
Municipal debt securities | 112.5 |
| | 0.4 |
| | (0.1 | ) | | 112.8 |
| 130 |
| | — |
| | (1 | ) | | 129 |
|
Mutual funds | 23.9 |
| | 0.3 |
| | (2.3 | ) | | 21.9 |
| |
Total available-for-sale investment securities | $ | 1,265.1 |
| | $ | 1.5 |
| | $ | (3.9 | ) | | $ | 1,262.7 |
| $ | 1,983 |
| | $ | — |
| | $ | (11 | ) | | $ | 1,972 |
|
The fair value and related unrealized losses of our available-for-sale investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of December 31:
| | | 2015 | 2018 |
| Less than 12 Months | | 12 Months or More | | Total | Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (in millions) | (in millions) |
U.S. Treasury and agency debt securities | $ | 475.7 |
| | $ | (1.8 | ) | | $ | — |
| | $ | — |
| | $ | 475.7 |
| | $ | (1.8 | ) | $ | 84 |
| | $ | — |
| | $ | 446 |
| | $ | (6 | ) | | $ | 530 |
| | $ | (6 | ) |
Corporate and other debt securities | 315.1 |
| | (1.5 | ) | | 3.1 |
| | — |
| | 318.2 |
| | (1.5 | ) | 108 |
| | (1 | ) | | 254 |
| | (3 | ) | | 362 |
| | (4 | ) |
Certificates of deposit and commercial paper | 271.5 |
| | (0.1 | ) | | — |
| | — |
| | 271.5 |
| | (0.1 | ) | 295 |
| | — |
| | — |
| | — |
| | 295 |
| | — |
|
Asset-backed securities | 199.4 |
| | (0.7 | ) | | 11.4 |
| | (0.1 | ) | | 210.8 |
| | (0.8 | ) | 93 |
| | — |
| | 179 |
| | (2 | ) | | 272 |
| | (2 | ) |
Municipal debt securities | 56.5 |
| | (0.1 | ) | | — |
| | — |
| | 56.5 |
| | (0.1 | ) | 17 |
| | — |
| | 64 |
| | (1 | ) | | 81 |
| | (1 | ) |
Mutual funds | — |
| | — |
| | 21.1 |
| | (3.1 | ) | | 21.1 |
| | (3.1 | ) | |
Total | $ | 1,318.2 |
| | $ | (4.2 | ) | | $ | 35.6 |
| | $ | (3.2 | ) | | $ | 1,353.8 |
| | $ | (7.4 | ) | $ | 597 |
| | $ | (1 | ) | | $ | 943 |
| | $ | (12 | ) | | $ | 1,540 |
| | $ | (13 | ) |
| | | 2014 | 2017 |
| Less than 12 Months | | 12 Months or More | | Total | Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (in millions) | (in millions) |
U.S. Treasury and agency debt securities | $ | 256.9 |
| | $ | (0.4 | ) | | $ | — |
| | $ | — |
| | $ | 256.9 |
| | $ | (0.4 | ) | $ | 519 |
| | $ | (4 | ) | | $ | 124 |
| | $ | (2 | ) | | $ | 643 |
| | $ | (6 | ) |
Corporate and other debt securities | 229.7 |
| | (0.7 | ) | | — |
| | — |
| | 229.7 |
| | (0.7 | ) | 297 |
| | (1 | ) | | 126 |
| | (1 | ) | | 423 |
| | (2 | ) |
Certificates of deposit and commercial paper | 3.7 |
| | — |
| | — |
| | — |
| | 3.7 |
| | — |
| 49 |
| | — |
| | — |
| | — |
| | 49 |
| | — |
|
Asset-backed securities | 151.9 |
| | (0.3 | ) | | 2.8 |
| | (0.1 | ) | | 154.7 |
| | (0.4 | ) | 193 |
| | (1 | ) | | 94 |
| | (1 | ) | | 287 |
| | (2 | ) |
Municipal debt securities | 28.0 |
| | (0.1 | ) | | — |
| | — |
| | 28.0 |
| | (0.1 | ) | 107 |
| | (1 | ) | | 18 |
| | — |
| | 125 |
| | (1 | ) |
Mutual funds | — |
| | — |
| | 20.7 |
| | (2.3 | ) | | 20.7 |
| | (2.3 | ) | |
Total | $ | 670.2 |
| | $ | (1.5 | ) | | $ | 23.5 |
| | $ | (2.4 | ) | | $ | 693.7 |
| | $ | (3.9 | ) | $ | 1,165 |
| | $ | (7 | ) | | $ | 362 |
| | $ | (4 | ) | | $ | 1,527 |
| | $ | (11 | ) |
The unrealized losses for the above securities as of December 31, 20152018 and 20142017 are primarily attributable to changes in interest rates. At each reporting date, we perform an evaluation of impaired available-for-sale securities to determine if the unrealized losses are other-than-temporary. As of December 31, 2015,2018, we do not consider any of the investments to be other-than-temporarily impaired. The gross unrealized gains and losses in the above tables were recorded, net of tax, in accumulated"Accumulated other comprehensive income (loss)." in our consolidated statements of financial position.
The contractual maturities of our fixed income available-for-sale investment securities as of December 31, 20152018 are set forth in the following table:
| | | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| (in millions) | (in millions) |
Due within one year | $ | 806.4 |
| | $ | 806.5 |
| $ | 569 |
| | $ | 567 |
|
Due after one year up to two years | 536.6 |
| | 535.1 |
| 544 |
| | 537 |
|
Due after two years up to three years | 404.9 |
| | 403.3 |
| 267 |
| | 265 |
|
Due after three years up to four years | 18.1 |
| | 18.0 |
| |
Due after three years | | 56 |
| | 57 |
|
Asset-backed securities | 230.3 |
| | 229.6 |
| 336 |
| | 334 |
|
Fixed income available-for-sale investment securities | $ | 1,996.3 |
| | $ | 1,992.5 |
| |
Total available-for-sale investment securities | | $ | 1,772 |
| | $ | 1,760 |
|
Asset-backed securities were excluded from the maturity categories because the actual maturities may differ from the contractual maturities since the underlying receivables may be prepaid without penalties. Further, actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
Proceeds from sales of available-for-sale investment securities and the gross gains and losses that have been included in earnings as a result of those sales were as follows:
| | | | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 |
| | (in millions) | | (in millions) |
Proceeds from sales of available-for-sale investment securities | | $ | 781.9 |
| | $ | 1,475.6 |
| | $ | 1,119.8 |
| | $ | 1,285 |
| | $ | 2,922 |
| | $ | 3,541 |
|
| | | | | | | | | | | | |
Gross gains | | $ | 1.4 |
| | $ | 2.2 |
| | $ | 2.0 |
| | $ | — |
| | $ | 1 |
| | $ | 5 |
|
Gross losses | | (0.5 | ) | | (0.4 | ) | | (0.6 | ) | | (4 | ) | | (3 | ) | | (4 | ) |
Net realized gains on sales of available-for-sale investment securities | | $ | 0.9 |
| | $ | 1.8 |
| | $ | 1.4 |
| |
Net realized (losses) gains on sales of available-for-sale investment securities | | | $ | (4 | ) | | $ | (2 | ) | | $ | 1 |
|
Held-to-Maturity Investment Securities
Our held-to-maturity investment securities consist of Indian rupee denominated investments primarily in commercial paper, international corporate bonds and government debt securities. Our investment guidelines are to purchase securities that are investment grade at the time of acquisition. We monitor the credit ratings of the securities in our portfolio on an ongoing basis.
The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities were as follows at December 31:
|
| | | | | | | | | | | | | | | |
| 2018 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (in millions) |
Short-term investments: | | | | | | | |
Corporate and other debt securities | $ | 546 |
| | $ | — |
| | $ | — |
| | $ | 546 |
|
Commercial paper | 519 |
| | — |
| | (1 | ) | | 518 |
|
Total short-term held-to-maturity investments | 1,065 |
| | — |
| | (1 | ) | | 1,064 |
|
Long-term investments: | | | | | | | |
Corporate and other debt securities | 6 |
| | — |
| | — |
| | 6 |
|
Total held-to-maturity investment securities | $ | 1,071 |
| | $ | — |
| | $ | (1 | ) | | $ | 1,070 |
|
|
| | | | | | | | | | | | | | | |
| 2017 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (in millions) |
Short-term investments: | | | | | | | |
Corporate and other debt securities | $ | 346 |
| | $ | — |
| | $ | (1 | ) | | $ | 345 |
|
Commercial paper | 399 |
| | — |
| | (2 | ) | | 397 |
|
Total short-term held-to-maturity investments | 745 |
| | — |
| | (3 | ) | | 742 |
|
Long-term investments: | | | | | | | |
Corporate and other debt securities | 161 |
| | — |
| | (1 | ) | | 160 |
|
Total held-to-maturity investment securities | $ | 906 |
| | $ | — |
| | $ | (4 | ) | | $ | 902 |
|
The fair value and related unrealized losses of held-to-maturity investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (in millions) |
| | | | | | | | | | | |
Corporate and other debt securities | $ | 263 |
| | $ | — |
| | $ | 57 |
| | $ | — |
| | $ | 320 |
| | $ | — |
|
Commercial paper | 268 |
| | (1 | ) | | — |
| | — |
| | 268 |
| | (1 | ) |
Total | $ | 531 |
| | $ | (1 | ) | | $ | 57 |
| | $ | — |
| | $ | 588 |
| | $ | (1 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (in millions) |
Corporate and other debt securities | $ | 473 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | 473 |
| | $ | (2 | ) |
Commercial paper | 394 |
| | (2 | ) | | — |
| | — |
| | 394 |
| | (2 | ) |
Total | $ | 867 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 867 |
| | $ | (4 | ) |
At each reporting date, the Company performs an evaluation of held-to-maturity securities to determine if the unrealized losses are other-than-temporary. We do not consider any of the investments to be other-than-temporarily impaired as of December 31, 2018.
The contractual maturities of our fixed income held-to-maturity investment securities as of December 31, 2018 are set forth in the following table:
|
| | | | | | | |
| Amortized Cost | | Fair Value |
| (in millions) |
Due within one year | $ | 1,065 |
| | $ | 1,064 |
|
Due after one year up to two years | 6 |
| | 6 |
|
Total held-to-maturity investment securities | $ | 1,071 |
| | $ | 1,070 |
|
During the years ended December 31, 2018 and 2017, there were no transfers of investments between our available-for-sale and held-to-maturity investment portfolios.
Equity and Cost Method Investments
As of December 31, 2018 and 2017, we had equity method investments of $66 million and $67 million, respectively, which primarily consist of a 49% ownership interest in a strategic consulting firm specializing in the use of human sciences to help business leaders better understand customer behavior. As of December 31, 2018 and 2017, we had cost method investments of $8 million and $7 million, respectively.
Note 4 |
| | | | |
Note 7 — Property and Equipment, net |
Property and equipment were as follows as of December 31:
| | | | Estimated Useful Life (Years) | | 2015 | | 2014 | | Estimated Useful Life (Years) | | 2018 | | 2017 |
| | (in millions) | | (in millions) |
Buildings | | 30 | | $ | 804.9 |
| | $ | 605.0 |
| | 30 | | $ | 839 |
| | $ | 836 |
|
Computer equipment and software | | 3 | | 696.9 |
| | 537.3 |
| |
Computer equipment | | | 3 – 5 | | 412 |
| | 364 |
|
Computer software | | | 3 – 8 | | 721 |
| | 594 |
|
Furniture and equipment | | 5 – 9 | | 384.5 |
| | 322.6 |
| | 5 – 9 | | 639 |
| | 511 |
|
Land | | 22.6 |
| | 22.6 |
| | 19 |
| | 19 |
|
Leasehold land | | lease term | | 63.4 |
| | 60.1 |
| | lease term | | 60 |
| | 63 |
|
Capital work-in-progress | | 114.9 |
| | 304.7 |
| | 156 |
| | 145 |
|
Leasehold improvements | | Shorter of the lease term or the life of the leased asset | | 263.3 |
| | 247.0 |
| | Shorter of the lease term or the life of the leased asset | | 338 |
| | 308 |
|
Sub-total | | 2,350.5 |
| | 2,099.3 |
| | 3,184 |
| | 2,840 |
|
Accumulated depreciation and amortization | | (1,079.1 | ) | | (852.1 | ) | | (1,790 | ) | | (1,516 | ) |
Property and equipment, net | | $ | 1,271.4 |
| | $ | 1,247.2 |
| | $ | 1,394 |
| | $ | 1,324 |
|
Depreciation and amortization expense related to property and equipment was $233.1$347 million, $172.1,$313 million and $155.7$266 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.
The gross amount of property and equipment recorded under capital leases was $45.9$73 million and $37.0$44 million atas of December 31, 20152018 and 2014, respectively, and primarily related to buildings.2017, respectively. Accumulated amortization and amortization expense related to capital lease assets were immaterial for the periods presented.
In India, leasehold land is
The gross amount of property and equipment recorded for software to be sold, leased by us fromor marketed in the governmentcaption "Computer software" above was $85 million and $52 million, as of India with lease terms ranging upDecember 31, 2018 and 2017, respectively. Accumulated amortization for software to 99 years. Lease payments are made at the inceptionbe sold, leased or marketed was $24 million and $12 million as of the lease agreementDecember 31, 2018 and amortized over the lease term.2017, respectively. Amortization expense of leasehold land isfor software to be sold, leased or marketed recorded as property and equipment was $14 million for the year ended December 31, 2018 and was immaterial for the periods presentedyears ended December 31, 2017 and is included in depreciation and amortization expense in our accompanying consolidated statements of operations.2016.
Note 5
|
| | | | |
Note 8 — Goodwill and Intangible Assets, net |
Changes in goodwill by our reportable segments were as follows for the years ended December 31, 20152018 and 2014:2017:
|
| | | | | | | | | | | | | | | | |
Segment | | January 1, 2018 | | Goodwill Additions and Adjustments | | Foreign Currency Translation Adjustments | | December 31, 2018 |
| | (in millions) |
Financial Services | | $ | 265 |
| | $ | 152 |
| | $ | (6 | ) | | $ | 411 |
|
Healthcare | | 2,106 |
| | 365 |
| | (2 | ) | | 2,469 |
|
Products and Resources | | 240 |
| | 152 |
| | (8 | ) | | 384 |
|
Communications, Media and Technology | | 93 |
| | 126 |
| | (2 | ) | | 217 |
|
Total goodwill | | $ | 2,704 |
| | $ | 795 |
| | $ | (18 | ) | | $ | 3,481 |
|
|
| | | | | | | | | | | | | | | | |
Segment | | January 1, 2017 | | Goodwill Additions and Adjustments | | Foreign Currency Translation Adjustments | | December 31, 2017 |
| | (in millions) |
Financial Services | | $ | 227 |
| | $ | 27 |
| | $ | 11 |
| | $ | 265 |
|
Healthcare | | 2,089 |
| | 13 |
| | 4 |
| | 2,106 |
|
Products and Resources | | 159 |
| | 72 |
| | 9 |
| | 240 |
|
Communications, Media and Technology | | 79 |
| | 11 |
| | 3 |
| | 93 |
|
Total goodwill | | $ | 2,554 |
| | $ | 123 |
| | $ | 27 |
| | $ | 2,704 |
|
|
| | | | | | | | | | | | | | | | |
Segment | | January 1, 2015 | | Goodwill Additions | | Foreign Currency Translation Adjustments | | December 31, 2015 |
| | (in millions) |
Financial Services | | $ | 204.5 |
| | $ | 5.5 |
| | $ | (7.3 | ) | | $ | 202.7 |
|
Healthcare | | 2,079.9 |
| | — |
| | (3.5 | ) | | 2,076.4 |
|
Manufacturing/Retail/Logistics | | 69.2 |
| | — |
| | (2.3 | ) | | 66.9 |
|
Other | | 60.0 |
| | — |
| | (1.3 | ) | | 58.7 |
|
Total goodwill | | $ | 2,413.6 |
| | $ | 5.5 |
| | $ | (14.4 | ) | | $ | 2,404.7 |
|
|
| | | | | | | | | | | | | | | | |
Segment | | January 1, 2014 | | Goodwill Additions | | Foreign Currency Translation Adjustments | | December 31, 2014 |
| | (in millions) |
Financial Services | | $ | 208.6 |
| | $ | 4.0 |
| | $ | (8.1 | ) | | $ | 204.5 |
|
Healthcare | | 107.4 |
| | 1,976.9 |
| | (4.4 | ) | | 2,079.9 |
|
Manufacturing/Retail/Logistics | | 71.6 |
| | 0.7 |
| | (3.1 | ) | | 69.2 |
|
Other | | 56.6 |
| | 5.4 |
| | (2.0 | ) | | 60.0 |
|
Total goodwill | | $ | 444.2 |
| | $ | 1,987.0 |
| | $ | (17.6 | ) | | $ | 2,413.6 |
|
In 2014,To better align our annual goodwill impairment assessment with the increasetiming of our budget process, we elected to change the date of our annual goodwill impairment assessment from December 31st to October 31st. Based on our most recent goodwill impairment assessment performed during 2018, we concluded the goodwill in goodwill was primarily related to business combinations completed during the year and described in Note 2.each of our reporting units were not at risk of impairment. We have not recognized any impairment losses on our goodwill balances.balances to-date.
Components of intangible assets were as follows as of December 31:
| | | | 2015 | | 2018 | | 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in millions) | | (in millions) |
Customer relationships | | $ | 650.3 |
| | $ | (157.6 | ) | | $ | 492.7 |
| | $ | 1,277 |
| | $ | (398 | ) | | $ | 879 |
| | $ | 1,005 |
| | $ | (304 | ) | | $ | 701 |
|
Developed technology | | 332.1 |
| | (52.5 | ) | | 279.6 |
| | 355 |
| | (187 | ) | | 168 |
| | 333 |
| | (140 | ) | | 193 |
|
Indefinite life trademarks | | 63.0 |
| | — |
| | 63.0 |
| | 72 |
| | — |
| | 72 |
| | 63 |
| | — |
| | 63 |
|
Other | | 45.1 |
| | (16.1 | ) | | 29.0 |
| | 64 |
| | (33 | ) | | 31 |
| | 51 |
| | (27 | ) | | 24 |
|
Total intangible assets | | $ | 1,090.5 |
| | $ | (226.2 | ) | | $ | 864.3 |
| | $ | 1,768 |
| | $ | (618 | ) | | $ | 1,150 |
| | $ | 1,452 |
| | $ | (471 | ) | | $ | 981 |
|
| | | | | | | |
| | 2014 | |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
| | (in millions) | |
Customer relationships | | $ | 644.4 |
| | $ | (112.2 | ) | | $ | 532.2 |
| |
Developed technology | | 332.1 |
| | (8.7 | ) | | 323.4 |
| |
Indefinite life trademarks | | 63.0 |
| | — |
| | 63.0 |
| |
Other | | 45.8 |
| | (10.7 | ) | | 35.1 |
| |
Total intangible assets | | $ | 1,085.3 |
| | $ | (131.6 | ) | | $ | 953.7 |
| |
Other than certain trademarks with indefinite lives, our intangible assets have finite lives and, as such, are subject to amortization. Amortization of intangible assets totaled $96.9$151 million for 2015, $36.02018, $130 million for 20142017 and $24.2$113 million for 2013. During 2015, 20142016. Of these amounts, during 2018, 2017 and 2013,2016, amortization of $4.8$38 million, $8.4$35 million and $7.7$20 million, respectively, relating to customer relationship intangible assets was recorded as a reduction of revenues. These intangible assets are attributedattributable to direct revenue contracts with sellers of acquired businesses.businesses was recorded as a reduction of revenues.
Estimated amortization expense related to our existing intangible assets for the next five years is as follows:
| | | | | | | | |
Year | | Amount | | Amount |
| | (in millions) | | (in millions) |
2016 | | $ | 96.1 |
| |
2017 | | 93.2 |
| |
2018 | | 85.8 |
| |
2019 | | 83.5 |
| | $ | 167 |
|
2020 | | 76.3 |
| | 158 |
|
2021 | | | 153 |
|
2022 | | | 137 |
|
2023 | | | 83 |
|
Accrued expenses and other current liabilities were as follows as of December 31: