Cognizant Technology Solutions (CTSH) 10-Q 7 May 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information
	3 Months Ended Mar. 31, 2010	Apr. 30, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-03-31
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Trading Symbol	CTSH
Entity Registrant Name	COGNIZANT TECHNOLOGY SOLUTIONS CORP
Entity Central Index Key	0001058290
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		299,418,969

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Revenues	$959,720	$745,862
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization expense shown separately below)	555,904	419,708
Selling, general and administrative expenses	194,993	166,872
Depreciation and amortization expense	25,806	21,152
Income from operations	183,017	138,130
Other income (expense), net:
Interest income	6,054	2,470
Other income (expense), net	(10,319)	(5,111)
Total other income (expense), net	(4,265)	(2,641)
Income before provision for income taxes	178,752	135,489
Provision for income taxes	27,252	22,357
Net income	$151,500	$113,132
Basic earnings per share	0.51	0.39
Diluted earnings per share	0.49	0.38
Weighted average number of common shares outstanding - Basic	297,885	291,613
Dilutive effect of shares issuable under stock-based compensation plans	8,779	6,380
Weighted average number of common shares outstanding - Diluted	306,664	297,993

1_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	12 Months Ended Dec. 31, 2009
Current assets:
Cash and cash equivalents	$1,080,942	$1,100,930
Short-term investments	352,939	298,402
Trade accounts receivable, net of allowances of $19,143 and $16,465, respectively	706,122	626,288
Unbilled accounts receivable	106,203	82,952
Deferred income tax assets, net	60,807	73,791
Other current assets	162,220	125,205
Total current assets	2,469,233	2,307,568
Property and equipment, net of accumulated depreciation of $297,911 and $274,570, respectively	478,363	481,516
Long-term investments	137,447	151,131
Goodwill	193,898	192,372
Intangible assets, net	76,745	75,757
Deferred income tax assets, net	86,584	80,618
Other assets	67,477	49,278
Total assets	3,509,747	3,338,240
Current liabilities:
Accounts payable	85,630	54,640
Deferred revenue	53,576	51,605
Accrued expenses and other current liabilities	438,941	540,363
Total current liabilities	578,147	646,608
Other noncurrent liabilities	45,231	38,455
Total liabilities	623,378	685,063
Commitments and contingencies (See Note 7)
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares authorized, none issued
Class A common stock, $.01 par value, 500,000 shares authorized, 299,380 and 297,231 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively	2,994	2,972
Additional paid-in capital	722,464	664,560
Retained earnings	2,116,868	1,965,368
Accumulated other comprehensive income	44,043	20,277
Total stockholders' equity	2,886,369	2,653,177
Total liabilities and stockholders' equity	$3,509,747	$3,338,240

2_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Parenthetical) (USD $)
In Thousands, except Per Share data	Mar. 31, 2010	Dec. 31, 2009
Trade accounts receivable, allowances	$19,143	$16,465
Property and equipment, accumulated depreciation	$297,911	$274,570
Preferred stock, par value	0.1	0.1
Preferred stock, shares authorized	15,000	15,000
Preferred stock, issued	0	0
Class A common stock, par value	0.01	0.01
Class A common stock, shares authorized	500,000	500,000
Class A common stock, shares issued	299,380	297,231
Class A common stock, shares outstanding	299,380	297,231

3_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Cash flows from operating activities:
Net income	$151,500	$113,132
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	27,381	21,152
Provision for doubtful accounts	2,658	14
Deferred income taxes	23,326	3,935
Stock-based compensation expense	13,945	11,763
Excess tax benefit on stock-based compensation plans	(15,753)	(1,819)
Other	(10,162)	675
Changes in assets and liabilities:
Trade accounts receivable	(92,220)	(13,342)
Other current assets	(46,307)	(7,596)
Other assets	(4,989)	(66)
Accounts payable	36,088	16,861
Other current and noncurrent liabilities	(83,139)	(69,619)
Net cash provided by operating activities	2,328	75,090
Cash flows from investing activities:
Purchases of property and equipment	(24,219)	(20,472)
Purchases of investments	(46,798)	(40,743)
Proceeds from maturity or sale of investments	13,876	18,974
Acquisitions, net of cash acquired		(1,304)
Net cash used in investing activities	(57,141)	(43,545)
Cash flows from financing activities:
Issuance of common stock under stock-based compensation plans	30,103	8,764
Excess tax benefit on stock-based compensation plans	15,753	1,819
Repurchases of common stock	(2,315)	(12,882)
Net cash provided by (used in) financing activities	43,541	(2,299)
Effect of currency translation on cash and cash equivalents	(8,716)	(5,744)
Increase (decrease) in cash and cash equivalents	(19,988)	23,502
Cash and cash equivalents, beginning of year	1,100,930	735,066
Cash and cash equivalents, end of period	$1,080,942	$758,568

Interim Condensed Consolidated

Interim Condensed Consolidated Financial Statements
	3 Months Ended Mar. 31, 2010
Interim Condensed Consolidated Financial Statements	Note 1 Interim Condensed Consolidated Financial Statements The terms Cognizant, we, our, us and Company refer to Cognizant Technology Solutions Corporation unless the context indicates otherwise. We have prepared the accompanying unaudited condensed consolidated financial statements included herein in accordance with generally accepted accounting principles in the United States of America and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form10-K for the year ended December31, 2009. In our opinion, all adjustments considered necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire year. We have evaluated subsequent events and have concluded no additional events or transactions have occurred that would require adjustment to, or additional disclosure in, our financial statements.

Investments

Investments
	3 Months Ended Mar. 31, 2010
Investments	Note 2 Investments Investments as of March31, 2010 and December31, 2009 were as follows: March31,2010 December31,2009 Available-for-sale securities: Agency discount notes $ 160 $ 160 Other 2 2 Total available-for-sale securities 162 162 Trading securities auction-rate securities 119,050 129,103 UBS Right 18,397 22,028 Time deposits 352,777 298,240 Total investments $ 490,386 $ 449,533 The carrying value of the time deposits approximated fair value as of March31, 2010 and December31, 2009. Gross realized gains or losses on the sale of available-for-sale securities were immaterial for the periods presented. As of March31, 2010 and December31, 2009, available-for-sale securities in an unrealized loss or gain position were immaterial. All available-for-sale securities at March31, 2010 and December31, 2009 contractually mature in 2010. Our investment in auction-rate securities are recorded at fair value and consist of AAA/A3-rated municipal bonds with an auction reset feature whose underlying assets are generally student loans, which are substantially backed by the Federal Family Education Loan Program (FFELP). Since February 2008, auctions for these securities have failed. The auction failures do not affect the value of the collateral underlying the auction-rate securities, and we continue to earn and receive interest on our auction-rate securities at a pre-determined formula with spreads tied to particular interest rate indices. As of March31, 2010 and December31, 2009, the majority of our investment in auction-rate securities was classified as a long-term investment. The classification of the auction-rate securities as long-term investments is due to continuing auction failures, the securities stated maturity of greater than one year and our ability and intent to hold such securities beyond one year. In November 2008, we accepted an offer from UBS AG (UBS) to sell to UBS, at par value, our auction-rate securities at any time during an exercise period from June30, 2010 to July2, 2012 (the UBS Right). In accepting the UBS Right, we granted UBS the authority to purchase these auction-rate securities or sell them on our behalf at par anytime after the execution of the UBS Right through July2, 2012. The offer is non-transferable. Additional information regarding our auction-rate securities was as follows: March31,2010 December31,2009 Par value $ 137,575 $ 151,275 ThreeMonthsEnded March31, 2010 YearEnded December31,2009 Redemptions at par value $ 13,700 $ 17,250

Accrued Expenses and Other Curr

Accrued Expenses and Other Current Liabilities
	3 Months Ended Mar. 31, 2010
Accrued Expenses and Other Current Liabilities	Note 3. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were as follows as of: March31,2010 December31,2009 Compensation and benefits $ 238,826 $ 356,127 Taxes 3,386 10,300 Professional fees 33,109 26,508 Travel and entertainment 16,750 15,871 Customer volume incentives 46,613 44,537 Derivative financial instruments 36,916 20,968 Other 63,341 66,052 Total accrued expenses and other current liabilities $ 438,941 $ 540,363

Income Taxes

Income Taxes
	3 Months Ended Mar. 31, 2010
Income Taxes	Note 4 Income Taxes Our Indian subsidiaries, collectively referred to as Cognizant India, are export-oriented companies, which, under the Indian Income Tax Act of 1961 are entitled to claim tax holidays for a period of ten consecutive years for each Software Technology Park, or STP, with respect to export profits for each STP. Substantially all of the earnings of Cognizant India are attributable to export profits. The majority of our STPs in India are currently entitled to a 100% exemption from Indian income tax. The tax holidays for STPs currently expire on March31, 2011. In addition, we have constructed our new development centers in areas designated as Special Economic Zones, or SEZs. Development centers operating in SEZs will be entitled to certain income tax incentives for periods up to 15 years. The incremental Indian taxes related to the taxable STPs, for which the income tax holiday has expired, have been incorporated into our effective income tax rate for 2010. The effective tax rate for the three months ended March31, 2010 and for the three months ended March31, 2009 was as follows: ThreeMonthsEnded March 31, 2010 2009 Effective tax rate 15.2 % 16.5 % The principal difference between the income tax rates for the 2010 and 2009 periods and the U.S. federal statutory rate is the effect of the Indian tax holiday and earnings taxed in countries that have lower rates than the United States.

Fair Value Measurements

Fair Value Measurements
	3 Months Ended Mar. 31, 2010
Fair Value Measurements	Note 5 Fair Value Measurements We measure our cash equivalents, investments, including auction-rate securities, and foreign exchange forward contracts at fair value. The authoritative guidance defines fair value as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels: Level 1 Inputs are quoted prices in active markets for identical assets or liabilities. Level 2 Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. Level 3 Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of March31, 2010: Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 675,740 $ $ $ 675,740 Investments: Available-for-sale securities current 162 162 Trading securities noncurrent 119,050 119,050 UBS Right noncurrent 18,397 18,397 Other current assets: Derivative financial instruments foreign exchange forward contracts 36,414 36,414 Other current liabilities: Derivative financial instruments foreign exchange forward contracts (36,916 ) (36,916 ) Other assets: Derivative financial instruments foreign exchange forward contracts 15,223 15,223 Total assets and (liabilities) measured at fair value $ 675,740 $ 14,883 $ 137,447 $ 828,070 The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of December31, 2009: Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 778,311 $ $ $ 778,311 Investments: Available-for-sale

Derivative Financial Instrument

Derivative Financial Instruments
	3 Months Ended Mar. 31, 2010
Derivative Financial Instruments	Note 6 Derivative Financial Instruments In the normal course of business, we use foreign exchange forward contracts to manage foreign currency exchange rate risk. The estimated fair value of the foreign exchange forward contracts considers the following items: discount rate, timing and amount of cash flow and counterparty credit risk. The following table provides information on the location and fair values of derivative financial instruments included in our condensed consolidated statements of financial position as of March31, 2010: Designation of Derivatives Location on Statement of Financial Position Assets Liabilities Cash Flow Hedges Designated as hedging instruments Foreign exchange forward contracts Other current assets $ 36,414 $ Other assets 15,223 Total 51,637 Other Derivatives Not designated as hedging instruments Foreign exchange forward contracts Accrued expenses and other current liabilities 36,916 Total 36,916 Total $ 51,637 $ 36,916 The following table provides information on the location and fair values of derivative financial instruments in our condensed consolidated statements of financial position as of December31, 2009: Designation of Derivatives Location on Statement of Financial Position Assets Liabilities Cash Flow Hedges Designated as hedging instruments Foreign exchange forward contracts Other current assets $ 20,211 $ Other assets 688 Other noncurrent liabilities 1,917 Total 20,899 1,917 Other Derivatives Not designated as hedging instruments Foreign exchange forward contracts Other current assets 147 Accrued expenses and other current liabilities 20,968 Total 147 20,968 Total $ 21,046 $ 22,885 Cash Flow Hedges We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of certain salary payments in India. These contracts are intended to partially offset the impact of movement of exchange rates on future operating costs and are scheduled to mature each month during 2010, 2011 and 2012. Under these contracts, we purchase Indian rupees and sell U.S. dollars and the changes in fair value of these contracts are initially reported in the caption accumulated other comprehensive income on our accompanying condensed consolidated statements of financial position and is subsequently reclassified to earnings in the same period the hedge contract settles. The notional value of our outstanding contracts by year of maturity and the net unrealized gain included in accumulated other comprehensive income for such contracts are as follows: March31,2010 December31,2009 2010 $ 420,000 $ 450,000 2011 480,000 360,000 2012 300,000 T

Commitments and Contingencies

Commitments and Contingencies
	3 Months Ended Mar. 31, 2010
Commitments and Contingencies	Note 7 Commitments and Contingencies As of March31, 2010, we had outstanding fixed capital commitments of approximately $21,331 related to our India development center expansion program. In connection with a 2008 acquisition, additional purchase price not to exceed $14,000, payable in 2010, is contingent on the acquired company achieving certain financial and operating targets during an earn-out period. We expect to fund such payment, if any, from operating cash flow. The ultimate amount payable cannot be predicted with reasonable certainty because the amount is dependent on future results of operations of the acquired business. In accordance with U.S. GAAP, we have not recorded a liability for this item on our balance sheet because the definitive amount is not determinable or distributable. As this acquisition was completed in 2008, the contingent consideration, if paid, will be recorded as an additional element of the cost of the acquired company. We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the outcome of such claims and legal actions, if decided adversely, is not expected to have a material adverse effect on our business, financial condition and results of operations. 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 customers systems or our failure to meet our contractual obligations to our clients, including any breach involving a customers confidential information or sensitive data, or our obligations under applicable laws or regulations could result in a claim 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 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 available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, would have a material adverse effect on our business, results of operations and financial condition.

Comprehensive Income

Comprehensive Income
	3 Months Ended Mar. 31, 2010
Comprehensive Income	Note 8 Comprehensive Income The components of accumulated other comprehensive income as of March31, 2010 and December31, 2009 were as follows: March31,2010 December31,2009 Foreign currency translation adjustments $ (6,038 ) $ 1,867 Unrealized gain on cash flow hedges, net of taxes 50,081 18,410 Total accumulated other comprehensive income $ 44,043 $ 20,277 The components of comprehensive income for the three months ended March31, 2010 and 2009 were as follows: 2010 2009 Comprehensive income: Net income $ 151,500 $ 113,132 Foreign currency translation adjustments (7,905 ) (5,548 ) Change in unrealized gain (loss) on cash flow hedges, net of taxes of $984 and ($386), respectively 31,671 (9,969 ) Total comprehensive income $ 175,266 $ 97,615

Segment Information

Segment Information
	3 Months Ended Mar. 31, 2010
Segment Information	Note 9 Segment Information Our reportable segments are: Financial Services, which includes customers providing banking/transaction processing, capital markets and insurance services; Healthcare, which includes healthcare providers and payers as well as life sciences customers; Manufacturing/Retail/Logistics, which includes manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services; and Other, which is an aggregation of industry segments which, individually, are less than 10% of consolidated revenues and segment operating profit. The Other reportable segment includes entertainment, media and information services, communications and high technology operating segments. Our sales managers, account executives, account managers and project teams are aligned in accordance with the specific industries they serve. Our chief operating decision maker evaluates the Companys 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 segments may affect revenue and operating expenses to differing 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 our development and delivery centers. Certain expenses, such as general and administrative, and a portion of depreciation and amortization, are not specifically allocated to specific segments as management does not believe it is practical to allocate such costs to individual segments because they are not directly attributable to any specific segment. Further, stock-based compensation expense and the related stock-based Indian fringe benefit tax are not allocated to individual segments in internal management reports used by the chief operating decision maker. Accordingly, these expenses are separately disclosed as unallocated and adjusted only against our total income from operations. Additionally, management has determined that it is not practical to allocate identifiable assets, by segment, since such assets are used interchangeably among the segments. Revenues from external customers and segment operating profit, before unallocated expenses, for the Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other reportable segments for the three months ended March31, 2010 and 2009, are as follows: Three Months Ended March 31, 2010 2009 Revenues: Financial Services $ 398,687 $ 331,342 Healthcare 252,425 189,326 Manufacturing/Retail/Logistics 173,131 123,090 Other 135,477 102,104 Total revenue $ 959,720 $ 745,862 Segment Operating Profit: Financial Services $ 128,264 $ 113,386 Healthcare 92,357 69,548 Manufacturing/Retail/Logistics

Recent Accounting Pronouncement

Recent Accounting Pronouncements
	3 Months Ended Mar. 31, 2010
Recent Accounting Pronouncements	Note 10 Recent Accounting Pronouncements In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on managements best estimate of the selling prices.In addition, the new standard eliminates the use of the residual method of allocation.In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements.Specifically, tangible products containing software and hardware that function together to deliver the tangible products essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards are required to be effective by no later than the first quarter of 2011 and early adoption is permitted. We have adopted both of these standards effective January1, 2010. Our adoption of these standards did not have a material effect on our financial condition or consolidated results of operations. In January 2010, the FASB issued new guidance requiring supplemental fair value disclosures and providing several clarifications regarding existing disclosure requirements. Specifically, the new guidance requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, the new standard requires a gross presentation of the Level 3 rollforward, stating separately information about purchases, sales, issuances, and settlements. The new guidance also provides clarification regarding the appropriate level of disaggregation of assets and liabilities for the purpose of fair value disclosures as well as the requirement to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 measurements. We have adopted the new guidance effective January1, 2010 and have presented the required information in Note 5.