Edgar Filing: COGNIZANT TECHNOLOGY SOLUTIONS CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2019
¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from to

Commission File Number 0-24429

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)



Delaware		13-3728359
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Glenpointe Centre West 500 Frank W. Burr Blvd. Teaneck, New Jersey		07666
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (201) 801-0233

N/A

(Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No: ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No: ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.01 par value per share	CTSH	The Nasdaq Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of April 26, 2019:



Class		Number of Shares
Class A Common Stock, par value $.01 per share		569,282,940

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

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		Page
PART I.	FINANCIAL INFORMATION	1

Item 1.	Consolidated Financial Statements (Unaudited)	1

	Consolidated Statements of Financial Position (Unaudited) as of March 31, 2019 and December 31, 2018	1

	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2019 and 2018	2

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018	3

	Consolidated Statements of Stockholders' Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018	4

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

PART II.	OTHER INFORMATION	45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	46

SIGNATURES		47

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(in millions, except par values)



	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	950		$	1,161
Short-term investments	2,718			3,350
Trade accounts receivable, net of allowances of $92 and $78, respectively	3,377			3,257
Other current assets	838			909
Total current assets	7,883			8,677
Property and equipment, net	1,314			1,394
Operating lease assets, net	809			—
Goodwill	3,638			3,481
Intangible assets, net	1,185			1,150
Deferred income tax assets, net	464			442
Long-term investments	79			80
Other noncurrent assets	724			689
Total assets	$	16,096		$	15,913
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	262		$	215
Deferred revenue	340			286
Short-term debt	19			9
Operating lease liabilities	184			—
Accrued expenses and other current liabilities	1,915			2,267
Total current liabilities	2,720			2,777
Deferred revenue, noncurrent	64			62
Operating lease liabilities, noncurrent	651			—
Deferred income tax liabilities, net	177			183
Long-term debt	727			736
Long-term income taxes payable	471			478
Other noncurrent liabilities	150			253
Total liabilities	4,960			4,489
Commitments and contingencies (See Note 13)
Stockholders’ equity:
Preferred stock, $0.10 par value, 15.0 shares authorized, none issued	—			—
Class A common stock, $0.01 par value, 1,000 shares authorized, 569 and 577 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	6			6
Additional paid-in capital	64			47
Retained earnings	11,140			11,485
Accumulated other comprehensive income (loss)	(74		)	(114		)
Total stockholders’ equity	11,136			11,424
Total liabilities and stockholders’ equity	$	16,096		$	15,913

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share data)



	Three Months Ended March 31,
	2019			2018
Revenues	$	4,110		$	3,912
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization expense shown separately below)	2,575			2,401
Selling, general and administrative expenses	873			711
Depreciation and amortization expense	123			107
Income from operations	539			693
Other income (expense), net:
Interest income	48			41
Interest expense	(7		)	(6		)
Foreign currency exchange gains (losses), net	2			(31		)
Other, net	1			—
Total other income (expense), net	44			4
Income before provision for income taxes	583			697
Provision for income taxes	(142		)	(177		)
Net income	$	441		$	520
Basic earnings per share	$	0.77		$	0.89
Diluted earnings per share	$	0.77		$	0.88
Weighted average number of common shares outstanding - Basic	573			587
Dilutive effect of shares issuable under stock-based compensation plans	2			2
Weighted average number of common shares outstanding - Diluted	575			589

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in millions)



	Three Months Ended March 31,
	2019			2018
Net income	$	441		$	520
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(2		)	37
Change in unrealized gains and losses on cash flow hedges	36			(36		)
Change in unrealized gains and losses on available-for-sale securities	6			(7		)
Other comprehensive income (loss)	40			(6		)
Comprehensive income	$	481		$	514

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in millions)



	Class A Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2018	577		$	6	$	47		$	11,485		$	(114	)	$	11,424
Cumulative effect of changes in accounting principle⁽¹⁾	—		—		—			2			—			2
Net income	—		—		—			441			—			441
Other comprehensive income (loss)	—		—		—			—			40			40
Common stock issued, stock-based compensation plans	2		—		50			—			—			50
Stock-based compensation expense	—		—		66			—			—			66
Repurchases of common stock	(10	)	—		(99		)	(672		)	—			(771		)
Dividends declared, $0.20 per share	—		—		—			(116		)	—			(116		)
Balance, March 31, 2019	569		$	6	$	64		$	11,140		$	(74	)	$	11,136

	Class A Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2017	588		$	6	$	49		$	10,544		$	70		$	10,669
Cumulative effect of changes in accounting principle⁽²⁾	—		—		—			122			(1		)	121
Net income	—		—		—			520			—			520
Other comprehensive income (loss)	—		—		—			—			(6		)	(6		)
Common stock issued, stock-based compensation plans	2		—		60			—			—			60
Stock-based compensation expense	—		—		59			—			—			59
Repurchases of common stock	(4	)	—		(105		)	(211		)	—			(316		)
Dividends declared, $0.20 per share	—		—		—			(119		)	—			(119		)
Balance, March 31, 2018	586		$	6	$	63		$	10,856		$	63		$	10,988


(1)	Reflects the adoption of the Accounting Standards Codification ("ASC") Topic 842 "Leases" (the "New Lease Standard") as described in Note 6.


(2)	Reflects the adoption of the ASC Topic 606 "Revenue from Contacts with Customers" (the "New Revenue Standard") as well as Accounting Standards Update ("ASU") 2018-02 "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02") on January 1, 2018. Refer to our Annual Report on Form 10-K for the year ended December 31, 2018.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)



	For the Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	441		$	520
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	133			117
Provision for doubtful accounts	14			2
Deferred income taxes	(42		)	2
Stock-based compensation expense	66			59
Other	(21		)	23
Changes in assets and liabilities:
Trade accounts receivable	(131		)	(273		)
Other current and noncurrent assets	90			247
Accounts payable	49			86
Deferred revenues, current and noncurrent	56			(2		)
Other current and noncurrent liabilities	(386		)	(393		)
Net cash provided by operating activities	269			388
Cash flows from investing activities:
Purchases of property and equipment	(106		)	(96		)
Purchases of available-for-sale investment securities	(243		)	(300		)
Proceeds from maturity or sale of available-for-sale investment securities	650			193
Purchases of held-to-maturity investment securities	(94		)	(222		)
Proceeds from maturity of held-to-maturity investment securities	348			171
Purchases of other investments	(31		)	(31		)
Proceeds from maturity or sale of other investments	29			59
Payments for business combinations, net of cash acquired	(197		)	(1		)
Net cash provided by (used in) investing activities	356			(227		)
Cash flows from financing activities:
Issuance of common stock under stock-based compensation plans	50			60
Repurchases of common stock	(771		)	(316		)
Repayment of term loan borrowings and finance lease obligations	(2		)	(39		)
Net change in notes outstanding under the revolving credit facility	—			(75		)
Dividends paid	(116		)	(118		)
Net cash (used in) financing activities	(839		)	(488		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	3			1
(Decrease) in cash, cash equivalents and restricted cash	(211		)	(326		)
Cash and cash equivalents, beginning of year	1,161			1,925
Cash, cash equivalents and restricted cash, end of period (See Note 9)	$	950		$	1,599

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1 — Interim Consolidated Financial Statements

The terms “Cognizant,” “we,” “our,” “us” and “the Company” refer to Cognizant Technology Solutions Corporation and its subsidiaries unless the context indicates otherwise. We have prepared the accompanying unaudited consolidated financial statements included herein in accordance with generally accepted accounting principles in the United States of America ("GAAP"), and Regulation S-X under the Securities Exchange Act of 1934, (as amended, the "Exchange Act"). The accompanying unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2018. In our opinion, all adjustments considered necessary for a fair statement of the accompanying unaudited 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.

Recently Adopted Accounting Pronouncements



Date Issued and Topic	Date Adopted and Method	Description	Impact
February 2016 Leases	January 1, 2019 Effective Date Method	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 recognizes interest expense and amortization of the ROU asset, and for operating leases, the lessee recognizes 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").	See Note 6 for the impact of adoption of this standard.
March 2017 Nonrefundable Fees and Other Costs	January 1, 2019 Modified Retrospective	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 are 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.	The adoption of this update did not have an 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	Early adoption on January 1, 2019 Prospective	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. In addition, this update clarifies the financial statement presentation requirement for capitalized implementation costs and related amortization of such costs.	The adoption of this update did not have an impact on our financial statements.

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Note 2 — Revenues

Disaggregation of Revenues

The table below presents disaggregated revenues from contracts with customers by customer location, service line and contract-type for each of our business segments. We believe this disaggregation best depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by industry, market and other economic factors. Revenues are attributed to regions based upon customer location. Substantially all of the revenue in our North America region relates to operations in the United States.



	Three Months Ended March 31, 2019
	Three Months Ended March 31, 2019
	Financial Services		Healthcare		Products and Resources		Communications, Media and Technology		Total
	(in millions)
Revenues
Geography:
North America	$	1,018	$	1,042	$	641	$	422	$	3,123
United Kingdom	129		25		94		81		329
Rest of Europe	162		82		115		46		405
Europe - Total	291		107		209		127		734
Rest of World	127		16		64		46		253
Total	$	1,436	$	1,165	$	914	$	595	$	4,110

Service line:
Consulting and technology services	$	913	$	638	$	552	$	306	$	2,409
Outsourcing services	523		527		362		289		1,701
Total	$	1,436	$	1,165	$	914	$	595	$	4,110

Type of contract:
Time and materials	$	919	$	458	$	400	$	375	$	2,152
Fixed-price	464		400		414		190		1,468
Transaction or volume-based	53		307		100		30		490
Total	$	1,436	$	1,165	$	914	$	595	$	4,110

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	Three Months Ended March 31, 2018
	Three Months Ended March 31, 2018
	Financial Services		Healthcare		Products and Resources		Communications, Media and Technology		Total
	(in millions)
Revenues
Geography:
North America	$	1,044	$	1,023	$	572	$	336	$	2,975
United Kingdom	116		23		87		84		310
Rest of Europe	162		61		109		42		374
Europe - Total	278		84		196		126		684
Rest of World	139		14		53		47		253
Total	$	1,461	$	1,121	$	821	$	509	$	3,912

Service line:
Consulting and technology services	$	871	$	638	$	481	$	278	$	2,268
Outsourcing services	590		483		340		231		1,644
Total	$	1,461	$	1,121	$	821	$	509	$	3,912

Type of contract:
Time and materials	$	935	$	448	$	369	$	306	$	2,058
Fixed-price	471		511		361		179		1,522
Transaction or volume-based	55		162		91		24		332
Total	$	1,461	$	1,121	$	821	$	509	$	3,912

Costs to Fulfill

The following table presents information related to the capitalized costs to fulfill, such as set-up or transition activities, for the three months ended March 31, 2019. Costs to fulfill are recorded in "Other noncurrent assets" in our unaudited consolidated statements of financial position and the amortization expense of costs to fulfill is included in "Cost of revenues" in our unaudited consolidated statement of operations. Costs to obtain contracts were immaterial for the periods disclosed.



	Costs to Fulfill
	(in millions)
Balance - December 31, 2018	$	400
Amortization expense	(20		)
Costs capitalized	43
Balance - March 31, 2019	$	423

Contract Balances

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 unaudited 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:



	Contract Assets
	(in millions)
Balance - December 31, 2018	$	305
Revenues recognized during the period but not billed	238
Amounts reclassified to accounts receivable	(208		)
Balance - March 31, 2019	$	335

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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 the timing of when we expect to recognize the revenues. The table below shows significant movements in the deferred revenue balances (current and noncurrent) for the period disclosed:



	Deferred Revenue
	(in millions)
Balance - December 31, 2018	$	348
Amounts billed but not recognized as revenues	205
Revenues recognized related to the opening balance of deferred revenue	(149		)
Balance - March 31, 2019	$	404

Revenues recognized during the three months ended March 31, 2019 for performance obligations satisfied or partially satisfied in previous periods were immaterial.

Remaining Performance Obligations

As of March 31, 2019, the aggregate amount of transaction price allocated to remaining performance obligations, was $1,990 million of which approximately 70% is expected to be recognized as revenue within 2 years. Disclosure is not required for performance obligations that meet any of the following criteria:


(1)	contracts with a duration of one year or less as determined under the New Revenue Standard,


(2)	contracts for which we recognize revenues based on the right to invoice for services performed,


(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


(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 amounts disclosed above.



Note 3 — Business Combinations

During the three months ended March 31, 2019, we completed two business combinations for total consideration of approximately $244 million, inclusive of contingent consideration. These acquisitions were Meritsoft, a financial software company based in Ireland, and Mustache, a U.S. based creative content agency specializing in creating original and branded content for digital, broadcast and social mediums.

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These acquisitions were not material, either individually or in the aggregate, to our operations or cash flow. Accordingly, pro forma results have not been presented. These acquisitions were included in our unaudited consolidated financial statements as of the date on which the businesses were acquired. 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. We will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the date of acquisition. The allocations of preliminary purchase price to the fair value of the aggregate assets acquired and liabilities assumed were as follows:



	Fair Value			Weighted Average Useful Life
	(in millions)
Cash	$	14
Current assets	8
Non-deductible goodwill ⁽¹⁾	157
Customer relationship intangible assets	50			9.9 years
Other intangible assets	30			6.9 years
Current liabilities	(4		)
Noncurrent liabilities	(11		)
Purchase price	$	244

(1) The primary items that generated goodwill are the value of the acquired assembled workforces and synergies between the acquired companies and us, neither of which qualify as an amortizable intangible asset.

There were no business combinations during the three months ended March 31, 2018.



Note 4 — Realignment Charges

We incur realignment charges to accelerate our shift to digital services and solutions while improving the overall efficiency of our operations. As part of this realignment, we may incur charges that include employee separation costs, lease termination costs and charges related to the development of our realignment plans. During the three months ended March 31, 2019, we incurred $2 million in costs associated with our CEO transition and the departure of our President ("Executive Transition Costs"). The total costs related to the realignment are reported in "Selling, general and administrative expenses" in our unaudited consolidated statements of operations. The accrued realignment costs as of March 31, 2019 and December 31, 2018 were immaterial.

Realignment charges were as follows:



	Three Months Ended March 31,
	2019		2018
	(in millions)
Executive Transition Costs	$	2	$	—
Lease termination costs	—		1
Total realignment costs	$	2	$	1

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Note 5 — Investments

Our investments were as follows:



	March 31, 2019		December 31, 2018
	(in millions)
Short-term investments:
Equity investment securities	$	25	$	25
Available-for-sale investment securities	1,361		1,760
Held-to-maturity investment securities	826		1,065
Time deposits ⁽¹⁾	506		500
Total short-term investments	$	2,718	$	3,350



Long-term investments:
Equity and cost method investments	$	73	$	74
Held-to-maturity investment securities	6		6
Total long-term investments	$	79	$	80


(1)	Includes $427 million and $423 million in restricted time deposits as of March 31, 2019 and December 31, 2018, respectively. See Note 9.

Equity Investment Securities

Our equity investment securities consist of a U.S. dollar denominated investment in a fixed income mutual fund. For the three months ended March 31, 2019 and 2018, realized and unrealized gains and losses 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.

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, and asset-backed securities, including 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.

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at March 31, 2019 were as follows:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
U.S. Treasury and agency debt securities	$	576	$	1	$	(4	)	$	573
Corporate and other debt securities	371		1		(1		)	371
Certificates of deposit and commercial paper	19		—		—			19
Asset-backed securities	341		1		(1		)	341
Municipal debt securities	57		—		—			57
Total available-for-sale investment securities	$	1,364	$	3	$	(6	)	$	1,361

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The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at