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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Cognizant Technology Solutions Corporation    CTSH

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

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COGNIZANT TECHNOLOGY : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

10/29/2020 | 05:06am EST

Executive Summary



Cognizant is one of the world's leading professional services companies,
transforming clients' business, operating and technology models for the digital
era. Our services include digital services and solutions, consulting,
application development, systems integration, application testing, application
maintenance, infrastructure services and business process services. Digital
services have become an increasingly important part of our portfolio, aligning
with our clients' focus on becoming data-enabled, customer-centric and
differentiated businesses. We tailor our services and solutions to specific
industries with an integrated global delivery model that employs client service
and delivery teams based at client locations and dedicated global and regional
delivery centers.
In the first quarter of 2020, the global COVID-19 pandemic began causing
significant loss of life and interruption to the global economy, including the
curtailment of activities by businesses and consumers in much of the world as
governments and others seek to limit the spread of the disease. In response to
COVID-19, we have prioritized the safety and well-being of our employees,
business continuity for our clients and supporting the efforts of governments
around the world to contain the spread of the virus. In light of our commitment
to help our clients as they navigate unprecedented business challenges while
protecting the safety of our employees, we have taken numerous steps, and may
continue to take further actions, to address the COVID-19 pandemic. We have been
working closely with our clients to support them as they implemented their
contingency plans, helping them access our services and solutions remotely. We
also undertook a significant effort to enable our employees to work from home by
providing them with computer and Internet accessibility equipment while seeking
to maintain appropriate security protocols. Despite these efforts, in the first
half of the year we experienced some delays in project fulfillment as delivery,
particularly in India and the Philippines, shifted to work-from-home. As
previously reported in our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2020, we are at near full project fulfillment capacity as a
work-from-home scenario is not possible at certain client projects due to
regulatory or other requirements.
As a result of the ongoing pandemic, we are experiencing reduced client demand.
We expect project deferrals, furloughs, and temporary rate concessions to
continue to adversely affect revenues across all of our business segments in
2020 and potentially beyond. We continue to actively monitor the impacts of and
responses to COVID-19 and the related risks, and plan to respond accordingly.
The pandemic continues to evolve, and its ultimate impacts will depend on future
developments that are uncertain and cannot be predicted with confidence, and may
materially adversely affect our business irrespective of our efforts to mitigate
the impact. See   Part II, Item 1A. Risk Factors  .
In the third quarter of 2020, we incurred $21 million of costs in response to
the COVID-19 pandemic, including costs incurred to enable our employees to work
remotely. During the fourth quarter of 2020 we may incur incremental costs
related to the COVID-19 pandemic, primarily related to operating in a
work-from-home environment.
We continue to implement our 2020 Fit for Growth Plan, investing in the key
digital areas of IoT, AI and analytics, digital engineering and cloud, while
working to maintain and optimize our core portfolio of services through
efficiency, tooling and automation, delivery optimization, protection of
renewals, industry alignment and geographic expansion. Our 2020 Fit for Growth
Plan involves certain measures to simplify our organizational model and optimize
our cost structure in order to partially fund the investments required to
execute on our strategy and advance our growth agenda as well as our decision to
exit certain content-related services that are not in line with our strategic
vision for the Company. During the three months ended September 30, 2020, we
incurred $43 million of employee separation and facility exit costs and other
charges under this plan. See   Note 4   for additional information on these
costs which are reported in the caption "Restructuring charges" in our unaudited
consolidated statements of operations. The optimization measures that are part
of the 2020 Fit for Growth Plan are expected to result in total charges of
approximately $200 million, primarily related to severance and facility exit
costs, and are expected to be substantially completed by the end of 2020. The
optimization measures are expected to generate an annualized savings run rate,
before anticipated investments, in the range of approximately $520 million to
$550 million in 2021. The COVID-19 pandemic may adversely impact our ability to
execute and realize the benefits of our strategy and various transformation
initiatives, including the 2020 Fit for Growth Plan. See   Part II, Item 1A.
Risk Factors  .
Our 2019 decision to exit certain content-related services negatively impacted
our third quarter 2020 revenues by approximately $57 million within our
Communications, Media and Technology segment in North America and we anticipate
the impact on 2020 revenues to be approximately $180 million.
On April 20, 2020, we announced a security incident involving a Maze ransomware
attack. As previously reported in our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2020, based on numerous remediation steps that have been
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undertaken and our continued monitoring of our environment, we believe we have
contained the attack and eradicated remnants of the attacker activity from our
environment. The lost revenue and containment, investigation, remediation, legal
and other costs incurred due to the ransomware attack may exceed our insurance
policy limits or may not be covered by insurance at all. Other actual and
potential consequences include, but are not limited to, negative publicity,
reputational damage, lost trust with customers, regulatory enforcement action,
litigation that could result in financial judgments or the payment of settlement
amounts and disputes with insurance carriers concerning coverage. See   Part II,
Item 1A. Risk Factors   and   Note 12   to our unaudited consolidated financial
statements.
In March 2020, the Indian parliament enacted the Budget of India, which
contained a number of provisions related to income tax, including a replacement
of the DDT, previously due from the dividend payer, with a tax payable by the
shareholder receiving the dividend. This provision reduced the tax rate
applicable to us for cash repatriated from India. Following this change, during
the first quarter of 2020, we limited our indefinite reinvestment assertion to
India earnings accumulated in prior years. In July 2020, the U.S. Treasury
Department and the Internal Revenue Service released final regulations, which
became effective in September 2020, that reduced the tax applicable on our
accumulated Indian earnings upon repatriation. As a result, during the third
quarter of 2020, after a thorough analysis of the impact of these changes in law
on the cost of earnings repatriation and considering our strategic decision to
increase our investments to accelerate growth in various international markets
and expand our global delivery footprint, we reversed our indefinite
reinvestment assertion on Indian earnings accumulated in prior years and
recorded a $140 million Tax on Accumulated Indian Earnings. The recorded income
tax expense reflects the India withholding tax on unrepatriated Indian earnings,
which were $5.2 billion as of December 31, 2019, net of applicable U.S. foreign
tax credits.
On October 28, 2020, our subsidiary in India remitted a dividend of $2.1
billion, which resulted in a net payment of $2.0 billion to its shareholders
(non-Indian Cognizant entities), after payment of $105 million of India
withholding tax.
On October 27, 2020, a jury returned a verdict in our favor in the amount of
$854 million, including $570 million punitive damages, in our lawsuit with
Syntel, which was initiated in 2015. We expect Syntel to appeal the decision and
thus we will not record the gain in our financial statements until it becomes
realizable. For more information, see   Note 12   to our unaudited consolidated
financial statements.
Q3 2020 Financial Results
The following table sets forth a summary of our financial results for the three
months ended September 30, 2020 and 2019:
                                                                                                                Increase / Decrease
                                                             2020           2019               $               %
                                                                 (Dollars in millions, except per share data)
Revenues                                               $   4,243$ 4,248$        (5)               (0.1)
Income from operations                                       603                       669                       (66)               (9.9)
Provision for income taxes                                  (276)                     (160)                     (116)               72.5
Net income                                                   348                       497                      (149)              (30.0)
Diluted EPS                                                 0.64                      0.90                     (0.26)              (28.9)
Other Financial Information1
Adjusted Income from Operations                        $     675$   734$       (59)               (8.0)
Adjusted Diluted EPS                                        0.97                      1.08                     (0.11)              (10.2)














1  Adjusted Income From Operations and Adjusted Diluted EPS are not measures of
financial performance prepared in accordance with GAAP. See "Non-GAAP Financial
Measures" for more information and reconciliations to the most
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directly comparable GAAP financial measures.
The following charts set forth revenues and change in revenues by business
segment and geography for the three months ended September 30, 2020 as compared
to the three months ended September 30, 2019:
                                                                  Financial Services                                                                    Healthcare
                                                                           Increase / (Decrease)                                                             Increase / (Decrease)
Dollars in millions                      Revenues              $                    %                  CC %2                Revenues               $                    %                 CC %2
North America                         $     1,033             (19)                 (1.8)                (1.8)            $     1,054               18                  1.7                 1.7
United Kingdom                                123               6                   5.1                  1.6                      40                4                 11.1                 7.0
Continental Europe                            181             (11)                 (5.7)               (10.0)                    116               31                 36.5                30.4
Europe - Total                                304              (5)                 (1.6)                (5.6)                    156               35                 28.9                23.4
Rest of World                                 132               1                   0.8                  2.6                      21                3                 16.7                19.4
Total                                 $     1,469             (23)                 (1.5)                (2.2)            $     1,231               56                  4.8                 4.2

                                                                Products and Resources                                                    

Communications, Media and Technology

                                                                           Increase / (Decrease)                                                             Increase / (Decrease)
Dollars in millions                      Revenues              $                    %                  CC %2                Revenues               $                    %                 CC %2
North America                         $       666             (21)                 (3.1)                (3.0)            $       426              (22)                (4.9)               (4.9)
United Kingdom                                 96               1                   1.1                 (3.5)                     86                9                 11.7                 7.0
Continental Europe                             97             (18)                (15.7)               (18.0)                     43                5                 13.2                 9.4
Europe - Total                                193             (17)                 (8.1)               (11.4)                    129               14                 12.2                 7.8
Rest of World                                  68              (1)                 (1.4)                 0.9                      61                9                 17.3                22.5
Total                                 $       927             (39)                 (4.0)                (4.6)            $       616                1                  0.2                (0.2)


Across all business segments and regions, revenues benefited from our recently
completed acquisitions, including Collaborative Solutions and Contino, and were
negatively impacted by project deferrals, furloughs and temporary rate
concessions brought on by the COVID-19 pandemic. Retail, consumer goods, travel
and hospitality clients within our Products and Resources segment as well as
communications and media clients in our Communications, Media and Technology
segment were particularly adversely affected by the pandemic. Clients in those
industries represented 11% of our total revenues in the third quarter of 2020.
At the same time, our manufacturing, logistics, energy and utilities clients
within our Products and Resources segment generated revenue growth due to our
clients' continued adoption and integration of digital technologies. Revenues in
our Financial Services segment continued to see certain clients transition the
support of some of their legacy systems and operations in-house or to captives.
Revenues among our technology clients in our Communications, Media and
Technology segment in the North America region were negatively impacted by
approximately $57 million due to our 2019 strategic decision to exit certain
content-related services. We continue to see growing demand from our technology
clients for other more strategic digital content services.
Our operating margin and Adjusted Operating Margin2 decreased to 14.2% and
15.9%, respectively, for the quarter ended September 30, 2020 from 15.7% and
17.3%, respectively, for the quarter ended September 30, 2019. Our GAAP and
Adjusted Operating Margin2 were adversely impacted by higher incentive-based
compensation accrual rates, the dilutive impact of our recently completed
acquisitions and an asset impairment related to the discontinuation of certain
real estate construction projects, partially offset by a significant decrease in
travel and entertainment expenses due to the COVID-19 pandemic, cost savings
generated by our cost optimization initiatives and the depreciation of the
Indian rupee against the U.S. dollar. In addition, our 2020 GAAP operating
margin was negatively impacted by COVID-19 Charges.
We finished the third quarter of 2020 with approximately 283,100 employees,
which is a decrease of 6,800 as compared to September 30, 2019 and an increase
of 1,900 as compared to June 30, 2020. Annualized turnover, including both
voluntary and involuntary, was approximately 17.9% for the three months ended
September 30, 2020. A significant portion of our attrition is related to
involuntary exits and is weighted towards the more junior members of our staff.




2 Constant currency revenue growth and Adjusted Operating Margin are not measures 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.

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Business Considerations
The significant and continuing impact and evolving nature of the COVID-19
pandemic makes it difficult to estimate its future impact on our ongoing
business, results of operations and overall financial performance. As clients
work through significant financial challenges related to the COVID-19 pandemic,
we have faced and may continue to face reduced client demand for services,
client pricing pressure, payment term extensions and insolvency risk, additional
delivery challenges, increased costs, a diversion of and strain on management
and other corporate resources, and reduced employee morale and productivity. See
  Part II, Item 1A. Risk Factors  .
While the immediate focus of many clients is on the COVID-19 pandemic impacts to
their businesses, we continue to expect the long-term focus of our clients to be
on their digital transformation into software drive, data-enabled,
customer-centric and differentiated businesses. As our clients seek to optimize
the cost of supporting their legacy systems and operations, our core portfolio
of services may be subject to pricing pressure and lower demand due to clients
transitioning certain work in-house or to new or existing captives.
Our clients will likely continue to contend with industry-specific changes
driven by evolving digital technologies, uncertainty in the regulatory
environment, industry consolidation and convergence as well as international
trade policies and other macroeconomic factors, which could affect their demand
for our services. Additionally, revenue from our technology clients will be
affected by our 2019 strategic decision to exit certain content-related work
under our 2020 Fit for Growth Plan.
We expect our 2020 financial results to be impacted by the cost optimization
measures executed as part of our 2020 Fit for Growth Plan. Additionally, we
intend to continue to invest in our digital capabilities, our talent base and
new service offerings across industries and geographies, while increasing our
investment in sales and marketing professionals to help us expand existing
accounts and acquire new ones. We will continue to pursue strategic acquisitions
that we believe add new technologies or platforms that complement our existing
services, improve our overall service delivery capabilities or expand our
geographic presence. Additionally, we will continue to focus on maintaining and
optimizing our core portfolio of services through efficiency, tooling and
automation, delivery optimization, protection of renewals, industry alignment
and geographic expansion. Finally, through the execution of our 2020 Fit for
Growth Plan and other initiatives, we will focus on operating discipline in
order to appropriately manage our cost structure, giving consideration to the
impact of the COVID-19 pandemic on our revenues.
In addition, our future results may be affected by immigration law changes that
may impact our ability to do business or significantly increase our costs of
doing business, such as those discussed in   Part II, Item 1A. Risk Factors 

,

potential tax law changes and other potential regulatory changes, as well as costs related to the potential resolution of legal and regulatory matters discussed in Note 12 to our unaudited consolidated financial statements.

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Results of Operations


Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

The following table sets forth, for the periods indicated, certain financial data for the three months ended September 30:

                                                                     % of                                  % of                           Increase / Decrease
                                                  2020             Revenues               2019           Revenues                       $                   %
                                                              (Dollars in millions, except per share data)
Revenues                                     $     4,243             100.0             $ 4,248             100.0                   $      (5)                (0.1)
Cost of revenues(1)                                2,647              62.4               2,681              63.1                         (34)                (1.3)
Selling, general and administrative
expenses(1)                                          804              18.9                 706              16.6                          98                 13.9
Restructuring charges                                 51               1.2                  65               1.5                         (14)               (21.5)
Depreciation and amortization expense                138               3.3                 127               3.0                          11                  8.7
Income from operations                               603              14.2                 669              15.7                         (66)                (9.9)
Other income (expense), net                           21                                   (11)                                           32            

(290.9)

Income before provision for income taxes             624              14.7                 658              15.5                         (34)                (5.2)
Provision for income taxes                          (276)                                 (160)                                         (116)                72.5
Income (loss) from equity method investments           -                                    (1)                                            1               (100.0)
Net income                                   $       348               8.2             $   497              11.7                   $    (149)               (30.0)
Diluted earnings per share                   $      0.64$  0.90$   (0.26)               (28.9)

Other Financial Information3
Adjusted Income from Operations and Adjusted
Operating Margin                             $       675              15.9             $   734              17.3                   $     (59)                (8.0)
Adjusted Diluted EPS                         $      0.97$  1.08$   (0.11)               (10.2)




(1)Exclusive of depreciation and amortization expense.
Revenues - Overall
Revenues for the quarter ended September 30, 2020 were flat as compared to the
quarter ended September 30, 2019. Across all business segments and regions,
revenues benefited from our recently completed acquisitions, including
Collaborative Solutions and Contino, and were negatively impacted by project
deferrals, furloughs and temporary rate concessions brought on by the COVID-19
pandemic. We continue to experience pricing pressure within our core portfolio
of services as our clients optimize the cost of supporting their legacy systems
and operations. At the same time, clients continue to adopt and integrate
digital technologies and their demand for our digital operations services and
solutions continues to grow. Revenues from clients added since September 30,
2019 were $145 million.
Revenues from our top clients as a percentage of total revenues were as follows:
                            Three Months Ended September 30,
                                    2020                     2019
Top five clients                                 8.1  %      7.9  %
Top ten clients                                 14.0  %     14.4  %








3 Adjusted Income From Operations, Adjusted Operating Margin and Adjusted Diluted EPS are not measures 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.

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Revenues - Reportable Business Segments
Revenues by reportable business segment were as follows for the three months
ended September 30:
                                                                                                            Increase/ (Decrease)
                                                              2020             2019                 $                   %              CC %4
                                                                                          (Dollars in millions)
Financial Services                                         $ 1,469$ 1,492$        (23)             (1.5)           (2.2)
Healthcare                                                   1,231            1,175                    56               4.8             4.2
Products and Resources                                         927              966                   (39)             (4.0)           (4.6)
Communications, Media and Technology                           616              615                     1               0.2            (0.2)
Total revenues                                             $ 4,243$ 4,248          $         (5)             (0.1)           (0.7)


Financial Services
Revenues from our Financial Services segment decreased 1.5%, or 2.2% on a
constant currency basis4, for the three months ended September 30, 2020, as
compared to the three months ended September 30, 2019. Revenues in this segment
decreased by $13 million from our insurance clients and $10 million from our
banking clients. The decline in revenues from banking clients in this segment
reflects a reduction in revenues on a large transformation project as a result
of delivery delays. Revenues from clients added, including those related to
acquisitions, since September 30, 2019 were $35 million. Demand from certain
financial services clients has been and may continue to be negatively affected
as they transition the support of some of their legacy systems and operations
in-house or to captives.
Healthcare
Revenues from our Healthcare segment grew 4.8%, or 4.2% on a constant currency
basis4, for the three months ended September 30, 2020, as compared to the three
months ended September 30, 2019. Revenues in this segment increased by $49
million from our life sciences clients and $7 million from our healthcare
clients. Our 2019 revenue included the negative impact of a customer dispute
with a healthcare client related to a large volume based contract. Revenues from
clients added, including those related to acquisitions, since September 30, 2019
were $22 million. Demand from our healthcare clients may continue to be affected
by uncertainty in the regulatory and political environment while demand among
our life sciences clients may be affected by industry consolidation.
Products and Resources
Revenues from our Products and Resources segment decreased 4.0%, or 4.6% on a
constant currency basis4, for the three months ended September 30, 2020, as
compared to the three months ended September 30, 2019. Retail, consumer goods,
travel and hospitality clients were particularly adversely affected by the
pandemic and are expected to continue to be negatively impacted for the
remainder of 2020 and possibly beyond. In the third quarter of 2020, revenues
decreased by $37 million among our retail and consumer goods clients and $45
million among our travel and hospitality clients. Revenues from our
manufacturing, logistics, energy and utilities clients increased $43 million due
to our clients' adoption and integration of digital technologies. Revenues from
clients added, including those related to acquisitions, since September 30, 2019
were $41 million.

Communications, Media and Technology
Revenues from our Communications, Media and Technology segment for the three
months ended September 30, 2020 were flat as compared to the three months ended
September 30, 2019. Revenues from our communications and media clients increased
by $20 million while revenues from our technology clients decreased by $19
million. Revenues among our technology clients in this segment were negatively
impacted by approximately $57 million due to our 2019 strategic decision to exit
certain content-related services and we anticipate the impact on 2020 revenues
to be approximately $180 million. Additionally, revenues were negatively
impacted by the COVID-19 pandemic, particularly among our communications and
media clients, partially offset by growing demand from our technology clients
for other more strategic digital content services. Revenues from clients added,
including those related to acquisitions, since September 30, 2019 were $47
million.




4  Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
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Revenues - Geographic Markets
Revenues by geographic market were as follows for the three months ended
September 30:
                                                               Increase / (Decrease)
                          2020         2019                  $                   %         CC %5
                                                  (Dollars in millions)
North America           $ 3,179$ 3,223      $                  (44)      (1.4)      (1.4)
United Kingdom              345          325                          20        6.2        2.0
Continental Europe          437          430                           7        1.6       (2.4)
Europe - Total              782          755                          27        3.6       (0.5)
Rest of World               282          270                          12        4.4        7.1
Total revenues          $ 4,243$ 4,248      $                   (5)      (0.1)      (0.7)


North America continues to be our largest market, representing 74.9% of total
revenues for the third quarter of 2020. Our North America region was negatively
impacted by our strategic decision to exit certain content-related services in
our Communications, Media and Technology segment and the transition of the
support of legacy systems for certain financial services and healthcare clients
in-house or to captives. Revenue growth in our Continental Europe region was
negatively affected by the decline in banking revenues in this region due to the
reduction of revenues on a large transformation project as a result of delivery
delays. Revenue growth in our Rest of World region was driven by our
communications and media clients. We believe that there are opportunities for
long-term growth across all of our geographic 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, employee benefits,
project-related immigration and travel for technical personnel, subcontracting
and equipment costs relating to revenues. Our cost of revenues decreased by 1.3%
during the third quarter of 2020 as compared to the third quarter of 2019,
decreasing as a percentage of revenues to 62.4% in the third quarter of 2020
compared to 63.1% in the third quarter of 2019. The decrease in cost of
revenues, as a percentage of revenues, was primarily due to a significant
decrease in travel and entertainment costs as a result of a reduction in travel
due to the COVID-19 pandemic, cost savings generated as a result of our cost
optimization strategy and the depreciation of the Indian rupee against the U.S.
dollar, partially offset by higher incentive-based compensation accrual rates in
2020.
SG&A Expenses (Exclusive of Depreciation and Amortization Expense)
SG&A expenses consist primarily of salaries, incentive-based compensation,
stock-based compensation expense, employee benefits, immigration, travel,
marketing, communications, management, finance, administrative and occupancy
costs. SG&A expenses increased by 13.9% during the third quarter of 2020 as
compared to the third quarter of 2019, increasing as a percentage of revenues to
18.9% in 2020 as compared to 16.6% in 2019. The increase, as a percentage of
revenues, was primarily due to an increase in compensation and benefit costs,
including higher incentive-based compensation, incremental costs related to our
recently completed acquisitions and an asset impairment related to the
discontinuation of certain real estate construction projects, partially offset
by a significant decrease in travel and entertainment costs as a result of the
reduction in travel due to the pandemic.
Restructuring Charges
Restructuring charges consist of our 2020 Fit for Growth Plan and our
realignment program. Restructuring charges were $51 million or 1.2%, as a
percentage of revenues for the three months ended September 30, 2020, as
compared to $65 million or 1.5%, as a percentage of revenues for the three
months ended September 30, 2019. For further detail on our restructuring charges
see   Note 4   to our unaudited consolidated financial statements.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by 8.7% during the third quarter
of 2020 as compared to the third quarter of 2019. The increase is due to
procurement of additional computer equipment primarily to provision
work-from-home arrangements and amortization of intangibles from recently
completed acquisitions.


5  Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
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Operating Margin - Overall
Our operating margin and Adjusted Operating Margin6 decreased to 14.2% and
15.9%, respectively, for the quarter ended September 30, 2020 from 15.7% and
17.3%, respectively, for the quarter ended September 30, 2019. Our GAAP and
Adjusted Operating Margin6 were adversely impacted by higher incentive-based
compensation accrual rates, the dilutive impact of our recently completed
acquisitions and an asset impairment related to the discontinuation of certain
real estate construction projects, partially offset by a significant decrease in
travel and entertainment expenses due to the COVID-19 pandemic, cost savings
generated by our cost optimization initiatives and the depreciation of the
Indian rupee against the U.S. dollar. In addition, our 2020 GAAP operating
margin was negatively impacted by COVID-19 Charges.
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 95 basis points, or 0.95 percentage points, during the
three months ended September 30, 2020. 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 17 basis points or 0.17 percentage points.
We enter into hedges of certain Indian rupee denominated payments in India,
which are intended to mitigate the volatility of the changes in the exchange
rate between the U.S. dollar and the Indian rupee. During the three months ended
September 30, 2020, the settlement of our cash flow hedges positively impacted
our operating margin by approximately 14 basis points or 0.14 percentage points
and positively impacted our operating margin by approximately 5 basis points or
0.05 percentage points for the three months ended September 30, 2019.
Segment Operating Profit

Segment operating profit was as follows for the three months ended September 30:
                                                                                                                                                Increase /
                                                        2020           Operating Margin %           2019           Operating Margin %           (Decrease)
                                                                                              (Dollars in millions)
Financial Services                                   $   463                  31.5               $   418                  28.0               $          45
Healthcare                                               378                  30.7                   312                  26.6                          66
Products and Resources                                   307                  33.1                   274                  28.4                          33
Communications, Media and Technology                     191                  31.0                   186                  30.2                          

5

Total segment operating profit                         1,339                  31.6                 1,190                  28.0                         

149

Less: unallocated costs                                  736                                         521                                               

215

Income from operations                               $   603                  14.2               $   669                  15.7               $         

(66)



Operating margins across all our segments benefited from a significant decrease
in travel and entertainment costs due to COVID-19 related reductions in travel,
cost savings generated by our cost optimization initiatives and the depreciation
of the Indian rupee against the U.S. dollar, partially offset by the dilutive
impact of our recently completed acquisitions.
Certain SG&A expenses, the excess or shortfall of incentive-based compensation
for commercial and delivery personnel as compared to target, restructuring
costs, COVID-19 Charges, costs related to the ransomware attack, 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 and are included above as "unallocated
costs" and adjusted against our total income from operations. The increase in
unallocated costs in the third quarter of 2020 compared to the third quarter of
2019 is primarily due to a smaller shortfall in 2020 than in 2019 of
incentive-based compensation as compared to target, asset impairment charge
related to the discontinuation of certain real estate construction projects and
COVID-19 Charges.






6  Adjusted Operating Margin is not a measure 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 measure.
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Other Income (Expense), Net
Total other income (expense), net consists primarily of foreign currency
exchange gains and losses, interest income and interest expense. The following
table sets forth total other income (expense), net for the three months ended
September 30:
                                                                                                       Increase/
                                                               2020                   2019             Decrease
                                                                        (in millions)
Foreign currency exchange gains (losses)                  $     56

$ (53)$ 109 (Losses) gains on foreign exchange forward contracts not designated as hedging instruments

                              (57)                      6                  (63)
Foreign currency exchange gains (losses), net                   (1)                    (47)                  46
Interest income                                                 27                      43                  (16)
Interest expense                                                (6)                     (7)                   1
Other, net                                                       1                       -                    1
Total other income (expense), net                         $     21

$ (11)$ 32



The foreign currency exchange gains and losses were primarily attributed to the
remeasurement of the Indian rupee denominated net monetary assets and
liabilities in our U.S. dollar functional currency India subsidiaries and, 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 and losses on foreign exchange forward contracts not
designated as hedging instruments related to the realized and unrealized gains
and losses on foreign exchange forward contracts entered into to offset foreign
currency exposure to non-U.S. dollar denominated net monetary assets and
liabilities. As of September 30, 2020, the notional value of our undesignated
hedges was $2,575 million. The decrease in interest income of $16 million was
primarily attributable to lower yields on our invested balances in India in
2020.
Provision for Income Taxes
The provision for income taxes increased to $276 million during the three months
ended September 30, 2020 from $160 million for the three months ended
September 30, 2019. The effective income tax rate increased to 44.2% for the
three months ended September 30, 2020 compared to 24.3% for the three months
ended September 30, 2019, primarily driven by the Tax on Accumulated Indian
Earnings.
Net Income
Net income decreased to $348 million for the three months ended September 30,
2020 from $497 million for the three months ended September 30, 2019,
representing 8.2% and 11.7% of revenues, respectively. The decrease in net
income was driven by the Tax on Accumulated Indian Earnings and lower income
from operations, partially offset by lower foreign currency exchange losses.

Non-GAAP Financial Measures
Portions of our disclosure include non-GAAP 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 our non-GAAP financial
measures to the corresponding GAAP measures, set forth below, should be
carefully evaluated.

Our non-GAAP financial measures, Adjusted Operating Margin, Adjusted Income From
Operations and Adjusted Diluted EPS exclude unusual items. Additionally,
Adjusted Diluted EPS excludes net non-operating foreign currency exchange gains
or losses and the tax impact of all the 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. 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 our operating results.
For our internal management reporting and budgeting purposes, we use various
GAAP and non-GAAP financial measures for financial and operational
decision-making, to evaluate period-to-period comparisons, to
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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 certain
costs provides a meaningful supplemental measure for investors to evaluate our
financial performance. We believe that the presentation of our non-GAAP
financial measures along with reconciliations to the most comparable GAAP
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 such as our 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 financial 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 three months ended September 30:
                                                                             % of                                  % of
                                                        2020               Revenues             2019             Revenues
                                                                (Dollars in millions, except per share amounts)
GAAP income from operations and operating margin    $      603               14.2             $  669               15.7
Realignment charges (1)                                      8                0.2                 65                1.6
2020 Fit for Growth plan restructuring charges (2)          43                1.0                  -                  -
COVID-19 Charges (3)                                        21                0.5                  -                  -

Adjusted Income from Operations and Adjusted
Operating Margin                                    $      675               15.9             $  734               17.3

GAAP diluted EPS                                    $     0.64$ 0.90
Effect of above adjustments, pre-tax                      0.13                                  0.12
Non-operating foreign currency exchange (gains)
losses, pre-tax (4)                                          -                                  0.09
Tax effect of above adjustments (5)                      (0.06)                                (0.03)
Tax on Accumulated Indian Earnings (6)                    0.26                                     -

Adjusted Diluted EPS                                $     0.97$ 1.08





(1)As part of the realignment program, during the three months ended
September 30, 2020, we incurred certain professional services fees. See   Note
4   to our unaudited consolidated financial statements for additional
information.
(2)As part of our 2020 Fit for Growth plan, during the three months ended
September 30, 2020, we incurred certain employee separation and facility exit
costs and other charges. See   Note 4   to our unaudited consolidated financial
statements for additional information.
(3)During the three months ended September 30, 2020, we incurred costs in
response to the COVID-19 pandemic including costs to enable our employees to
work remotely. Most of the costs related to the pandemic are reported in "Cost
of revenues" in our unaudited consolidated statements of operations.
(4)Non-operating foreign currency exchange gains and losses, inclusive of gains
and losses on related foreign exchange forward contracts not designated as
hedging instruments for accounting purposes, are reported in "Foreign currency
exchange gains (losses), net" in our unaudited consolidated statements of
operations.
(5)Presented below are the tax impacts of each of our non-GAAP adjustments to
pre-tax income:
                                                               Three Months Ended
                                                                 September 30,
                                                                 2020              2019
                                                                 (in millions)
  Non-GAAP income tax benefit (expense) related to:
  Realignment charges                                   $       2$ 17
  2020 Fit for Growth Plan restructuring charges               11                    -
  COVID-19 Charges                                              6                    -
  Foreign currency exchange gains and losses                   15                   (2)



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The effective 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.
(6)  During the third quarter of 2020 we reversed our indefinite reinvestment
assertion on Indian earnings accumulated in prior years and recorded $140
million in income tax expense.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The following table sets forth, for the periods indicated, certain financial data for the nine months ended September 30:

                                                                 % of                                % of                       Increase / Decrease
                                               2020            Revenues            2019            Revenues                    $                   %
                                                                   (Dollars in millions, except per share data)
Revenues                                    $ 12,468             100.0          $ 12,499             100.0                $     (31)               (0.2)
Cost of revenues(1)                            8,009              64.2             7,885              63.1                      124                 1.6
Selling, general and administrative
expenses(1)                                    2,226              17.9             2,296              18.4                      (70)               (3.0)
Restructuring charges                            177               1.4               116               1.0                       61                52.6
Depreciation and amortization expense            407               3.3               375               3.0                       32                 8.5
Income from operations                         1,649              13.2             1,827              14.6                     (178)               

(9.7)

Other income (expense), net                      (20)                                 90                                       (110)             

(122.2)

Income before provision for income taxes       1,629              13.1             1,917              15.3                     (288)              

(15.0)

Provision for income taxes                      (552)                               (469)                                       (83)               17.7
Income from equity method investments             (1)                                 (1)                                         -                   -
Net income                                  $  1,076               8.6          $  1,447              11.6                $    (371)              (25.6)
Diluted EPS                                 $   1.98$   2.57$   (0.59)              (23.0)
Other Financial Information (7)
Adjusted Income From Operations and
Adjusted Operating Margin                   $  1,878              15.1          $  2,060              16.5                $    (182)               (8.8)
Adjusted Diluted EPS                        $   2.75$   2.93$   (0.18)               (6.1)




(1)Exclusive of depreciation and amortization expense.
Revenues - Overall
Revenues for the nine months ended September 30, 2020 were flat as compared to
the nine months ended September 30, 2019. Across all business segments and
regions, revenues benefited from our recently completed acquisitions, including
Zenith, Collaborative Solutions and Contino, and were negatively impacted by the
ransomware attack and fulfillment challenges, project deferrals, furloughs and
temporary rate concessions brought on by the COVID-19 pandemic. We continue to
experience pricing pressure within our core portfolio of services as our clients
optimize the cost of supporting their legacy systems and operations. At the same
time, clients continue to adopt and integrate digital technologies and their
demand for our digital operations services and solutions continues to grow. In
addition, our revenues from clients added since September 30, 2019 were $250
million.
Revenues from our top clients as a percentage of total revenues were as follows:
                            Nine Months Ended September 30,
                                    2020                    2019
Top five clients                                8.1  %      8.1  %
Top ten clients                                14.1  %     14.8  %





7 Adjusted Income From Operations, Adjusted Operating Margin and Adjusted Diluted EPS are not measures 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.

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Revenues - Reportable Business Segments
Revenues by reportable business segment were as follows for the nine months
ended September 30:
                                                                                                              Increase / (Decrease)
                                                              2020              2019                  $                    %               CC %8
                                                                                   (Dollars in millions)
Financial Services                                         $  4,316$  4,401          $         (85)             (1.9)            (1.6)
Healthcare                                                    3,582             3,474                    108               3.1              3.1
Products and Resources                                        2,748             2,807                    (59)             (2.1)            (1.5)
Communications, Media and Technology                          1,822             1,817                      5               0.3              0.9
Total revenues                                             $ 12,468$ 12,499          $         (31)             (0.2)             0.1


Financial Services
Revenues from our Financial Services segment declined 1.9%, or 1.6% on a
constant currency basis8, for the nine months ended September 30, 2020, as
compared to the nine months ended September 30, 2019. Revenues in this segment
decreased $54 million from our insurance clients and $31 million from our
banking clients. Demand from certain financial services clients has been and may
continue to be negatively affected as they transition the support of some of
their legacy systems and operations in-house or to captives. Revenues from
clients added, including those related to acquisitions, since September 30, 2019
were $64 million.
Healthcare
Revenues from our Healthcare segment grew 3.1% for the nine months ended
September 30, 2020, as compared to the nine months ended September 30, 2019.
Revenues in this segment increased by $144 million from our life sciences
clients including revenue from our Zenith acquisition, while revenues from our
healthcare clients decreased by $36 million. Revenues from our healthcare
clients were negatively impacted by the establishment of an offshore captive by
a large client, partially offset by the 2019 negative impact of a customer
dispute with a healthcare client related to a large volume based contract.
Revenues from clients added since September 30, 2019 were $42 million.
Products and Resources
Revenues from our Products and Resources segment declined 2.1%, or 1.5% on a
constant currency basis8, for the nine months ended September 30, 2020, as
compared to the nine months ended September 30, 2019. Retail, consumer goods,
travel and hospitality clients were particularly adversely affected by the
COVID-19 pandemic. Thus, revenues from our travel and hospitality clients and
from our retail and consumer goods clients decreased by $87 million and $66
million, respectively. Revenues from our manufacturing, logistics, energy and
utilities clients increased $94 million due to our clients' adoption and
integration of digital technologies. Revenues from clients added since
September 30, 2019 were $70 million.
Communications, Media and Technology
Revenues from our Communications, Media and Technology segment remained flat for
the nine months ended September 30, 2020, as compared to the nine months ended
September 30, 2019. Revenues from our communications and media clients increased
$34 million while revenues from our technology clients decreased $29 million.
Revenues among our technology clients in this segment were negatively impacted
by approximately $128 million due to our 2019 strategic decision to exit certain
content-related services. Additionally, revenues were negatively impacted by the
COVID-19 pandemic, particularly among our communications and media clients,
partially offset by growing demand from our technology clients for other more
strategic digital content services. Revenues from clients added, including those
related to acquisitions, since September 30, 2019 were $74 million.







8  Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
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Revenues - Geographic Markets
Revenues by geographic market were as follows for the nine months ended
September 30:
                                                                 Increase / (Decrease)
                           2020          2019                  $                   %         CC %9
                                             (Dollars in millions)
North America           $  9,375$  9,485      $                 (110)      (1.2)      (1.1)
United Kingdom               996           976                          20        2.0        2.1
Continental Europe         1,293         1,262                          31        2.5        2.6
Europe - Total             2,289         2,238                          51        2.3        2.4
Rest of World                804           776                          28        3.6        8.1
Total revenues          $ 12,468$ 12,499      $                  (31)      (0.2)       0.1


North America continues to be our largest market, representing 75.2% of total
revenues for the nine months ended September 30, 2020. Our North America region
was negatively impacted by our strategic decision to exit certain
content-related services in our Communications, Media and Technology segment and
the transition of the support of legacy systems for certain financial services
and healthcare clients in-house or to captives. Revenue growth in our Europe and
Rest of World regions was driven by our life sciences clients and our
Communications, Media and Technology clients, respectively.
Cost of Revenues (Exclusive of Depreciation and Amortization Expense)
Our cost of revenues consists primarily of salaries, incentive-based
compensation, stock-based compensation expense, employee benefits,
project-related immigration and travel for technical personnel, subcontracting
and equipment costs relating to revenues. Our cost of revenues increased by 1.6%
during the nine months ended September 30, 2020 as compared to the nine months
ended September 30, 2019, increasing as a percentage of revenues to 64.2% during
the 2020 period compared to 63.1% in the 2019 period. The increase in cost of
revenues, as a percentage of revenues, was due primarily to an increase in costs
related to higher incentive-based compensation accrual rates in 2020 and the
impact on revenues from the COVID-19 pandemic and the ransomware attack. These
impacts were partially offset by a significant decrease in travel and
entertainment costs as a result of a reduction in travel due to the COVID-19
pandemic, the cost savings generated as a result of our cost optimization
strategy and the depreciation of the Indian rupee against the U.S. dollar.
SG&A Expenses (Exclusive of Depreciation and Amortization Expense)
SG&A expenses consist primarily of salaries, incentive-based compensation,
stock-based compensation expense, employee benefits, immigration, travel,
marketing, communications, management, finance, administrative and occupancy
costs. SG&A expenses decreased by 3.0% during the nine months ended
September 30, 2020 as compared to the nine months ended September 30, 2019,
decreasing as a percentage of revenues to 17.9% during the 2020 period as
compared to 18.4% in the 2019 period. The decrease, as a percentage of revenues,
was due primarily to the $117 million incremental accrual in 2019 related to the
India Defined Contribution Obligation as discussed in   Note 12   to our
unaudited consolidated financial statements, a significant decrease in travel
and entertainment costs as a result of a reduction in travel due to the COVID-19
pandemic and lower immigration costs, partially offset by an increase in
compensation and benefit costs, including higher incentive-based compensation,
the incremental costs of our recently completed acquisitions, reduced revenues
brought on by the COVID-19 pandemic and the impact of the ransomware attack on
both revenues and costs.
Restructuring Charges
Restructuring charges consist of our 2020 Fit for Growth Plan and our
realignment program. Restructuring charges were $177 million or 1.4%, as a
percentage of revenues for the nine months ended September 30, 2020, as compared
to $116 million or 1.0%, as a percentage of revenues for the nine months ended
September 30, 2019. For further detail on our restructuring charges see   Note
4   to our unaudited consolidated financial statements.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by 8.5% during the nine months
ended September 30, 2020 as compared to the nine months ended September 30,
2019. The increase is due to procurement of additional computer equipment
primarily to provision work-from-home arrangements and amortization of
intangibles from recently completed acquisitions.


9  Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
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Operating Margin - Overall
Our operating margin and Adjusted Operating Margin10 decreased to 13.2% and
15.1%, respectively, for the nine months ended September 30, 2020 from 14.6% and
16.5% for the nine months ended September 30, 2019. Our GAAP and Adjusted
Operating Margin10 were adversely impacted by higher incentive-based
compensation accrual rates, the dilutive impact of our recently completed
acquisitions, the decline in revenues brought on by the COVID-19 pandemic and
the impact of the ransomware attack on both revenues and costs. These impacts
were partially offset by a significant decrease in travel and entertainment
expenses due to the COVID-19 pandemic, the cost savings generated as a result of
our cost optimization strategy, lower immigration costs and the depreciation of
the Indian rupee against the U.S. dollar. In addition, our 2019 GAAP operating
margin included a 0.9% negative impact of the incremental accrual in 2019
related to the India Defined Contribution Obligation as discussed in   Note 12
to our unaudited consolidated financial statements, while our 2020 GAAP
operating margin was negatively impacted by higher restructuring charges as
discussed in   Note 4   to our unaudited consolidated financial statements as
well as COVID-19 Charges.
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 102 basis points, or 1.02 percentage points, during the
nine months ended September 30, 2020. 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 17 basis points or 0.17 percentage points.
We enter into hedges of certain Indian rupee denominated payments in India,
which are intended to mitigate the volatility of the changes in the exchange
rate between the U.S. dollar and the Indian rupee. During the nine months ended
September 30, 2020 the settlement of our cash flow hedges negatively impacted
our operating margin by approximately 6 basis points or 0.06 percentage points,
as compared to a positive impact of approximately 2 basis points or 0.02
percentage points during the nine months ended September 30, 2019.
Segment Operating Profit
Segment operating profit was as follows for the nine months ended September 30:
                                                                                                                                                Increase /
                                                        2020           Operating Margin %           2019           Operating Margin %           (Decrease)
                                                                                              (Dollars in millions)
Financial Services                                   $ 1,209                  28.0               $ 1,225                  27.8               $         (16)
Healthcare                                             1,004                  28.0                   963                  27.7                          41
Products and Resources                                   805                  29.3                   763                  27.2                          42
Communications, Media and Technology                     555                  30.5                   544                  29.9                          

11

Total segment operating profit                         3,573                  28.7                 3,495                  28.0                          78
Less: unallocated costs                                1,924                                       1,668                                               256
Income from operations                               $ 1,649                  13.2               $ 1,827                  14.6               $        (178)


Across all our business segments, operating margins benefited from a significant
decrease in travel and entertainment costs due to COVID-19 related reductions in
travel, cost savings generated by our cost optimization initiatives and the
depreciation of the Indian rupee against the U.S. dollar partially offset by the
dilutive impact of our recently completed acquisitions and the negative impact
on revenues of the COVID-19 pandemic and the ransomware attack. Additionally,
the 2019 operating margin in our Healthcare segment was negatively impacted by
mergers within the segment and a customer dispute with a customer related to a
large volume based contract. The increase in unallocated costs in 2020 compared
to 2019 is primarily due to a smaller shortfall in 2020 than in 2019 of
incentive-based compensation as compared to target, higher restructuring costs,
COVID-19 Charges and costs related to the ransomware attack, partially offset by
the 2019 India Defined Contribution Obligation discussed in   Note 12   to our
unaudited consolidated financial statements.






10  Adjusted Operating Margin is not a measure 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 measure.
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Other Income (Expense), Net
Total other income (expense), net consists primarily of foreign currency
exchange gains and losses, interest income and interest expense. The following
table sets forth total other income (expense), net for the nine months ended
September 30:
                                                                                                    Increase/
                                                             2020                  2019             Decrease
                                                                       (in millions)
Foreign currency exchange (losses)                        $    (51)

$ (30)$ (21) (Losses) gains on foreign exchange forward contracts not designated as hedging instruments

                              (54)                   1                  (55)
Foreign currency exchange gains (losses), net                 (105)                 (29)                 (76)
Interest income                                                105                  136                  (31)
Interest expense                                               (21)                 (20)                  (1)
Other, net                                                       1                    3                   (2)
Total other income (expense), net                         $    (20)$    90$     (110)


The foreign currency exchange gains and losses were primarily attributed to the
remeasurement of the Indian rupee denominated net monetary assets and
liabilities in our U.S. dollar functional currency India subsidiaries and, 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 and losses on our foreign exchange forward contracts not
designated as hedging instruments related to the realized and unrealized gains
and losses on foreign exchange forward contracts entered into to offset foreign
currency exposure to non-U.S. dollar denominated net monetary assets and
liabilities. The decrease in interest income of $31 million was primarily
attributable to lower yields on our invested balances in India in 2020.
Provision for Income Taxes
The provision for income taxes increased to $552 million during the nine months
ended September 30, 2020 from $469 million during the nine months ended
September 30, 2019. The effective income tax rate increased to 33.9% for the
nine months ended September 30, 2020 from 24.5% for the nine months ended
September 30, 2019 primarily driven by the Tax on Accumulated Indian Earnings
and the depreciation of the Indian rupee against the U.S. dollar, which resulted
in non-deductible foreign currency exchange losses on our unaudited consolidated
statement of operations.
Net Income
Net income decreased to $1,076 million for the nine months ended September 30,
2020 from $1,447 million for the nine months ended September 30, 2019,
representing 8.6% and 11.6% of revenues, respectively. The decrease in net
income was driven by lower income from operations, the Tax on Accumulated Indian
Earnings and higher foreign currency exchange losses.

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Non-GAAP Financial Measures
The following table presents a reconciliation of each non-GAAP financial measure
to the most comparable GAAP measure for the nine months ended September 30:
                                                                              % of                                   % of
                                                         2020               Revenues              2019             Revenues
                                                                 (Dollars in millions, except per share amounts)
GAAP income from operations and operating margin    $     1,649               13.2             $ 1,827               14.6
Realignment charges (1)                                      40                0.3                 116                1.0
2020 Fit for Growth plan restructuring charges (2)          137                1.1                   -                  -
COVID-19 Charges (3)                                         52                0.5                   -                  -
Incremental accrual related to the India Defined
Contribution Obligation (4)                                   -                  -                 117                0.9

Adjusted Income from Operations and Adjusted
Operating Margin                                    $     1,878               15.1             $ 2,060               16.5

GAAP diluted EPS                                    $      1.98$  2.57
Effect of above adjustments, pre-tax                       0.42                                   0.41
Non-operating foreign currency exchange (gains)
losses, pre-tax (5)                                        0.19                                   0.06
Tax effect of above adjustments (6)                       (0.10)                                 (0.11)
Tax on Accumulated Indian Earnings (7)                     0.26                                      -
Adjusted Diluted EPS                                $      2.75$  2.93





(1)As part of the realignment program, during the nine months ended
September 30, 2020, we incurred employee retention costs and professional fees.
See   Note 4   to our unaudited consolidated financial statements for additional
information.
(2)As part of our 2020 Fit for Growth plan, during the nine months ended
September 30, 2020, we incurred certain employee separation, employee retention
and facility exit costs and other charges. See   Note 4   to our unaudited
consolidated financial statements for additional information.
(3)During the nine months ended September 30, 2020, we incurred costs in
response to the COVID-19 pandemic including a one-time bonus to our employees at
the designation of associate and below in both India and the Philippines, costs
to enable our employees to work remotely and provide medical staff and extra
cleaning services for our facilities. Most of the costs related to the pandemic
are reported in "Cost of revenues" in our unaudited consolidated statements of
operations.
(4)In 2019, we recorded an accrual of $117 million related to the India Defined
Contribution Obligation as further described in   Note 12   to our unaudited
consolidated financial statements.
(5)Non-operating foreign currency exchange gains and losses, inclusive of gains
and losses on related foreign exchange forward contracts not designated as
hedging instruments for accounting purposes, are reported in "Foreign currency
exchange gains (losses), net" in our unaudited consolidated statements of
operations.
(6)Presented below are the tax impacts of each of our non-GAAP adjustments to
pre-tax income:
                                                                         Nine Months Ended
                                                                           September 30,
                                                                     2020                  2019
                                                                           (in millions)
Non-GAAP income tax benefit (expense) related to:
Realignment charges                                            $          10          $        30
2020 Fit for Growth Plan restructuring charges                            36                    -
COVID-19 Charges                                                          14                    -

Incremental accrual related to the India Defined Contribution Obligation

                                                                 -                   31
Foreign currency exchange gains and losses                                (3)                  (1)


The effective 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)During the third quarter of 2020 we reversed our indefinite reinvestment assertion on Indian earnings accumulated in prior years and recorded $140 million in income tax expense.

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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 September 30, 2020, we had cash, cash equivalents and short-term
investments of $4,575 million. During the first quarter of 2020, we borrowed
$1.74 billion against our revolving credit facility in order to increase our
cash on hand in the United States, as a large portion of our cash is held in
India.

The following table provides a summary of our cash flows for the nine months
ended September 30:
                                         2020         2019        Increase / Decrease
                                                        (in millions)
Net cash provided by (used in):
Operating activities                   $ 2,401$ 1,561      $                840
Investing activities                    (1,189)       1,963                    (3,152)
Financing activities                       617       (2,316)                    2,933



Operating activities
The increase in cash provided by operating activities for the nine months ended
September 30, 2020 compared to the same period in 2019 was primarily driven by
improved collections on our trade accounts receivable, deferrals of certain
payments due to COVID-19 pandemic regulatory relief provided by several
jurisdictions in which we operate, lower incentive-based compensation payouts
and lower cash taxes paid in 2020.
We monitor turnover, aging and the collection of accounts receivable by client.
Our DSO calculation includes receivables, net of allowance for doubtful
accounts, and contract assets, reduced by the uncollected portion of our
deferred revenue. Our DSO was 72 days as of September 30, 2020, 77 as of
September 30, 2019 and 73 days as of December 31, 2019. During the fourth
quarter of 2019, we changed our policy with regard to the presentation of
certain amounts due to customers, such as discounts and rebates, and
retrospectively applied this policy to the calculation of DSO as of September
30, 2019. This change in policy had the effect of reducing our September 30,
2019 DSO by 1 day.

Investing activities
Net cash used in investing activities for the nine months ended September 30,
2020 was primarily driven by payments for acquisitions and outflows for capital
expenditures. Net cash provided by investing activities for the nine months
ended September 30, 2019 was driven by net sales and maturities of investment
securities partially offset by payments for acquisitions and outflows for
capital expenditures.
Financing activities
The cash provided by financing activities for the nine months ended
September 30, 2020 compared to cash used in financing activities in the nine
months ended September 30, 2019 is primarily a result of our borrowing against
the revolving credit facility and lower repurchases of common stock in the nine
months ended September 30, 2020 as compared to the nine months ended
September 30, 2019.
We have a Credit Agreement providing for a $750 million Term Loan and a $1,750
million unsecured revolving credit facility, which are due to mature in November
2023. We are required under the Credit Agreement to make scheduled quarterly
principal payments on the Term Loan.
The Credit Agreement requires interest to be paid, at our option, at either the
ABR or the Eurocurrency Rate (each as defined in the Credit Agreement), plus, in
each case, an Applicable Margin (as defined in the Credit Agreement). Initially,
the Applicable Margin is 0.875% with respect to Eurocurrency Rate loans and
0.00% with respect to ABR loans. Subsequently, the Applicable Margin with
respect to Eurocurrency Rate 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 1.125%, depending on our Leverage Ratio, which is the ratio of
indebtedness for borrowed money to Consolidated EBITDA, as defined in the Credit
Agreement). Our Credit Agreement also provides a mechanism for determining an
alternative rate of interest to the Eurocurrency rate after LIBOR is no longer
available. The outstanding balance under our revolving credit facility as of
September 30, 2020 is a Eurocurrency Rate loan with a maturity of November 2023
and an Interest Period (as defined in the Credit Agreement) of one month.
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The Credit Agreement contains customary affirmative and negative covenants as
well as a financial covenant. The financial covenant is tested at the end of
each fiscal quarter and requires us to maintain a Leverage Ratio not in excess
of 3.50 to 1.00, or for a period of up to four quarters following certain
material acquisitions, 3.75 to 1.00. We were in compliance with all debt
covenants and representations of the Credit Agreement as of September 30, 2020.
In February 2020, our India subsidiary renewed its one-year 13 billion Indian
rupee ($177 million at the September 30, 2020 exchange rate) working capital
facility, which requires us to repay any balances drawn down within 90 days from
the date of disbursement. There is a 1.0% prepayment penalty applicable to
payments made prior to 30 days after disbursement. This working capital facility
contains affirmative and negative covenants and may be renewed annually in
February. As of September 30, 2020, we have not borrowed funds under this
facility.
During the nine months ended September 30, 2020, we returned $1,195 million to
our stockholders through $833 million in share repurchases under our stock
repurchase program and $362 million in dividend payments. We review our capital
return plan on an on-going basis, considering the potential impacts of COVID-19
pandemic, 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.
Other Liquidity and Capital Resources Information
We seek to ensure that our worldwide cash is available in the locations in which
it is needed. As part of our ongoing liquidity assessments, we regularly monitor
the mix of our domestic and international cash flows and cash balances. As of
September 30, 2020, the amount of our cash, cash equivalents and short-term
investments held outside the United States was $3,890 million, of which $2,281
million was in India. We evaluate on an ongoing basis what portion of the
non-U.S. cash, cash equivalents and short-term investments is needed locally to
execute our strategic plans and what amount is available for repatriation back
to the United States.
In March 2020, the Indian parliament enacted the Budget of India, which
contained a number of provisions related to income tax, including a replacement
of the DDT, previously due from the dividend payer, with a tax payable by the
shareholder receiving the dividend. This provision reduced the tax rate
applicable to us for cash repatriated from India. Following this change, during
the first quarter of 2020, we limited our indefinite reinvestment assertion to
India earnings accumulated in prior years. In July 2020, the U.S. Treasury
Department and the Internal Revenue Service released final regulations, which
became effective in September 2020, that reduced the tax applicable on our
accumulated Indian earnings upon repatriation. As a result, during the third
quarter of 2020, after a thorough analysis of the impact of these changes in law
on the cost of earnings repatriation and considering our strategic decision to
increase our investments to accelerate growth in various international markets
and expand our global delivery footprint, we reversed our indefinite
reinvestment assertion on Indian earnings accumulated in prior years and
recorded a $140 million Tax on Accumulated Indian Earnings. The recorded income
tax expense reflects the India withholding tax on unrepatriated Indian earnings,
which were $5.2 billion as of December 31, 2019, net of applicable U.S. foreign
tax credits.
On October 28, 2020, our subsidiary in India remitted a dividend of $2.1
billion, which resulted in a net payment of $2.0 billion to its shareholders
(non-Indian Cognizant entities), after payment of $105 million of India
withholding tax.
We expect our operating cash flows, cash and short-term investment balances to
be sufficient to meet our operating requirements and service our debt for the
next twelve months. Our ability to expand and grow our business in accordance
with current plans, make acquisitions and form joint ventures, meet our
long-term capital requirements beyond a twelve-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 pay for
acquisitions and joint ventures with capital stock 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.

Commitments and Contingencies


See Note 12 to our unaudited consolidated financial statements.

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Off-Balance Sheet Arrangements




Other than our foreign exchange forward and option contracts, there were no
off-balance sheet transactions, arrangements or other relationships with
unconsolidated entities or other persons in the nine months ended September 30,
2020 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.

Critical Accounting Estimates




Management's discussion and analysis of our financial condition and results of
operations is based on our unaudited consolidated financial statements that have
been prepared in accordance with GAAP. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
amounts reported for 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 reported period. On an on-going basis, we evaluate our
estimates. The most significant estimates relate to the recognition of revenue
and profits, including the application of the cost to cost method of measuring
progress to completion for certain fixed-price contracts, income taxes, business
combinations, valuation of goodwill and other long-lived assets and
contingencies. We base our estimates on historical experience, current trends
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. The actual amounts may differ from the estimates used in the
preparation of the accompanying unaudited consolidated financial statements. For
a discussion of our critical accounting estimates, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
Annual Report on Form 10-K for the year ended December 31, 2019. Our significant
accounting policies are described in Note 1 to the audited consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2019.
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. During the first quarter of 2020, COVID-19 negatively affected
all major economic and financial markets and, although there is an extremely
wide range of possible outcomes and the associated impact is highly dependent on
variables that are difficult to forecast, we deemed the deterioration in general
economic conditions sufficient to trigger an interim impairment testing of
goodwill as of March 31, 2020. Our interim test results as of March 31, 2020
indicated that the fair values of all of our reporting units exceeded their
carrying values and thus, no impairment of goodwill existed as of March 31,
2020. No additional triggers for an interim impairment test have been identified
since March 31, 2020. Due to the size of past acquisitions in our healthcare
reporting unit, this reporting unit carries the most significant portion of our
goodwill balance and has the least amount of excess fair value over its carrying
value.

Recently Adopted and New Accounting Pronouncements

See Note 1 to our unaudited consolidated financial statements.

Forward Looking Statements



The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Exchange Act) 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.
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Such forward-looking statements may be included in various filings made by us
with the SEC, 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 margin, earnings, capital expenditures, impacts to our business,
financial results and financial condition as a result of the COVID-19 pandemic,
anticipated effective income tax rate and income tax expense, liquidity, access
to capital, capital return plan, investment strategies, cost management,
realignment program, 2020 Fit for Growth Plan, plans and objectives, including
those related to our digital practice areas, investment in our business,
potential acquisitions, industry trends, client behaviors and trends, the
outcome of regulatory and litigation matters, the incremental accrual related to
the India Defined Contribution Obligation 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. Actual results, performance, 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 clients and operations are concentrated;
•the significant and continuing adverse impact of the COVID-19 pandemic on our
business, results of operations, liquidity and financial condition, and the
potential for such impact being materially adverse to us as the pandemic
continues to rapidly evolve and cause significant loss of life and interruption
to the global economy;
•our ability to attract, train and retain skilled professionals, including
highly skilled technical personnel to satisfy client demand and senior
management to lead our business globally;
•challenges 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 successfully implement our 2020 Fit for Growth Plan and achieve
the anticipated benefits from the plan;
•our ability to meet specified service levels or milestones required by certain
of our contracts;
•intense and evolving competition and significant technological advances that
our service offerings must keep pace with in the rapidly changing markets we
compete in;
•legal, reputation and financial risks related to our recent ransomware attack
and if we otherwise fail to protect client and/or our data from security
breaches or cyberattacks;
•the effectiveness of our business continuity and disaster recovery plans and
the potential that our global delivery capacity could be impacted;
•restrictions on visas, in particular in the United States, United Kingdom and
EU, or immigration more generally, which may affect our ability to compete for
and provide services to our clients;
•risks related to anti-outsourcing legislation, if adopted, and negative
perceptions associated with offshore outsourcing, both of which could impair our
ability to serve our clients;
•risks related to complying with the numerous and evolving legal and regulatory
requirements to which we are subject in the many 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 intercompany arrangements to
achieve global tax efficiencies or adverse outcomes of tax audits,
investigations or proceedings;
•potential exposure to litigation and legal claims in the conduct of our
business;
•potential significant expense that would occur if we change our intent not to
repatriate prior year Indian accumulated undistributed earnings; and
•the factors set forth in "Part I, Item 1A. Risk Factors" in our Annual Report
on Form 10-K for the year ended December 31, 2019, as updated by "  Part II,
Item 1A. Risk Factors  " in this Quarterly Report on Form 10-Q for the quarter
ended September 30, 2020.
You are advised to consult any further disclosures we make on related subjects
in the reports we file with the SEC, including this report in the section titled
"Part I, Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Part I, Item 1. Business" in our Annual Report on
Form 10-K for the year ended December 31, 2019. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.

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