COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION Executive Summary
Cognizant is one of the world's leading professional services companies,
engineering modern business 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 are
focused on continued investment in four key areas of digital: IoT, AI,
experience-driven software engineering and cloud. 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.
Q1 2021 Financial Results
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During the quarter ended March 31, 2021 , revenues increased by $176 million as
compared to the quarter ended March 31, 2020 , representing growth of 4.2%, or
2.4% on a constant currency basis1. Our recently completed acquisitions
contributed 310 basis points to our revenue growth. Our revenues reflected our
clients' continued adoption and integration of digital technologies and the
acceleration in the demand for cloud, mobile workplace solutions, e-commerce,
automation and AI as a result of the COVID-19 pandemic. We continue to
experience pricing pressure on our non-digital services as our clients,
particularly those in our Financial Services segment, optimize the cost of
supporting their legacy systems and operations. Revenue growth in our Healthcare
segment was strong, driven by increased demand for our services from our
pharmaceutical and health insurance clients. Revenue growth was also strong
among our manufacturing, logistics, energy and utilities clients in our Products
and Resources segment due to their continued adoption and integration of digital
technologies, while the pandemic continued to negatively affect some of our
retail, consumer goods, travel and hospitality clients in the same segment.
Overall revenue growth was negatively impacted by 90 basis points by our exit
from certain content-related services in our Communications, Media and
Technology segment.
Our operating margin and Adjusted Operating Margin1 were both 15.2% for the
quarter ended March 31, 2021 , as there were no adjustments for unusual items to
report in our calculation of Adjusted Operating Margin for that period. Our
margin and Adjusted Operating Margin1 were 13.7% and 15.1%, respectively, for
the quarter ended March 31, 2020 . Our 2021 operating margin benefited from a
significant decrease in travel and entertainment expenses due to the COVID-19
pandemic, savings resulting from the implementation of the delivery cost
optimization initiatives of our 2020 Fit for Growth Plan and lower immigration
costs. These benefits were partially offset by investments intended to drive
organic revenue growth, including additions to our sales organization and
initiatives to reposition our brand, as well as the negative impact on margin of
our recently completed acquisitions and costs related to continued enhancements
to our cyber security environment. Our 2020 GAAP operating margin was negatively
impacted by costs related to our restructuring program that concluded at the end
of 2020.
1 Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Diluted
EPS and constant currency revenue growth 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.
Cognizant 22 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Business Outlook As we seek to increase our commercial momentum and accelerate growth, our four strategic priorities are: •Repositioning our brand - improving our global brand recognition and becoming better known as a global digital partner to the entire C-suite; •Accelerating digital - growing our digital business organically and inorganically; •Globalizing Cognizant - growing our business in key international markets and diversifying leadership, capabilities and delivery footprint; and •Increasing our relevance to our clients - leading with thought leadership and capabilities to address clients' business needs. During the first quarter of 2021, we acquiredLinium andMagenic to strengthen our digital capabilities. We intend to continue to pursue strategic acquisitions, investments and alliances to expand our talent, experience and capabilities in key digital areas or in particular geographies or industries. We continue to expect the long-term focus of our clients to be on their digital transformation into software-driven, data-enabled, customer-centric and differentiated businesses. Clients continue to adopt and integrate digital technologies. Demand for our digital operations services and solutions has increased since the beginning of the COVID-19 pandemic. At the same time, as our clients seek to optimize the cost of supporting their legacy systems and operations, our non-digital services has been and may continue to be subject to pricing pressure. 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. The COVID-19 pandemic may continue to negatively impact demand, particularly among our 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. The 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. For example,India has seen a considerable and sudden increase in new COVID cases in March and April of 2021. A significant worsening of the pandemic, particularly inIndia , where a significant majority of our operations and technical personnel are located, could present challenges to our ability to deliver services to clients. We remain focused on protecting our employees' health, safety and well-being. As a global professional services company, we compete on the basis of the knowledge, experience, insights, skills and talent of our employees and the value they can provide to our clients. Our success is dependent, in large part, on our ability to keep our supply of skilled employees, in particular those with experience in key digital areas, in balance with client demand. For the three months endedMarch 31, 2021 , our annualized attrition, including both voluntary and involuntary, was 21.0%. Competition for skilled employees in the current labor market is intense, and we have experienced significantly elevated voluntary attrition during March andApril 2021 . Challenges attracting and retaining highly qualified personnel have negatively impacted, and we expect will continue to impact, our ability to satisfy client demand and achieve our full revenue potential. Further, our ongoing and anticipated future efforts with respect to recruitment, talent management and employee engagement may not be successful and will result in increased delivery costs during the remainder of 2021. 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, potential tax law changes and other potential regulatory changes, including potentially increased costs for employment and post-employment benefits inIndia as a result of the Code onSocial Security , 2020 following its effective date, which is not yet determined, as well as costs related to the potential resolution of legal and regulatory matters discussed in Note 12 to our unaudited consolidated financial statements. Cognizant 23 March 31, 2021 Form 10-Q
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Table of Contents Results of Operations
Three Months Ended
The following table sets forth, for the periods indicated, certain financial
data for the three months ended
% of % of Increase / Decrease
(Dollars in millions, except per share data) 2021 Revenues 2020 Revenues $ % Revenues$ 4,401 100.0$ 4,225 100.0$ 176 4.2 Cost of revenues(1) 2,764 62.8 2,747 65.0 17 0.6 Selling, general and administrative expenses(1) 827 18.8 711 16.8 116 16.3 Restructuring charges - - 55 1.3 (55) (100.0) Depreciation and amortization expense 141 3.2 133 3.1 8 6.0 Income from operations 669 15.2 579 13.7 90 15.5 Other income (expense), net (4) (69) 65
(94.2)
Income before provision for income taxes 665 15.1 510 12.1 155
30.4
Provision for income taxes (160) (142) (18)
12.7
Income (loss) from equity method investments - (1) 1 (100.0) Net income$ 505 11.5$ 367 8.7$ 138 37.6 Diluted earnings per share$ 0.95 $ 0.67 $ 0.28 41.8 Other Financial Information2 Adjusted Income from Operations and Adjusted Operating Margin$ 669 15.2$ 640 15.1$ 29 4.5 Adjusted Diluted EPS$ 0.97 $ 0.96 $ 0.01 1.0 (1)Exclusive of depreciation and amortization expense. Revenues - Overall2 During the quarter endedMarch 31, 2021 , revenues increased by$176 million as compared to the quarter endedMarch 31, 2020 , representing growth of 4.2%, or 2.4% on a constant currency basis2. Our recently completed acquisitions contributed 310 basis points to our revenue growth. Our revenues reflected our clients' continued adoption and integration of digital technologies and the acceleration in the demand for cloud, mobile workplace solutions, e-commerce, automation and AI as a result of the COVID-19 pandemic. At the same time, the pandemic continued to negatively affect some of our clients, including retail, consumer goods, travel and hospitality clients. We continue to experience pricing pressure on our non-digital services as our clients optimize the cost of supporting their legacy systems and operations. Overall revenue growth was negatively impacted by 90 basis points by our exit from certain content-related services. Revenues from clients added sinceMarch 31, 2020 , including those related to acquisitions, were$182 million .
2 Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Diluted
EPS and constant currency revenue growth 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.
Cognizant 24 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Revenues - Reportable Business Segments The following charts set forth revenues and change in revenues by business segment and geography for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 : Financial Services Healthcare Increase / (Decrease) Increase / (Decrease) Dollars in millions Revenues $ % CC %3 Revenues $ % CC %3 North America$ 1,013 1 0.1 (0.3)$ 1,101 63 6.1 6.0 United Kingdom 125 5 4.2 (1.7) 40 - - (5.9) Continental Europe 192 1 0.5 (7.2) 118 19 19.2 11.4 Europe - Total 317 6 1.9 (5.1) 158 19 13.7 6.4 Rest of World 128 - - (3.8) 29 12 70.6 68.1 Total$ 1,458 7 0.5 (1.7)$ 1,288 94 7.9 7.0 Products and Resources
Communications, Media and Technology
Increase / (Decrease) Increase / (Decrease)
Dollars in millions Revenues $ % CC %3 Revenues $ % CC %3
North America $ 718 29 4.2 3.8 $ 451 - - -
United Kingdom 106 13 14.0 6.0 99 15 17.9 9.4
Continental Europe 103 (6) (5.5) (13.8) 43 5 13.2 3.5
Europe - Total 209 7 3.5 (4.7) 142 20 16.4 7.6
Rest of World 71 8 12.7 9.8 64 11 20.8 19.3
Total $ 998 44 4.6 2.4 $ 657 31 5.0 3.1
Financial Services
Revenues from our Financial Services segment increased 0.5%, and decreased 1.7%
on a constant currency basis3, for the three months ended March 31, 2021 , as
compared to the three months ended March 31, 2020 . Revenues in this segment
increased by $14 million from our banking clients and decreased $7 million from
our insurance clients. Revenues from clients added, including those related to
acquisitions, since March 31, 2020 were $34 million . Moderate revenue growth
generated by our digital services did not fully offset revenue declines related
to our non-digital services as our clients optimize the cost of supporting their
legacy systems and operations.
Healthcare
Revenues from our Healthcare segment increased 7.9%, or 7.0% on a constant
currency basis3, for the three months ended March 31, 2021 , as compared to the
three months ended March 31, 2020 . Revenues in this segment increased by $49
million from our healthcare clients and $45 million from our life sciences
clients. Revenue growth among our healthcare customers benefited from increased
demand by health insurance customers for our integrated payer software solutions
while revenue growth among our life sciences clients was driven by increased
demand for our services among pharmaceutical companies. Revenues from clients
added, including those related to acquisitions, since March 31, 2020 were $30
million . Demand from our healthcare clients may continue to be affected by
uncertainty in the regulatory and political environment while demand from our
life sciences clients may be affected by industry consolidation.
Products and Resources
Revenues from our Products and Resources segment increased 4.6%, or 2.4% on a
constant currency basis3, for the three months ended March 31, 2021 , as compared
to the three months ended March 31, 2020 . Revenues from our manufacturing,
logistics, energy and utilities clients increased $82 million primarily due to
our clients' adoption and integration of digital technologies. Retail, consumer
goods, travel and hospitality clients continued to be adversely affected by the
COVID-19 pandemic. Thus, revenue decreased by $16 million among our retail and
consumer goods clients and $22 million among our travel and hospitality clients.
Revenues from clients added, including those related to acquisitions, since
March 31, 2020 were $64 million .
3 Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
Cognizant 25 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Communications, Media and Technology Revenues from our Communications, Media and Technology segment increased 5.0%, or 3.1% on a constant currency basis4, for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 . Revenues in this segment increased by$30 million from our communications and media clients and were relatively flat for our technology clients. Revenues from our communications and media clients benefited significantly from recently completed acquisitions and were negatively impacted by the COVID-19 pandemic. Revenues among our technology clients in this segment were negatively impacted by approximately$37 million due to our exit from certain content-related services, offset by growing demand from our technology clients for other more strategic digital content services and revenues from our acquisitions. Revenues from clients added, including those related to acquisitions, sinceMarch 31, 2020 were$54 million . Revenues - Geographic Markets Revenues by geographic market were as follows for the three months endedMarch 31 : Increase / (Decrease) (Dollars in millions) 2021 2020 $ % CC %4 North America$ 3,283 $ 3,190 $ 93 2.9 2.7 United Kingdom 370 337 33 9.8 2.7 Continental Europe 456 437 19 4.3 (3.7) Europe - Total 826 774 52 6.7 (0.9) Rest of World 292 261 31 11.9 8.9 Total revenues$ 4,401 $ 4,225 $ 176 4.2 2.4North America continues to be our largest market, representing 74.6% of total revenues. OurNorth America region revenue growth benefited from our recently completed acquisitions and was negatively impacted by our exit from certain content-related services. Our Continental Europe region benefited from favorable foreign currency exchange rates and increased demand for our services among pharmaceutical companies in that region. Revenue growth in our Rest of World region was primarily driven by our clients inIndia . 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 0.6% during the first quarter of 2021 as compared to the first quarter of 2020, decreasing as a percentage of revenues to 62.8% in the first quarter of 2021 compared to 65.0% in the first quarter of 2020. The decrease in cost of revenues, as a percentage of revenues, was due primarily to a significant decrease in travel and entertainment costs as a result of a reduction in travel due to the COVID-19 pandemic and savings resulting from the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan. 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 16.3% during the first quarter of 2021 as compared to the first quarter of 2020, increasing as a percentage of revenues to 18.8% in 2021 as compared to 16.8% in 2020. The increase, as a percentage of revenues, was due primarily to investments intended to drive organic revenue growth, including additions to our sales organization and initiatives to reposition our brand, as well as increased costs as a result of our recently completed acquisitions and costs related to continued enhancements to our cyber security environment, 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 and lower immigration costs. Depreciation and Amortization Expense Depreciation and amortization expense increased by 6.0% during the first quarter of 2021 as compared to the first quarter of 2020 primarily as a result of the amortization of intangible assets from recently completed acquisitions. 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. Cognizant 26 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Operating Margin - Overall Our operating margin and Adjusted Operating Margin5 were both 15.2% for the quarter endedMarch 31, 2021 . Our operating margin and Adjusted Operating Margin5 were 13.7% and 15.1%, respectively, for the quarter endedMarch 31, 2020 . Our 2021 margin benefited from a significant decrease in travel and entertainment expenses due to the COVID-19 pandemic, savings resulting from the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan and lower immigration costs. These benefits were partially offset by investments intended to drive organic revenue growth, including additions to our sales organization and initiatives to reposition our brand, as well as the negative impact on margin of our recently completed acquisitions and costs related to continued enhancements to our cyber security environment. Our 2020 GAAP operating margin was negatively impacted by costs related to our restructuring program that concluded at the end of 2020. Excluding the impact of applicable designated cash flow hedges, the depreciation of the Indian rupee against theU.S. dollar positively impacted our operating margin by 11 basis points during the three months endedMarch 31, 2021 . Each additional 1.0% change in exchange rate between the Indian rupee and theU.S. dollar will have the effect of moving our operating margin by 17 basis points. We enter into foreign exchange derivative contracts to hedge certain Indian rupee denominated payments inIndia . These hedges are intended to mitigate the volatility of the changes in the exchange rate between theU.S. dollar and the Indian rupee. During the three months endedMarch 31, 2021 , the settlement of our cash flow hedges positively impacted our operating margin by 48 basis points and negatively impacted our operating margin by 7 basis points for the three months endedMarch 31, 2020 . We finished the first quarter of 2021 with approximately 296,500 employees, which is an increase of 4,800 as compared toMarch 31, 2020 and 7,000 as compared toDecember 31, 2020 . Annualized attrition, including both voluntary and involuntary, was approximately 21.0% for the three months endedMarch 31, 2021 . Voluntary attrition constitutes the significant majority of our attrition. Both voluntary and involuntary attrition are weighted towards our more junior employees. Segment Operating Profit Segment operating profit was as follows for the three months endedMarch 31 : Increase / (Dollars in millions) 2021 Operating Margin % 2020 Operating Margin % (Decrease) Financial Services$ 406 27.8$ 381 26.3 $ 25 Healthcare 411 31.9 321 26.9 90 Products and Resources 308 30.9 261 27.4 47 Communications, Media and Technology 215 32.7 190 30.4
25
Total segment operating profit 1,340 30.4 1,153 27.3 187 Less: unallocated costs 671 574 97 Income from operations$ 669 15.2$ 579 13.7 $ 90 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 and savings resulting from the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan. The increase in unallocated costs for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 was primarily due to increased costs as a result of our recently completed acquisitions and continued enhancements to our cyber security environment. 5 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. Cognizant 27 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents 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 endedMarch 31 : Increase/ (in millions) 2021 2020 Decrease Foreign currency exchange (losses)$ (12) $ (108) $ 96 Gains on foreign exchange forward contracts not designated as hedging instruments 3 6 (3) Foreign currency exchange gains (losses), net (9) (102) 93 Interest income 9 41 (32) Interest expense (2) (6) 4 Other, net (2) (2) - Total other income (expense), net$ (4)
The foreign currency exchange gains and losses were attributed to the remeasurement of 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 ofMarch 31, 2021 , the notional value of our undesignated hedges was$574 million . The decrease in interest income of$32 million was primarily attributable to lower invested balances inIndia , which generate higher yields. Our invested balances inIndia are lower in 2021 as a result of our$2.1 billion repatriation of cash fromIndia in the fourth quarter of 2020. Provision for Income Taxes The provision for income taxes increased to$160 million during the three months endedMarch 31, 2021 from$142 million for the three months endedMarch 31, 2020 . The effective income tax rate decreased to 24.1% for the three months endedMarch 31, 2021 compared to 27.8% for the three months endedMarch 31, 2020 , primarily as a result of significantly lower non-deductible foreign currency exchange losses in our unaudited consolidated statement of operations in the 2021 period, and the discrete benefit of the effective settlement of the IRS examination for tax years 2012 through 2016 as described in Note 8 to our unaudited consolidated financial statements. Net Income Net income increased to$505 million for the three months endedMarch 31, 2021 from$367 million for the three months endedMarch 31, 2020 , representing 11.5% and 8.7% of revenues, respectively. The increase in net income was driven by higher income from operations and lower foreign currency exchange losses, partially offset by lower interest income and a higher provision for income taxes. 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 Cognizant 28 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for our executive officers and for making comparisons of our operating results to those of our competitors. Therefore, it is our belief that the use of non-GAAP financial measures excluding 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 endedMarch 31 : % of % of (Dollars in millions, except per share amounts) 2021 Revenues 2020 Revenues GAAP income from operations and operating margin$ 669 15.2$ 579 13.7 Realignment charges (1) - - 20 0.5 2020 Fit for Growth Plan restructuring charges (2) - - 35 0.8 COVID-19 Charges (3) - - 6 0.1 Adjusted Income from Operations and Adjusted Operating Margin$ 669 15.2$ 640 15.1 GAAP diluted EPS$ 0.95 $ 0.67 Effect of above adjustments, pre-tax - 0.11 Non-operating foreign currency exchange (gains) losses, pre-tax (4) 0.02 0.19 Tax effect of above adjustments (5) - (0.01) Adjusted Diluted EPS$ 0.97 $ 0.96 (1)As part of the realignment program, during the three months ended March 31, 2020, we incurred certain 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 three months endedMarch 31, 2020 , we incurred certain employee separation, employee retention, facility exit costs and other charges. See Note 4 to our unaudited consolidated financial statements for additional information. (3)During the three months endedMarch 31, 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 bothIndia andthe Philippines , certain costs to enable our employees to work remotely and costs to provide medical staff and extra cleaning services for our facilities. Substantially all of the costs related to the pandemic are reported in "Cost of revenues" in our unaudited consolidated statement 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 March 31, (in millions) 2021 2020 Non-GAAP income tax benefit (expense) related to: Realignment charges $ -$ 5 2020 Fit for Growth Plan restructuring charges - 9 COVID-19 Charges - 2 Foreign currency exchange gains and losses - (10) Cognizant 29 March 31, 2021 Form 10-Q
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Table of Contents
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 ofMarch 31, 2021 , we had cash, cash equivalents and short-term investments of$2,158 million and available capacity under our credit facilities of approximately$1,928 million . The following table provides a summary of our cash flows for the three months endedMarch 31 : (in millions) 2021 2020 Increase /
Decrease
Net cash provided by (used in): Operating activities$ 181 $ 497 $ (316) Investing activities (538) (272) (266) Financing activities (340) 1,135 (1,475) Operating activities The decrease in cash provided by operating activities for the three months endedMarch 31, 2021 compared to the same period in 2020 was primarily driven by higher incentive-based compensation payouts in 2021 and the remittance of certain tax payments in 2021, which were deferred due to COVID-19 pandemic regulatory relief 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 70 days as of bothMarch 31, 2021 andDecember 31, 2020 , and 74 as ofMarch 31, 2020 . Investing activities The increase in net cash used in investing activities for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 was primarily driven by higher payments for acquisitions and net purchases of investments, partially offset by lower outflows for capital expenditures. Financing activities The cash used in financing activities for the three months endedMarch 31, 2021 was driven by repurchases of common stock. The cash provided by financing activities for the three months endedMarch 31, 2020 was primarily a result of our borrowing against the revolving credit facility, partially offset by repurchases of common stock. 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 inNovember 2023 . We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan. As ofMarch 31, 2021 , we had no outstanding balance on our revolving credit facility. See Note 7 to our unaudited consolidated financial statements. InFebruary 2021 , ourIndia subsidiary renewed its one-year13 billion Indian rupee ($178 million at theMarch 31, 2021 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 ofMarch 31, 2021 , we have not borrowed funds under this facility. During the three months endedMarch 31, 2021 , we returned$362 million to our stockholders through$234 million in share repurchases under our stock repurchase program and$128 million in dividend payments. We review our capital return plan on an ongoing 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. Cognizant 30 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents 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. 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 tothe United States . We expect our operating cash flows, cash and short-term investment balances, together with our available capacity under our revolving credit facilities, 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, 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 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.
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 three months endedMarch 31, 2021 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 ongoing 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 endedDecember 31, 2020 . 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 endedDecember 31, 2020 .
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.
Cognizant 31 March 31, 2021 Form 10-Q
-------------------------------------------------------------------------------- Table of Contents Such forward-looking statements may be included in various filings made by us with theSEC , 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, the competitive marketplace for talent, 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 continuing impact of the COVID-19 pandemic, or other future pandemics, on our business, results of operations, liquidity and financial condition; •our ability to attract, train and retain skilled employees, 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 goals and capital return strategy; •our ability to successfully execute on the investments outlined in 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 if we fail to protect client and/or our data from security breaches and/or cyber attacks; •the effectiveness of our risk management, business continuity and disaster recovery plans and the potential that our global delivery capabilities could be impacted; •restrictions on visas, in particular inthe United States ,United Kingdom and EU, or immigration more generally or increased costs of such visas or the wages we are required to pay associates on visas, 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 and costs related to complying with 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; and •the factors set forth in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . You are advised to consult any further disclosures we make on related subjects in the reports we file with theSEC , 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 endedDecember 31, 2020 . 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. Cognizant 32 March 31, 2021 Form 10-Q
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