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 continuing to invest in digital services with a focus on four key areas: IoT, digital engineering, data 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. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in a fast-changing world. 2021 Financial Results Revenue Income from Operations Operating Margin Diluted EPS GAAP Adjusted GAAP Adjusted GAAP Adjusted [[Image Removed: ctsh-20211231_g4.jpg]] [[Image Removed: ctsh-20211231_g5.jpg]] [[Image Removed: ctsh-20211231_g6.jpg]] [[Image Removed: ctsh-20211231_g7.jpg]] GAAP GAAP Adjusted1 GAAP Adjusted1 GAAP Adjusted1 Revenue up Income from Income from Operating Operating Diluted EPS Diluted EPS up$1,855 million or 11.1% Operations up Operations up margin up 260 margin up 100 up$1.48 or$0.70 or 20.5% from 2020; 10.0% in$712 million $452 million or bps from 2020 bps from 2020 57.6% from from 2020 constant currency1 or 33.7% from 18.9% from 2020 2020 2020 During the year endedDecember 31, 2021 , revenues increased by$1,855 million as compared to the year endedDecember 31, 2020 , representing growth of 11.1%, or 10.0% on a constant currency basis1. Our recently completed acquisitions contributed 320 basis points to our revenue growth. Revenue growth also reflected our clients' continued adoption and integration of digital technologies and was aided by the negative impact on 2020 revenues of the COVID-19 pandemic. Revenue growth in the Healthcare segment was driven by increased demand for our services from our pharmaceutical clients while continued adoption and integration of digital technologies across our manufacturing, logistics, energy and utilities clients drove revenue growth in the Products and Resources segment. Revenues in the Communications, Media and Technology segment benefited from our technology clients' growing demand for services related to digital content. Our 2020 revenue was negatively affected by the Samlink Impact, which contributed approximately 70 basis points to our 2021 revenue growth. We continue to experience pricing pressure on our non-digital services as our clients, particularly those in the Financial Services segment, optimize the cost of supporting their legacy systems and operations. Our operating margin and Adjusted Operating Margin1 increased to 15.3% and 15.4%, respectively, for the year endedDecember 31, 2021 from 12.7% and 14.4%, respectively, for the year endedDecember 31, 2020 . Our 2021 GAAP and Adjusted Operating Margins benefited from savings generated by the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan and a decrease in travel and entertainment costs. These benefits were partially offset by investments intended to drive and support 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, increased subcontractor and compensation costs as a result of significantly elevated attrition and costs related to the modernization of our 1 Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measurements of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures. Cognizant 22 December 31, 2021 Form 10-K
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core IT systems. Our 2020 operating margins were adversely impacted by the decline in revenues brought on by the COVID-19 pandemic, the Samlink Impact and theApril 2020 ransomware attack. Our 2020 GAAP operating margin was also negatively impacted by costs related to our restructuring program that concluded at the end of 2020 and COVID-19 Charges. During the fourth quarter of 2021, we reached a settlement agreement with the final customer involved in our previously disclosed proposed exit from a large customer engagement of our Samlink subsidiary and additionally entered into an agreement to sell this subsidiary. We reached settlement agreements with the other two customers to this engagement in the second quarter of 2021. The financial terms of the final settlement agreements with the three customers did not materially differ from our original 2020 offer and, accordingly, the impact to our 2021 consolidated statement of operations was immaterial. In 2020, in connection with our settlement offer, we recorded a reduction of revenues of$118 million and additional expenses of$33 million , or, jointly, the Samlink Impact. This negatively impacted both our 2020 GAAP and Adjusted Diluted EPS2 by$0.27 . The sale of our Samlink subsidiary closed onFebruary 1, 2022 . In 2021, our Samlink subsidiary had$113 million in revenues. In the third quarter of 2021, the parties to the consolidated putative securities class action suit filed a settlement agreement that resolved the consolidated putative securities class action against us and certain of our former officers. As a result, we recorded a$20 million Class Action Settlement Loss in "Selling, general and administrative expenses" in our consolidated financial statements. The loss is excluded from Adjusted Operating Margin2 and Adjusted Diluted EPS2. For further information see Note 15 to our consolidated financial statements.
Business Outlook
As we seek to increase our commercial momentum and accelerate growth, our four strategic priorities are:
•Accelerating digital - growing our digital business organically and inorganically;
•Globalizing Cognizant - accelerating the growth of our business in key international markets and diversifying our leadership, capabilities and delivery footprint;
•Repositioning our brand - improving our global brand recognition and becoming better known as a global digital partner to the entire C-suite; and
•Increasing our relevance to our clients - leading with thought leadership and capabilities to address clients' business needs.
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. The COVID-19 pandemic accelerated our clients' need to modernize their business, which has led to increased demand for digital capabilities. In 2021, we completed seven acquisitions intended to expand our talent, experience and capabilities in key digital areas or in particular geographies or industries. As our clients seek to optimize the cost of supporting their legacy systems and operations, our non-digital services have been and may continue to be subject to pricing pressure. In addition, 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. 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. Competition for skilled employees in the current labor market is intense, and we experienced significantly elevated voluntary attrition during 2021. For the three months endedDecember 31, 2021 , our annualized attrition rate, including both voluntary and involuntary, was 34.6% as compared to 19.0% for the three months endedDecember 31, 2020 . For the year endedDecember 31, 2021 , our attrition rate, including both voluntary and involuntary, was 30.8% as compared to 20.6% for the year endedDecember 31, 2020 . Challenges attracting and retaining highly qualified personnel have negatively impacted our ability to satisfy client demand and achieve our full revenue potential. We expect this impact to continue in 2022. Further, our ongoing and anticipated future efforts with respect to recruitment, talent management and employee engagement may not be successful and may result in increased delivery costs during 2022. Our most significant costs are the salaries and related benefits for our employees. In certain regions, competition for employees with the advanced technical skills necessary to perform our services has caused wages to increase at a rate greater than the general rate of inflation. While we strive to adjust pricing to reduce the 2 Adjusted Operating Margin and Adjusted Diluted EPS are not measurements of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures. Cognizant 23 December 31, 2021 Form 10-K
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impact of compensation increases on our operating margin, we may not be successful in fully recovering these increases, which could adversely affect our profitability and operating margin.
Our future results may be affected by potential tax law changes and other
potential regulatory changes, including possible
Environmental, Social and Corporate Governance
We believe environmental and social considerations are increasingly important to our clients and the talent we seek to attract and retain. As a company committed to improving everyday life, ESG is an important part of our business and that of our clients. Cognizant's vision is to become the preeminent technology services provider to the leaders of the world's Global 2000 companies. Our ESG program is designed to support that vision and aligns with our clients' increasing focus on ESG. In 2021, we took the following steps to advance our ESG agenda: •InFebruary 2021 , we announced an initiative to advance economic mobility, educational opportunity, diversity, equity, and inclusion, and health and wellbeing in communities around the world through new philanthropic funding and in-kind contributions; •InApril 2021 , as the second wave of the COVID-19 pandemic grippedIndia , we launched Operation C3. This initiative facilitated vaccination for our Indian employees and their dependents, and set up vaccination drives across the country to help senior citizens, physically challenged dependents, and mothers with infants. Operation C3 also provided critical medical equipment to hospitals, helped to boost oxygen supplies and more;
•In
•InOctober 2021 , we announced our commitment to achieve net zero emissions by 2030. This pledge calls for reducing emissions by 50% from the Company's global operations and supply chain by 2030, and by 90% by 2040; and
•In
Cognizant 24 December 31, 2021 Form 10-K -------------------------------------------------------------------------------- Table of Contents Results of Operations For a discussion of our results of operations for the year endedDecember 31, 2019 , including a year-to-year comparison between 2020 and 2019, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report Form 10-K for the year endedDecember 31, 2020 .
The Year Ended
The following table sets forth certain financial data for the years ended
% of % of Increase / Decrease (Dollars in millions, except per share data) 2021 Revenues 2020 Revenues $ % Revenues$ 18,507 100.0$ 16,652 100.0$ 1,855 11.1 Cost of revenues(1) 11,604 62.7 10,671 64.1 933 8.7 Selling, general and administrative expenses(1) 3,503 18.9 3,100 18.6 403 13.0 Restructuring charges - - 215 1.3 (215) (100.0) Depreciation and amortization expense 574 3.1 552 3.3 22 4.0 Income from operations 2,826 15.3 2,114 12.7 712 33.7 Other income (expense), net 1 (18) 19 (105.6) Income before provision for income taxes 2,827 15.3 2,096 12.6 731 34.9 Provision for income taxes (693) (704) 11 (1.6) Income (loss) from equity method investments 3 - 3 * Net income$ 2,137 11.5$ 1,392 8.4$ 745 53.5 Diluted EPS$ 4.05 $ 2.57 $ 1.48 57.6 Other Financial Information 3 Adjusted Income From Operations and Adjusted Operating Margin$ 2,846 15.4$ 2,394 14.4$ 452 18.9 Adjusted Diluted EPS$ 4.12 $ 3.42 $ 0.70 20.5
(1) Exclusive of depreciation and amortization expense.
* Not meaningful Revenues - Overall During 2021, revenues increased by$1,855 million as compared to 2020, representing growth of 11.1%, or 10.0% on a constant currency basis3. Our recently completed acquisitions contributed 320 basis points to our revenue growth. Our revenue growth also reflected our clients' continued adoption and integration of digital technologies and was aided by the negative impact on 2020 revenues of the COVID-19 pandemic. Our 2020 revenue was negatively affected by the Samlink Impact, which contributed approximately 70 basis points to our 2021 revenue growth. We continue to experience pricing pressure on our non-digital services as our clients, particularly those in the Financial Services segment, optimize the cost of supporting their legacy systems and operations. Revenues from clients added during 2021, including those related to acquisitions, were$341 million . 3 Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measurements of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable. Cognizant 25 December 31, 2021 Form 10-K -------------------------------------------------------------------------------- Table of Contents Revenues - Reportable Business Segments
The following charts set forth revenues and change in revenues by business
segment and geography for the year ended
Financial Services Healthcare Increase / (Decrease) Increase / (Decrease) Dollars in millions Revenues $ % CC %4 Revenues $ % CC %4 North America$ 4,204 191 4.8 4.4$ 4,571 390 9.3 9.3 United Kingdom 547 84 18.1 12.5 168 11 7.0 2.3 Continental Europe 745 116 18.4 14.4 477 43 9.9 7.0 Europe - Total 1,292 200 18.3 13.6 645 54 9.1 5.7 Rest of World 555 39 7.6 5.2 121 41 51.3 50.9 Total$ 6,051 430 7.6 6.3$ 5,337 485 10.0 9.6 Products and Resources
Communications, Media and Technology
Increase / (Decrease) Increase / (Decrease) Dollars in millions Revenues $ % CC %4 Revenues $ % CC %4 North America$ 2,937 287 10.8 10.5$ 1,924 187 10.8 10.7 United Kingdom 471 100 27.0 19.0 456 112 32.6 26.1 Continental Europe 539 126 30.5 25.7 158 (19) (10.7) (14.5) Europe - Total 1,010 226 28.8 22.5 614 93 17.9 12.3 Rest of World 329 67 25.6 22.7 305 80 35.6 34.3 Total$ 4,276 580 15.7 13.9$ 2,843 360 14.5 13.2 Financial Services - revenues increased 7.6%, or 6.3% on a constant currency basis4 [[Image Removed: ctsh-20211231_g8.jpg]] Banking é$307M Insurance é$123M Revenue growth in this segment benefited from the 2020 Samlink Impact, which contributed approximately 220 basis points to our 2021 revenue growth, recently completed acquisitions and the negative impact on 2020 revenues of the COVID-19 pandemic. Revenue growth also reflects the growing demand for our digital services partially offset by clients' continued focus on cost optimization of supporting their legacy systems and operations. Revenues from clients added, including those related to acquisitions, sinceDecember 31, 2020 were$77 million .4
Healthcare - revenues increased 10.0%, or 9.6% on a constant currency basis4
Revenue growth among our life sciences clients was driven by increased demand for our services among pharmaceutical companies while revenue growth among our healthcare customers benefited from increased demand by health insurance customers for our integrated software solutions. Additionally, revenue growth reflected the negative impact on 2020 revenues of the COVID-19 pandemic. Revenues from clients added sinceDecember 31, 2020 were$45 million . [[Image Removed: ctsh-20211231_g9.jpg]] Healthcare é$231M Life Sciences é$254M 4 Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information. Cognizant 26 December 31, 2021 Form 10-K
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Products and Resources - revenues increased 15.7%, or 13.9% on a constant currency basis5 [[Image Removed: ctsh-20211231_g10.jpg]] Manufacturing, Logistics, Energy and Utilities é$383M Retail and Consumer Goods é$155M Travel and Hospitality é$42M Revenues from our manufacturing, logistics, energy and utilities clients benefited from our clients' adoption and integration of digital technologies. Revenue growth in this segment included approximately 500 basis points related to recently completed acquisitions. Additionally, revenue growth reflected the negative impact of the COVID-19 pandemic on our 2020 revenue in this segment. Revenues from clients added, including those related to acquisitions, sinceDecember 31, 2020 were$113 million .5
Communications, Media and Technology - revenues increased 14.5%, or 13.2% on a constant currency basis5
Revenues reflected growing demand from our technology clients for services related to digital content, primarily driven by our largest clients in this segment, and were negatively impacted by 190 basis points due to our exit from certain content-related services. Revenue growth in this segment included approximately 650 basis points related to recently completed acquisitions and also reflected the negative impact to our 2020 revenue of the COVID-19 pandemic. Revenues from clients added, including those related to acquisitions, sinceDecember 31, 2020 were$106 million . [[Image Removed: ctsh-20211231_g11.jpg]] Communications and Media é$150M Technology é$210M
Revenues - Geographic Markets
Revenues of
[[Image Removed: ctsh-20211231_g12.jpg]]
2021 as compared to 2020 Increase / (Decrease) (Dollars in millions) $ % CC %5 North America $ 1,055 8.4 8.2 United Kingdom 307 23.0 16.6 Continental Europe 266 16.1 12.2 Europe - Total 573 19.2 14.2 Rest of World 227 21.0 18.8 Total revenues $ 1,855 11.1 10.0North America continues to be our largest market, representing 73.7% of total revenues and 56.9% of total growth for the year endedDecember 31, 2021 . Revenue growth across all regions benefited from our recently completed acquisitions and was also aided by the negative impact on our 2020 revenues of the COVID-19 pandemic. All regions also benefited from favorable foreign currency exchange rate movements. A significant portion of revenue growth in our ContinentalEurope and Rest of World regions was driven by our German and Australian markets, respectively, which both benefited from recent acquisitions. In addition, revenue growth in Continental Europe benefited 770 basis points from the 2020 Samlink Impact. 5 Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information. Cognizant 27 December 31, 2021 Form 10-K
-------------------------------------------------------------------------------- Table of Contents Cost of Revenues (Exclusive of Depreciation and Amortization Expense) [[Image Removed: ctsh-20211231_g13.jpg]] é$933M ê 1.4% as a % of revenue ¡ % of Revenues 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. The decrease in cost of revenues, as a percentage of revenues, was due primarily to savings from the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan, the adverse Samlink Impact in 2020, a decrease in travel and entertainment costs as a result of a reduction in travel due to the COVID-19 pandemic as well as the negative impact on our 2020 results from the pandemic and theApril 2020 ransomware attack, partially offset by increased subcontractor and compensation costs as a result of significantly elevated employee attrition levels. 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. The increase, as a percentage of revenues, was due primarily to investments intended to drive and support 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 the modernization of our core IT systems, partially offset by a reduction in expenses attributable to the COVID-19 pandemic and theApril 2020 ransomware attack. [[Image Removed: ctsh-20211231_g14.jpg]] é$403M é 0.3% as a % of revenue ¡ % of Revenues
Depreciation and Amortization Expense
Depreciation and amortization expense increased by 4.0% during 2021 as compared to 2020 primarily due to amortization of intangibles from recently completed acquisitions. Operating Margin and Adjusted Operating Margin6 - Overall
[[Image Removed: ctsh-20211231_g15.jpg]][[Image Removed: ctsh-20211231_g16.jpg]]
Our 2021 GAAP and Adjusted Operating Margins6 benefited from savings generated by the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan and a decrease in travel and entertainment costs. These benefits were partially offset by investments intended to drive and support 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, increased subcontractor and compensation costs as a result of significantly elevated employee attrition and costs related to the modernization of our core IT systems. Our 2020 operating margins were adversely impacted by the decline in revenues brought on by the COVID-19 pandemic, the Samlink Impact and theApril 2020 ransomware attack. Our 2020 GAAP operating margin was also negatively impacted by costs related to our restructuring program that concluded at the end of 2020 and COVID-19 Charges.
6 Adjusted Income From Operations and Adjusted Operating Margin are not measurements of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
Cognizant 28 December 31, 2021 Form 10-K
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Excluding the impact of applicable designated cash flow hedges, the appreciation of the Indian rupee against theU.S. dollar negatively impacted our operating margin by approximately 5 basis points in 2021, while in 2020 the depreciation of the Indian rupee against theU.S. dollar positively impacted our operating margin by approximately 92 basis points. 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 approximately 18 basis points, excluding the impact of our cash flow hedges. 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. In 2021, the settlement of our cash flow hedges positively impacted our operating margin by approximately 35 basis points. The impact of the settlement of our cash flow hedges was immaterial in 2020. We finished the year endedDecember 31, 2021 with approximately 330,600 employees as compared to 289,500 employees for the year endedDecember 31, 2020 . Annualized attrition, including both voluntary and involuntary, was approximately 34.6% for the three months endedDecember 31, 2021 . Attrition, including both voluntary and involuntary, was approximately 30.8% for the year endedDecember 31, 2021 . In 2021, voluntary attrition was significantly elevated and constituted the vast majority of our attrition for the period. By comparison, voluntary attrition in the year endedDecember 31, 2020 represented only approximately half of our attrition for the period as our personnel actions taken under our Fit for Growth Plan increased involuntary attrition while voluntary attrition was suppressed due to the COVID-19 pandemic. Attrition in all periods presented is weighted towards our more junior level employees. [[Image Removed: ctsh-20211231_g17.jpg]]
* Annualized attrition Segment Operating Profit
Segment operating profit and operating margin percentage were as follows:
[[Image Removed: ctsh-20211231_g18.jpg]] [[Image Removed: ctsh-20211231_g19.jpg]] [[Image Removed: ctsh-20211231_g20.jpg]] [[Image Removed: ctsh-20211231_g21.jpg]] Across all our business segments, operating margins benefited from savings from the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan, the decrease in travel and entertainment costs due to COVID-19 related reductions in travel and the negative impact on our 2020 results of the COVID-19 pandemic and theApril 2020 ransomware attack. In 2021, segment operating margins were negatively impacted by increased subcontractor and compensation costs as a result of significantly elevated employee attrition levels. The 2020 operating margin in our Financial Services segment includes the 2020 adverse Samlink Impact. Total segment operating profit was as follows for the year endedDecember 31 : Increase / (Dollars in millions) 2021 % of Revenues 2020 % of Revenues (Decrease) Total segment operating profit$ 5,557 30.0$ 4,704 28.2 $ 853 Less: unallocated costs 2,731 2,590 141 Income from operations$ 2,826 15.3$ 2,114 12.7 $ 712 The increase of$141 million in unallocated costs for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 was primarily due to increased costs as a result of our recently completed acquisitions and costs related to initiatives to reposition our brand and the modernization of our core IT systems. Unallocated costs in 2020 included restructuring costs, COVID-19 Charges and costs related to theApril 2020 ransomware attack. Cognizant 29 December 31, 2021 Form 10-K
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Table of Contents Other Income (Expense), Net Total other income (expense), net consists primarily of foreign currency exchange gains and losses, interest income and interest expense. The following table sets forth total other income (expense), net for the years endedDecember 31 : Increase / (in millions) 2021 2020 Decrease Foreign currency exchange (losses)$ (33) $ (53) $ 20
Gains (losses) on foreign exchange forward contracts not designated as hedging instruments
13 (63) 76 Foreign currency exchange (losses), net (20) (116) 96 Interest income 30 119 (89) Interest expense (9) (24) 15 Other, net - 3 (3) Total other income (expense), net$ 1 $ (18) $ 19 The foreign currency exchange gains and losses were primarily attributed to the remeasurement of the Indian rupee denominated net monetary assets and liabilities in ourU.S. dollar functional currencyIndia 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. As ofDecember 31, 2021 , the notional value of our undesignated hedges was$847 million . The decrease in interest income of$89 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 repatriation of cash fromIndia in the fourth quarter of 2020.
Provision for Income Taxes
[[Image Removed: ctsh-20211231_g22.jpg]] ê$11M ¡ Effective Income Tax Rate ê 9.1%
The effective tax rate decreased primarily as a result of:
•our decision in 2020 to reverse our indefinite reinvestment assertion on Indian
earnings accumulated in prior years which resulted in a
•the 2020 Samlink Impact, which was not deductible for tax purposes;
•the discrete benefit in 2021 of the settlement of the
•lower non-deductible foreign currency exchange losses in our consolidated statement of operations in 2021.
Net Income
The increase in net income was driven by higher income from operations and lower foreign currency exchange losses, partially offset by lower interest income. [[Image Removed: ctsh-20211231_g23.jpg]] é$745M ¡ % of Revenues 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 Cognizant 30 December 31, 2021 Form 10-K
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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. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment. 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 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 years ended
% of % of (Dollars in millions, except per share data) 2021 Revenues 2020 Revenues GAAP income from operations and operating margin$ 2,826 15.3 %$ 2,114 12.7 % Class Action Settlement Loss (1) 20 0.1 - - Realignment charges (2) - - 42 0.3 2020 Fit for Growth Plan restructuring charges (3) - - 173 1.0 COVID-19 Charges (4) - - 65 0.4 Adjusted Income From Operations and Adjusted Operating Margin 2,846 15.4 2,394 14.4 GAAP diluted EPS$ 4.05 $ 2.57 Effect of above adjustments, pre-tax 0.04 0.52 Effect of non-operating foreign currency exchange losses (gains), pre-tax (5) 0.03 0.22 Tax effect of above adjustments (6) - (0.15) Tax on Accumulated Indian Earnings (7) - 0.26 Adjusted Diluted EPS$ 4.12 $ 3.42 Net cash provided by operating activities$ 2,495 $ 3,299 Purchases of property and equipment (279) (398) Free cash flow$ 2,216 $ 2,901
(1) During 2021, we recorded the Class Action Settlement Loss in "Selling, general and administrative expenses" in our consolidated financial statements. See Note 15 to our consolidated financial statements for additional information.
(2) As part of our realignment program, during 2020, we incurred employee retention costs and certain professional fees. See Note 4 to our consolidated financial statements for additional information.
Cognizant 31 December 31, 2021 Form 10-K
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(3) As part of our 2020 Fit for Growth plan, during 2020, we incurred certain employee separation, employee retention and facility exit costs and other charges. See Note 4 to our consolidated financial statements for additional information. (4) During 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. Most of the costs related to the pandemic are reported in "Cost of revenues" in our consolidated statement of operations. (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 consolidated statements of operations. (6) Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income: For the years ended December 31, (in millions) 2021 2020 Non-GAAP income tax benefit (expense) related to: Class Action Settlement Loss $ 6 $ - Realignment charges - 11 2020 Fit for Growth Plan restructuring charges - 45 COVID-19 Charges - 17 Foreign currency exchange gains and losses (5) 6
(7) In 2020, we reversed our indefinite reinvestment assertion on Indian
earnings accumulated in prior years and recorded
Liquidity and Capital Resources
Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. As ofDecember 31, 2021 , we had cash, cash equivalents and short-term investments of$2,719 million . Additionally, as ofDecember 31, 2021 , we had available capacity under our credit facilities of approximately$1,925 million . The following table provides a summary of our cash flows for the years endedDecember 31 : (in millions) 2021 2020 Increase / Decrease Net cash provided by (used in): Operating activities$ 2,495 $ 3,299 $ (804) Investing activities (2,164) (1,238) (926) Financing activities (1,203) (2,009) 806 Other Cash Flow Information7 Free cash flow 2,216 2,901 (685) Operating activities7 The decrease in cash provided by operating activities in 2021 compared to 2020 was primarily driven by the deferrals of certain non-income tax payments due to COVID-19 pandemic regulatory relief in 2020, a portion of which was remitted in 2021, and higher incentive-based compensation payouts in 2021. We monitor turnover, aging and the collection of trade accounts receivable by client. Our DSO calculation includes trade accounts receivable, net of allowance for credit losses, and contract assets, reduced by the uncollected portion of our deferred revenue. DSO was 69 days as ofDecember 31, 2021 and 70 days as ofDecember 31, 2020 . Investing activities The increase in cash used in investing activities in 2021 compared to 2020 was primarily driven by net purchases of investments as compared to sales in 2020, partially offset by lower payments for acquisitions and capital expenditures.
7 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information.
Cognizant 32 December 31, 2021 Form 10-K
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Financing activities
The decrease in cash used in financing activities in 2021 compared to 2020 is primarily due to lower repurchases of common stock in 2021.
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. See Note 10 to our consolidated financial statements. We believe that we currently meet all conditions set forth in the Credit Agreement to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the revolving credit facility as ofDecember 31, 2021 and through the date of this filing. As ofDecember 31, 2021 , we had no outstanding balance on our revolving credit facility. InFebruary 2021 , ourIndia subsidiary renewed its one-year13 billion Indian rupee ($175 million at theDecember 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 within 30 days of disbursement. This working capital facility contains affirmative and negative covenants and may be renewed annually in February. As ofDecember 31, 2021 , there was no balance outstanding under the working capital facility. Capital Allocation Framework
[[Image Removed: ctsh-20211231_g24.jpg]] Acquisitions Share Repurchases Dividend payments Our capital allocation framework anticipates the deployment of approximately 50% of our free cash flow8 for acquisitions, 25% for share repurchases and 25% for dividend payments. We review our capital allocation framework 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. 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, pay our purchase commitments and Tax Reform Act transition tax payments and service our debt for the next twelve months. Our Tax Reform Act transition tax payments are due in annual installments of$50 million ,$94 million ,$126 million and$157 million through 2025. We also have purchase commitments of approximately$263 million which will be paid over the next two years. See Note 7 to our consolidated financial statements for a description of our operating lease obligations. 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 allocation framework 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.
8 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information.
Cognizant 33 December 31, 2021 Form 10-K
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Table of Contents Critical Accounting Estimates Management's discussion and analysis of our financial condition and results of operations is based on our accompanying consolidated financial statements that have been prepared in accordance with GAAP. We base our estimates on historical experience, current trends and on various other assumptions that are believed to be relevant at the time our consolidated financial statements are prepared. We evaluate our estimates on a continuous basis. However, the actual amounts may differ from the estimates used in the preparation of our consolidated financial statements. We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our consolidated financial statements as they require the most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Changes to these estimates could have a material effect on our results of operations and financial condition. Our significant accounting policies are described in Note 1 to our consolidated financial statements. Revenue Recognition. Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract's total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized using the cost to cost method, if the right to invoice is not representative of the value being delivered. The cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information. Such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known. Net changes in estimates of such future costs and contract losses were immaterial to the consolidated results of operations for the periods presented. Income Taxes. Determining the consolidated provision for income tax expense, deferred income tax assets (and related valuation allowance, if any) and liabilities requires significant judgment. We are required to calculate and provide for income taxes in each of the jurisdictions where we operate. Changes in the geographic mix of income before taxes or estimated level of annual pre-tax income can affect our overall effective income tax rate. In addition, transactions between our affiliated entities are arranged in accordance with applicable transfer pricing laws, regulations and relevant guidelines. As a result, and due to the interpretive nature of certain aspects of these laws and guidelines, we have pending applications for APAs before the taxing authorities in some of our most significant jurisdictions. It could take years for the relevant taxing authorities to negotiate and conclude these applications. The consolidated provision for income taxes may change period to period based on changes in facts and circumstances, such as settlements of income tax audits or finalization of our applications for APAs. Our provision for income taxes also includes the impact of reserves established for uncertain income tax positions, as well as the related interest, which may require us to apply judgment to complex issues and may require an extended period of time to resolve. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final outcome of these matters will not differ from our recorded amounts. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. To the extent that the final outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. Business Combinations,Goodwill and Intangible Assets.Goodwill and intangible assets, including indefinite-lived intangible assets, arise from the accounting for business combinations. We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired, liabilities assumed, including any contingent consideration, and any noncontrolling interest in the acquiree to properly allocate purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price utilizes estimates and assumptions in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets, including the timing and amount of forecasted revenues and cash flows, anticipated growth rates, client attrition rates and the discount rate reflecting the risk inherent in future cash flows. We exercise judgment to allocate goodwill to the reporting units expected to benefit from each business combination.Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, regulatory environment, established business plans, operating performance indicators or competition. Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit. Cognizant 34 December 31, 2021 Form 10-K
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We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. Under the income approach, we estimate projected future cash flows, the timing of such cash flows and long-term growth rates, and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on a market participant weighted-average cost of capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. Based on our most recent evaluation of goodwill performed during the fourth quarter of 2021, we concluded that the goodwill in each of our reporting units were not at risk of impairment. As ofDecember 31, 2021 , our goodwill balance was$5,620 million . We review our finite-lived assets, including our finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The carrying amount may not be recoverable when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset groups. The impairment loss is determined as the amount by which the carrying amount of the asset group exceeds its fair value. Assessing the fair value of asset groups involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows and discount rates reflecting the risk inherent in future cash flows.
Recently Adopted and New Accounting Pronouncements
See Note 1 to our consolidated financial statements for additional information.
Forward Looking Statements The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (within the meaning of Section 21E of the 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. 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 and future attrition trends, anticipated effective income tax rate and income tax expense, liquidity, access to capital, capital return strategy, investment strategies, cost management, 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 and costs associated with regulatory and litigation matters, the appropriateness of the 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 maintain our capital return strategy;
Cognizant 35 December 31, 2021 Form 10-K
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•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 employees 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 and client expectations 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, in the section entitled " Item 1A. Risk Factors " in this report.
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 sections titled " Part I, Item 1. Business ," " Part I, Item 1A. Risk Factors " and " Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ." 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 36 December 31, 2021 Form 10-K
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