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. The global COVID-19 pandemic has caused and is continuing to cause significant loss of life and interruption to the global economy, including the curtailment of activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease. In response to COVID-19, we have prioritized the safety and well-being of our employees, business continuity for our clients, and supporting the efforts of governments around the world to contain the spread of the virus. In light of our commitment to help our clients as they navigate unprecedented business challenges while protecting the safety of our employees, we have taken numerous steps, and may continue to take further actions, to address the COVID-19 pandemic. We have been working closely with our clients to support them as they implemented their contingency plans, helping them access our services and solutions remotely. We also undertook a significant effort to enable our employees to work from home by providing them with computer and Internet accessibility equipment while seeking to maintain appropriate security protocols. Despite these efforts, in the first half of 2020 we experienced some delays in project fulfillment as delivery, particularly inIndia andthe Philippines , shifted to work-from-home in response to the pandemic. Additionally, as a result of the ongoing pandemic, we experienced reduced client demand, project deferrals, furloughs, and temporary rate concessions, which adversely affected revenues across all of our business segments in 2020. For the year endedDecember 31, 2020 , we incurred$65 million of costs in response to the COVID-19 pandemic, including certain costs incurred to enable our employees to work remotely. In 2020, we incurred costs related to the execution of our multi-year 2020 Fit for Growth Plan aimed at accelerating revenue growth. This plan refined our strategic focus and launched a series of measures to improve our operational and commercial models and optimize our cost structure in order to partially fund investments in key digital areas of IoT, AI, experience-driven software engineering and cloud and advance our growth agenda. The 2020 Fit for Growth Plan included our decision to exit certain content-related services that are not in line with our strategic vision for the Company. The optimization measures that were part of the 2020 Fit for Growth Plan resulted in total charges of$221 million , primarily related to severance and facility exit costs that are expected to generate an annualized savings run rate, before anticipated investments, of approximately$530 million in 2021. See Note 4 to our consolidated financial statements for additional information on these costs, which are reported in the caption "Restructuring charges" in our consolidated statements of operations. We do not expect to incur additional costs related to this plan. The COVID-19 pandemic may adversely impact our ability to realize the benefits of our strategy and various transformation initiatives, including the 2020 Fit for Growth Plan. See Part I, Item 1A. Risk Factors . Our exit from certain content-related services negatively impacted our 2020 revenues by approximately$178 million within our Communications, Media and Technology segment inNorth America . OnApril 20, 2020 , we announced a security incident involving a Maze ransomware attack. As previously reported in our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 , based on numerous remediation steps that have been undertaken and our continued monitoring of our environment, we believe we have contained the attack and eradicated remnants of the attacker activity from our environment. The lost revenue and containment, investigation, remediation, legal and other costs incurred due to the ransomware attack may exceed our insurance policy limits or may not be covered by insurance at all. Other actual and potential consequences include, but are not limited to, negative publicity, reputational damage, lost trust with customers, regulatory enforcement action, litigation that could result in financial judgments or the payment of settlement amounts and disputes with insurance carriers concerning coverage. InMarch 2020 , the Indian parliament enacted the Budget of India, which contained a number of provisions related to income tax, including a replacement of the DDT, previously due from the dividend payer, with a tax payable by the shareholder receiving the dividend. This provision reduced the tax rate applicable to us for cash repatriated from India. Following this change, during the first quarter of 2020, we limited our indefinite reinvestment assertion to India earnings accumulated in prior 19 -------------------------------------------------------------------------------- Table of Contents years. InJuly 2020 , theU.S. Treasury Department and theIRS released final regulations, which became effective inSeptember 2020 , that reduced the tax applicable on our accumulated Indian earnings upon repatriation. As a result, during the third quarter of 2020, after a thorough analysis of the impact of these changes in law on the cost of earnings repatriation and considering our strategic decision to increase our investments to accelerate growth in various international markets and expand our global delivery footprint, we reversed our indefinite reinvestment assertion on Indian earnings accumulated in prior years and recorded a$140 million Tax on Accumulated Indian Earnings. The recorded income tax expense reflects the India withholding tax on unrepatriated Indian earnings, which were$5.2 billion as ofDecember 31, 2019 , net of applicableU.S. foreign tax credits. OnOctober 28, 2020 , our subsidiary inIndia remitted a dividend of$2.1 billion , which resulted in a net payment of$2.0 billion to its shareholders (non-Indian Cognizant entities), after payment of$106 million of India withholding tax. OnOctober 27, 2020 , a jury returned a verdict in our favor in the amount of$854 million , including$570 million punitive damages, in our lawsuit with Syntel, which was initiated in 2015. We expect Syntel to appeal the decision and thus we will not record the gain in our financial statements until it becomes realizable. For more information, see Note 15 to our consolidated financial statements. In the fourth quarter of 2020, we made an offer to settle and exit a large customer engagement in Financial Services in Continental Europe ("Proposed Exit"). The offer includes, among other terms, a proposed payment and the forgiveness of certain receivables. The 2020 impact of the Proposed Exit was a reduction of revenues of$118 million and additional expenses of$33 million , primarily related to the impairment of long-lived assets. The Proposed Exit negatively impacted each of our GAAP and Adjusted Diluted EPS by$0.27 for the year endedDecember 31, 2020 . While the amounts recorded are based on our best estimate of the expected terms of the exit, the negotiations are ongoing and, as such, we may not reach an agreement or the final terms of the agreement that is reached may materially differ from those contemplated in our accounting. In either instance, there could be additional impacts to our statement of operations, financial condition and our cash flows. 2020 Financial Results The following table sets forth a summary of our financial results for the years endedDecember 31, 2020 and 2019: Increase / Decrease 2020 2019 $ % (Dollars in millions, except per share data) Revenues$ 16,652 $ 16,783 $ (131) (0.8) Income from operations 2,114 2,453 (339) (13.8) Net income 1,392 1,842 (450) (24.4) Diluted EPS 2.57 3.29 (0.72) (21.9) Other Financial Information1 Adjusted Income From Operations 2,394 2,787 (393) (14.1) Adjusted Diluted EPS 3.42 3.99 (0.57) (14.3) Our financial results were negatively impacted by our exit from certain content-related services, the Proposed Exit, the ransomware attack and the COVID-19 pandemic. We continue to experience pricing pressure within our core portfolio of services as our clients optimize the cost of supporting their legacy systems and operations. At the same time, clients are adopting and integrating digital technologies and their demand for our digital services and solutions has continued to increase since the beginning of the COVID-19 pandemic as a result of increased demand for mobile workplace solutions, e-commerce, automation and AI and cybersecurity services and solutions.
1 Adjusted Income From Operations 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.
20 -------------------------------------------------------------------------------- Table of Contents The following charts set forth revenues and change in revenues by business segment and geography for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 : Financial Services Healthcare Increase / (Decrease) Increase / (Decrease) Dollars in millions Revenues $ % CC %2 Revenues $ % CC %2 North America$ 4,013 (124) (3.0) (3.0)$ 4,181 34 0.8 0.8 United Kingdom 463 (21) (4.3) (4.7) 157 27 20.8 19.8 Continental Europe 629 (99) (13.6) (14.0) 434 93 27.3 24.0 Europe - Total 1,092 (120) (9.9) (10.3) 591 120 25.5 22.9 Rest of World 516 (4) (0.8) 2.0 80 3 3.9 6.0 Total$ 5,621 (248) (4.2) (4.0)$ 4,852 157 3.3 3.1 Products and Resources
Communications, Media and Technology
Increase / (Decrease) Increase / (Decrease) Dollars in millions Revenues $ % CC %2 Revenues $ % CC %2 North America$ 2,650 (28) (1.0) (1.0)$ 1,737 (27) (1.5) (1.5) United Kingdom 371 (9) (2.4) (3.0) 344 25 7.8 6.8 Continental Europe 413 (40) (8.8) (8.7) 177 8 4.7 2.1 Europe - Total 784 (49) (5.9) (6.1) 521 33 6.8 5.2 Rest of World 262 3 1.2 4.7 225 28 14.2 20.2 Total$ 3,696 (74) (2.0) (1.7)$ 2,483 34 1.4 1.6 Across all our business segments and regions, revenues were negatively impacted by the COVID-19 pandemic and the ransomware attack. Retail, consumer goods, travel and hospitality clients within our Products and Resources segment as well as communications and media clients in our Communications, Media and Technology segment were particularly adversely affected by the pandemic. Revenues in our Financial Services segment in our Continental Europe region were negatively impacted by$118 million due to the Proposed Exit. Additionally, we continued to see certain financial services and healthcare clients transition the support of some of their legacy systems and operations in-house. Revenue growth among our life sciences clients was driven by revenues from Zenith and increased demand for our services among pharmaceutical companies while revenues from our healthcare clients benefited from stronger software license sales. Our manufacturing, logistics, energy and utilities clients within our Products and Resources segment generated revenue growth due to our clients' continued adoption and integration of digital technologies. Revenues among our technology clients in our Communications, Media and Technology segment in theNorth America region were negatively impacted by approximately$178 million due to our exit from certain content-related services. We continue to see growing demand from our technology clients for other more strategic digital content services. Additionally, the year-over-year change in our revenues included 210 basis points of benefit from our recently completed acquisitions, including Collaborative Solutions, Zenith and Contino. Our operating margin and Adjusted Operating Margin2 decreased to 12.7% and 14.4%, respectively, for the year endedDecember 31, 2020 from 14.6% and 16.6%, respectively, for the year endedDecember 31, 2019 . Our GAAP and Adjusted Operating Margin2 were adversely impacted by higher incentive-based compensation accrual rates, investments intended to drive organic and inorganic revenue growth, the impact of the Proposed Exit, the decline in revenues brought on by the COVID-19 pandemic and the impact of the ransomware attack on both revenues and costs. These impacts were partially offset by a significant decrease in travel and entertainment expenses due to the COVID-19 pandemic, the cost savings generated as a result of the 2020 Fit for Growth Plan, lower immigration costs and the depreciation of the Indian rupee against theU.S. dollar. In addition, our 2019 GAAP operating margin included a 0.7% negative impact of the incremental accrual in 2019 related to the India Defined Contribution Obligation as discussed in Note 15 to our consolidated financial statements, while our 2020 GAAP operating margin was negatively impacted by COVID-19 Charges. 2 Constant currency revenue growth (CC) and Adjusted Operating Margin are not measurements 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, as applicable. 21 -------------------------------------------------------------------------------- Table of Contents Business Outlook We have four strategic priorities as we seek to increase our commercial momentum and accelerate growth. These strategic priorities are: •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; •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. As our clients seek to optimize the cost of supporting their legacy systems and operations, our core portfolio of services may be subject to pricing pressure and lower demand due to clients transitioning certain work in-house. At the same time, clients continue to adopt and integrate digital technologies and their demand for our digital operations services and solutions has only increased since the beginning of the COVID-19 pandemic, as demand for mobile workplace solutions, e-commerce, automation and AI and cybersecurity services and solutions has grown. 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 significant and evolving nature of the COVID-19 pandemic makes it difficult to estimate its future impact on our ongoing business, results of operations and overall financial performance. See Part I , Item 1A. Risk Factors . 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. Competition for skilled labor is intense and 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 around the world. As such, we will continue to focus on recruiting, talent management and employee engagement to attract and retain our employees. We will continue to pursue strategic acquisitions, investments and alliances that will expand our talent, experience and capabilities in key digital areas or in particular geographies or industries. 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 in 2021 and future years for employment and post-employment benefits inIndia as a result of the issuance of the Code in late 2020, as well as costs related to the potential resolution of legal and regulatory matters discussed in Note 15 to our consolidated financial statements. For additional information, see Part I, Item 1A. Risk Factors . 22
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Table of Contents Results of Operations For a discussion of our results of operations for the year endedDecember 31, 2018 , including a year-to-year comparison between 2019 and 2018, 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, 2019 . The Year EndedDecember 31, 2020 Compared to The Year EndedDecember 31, 2019 The following table sets forth certain financial data for the years endedDecember 31 : % of % of Increase / Decrease 2020 Revenues 2019 Revenues $ % (Dollars in millions, except per share data) Revenues$ 16,652 100.0$ 16,783 100.0$ (131) (0.8) Cost of revenues(1) 10,671 64.1 10,634 63.4 37 0.3 Selling, general and administrative expenses(1) 3,100 18.6 2,972 17.7 128 4.3 Restructuring charges 215 1.3 217 1.3 (2) (0.9) Depreciation and amortization expense 552 3.3 507 3.0 45 8.9 Income from operations 2,114 12.7 2,453 14.6 (339) (13.8) Other income (expense), net (18) 90 (108)
(120.0)
Income before provision for income taxes 2,096 12.6 2,543 15.2 (447)
(17.6)
Provision for income taxes (704) (643) (61)
9.5
Income (loss) from equity method investments - (58) 58 (100.0) Net income$ 1,392 8.4$ 1,842 11.0$ (450) (24.4) Diluted EPS$ 2.57 $ 3.29 $ (0.72) (21.9) Other Financial Information 3 Adjusted Income From Operations and Adjusted Operating Margin$ 2,394 14.4$ 2,787 16.6 (393) (14.1) Adjusted Diluted EPS$ 3.42 $ 3.99 $ (0.57) (14.3)
(1) Exclusive of depreciation and amortization expense.
Revenues - Overall During 2020, revenues decreased by$131 million as compared to 2019, representing a decline of 0.8%, or 0.7% on a constant currency basis3. Across all business segments and regions, revenues were negatively impacted by the ransomware attack and the COVID-19 pandemic. In addition, our exit from certain content-related services and the Proposed Exit negatively impacted our revenues by$178 million and$118 million , respectively. We continue to experience pricing pressure within our core portfolio of services as our clients optimize the cost of supporting their legacy systems and operations. At the same time, clients are adopting and integrating digital technologies and their demand for our digital services and solutions has continued to increase since the beginning of the COVID-19 pandemic as a result of increased demand for mobile workplace solutions, e-commerce, automation and AI and cybersecurity services and solutions. Additionally, the year-over-year change in our revenues included 210 basis points of benefit from our recently completed acquisitions, including Collaborative Solutions, Zenith and Contino. Revenues from clients added during 2020, including those related to acquisitions, were$342 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. 23 -------------------------------------------------------------------------------- Table of Contents Revenues - Reportable Business Segments Revenues by reportable business segment were as follows: Increase / (Decrease) 2020 2019 $ % CC%4 (Dollars in millions)
Financial Services$ 5,621 $ 5,869 $ (248) (4.2) (4.0) Healthcare 4,852 4,695 157 3.3 3.1 Products and Resources 3,696 3,770 (74) (2.0) (1.7) Communications, Media and Technology 2,483 2,449 34 1.4 1.6 Total revenues$ 16,652 $ 16,783 $ (131) (0.8) (0.7) Financial Services Revenues from our Financial Services segment declined 4.2%, or 4.0% on a constant currency basis4, in 2020. Revenues among our insurance clients decreased by$85 million as compared to a decrease of$163 million from our banking clients. The Proposed Exit negatively impacted our revenues from banking clients by$118 million . Revenues from clients added during 2020, including those related to acquisitions, were$70 million . Moderate revenue growth generated by our digital services did not fully offset revenue declines attributable to certain financial services clients who continued to transition the support of some of their legacy systems and operations in-house. Healthcare Revenues from our Healthcare segment grew 3.3%, or 3.1% on a constant currency basis4, in 2020. Revenues in this segment increased by$173 million among our life science clients while revenues from our healthcare clients decreased$16 million . Revenue growth among our life sciences clients was driven by revenues from Zenith and increased demand for our services among pharmaceutical companies. Revenues from our healthcare clients were negatively impacted by the establishment of an offshore captive by a large client, partially offset by the 2019 negative impact of a customer dispute with a healthcare client related to a large volume based contract. Additionally, revenues from our healthcare clients benefited from stronger software license sales in 2020. Revenues from clients added during 2020, including those related to acquisitions, were$50 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 declined 2.0%, or 1.7% on a constant currency basis4, in 2020. Retail, consumer goods, travel and hospitality clients were particularly adversely affected by the COVID-19 pandemic. Thus, revenue from our travel and hospitality clients and from our retail and consumer goods clients decreased by$126 million and$100 million , respectively. Revenues from our manufacturing, logistics, energy and utilities clients increased by$152 million due to our clients' adoption and integration of digital technologies. Revenues from clients added during 2020, including those related to acquisitions, were$105 million . Communications, Media and Technology Revenues from our Communications, Media and Technology segment grew 1.4%, or 1.6% on a constant currency basis4, in 2020. Revenues from our communications and media clients increased$72 million while revenues from our technology clients decreased$38 million . Revenues among our technology clients in this segment were negatively impacted by approximately$178 million due to our exit from certain content-related services. Additionally, revenues were negatively impacted by the COVID-19 pandemic, particularly among our communications and media clients, partially offset by growing demand from our technology clients for other more strategic digital content services. Revenues from clients added during 2020, including those related to acquisitions, were$117 million .
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.
24 -------------------------------------------------------------------------------- Table of Contents Revenues - Geographic Locations Revenues by geographic market, as determined by client location, were as follows: Increase / (Decrease) 2020 2019 $ % CC %5 (Dollars in millions) North America$ 12,581 $ 12,726 $ (145) (1.1) (1.1) % United Kingdom 1,335 1,313 22 1.7 1.0 % Continental Europe 1,653 1,691 (38) (2.2) (3.3) % Europe - Total 2,988 3,004 (16) (0.5) (1.4) % Rest of World 1,083 1,053 30 2.8 6.4 % Total revenues$ 16,652 $ 16,783 $ (131) (0.8) (0.7) %North America continues to be our largest market, representing 75.6% of total 2020 revenues. OurNorth America region was negatively impacted by our exit from certain content-related services in our Communications, Media and Technology segment and the transition of the support of legacy systems for certain financial services and healthcare clients in-house. Our Continental Europe region was negatively impacted by the Proposed Exit, partially offset by growth from our life sciences customers. Revenues in ourUnited Kingdom region have particularly benefited from our recently completed acquisitions. Revenue growth in our Rest of World region was driven by our Communications, Media and Technology clients.
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 0.3% during 2020 as compared to 2019, increasing as a percentage of revenues to 64.1% in 2020 compared to 63.4% in 2019. The increase in cost of revenues, as a percentage of revenues, was due primarily to an increase in costs related to higher incentive-based compensation accrual rates in 2020 and the impact of the Proposed Exit, the COVID-19 pandemic and the ransomware attack. These impacts were partially offset by a significant decrease in travel and entertainment costs as a result of a reduction in travel due to the COVID-19 pandemic, the cost savings generated as a result of our cost optimization strategy and the depreciation of the Indian rupee against theU.S. dollar. SG&A Expenses (Exclusive of Depreciation and Amortization Expense) SG&A expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, immigration, travel, marketing, communications, management, finance, administrative and occupancy costs. SG&A expenses increased by 4.3% during 2020 as compared to 2019, increasing as a percentage of revenues to 18.6% in 2020 as compared to 17.7% in 2019. The increase, as a percentage of revenues, was due primarily to an increase in costs related to higher incentive-based compensation accrual rates in 2020, investments intended to drive organic and inorganic revenue growth and the impacts of the COVID-19 pandemic, the Proposed Exit and the ransomware attack. These negative impacts were partially offset by a significant decrease in travel and entertainment costs as a result of a reduction in travel due to the COVID-19 pandemic and lower immigration costs, in addition to the$117 million incremental accrual in 2019 related to the India Defined Contribution Obligation as discussed in Note 15 to our consolidated financial statements. Restructuring Charges Restructuring charges consist of our 2020 Fit for Growth Plan and our realignment program. Restructuring charges were$215 million , or 1.3% as a percentage of revenues during 2020, as compared to$217 million , or 1.3% as a percentage of revenues, during 2019. For further detail on our restructuring charges see Note 4 to our consolidated financial statements. Depreciation and Amortization Expense Depreciation and amortization expense increased by 8.9% during 2020 as compared to 2019. The increase was due to procurement of additional computer equipment primarily to provision work-from-home arrangements and amortization of intangibles from recently completed acquisitions.
5 Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information.
25 -------------------------------------------------------------------------------- Table of Contents Operating Margin - Overall Our operating margin and Adjusted Operating Margin6 decreased to 12.7% and 14.4%, respectively, in 2020 from 14.6% and 16.6%, respectively, during 2019. Our GAAP and Adjusted Operating Margin6 were adversely impacted by higher incentive-based compensation accrual rates, investments intended to drive organic and inorganic revenue growth, the impact of the Proposed Exit, the decline in revenues brought on by the COVID-19 pandemic and the impact of the ransomware attack on both revenues and costs. These impacts were partially offset by a significant decrease in travel and entertainment expenses due to the COVID-19 pandemic, the cost savings generated as a result of the 2020 Fit for Growth Plan, lower immigration costs and the depreciation of the Indian rupee against theU.S. dollar. In addition, our 2019 GAAP operating margin included a 0.7% negative impact of the incremental accrual in 2019 related to the India Defined Contribution Obligation as discussed in Note 15 to our consolidated financial statements, while our 2020 GAAP operating margin was negatively impacted by COVID-19 Charges. Excluding the impact of applicable designated cash flow hedges, the depreciation of the Indian rupee against theU.S. dollar positively impacted our operating margin by approximately 92 basis points or 0.92 percentage points in 2020, while in 2019 the depreciation of the Indian rupee against theU.S. dollar positively impacted our operating margin by approximately 53 basis points or 0.53 percentage 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 17 basis points or 0.17 percentage 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. The impact of the settlement of our cash flow hedges was immaterial in 2020 and 2019. Our most significant costs are the salaries and related benefits for our employees. These costs are affected by the impact of inflation. In certain regions, competition for professionals 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. We finished the year endedDecember 31, 2020 with approximately 289,500 employees, which is a decrease of 3,000 as compared toDecember 31, 2019 . For the three months endedDecember 31, 2020 , annualized turnover, including both voluntary and involuntary, was approximately 19.0%. Turnover for the years endedDecember 31, 2020 and 2019, including both voluntary and involuntary, was approximately 20.6% and 21.7%. Voluntary attrition normally constitutes the significant majority of our attrition. In 2020, we saw elevated levels of involuntary attrition due to our Fit for Growth Plan, including the exit from certain content-related services. We also saw a decrease in voluntary attrition from historic levels in the early stages of the COVID-19 pandemic. Both voluntary and involuntary attrition are weighted towards our more junior employees. Segment Operating Profit and Margin Segment operating profit and margin were as follows: Increase 2020 Operating Margin % 2019 Operating Margin % /(Decrease) (Dollars in millions) Financial Services$ 1,449 25.8$ 1,605 27.3 $ (156) Healthcare 1,383 28.5 1,261 26.9 122 Products and Resources 1,078 29.2 1,028 27.3 50 Communications, Media and Technology 794 32.0 732 29.9 62 Total segment operating profit and margin 4,704 28.2 4,626 27.6 78 Less: unallocated costs 2,590 2,173 417 Income from operations$ 2,114 12.7$ 2,453 14.6 $ (339) Across all our business segments, operating margins benefited from a significant decrease in travel and entertainment costs due to COVID-19 related reductions in travel, cost savings generated by our cost optimization initiatives and the depreciation of the Indian rupee against theU.S. dollar, partially offset by investments intended to drive organic and inorganic revenue growth and the negative impact on revenues of the COVID-19 pandemic and the ransomware attack. The 2020 operating margin in our Financial Services segment was negatively impacted by the Proposed Exit. Additionally, the 2019 operating margin in our Healthcare segment was negatively impacted by client mergers within the segment and a dispute with a customer related to a large volume based contract. The increase in unallocated costs in 2020 compared to 2019 is primarily due 6 Adjusted Operating Margin is not a measurement 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. 26 -------------------------------------------------------------------------------- Table of Contents to a smaller shortfall in 2020 than in 2019 of incentive-based compensation as compared to target, COVID-19 Charges and costs related to the ransomware attack, partially offset by the 2019 India Defined Contribution Obligation discussed in Note 15 to our consolidated financial statements. 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 / 2020 2019 Decrease (in millions) Foreign currency exchange (losses)$ (53) $ (73) $ 20
(Losses) gains on foreign exchange forward contracts not designated as hedging instruments
(63) 8 (71) Foreign currency exchange (losses), net (116) (65) (51) Interest income 119 176 (57) Interest expense (24) (26) 2 Other, net 3 5 (2) Total other income (expense), net$ (18) $ 90 $ (108) 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 currency India subsidiaries and, to a lesser extent, the remeasurement of other net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. The gains and losses on our foreign exchange forward contracts not designated as hedging instruments related to the realized and unrealized gains and losses on foreign exchange forward contracts entered into to offset foreign currency exposure to non-U.S. dollar denominated net monetary assets and liabilities. As ofDecember 31, 2020 , the notional value of our undesignated hedges was$637 million . The decrease in interest income of$57 million was primarily attributable to lower yields in 2020. Provision for Income Taxes The provision for income taxes was$704 million in 2020 and$643 million in 2019. The effective income tax rate increased to 33.6% in 2020 as compared to 25.3% in 2019 primarily driven by the Tax on Accumulated Indian Earnings, the impact of the Proposed Exit, which was not deductible for tax purposes, and the depreciation of the Indian rupee against theU.S. dollar, which resulted in non-deductible foreign currency exchange losses in our consolidated statement of operations. Income (loss) from equity method investments In 2019, we recorded an impairment charge of$57 million on one of our equity method investments as further described in Note 5 to our consolidated financial statements. Net Income Net income was$1,392 million in 2020 and$1,842 million in 2019. Net income as a percentage of revenues decreased to 8.4% in 2020 from 11.0% in 2019. The decrease in net income was driven by lower income from operations, higher foreign currency exchange losses (inclusive of losses on our foreign exchange forward contracts not designated as hedging instruments), 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 27 -------------------------------------------------------------------------------- Table of Contents statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period's foreign currency exchange rates measured against the comparative period's reported revenues. We believe providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For our internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to 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 endedDecember 31 : % of % of 2020 Revenues 2019 Revenues (Dollars in millions, except per share data) GAAP income from operations and operating margin$ 2,114 12.7 %$ 2,453 14.6 % Realignment charges (1) 42 0.3 169 1.0 2020 Fit for Growth Plan restructuring charges (2) 173 1.0 48 0.3 COVID-19 Charges (3) 65 0.4 - - Incremental accrual related to the India Defined Contribution Obligation (4) - - 117 0.7 Adjusted Income From Operations and Adjusted Operating Margin 2,394 14.4 2,787 16.6 GAAP diluted EPS$ 2.57 $ 3.29 Effect of above adjustments, pre-tax 0.52 0.60 Effect of non-operating foreign currency exchange losses (gains), pre-tax (5) 0.22 0.11 Tax effect of above adjustments (6) (0.15) (0.15) Tax on Accumulated Indian Earnings (7) 0.26 - Effect of the equity method investment impairment (8) - 0.10 Effect of the India Tax Law (9) - 0.04 Adjusted Diluted EPS$ 3.42 $ 3.99
(1) As part of our realignment program, during 2020, we incurred employee retention costs and certain professional services fees and, during 2019, we incurred Executive Transition Costs, employee separation costs, employee retention costs and third party realignment costs. See Note 4 to our consolidated financial statements for additional information. (2) 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 and, during 2019, we incurred certain employee separation, employee retention and facility exit costs under the plan. See Note 4 to our consolidated financial statements for additional information.
28 -------------------------------------------------------------------------------- Table of Contents (3) 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 both India andthe Philippines , certain costs to enable our employees to work remotely and provide medical staff and extra cleaning services for our facilities. Most of the costs related to the pandemic are reported in "Cost of revenues" in our consolidated statement of operations. (4) In 2019, we recorded an accrual of$117 million related to the India Defined Contribution Obligation as further described in Note 15 to our consolidated financial statements. (5) Non-operating foreign currency exchange gains and losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, are reported in "Foreign currency exchange gains (losses), net" in our 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, 2020 2019 (in millions) Non-GAAP income tax benefit (expense) related to: Realignment charges $ 11 $ 43 2020 Fit for Growth Plan restructuring charges 45 13 COVID-19 Charges 17 - Incremental accrual related to the India Defined Contribution Obligation - 31 Foreign currency exchange gains and losses 6 (1) (7) In 2020, we reversed our indefinite reinvestment assertion on Indian earnings accumulated in prior years and recorded$140 million in income tax expense. (8) In 2019, we recorded an impairment charge of$57 million on one of our equity investments as further described in Note 5 to our consolidated financial statements. (9) In 2019, we recorded a one-time net income tax expense of$21 million as a result of the enactment of a new tax law inIndia .
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, 2020 , we had cash, cash equivalents and short-term investments of$2,724 million . Additionally, as ofDecember 31, 2020 , we had available capacity under our credit facilities of approximately$1,928 million . The following table provides a summary of our cash flows for the years endedDecember 31 : 2020 2019 Increase / Decrease (in millions) Net cash provided by (used in): Operating activities$ 3,299 $ 2,499 $ 800 Investing activities (1,238) 1,588 (2,826) Financing activities (2,009) (2,569) 560 Operating activities The increase in cash generated from operating activities for 2020 compared to 2019 was primarily driven by improved collections on our trade accounts receivable, deferrals of certain payments due to COVID-19 pandemic regulatory relief provided by several jurisdictions in which we operate, and lower incentive-based compensation payouts and cash taxes paid in 2020. We monitor turnover, aging and the collection of trade accounts receivable by client. Our DSO calculation includes trade accounts receivable, net of allowance for doubtful accounts, and contract assets, reduced by the uncollected portion of our deferred revenue. DSO was 70 days as ofDecember 31, 2020 and 73 days as ofDecember 31, 2019 . 29 -------------------------------------------------------------------------------- Table of Contents Investing activities Net cash used in investing activities in 2020 was primarily driven by payments for acquisitions. Net cash provided by investing activities in 2019 was driven by net sales of investments partially offset by payments for acquisitions and outflows for capital expenditures. Financing activities The decrease in cash used in financing activities in 2020 compared to 2019 is primarily due to lower repurchases of common stock in 2020. 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. During the first quarter of 2020, we borrowed$1.74 billion against our revolving credit facility and repaid this amount in full in the fourth quarter of 2020. 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, 2020 and through the date of this filing. As ofDecember 31, 2020 , we had no outstanding balance on our revolving credit facility. InFebruary 2020 , our India subsidiary renewed its one-year13 billion Indian rupee ($178 million at theDecember 31, 2020 exchange rate) working capital facility, which requires us to repay any balances drawn down within 90 days from the date of disbursement. There is a 1.0% prepayment penalty applicable to payments made within 30 days of disbursement. This working capital facility contains affirmative and negative covenants and may be renewed annually in February. As ofDecember 31, 2020 , there was no balance outstanding under the working capital facility. During 2020, we returned$2,034 million to our stockholders through$1,554 million in share repurchases under our stock repurchase program and$480 million in dividend payments. Our stock repurchase program, as amended by our Board of Directors inDecember 2020 , allows for the repurchase of an aggregate of up to$9.5 billion , excluding fees and expenses, of our Class A common stock. As ofDecember 31, 2020 , we have$2.8 billion , excluding fees and expenses, available for repurchases under the program. Our shares outstanding decreased to 530 million as ofDecember 31, 2020 from 548 million as ofDecember 31, 2019 . We review our capital return plan on an on-going basis, considering the potential impacts of COVID-19 pandemic, our financial performance and liquidity position, investments required to execute our strategic plans and initiatives, acquisition opportunities, the economic outlook, regulatory changes and other relevant factors. As these factors may change over time, the actual amounts expended on stock repurchase activity, dividends, and acquisitions, if any, during any particular period cannot be predicted and may fluctuate from time to time. Other Liquidity and Capital Resources Information We seek to ensure that our worldwide cash is available in the locations in which it is needed. As part of our ongoing liquidity assessments, we regularly monitor the mix of our domestic and international cash flows and cash balances. 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 . InMarch 2020 , the Indian parliament enacted the Budget of India, which contained a number of provisions related to income tax, including a replacement of the DDT, previously due from the dividend payer, with a tax payable by the shareholder receiving the dividend. This provision reduced the tax rate applicable to us for cash repatriated from India. Following this change, during the first quarter of 2020, we limited our indefinite reinvestment assertion to India earnings accumulated in prior years. InJuly 2020 , theU.S. Treasury Department and theIRS released final regulations, which became effective inSeptember 2020 , that reduced the tax applicable on our accumulated Indian earnings upon repatriation. As a result, during the third quarter of 2020, after a thorough analysis of the impact of these changes in law on the cost of earnings repatriation and considering our strategic decision to increase our investments to accelerate growth in various international markets and expand our global delivery footprint, we reversed our indefinite reinvestment assertion on Indian earnings accumulated in prior years and recorded a$140 million Tax on Accumulated Indian Earnings. The recorded income tax expense reflects the India withholding tax on unrepatriated Indian earnings, which were$5.2 billion as ofDecember 31, 2019 , net of applicableU.S. foreign tax credits. OnOctober 28, 2020 , our subsidiary inIndia remitted a dividend of$2.1 billion , which resulted in a net payment of$2.0 billion to its shareholders (non-Indian Cognizant entities), after payment of$106 million of India withholding tax. 30 -------------------------------------------------------------------------------- Table of Contents 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
Commitments
As ofDecember 31, 2020 , we had the following obligations and commitments to make future payments under contractual obligations and commercial commitments: Payments due by period Less than More than Total 1 year 1-3 years 3-5 years 5 years (in millions)
Long-term debt obligations(1)
$ - $ - Interest on long-term debt(2) 19 7 12 - - Finance lease obligations 23 11 11 1 - Operating lease obligations 1,271 260 398 264 349 Other purchase commitments(3) 432 216 184 28 4 Tax Reform Act transition tax 478 50 145 283 - Total$ 2,926 $ 582 $ 1,415 $ 576 $ 353 (1) Consists of scheduled repayments of our Term Loan. (2) Interest on the Term Loan was calculated at interest rates in effect as ofDecember 31, 2020 . (3) Other purchase commitments include, among other things, communications and information technology obligations, as well as other obligations that we cannot cancel or where we would be required to pay a termination fee in the event of cancellation. As ofDecember 31, 2020 , we had$193 million of unrecognized income tax benefits. This represents the income tax benefits associated with certain income tax positions on ourU.S. and non-U.S. tax returns that have not been recognized on our financial statements due to uncertainty regarding their resolution. The resolution of these income tax positions with the relevant taxing authorities is at various stages, and therefore we are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters. Contingencies See Note 15 to our consolidated financial statements for additional information.
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 2020 and 2019 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 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. 31 -------------------------------------------------------------------------------- Table of Contents 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. 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 32
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Table of Contents 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.
We also evaluate indefinite-lived intangible assets for impairment at least annually, or as circumstances warrant. Our 2020 qualitative assessment included the review of relevant macroeconomic factors and entity-specific qualitative factors to determine if it was more-likely-than-not that the fair value of our indefinite-lived intangible assets was below carrying value. Beginning with the first quarter of 2020, COVID-19 negatively affected all major economic and financial markets and, although there is a wide range of possible outcomes and the associated impact is highly dependent on variables that are difficult to forecast, we deemed the deterioration in general economic conditions sufficient to trigger an interim impairment testing of goodwill as ofMarch 31, 2020 . Our interim test results as ofMarch 31, 2020 indicated that the fair values of all of our reporting units exceeded their carrying values and thus, no impairment of goodwill existed as ofMarch 31, 2020 . Based on our most recent evaluation of goodwill and indefinite-lived intangible assets performed during the fourth quarter of 2020, we concluded that the goodwill and indefinite-lived intangible asset balances in each of our reporting units were not at risk of impairment. 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. We recognize an impairment loss when the sum of the 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. Contingencies. Loss contingencies are recorded as liabilities when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, we do not record a liability, but instead disclose the nature and amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Significant judgment is required in the determination of whether an exposure is considered probable and reasonably estimable. Our judgments are subjective and based on the information available from the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. As additional information becomes available, we reassess any potential liability related to any pending litigation and may revise our estimates. Such revisions in estimates of any potential liabilities could have a material impact on our results of operations and financial position.
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, 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, the Proposed Exit 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; 33 -------------------------------------------------------------------------------- Table of Contents •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 implement our 2020 Fit for Growth Plan and achieve the anticipated benefits from the plan; •our ability to meet specified service levels or milestones required by certain of our contracts; •intense and evolving competition and significant technological advances that our service offerings must keep pace with in the rapidly changing markets we compete in; •legal, reputation and financial risks 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 related to complying with the numerous and evolving legal and regulatory requirements to which we are subject in the many jurisdictions in which we operate; •potential changes in tax laws, or in their interpretation or enforcement, failure by us to adapt our corporate structure and intercompany arrangements to achieve global tax efficiencies or adverse outcomes of tax audits, investigations or proceedings; •potential exposure to litigation and legal claims in the conduct of our business; 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. 34
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Table of Contents Glossary Defined Term Definition 10b5-1 Plan Trading plan adopted pursuant to Rule 10b5-1 of the Exchange Act Pamlico 10thMagnitude Blocker LLC , now known as Cognizant 10th 10th MagnitudeMagnitude Blocker, LLC Cognizant Technology Solutions Corporation Amended and Restated 2009 2009 Incentive Plan Incentive Compensation Plan 2017 Incentive PlanCognizant Technology Solutions Corporation 2017 Incentive Award Plan Adjusted Diluted EPS Adjusted diluted earnings per share AI Artificial Intelligence APA Advance Pricing Agreement ASC Accounting Standards Codification ASR Accelerated Stock Repurchase ASU Accounting Standards UpdateBright Wolf Bright Wolf, LLC Budget of India Union Budget of India for 2020-2021 CC Constant Currency Code The Code onSocial Security , 2020 Code ZeroCode Zero, LLC Collaborative SolutionsCollaborative Solutions Holdings, LLC ContinoContino Holdings Inc. COVID-19 The novel coronavirus disease COVID-19 Charges Costs directly related to the COVID-19 pandemic CPI Consumer Price Index Credit agreement with a commercial bank syndicate datedNovember 6 , Credit Agreement 2018 Credit Loss Standard ASC Topic 326 "Financial Instruments - Credit Losses" CTS India Our principal operating subsidiary inIndia DDT Dividend Distribution Tax D&I Diversity and Inclusion Division Bench Division Bench of theMadras High Court DevOps Agile relationship between development and IT operationsDOJ United States Department of Justice DSO Days Sales Outstanding EI-Technologies Entrepreneurs et Investisseurs Technologies SAS EPS Earnings Per Share ESG Environmental, social and corporate governance EUEuropean Union Exchange Act Securities Exchange Act of 1934, as amended Costs associated with our CEO transition and the departure of our Executive Transition Costs President in 2019 FASBFinancial Accounting Standards Board FCPA Foreign Corrupt Practices Act Generally Accepted Accounting Principles inthe United States of GAAP AmericaHigh Court Madras High Court HR Human Resources InawisdomInawisdom Limited India Defined Contribution Certain statutory defined contribution obligations of employees and Obligation employers inIndia 35
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Table of Contents New tax regime enacted by theGovernment of India effectiveApril 1 ,India Tax Law 2019 IP Intellectual property IoT Internet of ThingsIRS Internal Revenue Service IT Information Technology ITDIndian Income Tax Department LevLevementum, LLC LIBOR London Inter-bank Offered RateLinium the ServiceNow business of Ness Digital EngineeringMagenic Magenic Technologies, Inc. MAT Minimum Alternative Tax MeritsoftSterling Topco Limited MustacheMustache, LLC New Revenue Standard ASC Topic 606 "Revenue from Contracts with Customers" New Lease Standard ASC Topic 842 "Leases" New SignatureBSI Corporate Holdings, Inc. OECD Organization for Economic Co-operation and Development Offer to settle and exit from a large customer engagement in Financial Proposed Exit Services in Continental Europe PSU Performance Stock UnitsCognizant Technology Solutions Corporation 2004 Employee Stock Purchase Purchase Plan Plan, as amended ROU Right of Use RSU Restricted Stock Units SaaS Software as a service SamlinkOy Samlink Ab SEC United States Securities and Exchange Commission SCISupreme Court of India ServianSVN HoldCo Pty Limited SEZSpecial Economic Zone SG&A Selling, general and administrative SLP Special Leave Petition SyntelSyntel Sterling Best Shores Mauritius Ltd. Tax on Accumulated Indian The income tax expense related to the reversal of our indefinite Earnings reinvestment assertion on Indian earnings accumulated in prior years Tax Reform Act Tax Cuts and Jobs Act Term Loan Unsecured term loan under the Credit AgreementTin Roof Tin Roof Software, LLC The TriZetto Group, Inc. , now known asCognizant Technology Software TriZetto Group, Inc. ZenithZenith Technologies Limited 36
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