Cognizant Technology Solutions Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; it does not provide a standalone fourth-quarter income statement.
Business context
Cognizant provides consulting, technology, digital engineering, IT outsourcing and business-process services to clients across Financial Services, Health Sciences, Products and Resources, and Communications, Media and Technology. North America generated 74.3% of 2022 revenue. The company had approximately 355,300 employees at year-end, including 258,500 in India.
Financial results and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $19.428 billion | $18.507 billion | +5.0%; +7.5% constant currency |
| Operating income | $2.968 billion | $2.826 billion | +5.0% |
| Operating margin | 15.3% | 15.3% | Flat |
| Net income | $2.290 billion | $2.137 billion | +7.2% |
| Diluted EPS | $4.41 | $4.05 | +8.9% |
| Adjusted diluted EPS | $4.40 | $4.12 | +6.8% |
| Cash from operations | $2.568 billion | $2.495 billion | +$73 million |
| Free cash flow | $2.236 billion | $2.216 billion | +$20 million |
Adjusted measures and constant-currency growth are non-GAAP measures. Adjusted operating margin was 15.3%, down 10 basis points from 2021. The filing defines free cash flow as operating cash flow less purchases of property and equipment.
Revenue growth was strongest in Communications, Media and Technology (+11.1%), Products and Resources (+6.8%), and Health Sciences (+5.5%). Financial Services grew 0.3%; its results included a 170-basis-point adverse effect from the Samlink sale. Growth overall reflected digital demand and pricing improvements, partly offset by slower demand in the second half and staffing challenges.
At December 31, cash and cash equivalents were $2.191 billion and short-term investments were $310 million, or $2.501 billion combined. The company reported approximately $2.0 billion of available credit-facility capacity and no revolver borrowings. Debt consisted principally of a $650 million term loan, including $8 million classified as current. Current assets were $7.266 billion and current liabilities were $3.347 billion. Days sales outstanding increased to 74 from 69.
Material changes and unusual items
- Acquisitions contributed about 100 basis points to revenue growth; the Samlink sale reduced growth by about 60 basis points overall. The two 2022 acquisitions had a combined purchase price of $375 million.
- Delivery costs rose 7.3%, faster than revenue, largely due to higher compensation costs. A Health Sciences volume-based contract impairment reduced operating margin by 30 basis points.
- Foreign-exchange movements, particularly Indian rupee depreciation, supported reported margins. The company estimates each 1% change in the rupee/U.S. dollar rate moves operating margin by about 18 basis points, excluding cash-flow hedges.
- Financing cash use increased to $1.939 billion, principally reflecting higher share repurchases. The company repurchased $1.422 billion of shares in 2022 and paid $1.08 per share in dividends.
- A $36 million tax benefit recognized in 2022 related to a previously unrecognized uncertain tax position. The effective tax rate was 24.2%, compared with 24.5% in 2021.
- Tax-law changes requiring capitalization and amortization of research expenses increased 2022 U.S. income taxes payable by approximately $300 million; that amount was unpaid at year-end and due by April 15, 2023. The company estimated a similar additional cash-tax amount for 2023.
Outlook, risks and contingencies
The filing gives no numerical revenue, earnings or margin guidance. Management expected clients to face economic uncertainty, regulatory change and industry shifts, and highlighted the risk that these conditions could affect demand. It expected first-quarter 2023 annualized attrition to be below the 2022 full-year rate, while cautioning that attrition is difficult to predict. Full-year attrition was 31.7%; the annualized fourth-quarter rate was 25.3%.
Management identified talent attraction and retention, wage inflation, client spending reductions or contract termination, intense competition, technology change, foreign-exchange volatility, cybersecurity and data privacy, immigration restrictions, and regulatory and tax changes as key risks. The company noted that most employees are in India, while most revenue is generated in North America and Europe. Russia’s invasion of Ukraine increased uncertainty; company revenue and operations in Russia and Ukraine were immaterial.
- Tax dispute in India: The Indian tax authority asserts an additional 33 billion rupees (approximately $399 million at year-end exchange rates) is owed on a 2016 subsidiary share repurchase. The company disputes the claim, has deposited $60 million and has $357 million of time deposits under lien; it recorded no reserve. A related 2013 transaction is also in litigation, with no specific tax demand disclosed.
- India employee-benefit obligation: The company had accrued $117 million for potential retroactive application of an Indian Supreme Court ruling. The ultimate amount remains uncertain and could differ materially from the accrual.
- Other litigation: Cognizant won a $570 million judgment against Syntel, including punitive damages, but Syntel appealed; Cognizant had not recognized the gain. Shareholder derivative litigation and related indemnification/legal-expense obligations remain, and the filing states no applicable insurance amounts remained available for specified ongoing obligations.
- Capital allocation and debt: The stated framework targets approximately 50% of free cash flow for acquisitions, 25% for repurchases and 25% for dividends, subject to changing conditions. A new $650 million term loan and $1.85 billion revolving facility mature in October 2027; scheduled term-loan principal payments begin in December 2023. The company reported covenant compliance.
- Subsequent events: The board approved a $0.29-per-share dividend in February 2023. Cognizant completed the $103 million OneSource Virtual acquisition in January 2023 and agreed to acquire Mobica for approximately $335 million, subject to closing conditions.
Management and the auditor reported effective internal control over financial reporting as of year-end. PwC issued an unqualified opinion on the financial statements and controls, and identified revenue recognition estimates for fixed-price contracts as a critical audit matter.
Important facts for investors to verify
- Whether second-half demand weakness and elevated annual attrition affect 2023 growth, utilization, delivery costs and margins.
- How the Health Sciences contract impairment and pricing pressure develop, and whether the cost-to-cost estimates on fixed-price contracts remain appropriate.
- The status, potential financial exposure and timing of the Indian tax disputes and the $117 million employee-benefit accrual.
- The cash-tax consequences of U.S. research-expense capitalization, along with operating cash flow, DSO and working-capital trends.
- Acquisition integration and returns, the use of cash for acquisitions and shareholder returns, and compliance with debt covenants.
- Cybersecurity, client concentration and termination exposure, foreign-exchange sensitivity, and the unrecognized Syntel judgment pending appeal.