Cognizant Technology Solutions Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports quarterly results, including the three months ended December 31, 2011. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and period
Cognizant provides IT consulting, technology and business-process outsourcing services, primarily to Global 2000 companies. It serves clients through industry-focused segments and a global delivery model, with most employees and substantial delivery operations in India. Headcount was approximately 137,700 at year-end.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $6,121.2 million | $4,592.4 million | +33.3% |
| Operating income | $1,136.5 million | $861.9 million | +31.9% |
| Operating margin | 18.6% | 18.8% | Down 0.2 percentage points |
| Net income | $883.6 million | $733.5 million | +20.5% |
| Net margin | 14.4% | 16.0% | Down 1.6 percentage points |
| Diluted EPS | $2.85 | $2.37 | +20.3% |
| Cash from operations | $875.2 million | $764.7 million | +14.4% |
| Capital expenditures | $288.2 million | $185.5 million | Higher investment |
Revenue grew across all segments: Financial Services +29.5% to $2,518.4 million; Healthcare +37.8% to $1,622.2 million; Manufacturing/Retail/Logistics +40.9% to $1,197.5 million; and Other +26.1% to $783.1 million. The fastest-growing segment was Manufacturing/Retail/Logistics.
Fourth-quarter revenue was $1,663.7 million versus $1,310.6 million in Q4 2010; net income was $240.1 million versus $206.2 million, and diluted EPS was $0.78 versus $0.66.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents plus short-term investments totaled $2,432.3 million, working capital was $2,875.8 million, and the company reported no third-party debt. Cash and cash equivalents alone were $1,310.9 million. Investing activities used $850.3 million, reflecting investment purchases, capital spending and acquisitions; financing activities used $255.5 million, mainly reflecting share repurchases. The company repurchased approximately $338.8 million of shares in 2011 and paid no cash dividends.
Management said operating cash flow and available cash were expected to meet operating requirements for the next 12 months. A majority of cash and short-term investments was held by foreign subsidiaries; management intended to keep most foreign earnings permanently reinvested outside the United States.
Material changes and unusual items
- The effective tax rate rose to 24.4% from 16.5%, principally because India’s Software Technology Park tax holiday expired in March 2011. Net income grew more slowly than revenue, and net margin declined.
- GAAP operating margin edged down, while management’s non-GAAP margin excluding stock-based compensation was 20.0% in both 2011 and 2010. Stock-based compensation was $90.2 million in 2011, up from $57.0 million.
- Two acquisitions were completed in 2011 for approximately $91 million net of acquired cash, strengthening business-process and analytics offerings and retail SAP capabilities.
- Cash-flow hedge contracts had a net unrealized loss of $385.6 million at year-end, compared with a net unrealized gain of $32.3 million a year earlier. The change was recorded in accumulated other comprehensive income and was attributed to rupee depreciation; it is not equivalent to a current-period realized operating loss.
- Receivables increased with growth: trade receivables reached $1,179.0 million and unbilled receivables $139.6 million. Days sales outstanding, including unbilled receivables, increased to 73 days from 71.
Outlook, management commentary and risks
Management described the global economy as fragile and expected Europe to grow more slowly than the company in 2012 amid economic uncertainty. It anticipated continued client focus on cost containment, alongside demand for innovation, and cited foreign-exchange volatility and global economic uncertainty as factors affecting results. No specific 2012 revenue or EPS guidance is provided in the supplied filing text.
Management planned to keep investing above its targeted 19%–20% operating margin (excluding stock-based compensation and applicable related tax) in talent, services, sales and delivery capacity. It expected approximately $370 million of global capital expenditures in 2012. Its India real-estate plan contemplated 10.5 million additional square feet through 2015 and more than $700 million of investment over that period; outstanding fixed capital commitments were $240.1 million at year-end.
- Operating and market exposure: customer spending, economic weakness in North America or Europe, competition and pricing pressure, and concentration in Financial Services (41.1% of 2011 revenue).
- Delivery costs and execution: wage inflation and competition for skilled staff, utilization, fixed-price project estimates, and the ability to recruit and retain employees. Fixed-price contracts represented 31.7% of revenue.
- Geographic, currency and regulatory risks: substantial India operations, rupee movements, immigration restrictions, tax-law changes and geopolitical or infrastructure disruption. North American customers generated 78.5% of revenue.
- Tax and contingent exposures: $56.5 million of unrecognized tax benefits; timing and cash consequences of resolution were uncertain. Management did not expect ordinary-course litigation to have a material adverse effect, but contractual indemnities and client claims could be significant in adverse circumstances.
- Technology and data: cybersecurity, confidentiality, privacy, system failure, intellectual-property and service-delivery risks could lead to claims, client losses or reputational damage.
Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2011; the independent auditor also issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether revenue growth and segment profitability persist, particularly given the expected slower European growth and Financial Services exposure.
- How the higher Indian tax burden affects the effective tax rate, tax credits and cash taxes, including the realization of Minimum Alternative Tax credits.
- The effect of rupee movements and hedge settlements on operating margins, earnings and accumulated other comprehensive income.
- Receivables growth, collection trends, unbilled balances and fixed-price contract cost estimates.
- Returns on planned capital spending, facility commitments and acquisitions, and the sustainability of repurchases alongside international cash constraints.
- The filing’s detailed financial statements and notes for cash-flow reconciliation, contractual obligations and the treatment of stock-based compensation.