Cognizant Technology Solutions Corporation — 2009 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2009, not a standalone quarterly filing. Cognizant provides IT consulting, technology and outsourcing services using a global delivery model, with most employees and delivery capacity in India. Its four reporting segments are Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other.
Financial performance and position
Amounts are in U.S. dollars; annual figures are for fiscal years ended December 31.
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $3,278.7 million | $2,816.3 million | +16.4% |
| Income from operations | $618.5 million | $516.7 million | +19.7% |
| Operating margin | 18.9% | 18.3% | +0.6 percentage points |
| Net income | $535.0 million | $430.8 million | +24.2% |
| Diluted EPS | $1.78 | $1.44 | +$0.34 |
| Operating cash flow | $672.3 million | $429.7 million | +$242.6 million |
- Revenue growth slowed from 31.9% in 2008 to 16.4% in 2009. Healthcare grew 25.0%, Manufacturing/Retail/Logistics 27.5%, Other 11.4%, and Financial Services 9.5%.
- Management reported a 20.3% operating margin excluding stock-based compensation and stock-based Indian fringe benefit tax expense, compared with 20.2% in 2008. This is a non-GAAP measure; stock-based compensation remains a recurring expense.
- For Q4 2009, revenue was $902.7 million, operating income $166.9 million, net income $144.0 million and diluted EPS $0.47. Revenue and net income were up approximately 19.9% and 28.2%, respectively, from Q4 2008.
- At year-end, cash and cash equivalents were $1,100.9 million, short-term investments $298.4 million, and working capital approximately $1,661.0 million. Total assets were $3,338.2 million and stockholders’ equity $2,653.2 million. The company reported no third-party debt.
- Capital expenditures were $76.6 million in 2009. Investing activities used $394.8 million, including investment purchases and acquisitions; financing activities provided $76.9 million.
- Trade receivables were $626.3 million and unbilled receivables $83.0 million. Days sales outstanding, including unbilled receivables, rose to 72 days from 71 in 2008.
Changes, outlook and material items
- Operating margin improved amid operating efficiencies and a favorable Indian rupee effect; management said rupee depreciation favorably affected margin by 255 basis points versus 2008. Lower interest income and higher compensation and growth investment partly offset these benefits.
- Management described the economic environment as fragile. For 2010, it expected stabilization and possible normalization of customer IT budgets, continued cost-containment demand, industry consolidation, technology and regulatory changes, and foreign-currency volatility. It did not provide a specific revenue or earnings forecast in the supplied filing text.
- Management expected to reinvest above its historical 19%–20% target operating-margin range (excluding specified stock-related costs) and planned approximately $180 million of global capital expenditures in 2010. It also planned continued investment in talent and services, expansion in Europe and Asia Pacific, and selective acquisitions.
- Four acquisitions were completed in 2009 for aggregate consideration of approximately $97.3 million, net of acquired cash, to expand retail, infrastructure, engineering/manufacturing and financial-services BPO/KPO capabilities.
- Liquidity and investment risk: $129.1 million of long-term auction-rate securities had experienced failed auctions. UBS had granted a right to sell the securities at par during June 2010–July 2012; the filing identifies UBS performance and continued illiquidity as risks. The company said it expected operating cash flow and available cash to cover requirements for at least 12 months.
- Tax exposure: Indian tax holidays were extended through March 31, 2011; management expected the effective tax rate to increase significantly beginning in 2011 if benefits were not extended or replaced. Approximately $1,624.5 million of foreign earnings were treated as indefinitely reinvested, with no incremental U.S. tax accrued on those earnings.
- Other risks include dependence on U.S. and European demand and the financial-services sector, wage and talent pressures, currency movements, immigration restrictions, fixed-price contract estimation and cost overruns, customer concentration and termination rights, cybersecurity/data privacy, and acquisition integration. Legal claims in the ordinary course were not expected by management to be materially adverse. The auditor gave an unqualified opinion and concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Whether 2010 growth and margins can be sustained as the financial-services sector and broader customer IT spending recover.
- The liquidity, valuation assumptions and eventual realization of auction-rate securities and the UBS par-value right.
- The expected effect of Indian tax-holiday expiration on the effective tax rate and earnings from 2011 onward.
- Receivables quality and collection trends, given higher balances and DSO, as well as the profitability and risk profile of fixed-price contracts.
- Acquisition integration, planned capital spending and the company’s ability to recruit and retain skilled staff while managing wage and currency volatility.