Cognizant Technology Solutions Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless stated otherwise, amounts are in U.S. dollars. The filing describes a professional services and technology company operating across Financial Services, Healthcare, Products and Resources, and Communications, Media and Technology.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $4.243 billion | $4.248 billion | $12.468 billion | $12.499 billion |
| Operating income | $603 million | $669 million | $1.649 billion | $1.827 billion |
| GAAP operating margin | 14.2% | 15.7% | 13.2% | 14.6% |
| Net income | $348 million | $497 million | $1.076 billion | $1.447 billion |
| Diluted EPS | $0.64 | $0.90 | $1.98 | $2.57 |
| Adjusted operating margin | 15.9% | 17.3% | 15.1% | 16.5% |
| Adjusted diluted EPS | $0.97 | $1.08 | $2.75 | $2.93 |
Adjusted measures are non-GAAP. Q3 revenue was essentially flat year over year; nine-month revenue declined 0.2%. Lower operating income and a higher tax burden drove lower GAAP earnings. Q3 effective tax rate was 44.2%, versus 24.3% a year earlier; the nine-month rate was 33.9%, versus 24.5%.
For Q3, Healthcare revenue increased 4.8%, Financial Services declined 1.5%, Products and Resources declined 4.0%, and Communications, Media and Technology was nearly flat. Pandemic-affected retail, consumer goods, travel and hospitality clients were weak; manufacturing, logistics, energy and utilities contributed growth. The exit from certain content-related services reduced Q3 revenue by about $57 million and nine-month revenue by about $128 million.
Cash, liquidity and debt
- Cash and cash equivalents were $4.436 billion at September 30, 2020; short-term investments were $139 million. The company also reported $441 million of long-term investments, including $402 million of restricted time deposits.
- Nine-month operating cash flow was $2.401 billion, compared with $1.561 billion in 2019. Management attributed the increase principally to improved receivable collections, lower incentive payouts and cash taxes, and certain payment deferrals.
- Nine-month investing cash outflow was $1.189 billion, including $1.069 billion for acquisitions and $309 million for property and equipment. Financing cash inflow was $617 million, including $1.740 billion borrowed under the revolving credit facility.
- Total reported debt was approximately $2.450 billion: $1.740 billion outstanding on the revolver, $713 million on the term loan before current maturities and financing costs, and $38 million of current maturities. The debt facilities mature in November 2023; the company reported covenant compliance.
- Cash, cash equivalents and short-term investments held outside the U.S. totaled $3.890 billion, including $2.281 billion in India. Management said available cash and operating cash flow were expected to cover operating requirements and debt service for the next 12 months.
- Days sales outstanding were 72 days, compared with 77 days at September 30, 2019. The company returned $1.195 billion to shareholders in the first nine months through repurchases and dividends.
Material developments, outlook and risks
- COVID-19: Project deferrals, furloughs, temporary rate concessions and delivery constraints affected demand and execution. Management expected impacts across segments through the remainder of 2020 and potentially beyond, especially in retail, consumer goods, travel and hospitality, and communications and media. Q3 COVID-19-related costs were $21 million; nine-month costs were $52 million.
- Fit for Growth: Q3 restructuring charges were $51 million; nine-month charges were $177 million. The company expected approximately $200 million of total optimization charges, substantially completed by year-end 2020, and forecast annualized savings of approximately $520–$550 million in 2021, before anticipated investments. These are management expectations, not guaranteed outcomes.
- Indian earnings tax and remittance: Cognizant recorded a $140 million tax charge after reversing its indefinite reinvestment assertion for previously accumulated Indian earnings. On October 28, 2020, its India subsidiary remitted a $2.1 billion dividend, with $105 million of withholding tax and a net $2.0 billion payment to non-Indian Cognizant entities.
- Ransomware incident: The April 2020 Maze attack caused system disruption, service interruptions for some clients and added remediation costs. The company said it believed the attack was contained, but lost revenue and related costs could exceed insurance coverage; litigation and regulatory action were also possible.
- Legal matters: A jury verdict on October 27, 2020 awarded Cognizant $854 million, including $570 million in punitive damages, in its dispute with Syntel. Cognizant expected an appeal and had not recorded the gain. In the Indian tax dispute, the ITD asserts additional tax related to share repurchases; the company reported restricted deposits and stated it had not accrued a reserve because it believes applicable taxes were paid. Other securities and derivative litigation remained unresolved, with possible losses not estimable.
- Other items: Cognizant completed multiple acquisitions in 2020, with aggregate acquisition payments of $1.069 billion in the first nine months. The board declared a $0.22-per-share dividend after quarter-end, payable November 30, 2020. No specific revenue or EPS guidance for the full year is stated in the supplied filing text.
Key facts for investors to verify
- Whether pandemic-related client demand, pricing concessions and project delivery constraints continued to affect revenue and margins after Q3.
- Whether the Fit for Growth charges, completion timeline and projected 2021 savings were achieved, and how investments affect realized savings.
- The actual cash availability after accounting for restricted Indian deposits, cash location and the post-quarter Indian remittance.
- Developments in the Syntel appeal, the India tax dispute, and potential ransomware-related insurance recovery, claims or costs.
- Acquisition integration, purchase-price allocations and the impact of acquisitions on growth, margins and debt.