Cognizant Technology Solutions Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts are in U.S. dollars unless stated otherwise. The filing is unaudited.
Business context and results
Cognizant provides consulting, technology and business-process services across Financial Services, Healthcare, Products and Resources, and Communications, Media and Technology. Management said COVID-19 reduced demand and disrupted delivery; the April ransomware incident also caused service interruptions. By quarter-end, project fulfillment was near capacity except where clients’ regulatory or other requirements prevented remote work.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $4.000B | $4.141B | $8.225B | $8.251B |
| Operating income / margin | $467M / 11.7% | $619M / 14.9% | $1.046B / 12.7% | $1.158B / 14.0% |
| Net income | $361M | $509M | $728M | $950M |
| Diluted EPS | $0.67 | $0.90 | $1.34 | $1.67 |
| Adjusted operating margin | 14.1% | 16.1% | 14.6% | 16.1% |
| Adjusted diluted EPS | $0.82 | $0.94 | $1.78 | $1.85 |
Adjusted results are non-GAAP measures. Q2 revenue declined 3.4% year over year (2.5% at constant currency); first-half revenue declined 0.3% reported but grew 0.5% at constant currency. Q2 Healthcare revenue grew 2.0%, while Financial Services fell 5.2%, Products and Resources fell 6.5%, and Communications, Media and Technology fell 4.4%.
Cash flow, liquidity and debt
- For the first half, operating cash flow was $1.476B, versus $844M in 2019. Capital expenditures were $205M; operating cash flow less capital expenditures was approximately $1.271B, compared with $642M.
- Cash and cash equivalents were $4.422B at June 30; short-term investments were $160M. Together these totaled $4.582B, although some funds are restricted or held outside the United States.
- Debt comprised $1.740B drawn on the revolving facility and a $722M term loan, with $38M of current term-loan maturities. The revolver and term loan mature in November 2023. The company reported compliance with debt covenants.
- First-half financing included $1.740B of revolver borrowings, $585M of share repurchases and $242M of dividends paid. The company said it had made no share repurchases since April 30.
Changes, outlook and material risks
- COVID-19 and demand: Q2 revenue was affected by project deferrals, furloughs, rate concessions and fulfillment challenges. Management expected pressure across segments through the rest of 2020 and potentially beyond, particularly in retail, consumer goods, travel and hospitality, and communications and media. It did not provide a full-year revenue or earnings forecast in the supplied filing text.
- Ransomware: The Maze attack caused unauthorized access to certain data and business disruption; management said it believed the attack was contained. It estimated a 90-basis-point reduction in Q2 year-over-year revenue growth and $24M of Q2 costs. Further security and remediation costs were expected; costs and claims may exceed insurance coverage. Management did not expect significant revenue impact for the rest of 2020.
- Restructuring: Q2 restructuring charges were $71M, including $59M under the 2020 Fit for Growth Plan. The plan was expected to incur total charges of $170M–$200M, be substantially completed by year-end 2020, and generate an annualized savings run rate of approximately $500M–$550M in 2021, before anticipated investments. The pandemic could require additional cost actions or impede execution.
- Other unusual items: The 2019 exit from certain content-related services reduced Q2 revenue by approximately $48M; management estimated an approximately $180M revenue impact for 2020. First-half foreign-exchange losses contributed to lower net income; the effective tax rate rose to 27.5% from 24.5%.
- Disputes and contingencies: Indian tax authorities asserted an additional 33B rupees (about $437M) relating to a 2016 share repurchase; a separate 2013 transaction is also disputed. The company had $391M of restricted deposits under lien and a $66M deposit with the tax authority, and recorded no reserve, stating it believed applicable taxes had been paid. The ultimate India defined-contribution obligation and several securities and derivative lawsuits also remain uncertain; the filing provides no reliable loss estimate for the lawsuits.
- Other outlook items: Management expected operating cash flows, cash and short-term investments to meet operating needs and service debt for the next 12 months. A July 2020 agreement to acquire New Signature for approximately $305M was expected to close in Q3. The board declared a $0.22-per-share dividend payable August 31, 2020.
Key facts for investors to verify
- Whether client demand, pricing, payment terms and delivery capacity recover as the pandemic evolves, especially in the most exposed industries.
- Actual ransomware remediation costs, client and regulatory consequences, insurance recovery and any further revenue effects.
- Progress, total charges and realized savings from the Fit for Growth Plan, including any additional cost measures.
- Developments in the Indian tax disputes, the status and availability of restricted deposits, and the eventual defined-contribution obligation.
- Debt repayment, cash location and accessibility, acquisition spending, and the pace of share repurchases and dividends.
- Performance of the Healthcare reporting unit: the filing said it held the largest share of goodwill and had the least excess fair value over carrying value; the March 2020 impairment test found no impairment.