Cognizant Technology Solutions Corporation — 2018 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. Cognizant provides digital, consulting, technology, outsourcing and business-process services across Financial Services, Healthcare, Products and Resources, and Communications, Media and Technology. Its strategy emphasizes digital services, global delivery and selective acquisitions.
Financial performance
- Revenue: $16.125 billion, up 8.9% year over year (8.5% at constant currency). The 2018 adoption of the new revenue standard added $96 million to reported revenue; 2017 was not restated.
- Profit and margins: Operating income was $2.801 billion, with a 17.4% GAAP operating margin, versus $2.481 billion and 16.8% in 2017. Net income was $2.101 billion, or 13.0% of revenue, versus $1.504 billion, or 10.2%. Diluted EPS was $3.60 versus $2.53. The 2018 revenue-standard adoption added $134 million to operating income and $0.19 to diluted EPS.
- Adjusted measures: Adjusted operating margin was 18.1% and Adjusted Diluted EPS was $4.02. These are non-GAAP measures; the company changed its adjustment methodology in 2018. GAAP results included $100 million of initial U.S. Foundation funding and $19 million of realignment charges.
- Fourth quarter: Revenue was $4.129 billion, operating income $693 million, net income $648 million and diluted EPS $1.12. The filing does not provide a standalone fourth-quarter cash-flow figure in the supplied text.
- Segments: Revenue growth was strongest in Communications, Media and Technology (+17.4%), followed by Products and Resources (+12.3%), Healthcare (+9.5%) and Financial Services (+3.7%). Banking customers’ legacy-cost optimization weighed on Financial Services growth.
- Cash flow: Operating cash flow was $2.592 billion, up from $2.407 billion. Capital expenditures were $377 million; company-defined free cash flow was $2.215 billion, up from $2.123 billion. Days sales outstanding rose to 75 days from 71.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $4.511 billion, including $423 million of restricted India time deposits. Working capital was $5.900 billion. Total debt was $745 million. A refinanced $750 million term loan and $1.750 billion revolving facility mature in November 2023; no revolver borrowings were outstanding at year-end, and the company reported covenant compliance.
- Capital returns: Cognizant returned $3.708 billion through repurchases and dividends in 2017–2018. The 2018 dividend was $0.80 per share. Its 2019 plan anticipates allocating about 50% of global free cash flow to dividends and repurchases and about 25% to acquisitions, as needed.
Changes, outlook and material items
- Revenue increased 8.9%, while operating income rose 12.9%. Net income increased 39.7%, primarily reflecting lower taxes: the 2017 effective tax rate of 43.4% included a $617 million provisional Tax Reform Act charge; the 2018 rate was 25.0%.
- Management cited digital demand, discretionary project spending, new-customer wins and continued North American strength. Europe revenue grew 18.3%; U.K. banking weakness and cost optimization among certain banks remained headwinds. Five acquisitions were completed in 2018 for approximately $1.122 billion in total consideration.
- No specific quantified 2019 revenue or earnings guidance is provided in the supplied filing text. Management’s stated priorities include investment in digital capabilities and talent, local hiring and reskilling, growth in Europe and other international markets, selective acquisitions and cost discipline. Demand, trade policies, Brexit-related uncertainty, regulation and currency movements could affect results.
- Legal and tax matters: In February 2019, the company announced resolution of DOJ and SEC investigations related to payments involving company-owned facilities in India, requiring approximately $28 million in payments, consistent with an accrued amount. Related shareholder litigation and indemnification expenses may continue. Separately, the Indian tax department asserts an additional $475 million is due on the 2016 India cash remittance; a separate dispute relates to a 2013 transaction. Cognizant recorded no reserve for these disputes, which were pending before the Madras High Court at year-end.
- The company estimates that repatriating approximately $4.679 billion of accumulated undistributed Indian earnings would result in about $980 million of additional income tax under its current interpretation of Indian tax law.
- Leadership transition announced: Brian Humphries was appointed CEO effective April 1, 2019, succeeding Francisco D’Souza. President Rajeev Mehta was also scheduled to step down effective that date.
Most important facts for investors to verify
- How much of 2018 growth and earnings reflects the new revenue standard, acquisitions and the company’s revised non-GAAP definitions.
- The status and potential financial consequences of the Indian tax disputes, including restrictions on $423 million of deposits and the separate $71 million deposit.
- Whether digital growth and margin initiatives can offset slower Financial Services growth, wage and attrition pressures, and currency volatility.
- Execution of the 2019 capital-return plan alongside acquisition spending, and the treatment of Indian cash and potential repatriation taxes.
- Progress and remaining costs related to the FCPA resolution, shareholder litigation and associated indemnification obligations.