Cognizant Technology Solutions Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing was signed February 12, 2021. Amounts below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Business context and reporting period
Cognizant provides consulting, digital and technology services, application and infrastructure services, and business process services. It serves clients through four industry segments: Financial Services; Healthcare; Products and Resources; and Communications, Media and Technology. The company emphasized digital investment in IoT, AI, experience-driven software engineering and cloud, and completed nine acquisitions during 2020.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $16,652 | $16,783 | Down 0.8% (0.7% constant currency) |
| Income from operations | $2,114 | $2,453 | Down 13.8% |
| Operating margin | 12.7% | 14.6% | Down 1.9 percentage points |
| Net income | $1,392 | $1,842 | Down 24.4% |
| Diluted EPS | $2.57 | $3.29 | Down $0.72 |
| Adjusted operating margin | 14.4% | 16.6% | Down 2.2 percentage points |
| Adjusted diluted EPS | $3.42 | $3.99 | Down $0.57 |
| Cash from operating activities | $3,299 | $2,499 | Up $800 |
Adjusted results are non-GAAP measures and exclude specified items; they should be considered alongside GAAP results. The effective tax rate rose to 33.6% from 25.3%, including a $140 million tax expense related to reversing the indefinite reinvestment assertion on accumulated Indian earnings. Foreign currency exchange losses, including losses on undesignated forward contracts, were $116 million in 2020.
At year-end, cash and cash equivalents were $2,680 and short-term investments were $44. Total debt was approximately $701 net of financing costs ($703 gross term-loan principal); there was no balance outstanding on the revolving credit facility. Available credit-facility capacity was approximately $1,928. Operating cash flow increased partly due to improved receivables collections, deferred payments and lower incentive compensation and cash taxes. Days sales outstanding improved to 70 days from 73.
Operating, investing and financing cash flows were $3,299, $(1,238) and $(2,009), respectively. The company returned $2,034 to shareholders in 2020 through $1,554 of share repurchases and $480 of dividends. It paid dividends of $0.88 per share for the year and announced a quarterly dividend increase to $0.24 in February 2021.
Material changes versus 2019
- Revenue declined slightly, but operating income, margins, net income and EPS fell more sharply. Management attributed pressure to the pandemic, the ransomware incident, pricing pressure, investment spending and specific client exits.
- Segment revenue was mixed: Financial Services fell 4.2%; Healthcare grew 3.3%; Products and Resources fell 2.0%; and Communications, Media and Technology grew 1.4%.
- Healthcare, Products and Resources, and Communications, Media and Technology segment operating margins improved; Financial Services margin declined. Consolidated margin was also affected by higher unallocated costs.
- Cash from operations improved, while investing cash flow moved to a $1,238 outflow, primarily reflecting acquisition payments. The company completed nine acquisitions and spent $1,123 net of cash acquired on business combinations.
- Year-end cash and cash equivalents were broadly stable at $2,680 versus $2,645, while short-term investments fell to $44 from $779. Total assets increased to $16,923 from $16,204, including higher goodwill following acquisitions.
Outlook, management commentary and notable risks
Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects continued client focus on digital transformation, while warning that legacy services may face pricing pressure and clients may move work in-house. Digital demand—including cloud, automation, AI, e-commerce, mobile workplace and cybersecurity services—continued to increase. The company expects operating cash flows, cash and short-term investments, and available revolving capacity to cover operating needs and debt service for the next 12 months.
- COVID-19: The pandemic caused project delays, deferrals, furloughs, temporary rate concessions and reduced demand, particularly in travel and hospitality, retail, consumer goods, and communications and media. The company recorded $65 million of pandemic-related costs.
- Cost restructuring: The 2020 Fit for Growth Plan and realignment activities generated $215 million of restructuring charges in 2020. Management estimated an annualized savings run rate of approximately $530 million in 2021, before anticipated investments, and stated it did not expect additional costs related to the plan.
- Ransomware incident: A Maze ransomware attack announced in April 2020 caused unauthorized access to certain data and significant business disruption. Cognizant reported containment and remediation efforts, but said losses and related costs could exceed insurance limits or be uncovered.
- Proposed client exit: An unresolved offer to settle and exit a large Financial Services engagement in Continental Europe reduced 2020 revenue by $118 million and added $33 million of expenses. Final terms could differ materially or no agreement may be reached, creating further financial and cash-flow effects.
- Contingencies: Cognizant won an $854 million jury verdict against Syntel, including $570 million in punitive damages, but expected an appeal and did not recognize the gain. An Indian tax dispute relates to share repurchases and includes $405 million of restricted deposits under lien and a $68 million deposit with the tax authority; the company recorded no reserve, while the dispute remains unresolved.
- Other risks: Management highlighted talent retention and wage inflation, immigration and visa restrictions, foreign-exchange exposure, competition, data privacy and cybersecurity, client concentration, regulatory and tax changes, and litigation. The company reported effective disclosure controls and internal control over financial reporting as of year-end.
Most important facts for investors to verify
- Whether growth in digital services and acquisitions can offset declines and pricing pressure in legacy services.
- Whether the Fit for Growth savings are realized as estimated, and how investment needs affect future margins.
- The outcome and accounting impact of the Proposed Exit negotiations and any continuing effects of the ransomware incident, including insurance recovery.
- The status and potential cash impact of the Indian tax dispute, the related restricted deposits, and other tax exposures.
- Cash conversion and capital allocation sustainability, including buybacks, dividends, acquisition spending and debt service.