Cognizant Technology Solutions Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report; quarterly figures are included where relevant. Amounts are in U.S. dollars.
Business context
Cognizant provides consulting, technology and outsourcing services, organized across Financial Services, Healthcare, Products and Resources, and Communications, Media and Technology. Its strategy centers on expanding digital services while improving operating efficiency. Delivery relies heavily on India: approximately 180,000 of 260,000 employees were based there at year-end.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $14.810 billion | $13.487 billion |
| Income from operations | $2.481 billion | $2.289 billion |
| GAAP operating margin | 16.8% | 17.0% |
| Net income | $1.504 billion | $1.553 billion |
| Diluted EPS | $2.53 | $2.55 |
| Operating cash flow | $2.407 billion | $1.645 billion |
| Cash, cash equivalents and short-term investments | $5.056 billion | $5.169 billion |
| Total debt | $873 million | $878 million |
| Working capital | $6.272 billion | $6.182 billion |
Revenue grew 9.8% and operating income grew 8.4%; net income fell 3.2%. Non-GAAP operating margin was 19.7%, versus 19.5%, and non-GAAP diluted EPS was $3.77, versus $3.39. These non-GAAP measures exclude specified items and are not GAAP results. Cash and short-term investments exceeded total debt by approximately $4.2 billion.
All four segments grew: Communications, Media and Technology 17.7%; Products and Resources 14.3%; Healthcare 10.1%; and Financial Services 5.0%. North America generated 77.3% of revenue; Europe generated 16.2%. Financial Services and Healthcare contributed 38.1% and 28.8% of revenue, respectively.
Fourth-quarter revenue was $3.828 billion and operating income was $657 million. The quarter recorded a net loss of $18 million, primarily reflecting the provisional Tax Reform Act charge; fourth-quarter 2016 net income was $416 million.
Material changes and unusual items
- The $617 million provisional, one-time tax expense related to U.S. tax reform drove the effective tax rate to 43.4%, from 34.2% in 2016. The filing estimates a 24%–26% effective tax rate for 2018–2020, excluding discrete items; the tax charge remains subject to refinement.
- Operating margin declined from 17.0% to 16.8%, reflecting higher compensation and depreciation costs and $72 million in realignment charges, partly offset by scale efficiencies and lower immigration costs. The company said most realignment costs had been incurred but anticipated possible additional costs in 2018.
- Operating cash flow increased by $762 million. Investing activities used $582 million and financing activities used $1.985 billion, including $1.889 billion of share repurchases and $265 million of dividends paid.
- The company repurchased $1.8 billion of shares under its capital-return plan and initiated a $0.15 quarterly dividend in 2017. In February 2018, it raised the quarterly dividend to $0.20 per share. A separate repurchase authorization permits up to $3.5 billion through December 2019.
- Five acquisitions were completed in 2017 for approximately $233 million, expanding digital, healthcare consulting and business-process capabilities.
Outlook, risks and contingencies
- Management targeted a gradual increase in non-GAAP operating margin, with a goal of 22% in 2019; achieving it depends on cost efficiency, utilization, higher-margin work and successful investments.
- Management cited continuing digital demand and opportunities in Europe, the Middle East, Asia Pacific and Latin America, but also flagged uncertainty in healthcare regulation, cautious spending by some banking customers, weakness in retail, foreign-exchange volatility and legal expenses.
- An internal investigation into potentially improper payments in India remains ongoing, with cooperation from the DOJ and SEC. The investigation identified approximately $6 million in payments from 2009–2016 that may have been improper. The company reported $36 million in related 2017 costs, recorded no 2017 adjustment for the payments, and could not estimate potential losses, fines or sanctions. Related securities and shareholder derivative litigation is pending.
- A material weakness in internal controls, identified in 2016 in connection with the investigation, was reported remediated as of December 31, 2017. Management and the auditor concluded that internal control over financial reporting was effective at year-end; the auditor also issued an unqualified opinion on the financial statements.
- Key exposures include competition and pricing pressure, dependence on U.S. and European customers and India-based delivery, wage and currency movements, immigration and outsourcing rules, cybersecurity and data-protection obligations, short-term customer contracts, and uncertain tax benefits. The company had $800 million of term-loan principal outstanding, due by November 2019, plus $75 million drawn on its revolving facility.
Investor facts to verify
- Whether the provisional $617 million tax charge changes as the company completes its tax accounting, and whether the projected 24%–26% effective tax rate is achieved.
- Developments and potential financial consequences of the FCPA investigation and related litigation, including future legal, remediation or penalty costs.
- Progress toward the 22% non-GAAP operating-margin target and the reconciliation of non-GAAP results to GAAP, including recurring excluded expenses.
- Cash conversion, collections and receivables: trade receivables were $2.865 billion and days sales outstanding were 71 days at year-end.
- Execution and funding of the capital-return plan, alongside debt maturities and cash held outside the United States, including $1.397 billion held in India.