Cognizant Technology Solutions Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are U.S. dollars unless noted.
Business context
Cognizant provides IT, consulting and business-process services through a global delivery model. Its four reportable segments are Financial Services, Healthcare, Manufacturing/Retail/Logistics and Other. Most employees and delivery capacity are in India; North America generated 76.8% of 2014 revenue.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $10.263 billion | $8.843 billion |
| Income from operations / operating margin | $1.885 billion / 18.4% | $1.678 billion / 19.0% |
| Net income / net margin | $1.439 billion / 14.0% | $1.229 billion / 13.9% |
| Diluted EPS | $2.35 | $2.02 |
| Operating cash flow | $1.473 billion | $1.424 billion |
- Revenue grew 16.1%; net income rose 17.1%. Non-GAAP operating margin was 20.2% versus 20.6%, and non-GAAP diluted EPS was $2.60 versus $2.27. These are non-GAAP measures and exclude specified expenses.
- Fourth-quarter revenue was $2.742 billion, operating income $479.4 million, net income $362.9 million and diluted EPS $0.59. In Q4 2013, the corresponding figures were $2.355 billion, $447.8 million, $324.3 million and $0.53.
- Cash, cash equivalents and short-term investments totaled $3.775 billion at year-end; working capital was $4.158 billion. Total debt was $1.638 billion, with $100 million of the $750 million revolving facility still available. Debt matures in 2019, subject to scheduled term-loan payments.
- Investing cash outflow was $3.161 billion, mainly reflecting the TriZetto acquisition. Financing cash inflow was $1.503 billion, primarily from borrowings. No cash dividends were paid; the company repurchased $248.3 million of stock during the year.
Changes versus prior year
- Growth was broad-based: segment revenue rose 15.3% in Financial Services, 18.7% in Healthcare, 12.1% in Manufacturing/Retail/Logistics and 20.3% in Other. Europe revenue increased 19.3%, and Rest of World increased 23.6%.
- Consulting and technology services revenue grew 22.1%; outsourcing services revenue grew 10.0%.
- GAAP operating margin declined 0.6 percentage points. Management cited compensation and benefit costs, subcontractor expense, acquisition-related professional fees and business investment; rupee depreciation and lower realized hedge losses partly offset these costs.
- Debt increased from zero at year-end 2013 following the TriZetto financing. Cash and short-term investments were broadly stable, while working capital declined by $215 million.
Outlook, commentary and risks
- Cognizant acquired TriZetto on November 20, 2014 for approximately $2.628 billion in cash, net of cash acquired, funded with cash and a $1.0 billion term loan. TriZetto contributed $80.6 million of post-acquisition revenue in 2014. Management sees potential to combine its healthcare software platforms with Cognizant’s services, though successful integration and expected benefits are not assured.
- Management expected continued investment in talent and services, growth in Europe and other international markets, more strategic clients, disciplined cost management and selective acquisitions. It identified customer cost containment and innovation spending, regulatory and technology change, currency volatility, economic uncertainty and TriZetto as factors affecting 2015. No specific 2015 revenue or EPS guidance is provided in the supplied filing text.
- Management expected a stronger U.S. dollar to weigh on revenue from outside the United States, particularly Europe and the U.K. Indian rupee exposure is significant: about 25% of global operating costs were rupee-denominated. Cash-flow hedges had $2.460 billion notional value and a $102.6 million net unrealized loss at year-end; settled hedge losses were $136.6 million in 2014.
- Key risks include intense competition and pricing pressure; wage inflation, utilization and fixed-price contract estimation; dependence on skilled personnel and India-based delivery; customer concentration and short-term cancellable contracts; data security, privacy and healthcare regulation; foreign exchange and tax changes; and acquisition integration. Top five customers represented 12.2% of revenue; no single customer exceeded 10%.
- Management said ordinary-course legal claims were not expected to materially affect results or financial position. The company had $135.6 million of unrecognized tax benefits whose settlement timing and cash requirements could not be reliably estimated. Internal controls were reported effective, but TriZetto was excluded from the year-end control assessment and audit because of its recent acquisition.
Important facts for investors to verify
- Reconcile the margin decline and recurring stock-based compensation and acquisition-related costs with the company’s non-GAAP presentation.
- Track TriZetto integration, revenue contribution, acquired intangible amortization and whether anticipated cross-selling and platform synergies materialize.
- Review debt repayment, covenant compliance and U.S. liquidity needs, given that $3.433 billion of cash and investments was held outside the United States and foreign earnings were intended to remain indefinitely reinvested.
- Monitor rupee and other currency movements, hedge settlements and the effects of India tax incentives and their scheduled expirations.
- Assess receivables and collections: trade receivables were $1.969 billion, unbilled receivables $324.6 million, and reported DSO was 70 days under a revised calculation method.