Cognizant Technology Solutions Corp 8-K, filed May 7, 2020
Cognizant Technology Solutions Corp (CTSH)
8-K
2020-05-07
For: 2020-05-07
View Original
Added on
April 12, 2026
About this 8-K
Cognizant Technology Solutions Corp filed this 8-K on May 7, 2020.
Items reported
- Item 2.02: Financial results
- Item 7.01: Regulation FD disclosure
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): May 7, 2020
(Exact Name of Registrant as Specified in Charter)
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | |||||||||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||||||||||||||
(201 ) 801-0233
(Registrant’s telephone number, including area code)
Not applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425). | |||||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12). | |||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)). | |||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)). | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Class A Common Stock, $0.01 par value per share | ||||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
| Emerging growth company | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02. Results of Operations and Financial Condition.
On May 7, 2020, Cognizant Technology Solutions Corporation (the “Company”), issued a press release to report the Company’s financial results for the quarter ended March 31, 2020. The full text of the press release is attached to this current report on Form 8-K as Exhibit 99.1.*
Item 7.01. Regulation FD Disclosure.
The Company’s investor presentation containing additional financial information for the quarter ended March 31, 2020 is attached to this current report on Form 8-K as Exhibit 99.2.*
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit No. | Description | |||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document). | |||||||
| * | The information in Item 2.02, Item 7.01, Exhibit 99.1 and Exhibit 99.2 of this current report on Form 8-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing. | ||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION | ||||||||
By: | /s/ Karen McLoughlin | |||||||
Name: | Karen McLoughlin | |||||||
Title: | Chief Financial Officer | |||||||
Date: May 7, 2020
Exhibit 99.1
| Glenpointe Centre West | ||||||||||||||
| 500 Frank W. Burr Blvd. | ||||||||||||||
Teaneck, NJ 07666 | ||||||||||||||
COGNIZANT REPORTS FIRST QUARTER 2020 RESULTS
Quarterly revenue of $4.2 billion, up 2.8% (3.5% in constant currency) over 2019
TEANECK, N.J., May 7, 2020 - Cognizant Technology Solutions Corporation (Nasdaq: CTSH), one of the world’s leading professional services companies, today announced its first quarter 2020 financial results.
Highlights - First Quarter 2020
•Revenue increased to $4.2 billion, up 2.8% (3.5% in constant currency1) from the year-ago quarter, including a negative 50 basis points impact from the exit of certain content services business.
•GAAP operating margin was 13.7% compared to 13.1% in the year-ago quarter.
•Adjusted Operating Margin1 was 15.1% compared to 16.0% the year-ago quarter.
•Net income was $367 million compared to $441 million in the year-ago quarter.
•Quarterly GAAP diluted EPS was $0.67 compared to $0.77 in the year-ago quarter.
•Quarterly Adjusted Diluted EPS1 was $0.96 compared to $0.91 in the year-ago quarter.
“We executed well in what was a challenging quarter, and posted our strongest quarterly signings since 2017,” said Brian Humphries, Chief Executive Officer. “Amid the pandemic’s unprecedented human and economic challenges, we remain focused on the health and safety of our associates whilst maintaining business continuity for our clients and supporting our communities. While we expect a challenging demand environment throughout 2020, we believe the pandemic is accelerating the secular trends of core modernization and cloud migration as companies shift to digital business models. These and other related IT trends play directly to Cognizant’s strategy. I am confident we will emerge from this crisis in a position of strength.”
First Quarter 2020 Performance by Business Segment
Financial Services (34.3% of revenues) revenue grew 1.0% year-over-year, or 1.8% in constant currency. Growth in banking was driven by the contribution of the previously announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform and regional banks in North America. This was partially offset by continued softness with a few of our largest banking and insurance clients.
_______________
1 Constant currency revenue growth, Adjusted Operating Margin and Adjusted Diluted Earnings Per Share ("Adjusted Diluted EPS") are not measurements of financial performance prepared in accordance with GAAP. See “About Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures at the end of this release.
Healthcare (28.3% of revenues) revenue grew 2.5% year-over-year, or 2.7% in constant currency. Segment revenue was driven by double-digit growth in life sciences, including the contribution of Zenith Technologies, which was acquired in July 2019. This was partially offset by a low-single digit decline in revenue within healthcare as results were negatively impacted primarily by the movement of work to a captive at a large North American client.
Products and Resources (22.6% of revenues) revenue grew 4.4% year-over-year, or 5.3% in constant currency, driven by growth across retail and consumer goods, manufacturing, logistics, energy and utilities. This was partially offset by softness in the travel and hospitality industries.
Communications, Media and Technology (14.8% of revenues) revenue grew 5.2% year-over-year, or 6.3% in constant currency, driven by broad-based growth across all the industries in this segment. Revenue growth in technology was negatively impacted by our previously announced decision to exit certain portions of our content services business.
“We entered 2020 with a strong balance sheet and further strengthened our financial flexibility in the first quarter,” said Karen McLoughlin, Chief Financial Officer. “Against an uncertain economic backdrop, we will continue with our 2020 Fit For Growth Plan to streamline the Company’s operating model and reduce costs to fund growth investments that align to our long-term growth strategy.”
COVID-19 Business Implications
During the first quarter, COVID-19-related disruptions reduced revenue in March, reflecting delays in project fulfillment as Cognizant rapidly enabled the shift to work-from-home capabilities across its delivery teams.
Entering the second quarter, the pandemic and resulting economic slowdown are dampening demand across industries, most significantly within the travel, hospitality, retail, automotive, energy, and media and entertainment. At the same time, the pivot to digital is accelerating as companies look to quickly modernize and increase their competitiveness, migrate more of their workloads to the cloud, and fundamentally rethink their core business processes.
Business Outlook
As communicated in our April 9th update, given the continued uncertainty around the duration of the COVID-19 pandemic and its impact on our ability to forecast performance, we are not providing guidance at this time.
Declaration of Quarterly Cash Dividend
The Company has declared a quarterly cash dividend of $0.22 per share on Cognizant Class A common stock for shareholders of record at the close of business on May 20, 2020. This dividend will be payable on May 29, 2020.
Update on Previously Reported Cyber-Security Incident
In late April, the Company announced a security incident involving its internal systems resulting from a Maze ransomware attack. The Company believes it has contained the attack and that the actor is no longer operating in the Company’s environment.
Since becoming aware of the attack, the Company has taken decisive actions to remediate the threat while keeping clients regularly informed. The Company believes these measures enabled it to continue its operations in a timely and secure manner. In addition, the Company has and will continue to take any necessary steps to protect the integrity of its systems.
The Company will provide an update regarding the business interruption and financial impact of the attack on its conference call to discuss first quarter 2020 results referenced below.
Conference Call
Cognizant will host a conference call on May 7, 2020, at 5:00 p.m. (Eastern) to discuss the Company’s first quarter 2020 results. To listen to the conference call, please dial (877) 810-9510 (domestically) or (201) 493-6778 (internationally) and provide the following conference passcode: “Cognizant Call.”
The conference call will also be available live on the Investor Relations section of the Cognizant website at http://investors.cognizant.com. Please go to the website at least 15 minutes prior to the call to register and to download and install any necessary audio software. An earnings supplement will also be available on the Cognizant website at the time of the conference call.
For those who cannot access the live broadcast, a replay will be available. To listen to the replay, please dial (877) 660-6853 (domestically) or (201) 612-7415 (internationally) and enter 13701787 from two hours after the end of the call until 11:59 p.m. (Eastern) on May 21, 2020. The replay will also be available at Cognizant’s website www.cognizant.com for 60 days following the call.
About Cognizant
Cognizant (Nasdaq-100: CTSH) is one of the world’s leading professional services companies, transforming clients’ business, operating and technology models for the digital era. Our unique industry-based, consultative approach helps clients envision, build and run more innovative and efficient businesses. Headquartered in the U.S., Cognizant is ranked 193 on the Fortune 500 and is consistently listed among the most admired companies in the world. Learn how Cognizant helps clients lead with digital at www.cognizant.com or follow us @Cognizant.
Forward-Looking Statements
This press release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to future events that may not prove to be accurate. These statements include, but are not limited to, express or implied forward-looking statements relating to our expectations regarding the impact of the COVID-19 pandemic on our business, our expectations regarding the success of our actions to contain the ransomware attack and to protect the integrity of our systems and data, the impact of the ransomware attack on our clients, business, reputation and financial results, opportunities in the marketplace, our cost structure, investment in and growth of our business, our realignment plans, the timing, cost and impact of the 2020 Fit for Growth Plan, our and our clients’ shift to digital solutions and services and our anticipated financial performance. These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions, the ongoing assessment of the ransomware attack, legal, reputational and financial risks resulting from cyberattacks, including the ransomware attack, the effectiveness of business continuity
plans following the ransomware attack and during the COVID-19 pandemic, the impact of the COVID-19 pandemic, changes in the regulatory environment, including with respect to immigration and taxes, and the other factors discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Cognizant undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law.
About Non-GAAP Financial Measures
To supplement our financial results presented in accordance with GAAP, this press release includes references to the following measures defined by the Securities and Exchange Commission as non-GAAP financial measures: Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS, free cash flow, net cash and constant currency revenue growth. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of our non-GAAP financial measures to the corresponding GAAP measures should be carefully evaluated.
Our non-GAAP financial measures, Adjusted Operating Margin, Adjusted Income From Operations and Adjusted Diluted EPS exclude unusual items. Additionally, Adjusted Diluted EPS excludes net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. The income tax impact of each item is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment. Net cash is defined as cash and cash equivalents and short-term investments less short-term and long-term debt. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period’s foreign currency exchange rates measured against the comparative period's reported revenues.
Management believes providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For our internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for our executive officers and for making comparisons of our operating results to those of our competitors. Therefore, it is our belief that the use of non-GAAP financial measures excluding certain costs provides a meaningful supplemental measure for investors to evaluate our financial performance. Accordingly, we believe that the presentation of our non-GAAP measures, when read in conjunction with our reported GAAP results, can provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations.
A limitation of using non-GAAP financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and may exclude costs that are recurring such as our net non-operating foreign currency exchange gains or losses. In addition, other companies may calculate non-GAAP financial measures differently than us, thereby limiting the usefulness of these non-GAAP financial measures as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from our non-GAAP financial measures to allow investors to evaluate such non-GAAP financial measures..
| Investor Relations Contact: | Media Contact: | |||||||||||||
| Katie Royce | Rick Lacroix | |||||||||||||
| Global Head of Investor Relations | VP, Corporate Communications | |||||||||||||
| 201-679-2739 | 201-470-8961 | |||||||||||||
| Katie.Royce@cognizant.com | Richard.Lacroix@cognizant.com | |||||||||||||
- tables to follow -
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| Revenues | $ | 4,225 | $ | 4,110 | |||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization expense shown separately below) | 2,747 | 2,575 | |||||||||||||||||||||||||||
| Selling, general and administrative expenses | 711 | 871 | |||||||||||||||||||||||||||
| Restructuring charges | 55 | 2 | |||||||||||||||||||||||||||
| Depreciation and amortization expense | 133 | 123 | |||||||||||||||||||||||||||
| Income from operations | 579 | 539 | |||||||||||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||||||||
| Interest income | 41 | 48 | |||||||||||||||||||||||||||
| Interest expense | (6) | (7) | |||||||||||||||||||||||||||
| Foreign currency exchange gains (losses), net | (102) | 2 | |||||||||||||||||||||||||||
| Other, net | (2) | 1 | |||||||||||||||||||||||||||
| Total other income (expense), net | (69) | 44 | |||||||||||||||||||||||||||
| Income before provision for income taxes | 510 | 583 | |||||||||||||||||||||||||||
| Provision for income taxes | (142) | (142) | |||||||||||||||||||||||||||
| Income (loss) from equity method investment | (1) | — | |||||||||||||||||||||||||||
| Net income | $ | 367 | $ | 441 | |||||||||||||||||||||||||
| Basic earnings per share | $ | 0.67 | $ | 0.77 | |||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.67 | $ | 0.77 | |||||||||||||||||||||||||
| Weighted average number of common shares outstanding - Basic | 546 | 573 | |||||||||||||||||||||||||||
Dilutive effect of shares issuable under stock-based compensation plans | — | 2 | |||||||||||||||||||||||||||
| Weighted average number of common shares outstanding - Diluted | 546 | 575 | |||||||||||||||||||||||||||
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in millions, except par values)
| March 31, 2020 | December 31, 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 3,886 | $ | 2,645 | |||||||
| Short-term investments | 396 | 779 | |||||||||
| Trade accounts receivable, net | 3,220 | 3,256 | |||||||||
| Other current assets | 823 | 931 | |||||||||
| Total current assets | 8,325 | 7,611 | |||||||||
| Property and equipment, net | 1,322 | 1,309 | |||||||||
| Operating lease assets, net | 927 | 926 | |||||||||
| Goodwill | 4,014 | 3,979 | |||||||||
| Intangible assets, net | 1,005 | 1,041 | |||||||||
| Deferred income tax assets, net | 594 | 585 | |||||||||
| Long-term investments | 433 | 17 | |||||||||
| Other noncurrent assets | 809 | 736 | |||||||||
| Total assets | $ | 17,429 | $ | 16,204 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 289 | $ | 239 | |||||||
| Deferred revenue | 354 | 313 | |||||||||
| Short-term debt | 38 | 38 | |||||||||
| Operating lease liabilities | 197 | 202 | |||||||||
| Accrued expenses and other current liabilities | 1,994 | 2,191 | |||||||||
| Total current liabilities | 2,872 | 2,983 | |||||||||
| Deferred revenue, noncurrent | 42 | 23 | |||||||||
| Operating lease liabilities, noncurrent | 734 | 745 | |||||||||
| Deferred income tax liabilities, net | 31 | 35 | |||||||||
| Long-term debt | 2,430 | 700 | |||||||||
| Long-term income taxes payable | 478 | 478 | |||||||||
| Other noncurrent liabilities | 229 | 218 | |||||||||
| Total liabilities | 6,816 | 5,182 | |||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.10 par value, 15.0 shares authorized, none issued | — | — | |||||||||
Class A common stock, $0.01 par value, 1,000 shares authorized, 541 and 548 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | 5 | 5 | |||||||||
| Additional paid-in capital | 41 | 33 | |||||||||
| Retained earnings | 10,831 | 11,022 | |||||||||
| Accumulated other comprehensive income (loss) | (264) | (38) | |||||||||
| Total stockholders’ equity | 10,613 | 11,022 | |||||||||
| Total liabilities and stockholders’ equity | $ | 17,429 | $ | 16,204 | |||||||
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
Reconciliations of Non-GAAP Financial Measures
(Unaudited)
(dollars in millions, except per share amounts)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| GAAP income from operations | $ | 579 | $ | 539 | |||||||||||||||||||||||||||||||||||||
Realignment charges(a) | 20 | 2 | |||||||||||||||||||||||||||||||||||||||
2020 Fit for Growth Plan restructuring charges(b) | 35 | — | |||||||||||||||||||||||||||||||||||||||
COVID-19 Charges(c) | 6 | — | |||||||||||||||||||||||||||||||||||||||
Incremental accrual related to the India Defined Contribution Obligation(d) | — | 117 | |||||||||||||||||||||||||||||||||||||||
| Adjusted Income From Operations | $ | 640 | $ | 658 | |||||||||||||||||||||||||||||||||||||
| GAAP operating margin | 13.7 | % | 13.1 | % | |||||||||||||||||||||||||||||||||||||
| Realignment charges | 0.5 | — | |||||||||||||||||||||||||||||||||||||||
2020 Fit for Growth Plan restructuring charges | 0.8 | — | |||||||||||||||||||||||||||||||||||||||
| Covid-19 Charges | 0.1 | — | |||||||||||||||||||||||||||||||||||||||
Incremental accrual related to the India Defined Contribution Obligation | — | 2.9 | |||||||||||||||||||||||||||||||||||||||
Adjusted Operating Margin | 15.1 | % | 16.0 | % | |||||||||||||||||||||||||||||||||||||
| GAAP diluted earnings per share | $ | 0.67 | $ | 0.77 | |||||||||||||||||||||||||||||||||||||
Effect of above adjustments, pre-tax | 0.11 | 0.20 | |||||||||||||||||||||||||||||||||||||||
Non-operating foreign currency exchange (gains) losses, pre-tax(e) | 0.19 | (0.01) | |||||||||||||||||||||||||||||||||||||||
Tax effect of above adjustments (f) | (0.01) | (0.05) | |||||||||||||||||||||||||||||||||||||||
| Adjusted Diluted Earnings Per Share | $ | 0.96 | $ | 0.91 | |||||||||||||||||||||||||||||||||||||
Notes:
(a)During the three months ended March 31, 2020, we incurred realignment charges that include $6 million in employee retention costs and $14 million in professional fees. The total costs related to the realignment are reported in "Restructuring charges" in our unaudited consolidated statements of operations.
(b)During the three months ended March 31, 2020, we incurred restructuring charges as part of our 2020 Fit for Growth Plan that include $26 million in employee separation costs, $5 million in facility exit costs and $4 million in employee retention costs. These charges include $11 million of costs incurred related to our exit from certain content-related services. The total costs related to the 2020 Fit for Growth Plan are reported in "Restructuring charges" in our unaudited consolidated statements of operations.
(c)During the three months ended March 31, 2020, we incurred costs in response to the COVID-19 pandemic that include a one-time bonus to our employees at the designation of associate and below in both India and the Philippines and costs to enable our employees to work remotely and provide medical staff and extra cleaning services for our facilities. Substantially all of the costs related to the pandemic are reported in "Cost of revenues" in our unaudited consolidated statements of operations.
(d)During the three months ended March 31, 2019, a ruling of the Supreme Court of India interpreting certain statutory defined contribution obligations of employees and employers (the “India Defined Contribution Obligation”) altered historical understandings of such obligations, extending them to cover additional portions of the employee’s income. As a result, the ongoing contributions of our affected employees and the Company have increased. In the first quarter of 2019, we accrued $117 million with respect to prior periods, assuming retroactive application of the Supreme Court’s ruling. There is significant uncertainty as to how the liability should be calculated as it is impacted by multiple variables, including the period of assessment, the application with respect to certain current and former employees and whether interest and penalties may be assessed. Since the ruling, a variety of trade associations and industry groups have advocated to the Indian government, highlighting the harm to the information technology sector, other industries and job growth in India that would result from a retroactive application of the ruling. It is possible that the Indian government will review the matter and there is a substantial question as to whether the Indian government will apply the Supreme Court’s ruling on a retroactive basis. As such, the ultimate amount of our obligation may be materially different from the amount accrued. The incremental accrual related to the India Defined Contribution Obligation is reported in "Selling, general and administrative expenses" in our unaudited consolidated statement of operations.
(e)Non-operating foreign currency exchange gains and losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, are reported in "Foreign currency exchange gains (losses), net" in our unaudited consolidated statements of operations.
(f)Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income:
| Three Months Ended March 31 | |||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Non-GAAP income tax benefit (expense) related to: | |||||||||||||||||||||||||||||
| Realignment charges | $ | 5 | $ | — | |||||||||||||||||||||||||
| 2020 Fit For Growth plan restructuring charges | 9 | — | |||||||||||||||||||||||||||
| COVID-19 Charges | 2 | — | |||||||||||||||||||||||||||
Foreign currency exchange gains and losses | (10) | 1 | |||||||||||||||||||||||||||
| Incremental accrual related to the India Defined Contribution Obligation | — | 31 | |||||||||||||||||||||||||||
The effective tax rate related to each of our non-GAAP adjustments varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions.
Reconciliations of net cash
(in millions)
| March 31, 2020 | December 31, 2019 | |||||||||||||
| Cash and cash equivalents | $ | 3,886 | $ | 2,645 | ||||||||||
Short-term investments(a) | 396 | 779 | ||||||||||||
| Less: | ||||||||||||||
| Short-term debt | 38 | 38 | ||||||||||||
| Long-term debt | 2,430 | 700 | ||||||||||||
| Net cash | $ | 1,814 | $ | 2,686 | ||||||||||
Notes:
(a)As of December 31, 2019, $414 million in restricted time deposits were classified as short-term investments. As of March 31, 2020, the restricted deposits in the amount of $393 million were reclassified to long-term investments and therefore are not included in net cash as of that date.
The above tables serve to reconcile the Non-GAAP financial measures to the most directly comparable GAAP measures. Please refer to the “About Non-GAAP Financial Measures” section of our press release for further information on the use of these Non-GAAP measures.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
Schedule of Supplemental Information
(Unaudited)
(dollars in millions)
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Year over Year | |||||||||||||||||||||||||||||||||||||||||
| $ | % of total | % Change | Constant Currency % Change (a) | ||||||||||||||||||||||||||||||||||||||
| Revenues by Segment: | |||||||||||||||||||||||||||||||||||||||||
| Financial Services | $ | 1,451 | 34.3 | % | 1.0 | % | 1.8 | % | |||||||||||||||||||||||||||||||||
| Healthcare | 1,194 | 28.3 | % | 2.5 | % | 2.7 | % | ||||||||||||||||||||||||||||||||||
| Products and Resources | 954 | 22.6 | % | 4.4 | % | 5.3 | % | ||||||||||||||||||||||||||||||||||
| Communications, Media and Technology | 626 | 14.8 | % | 5.2 | % | 6.3 | % | ||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 4,225 | 2.8 | % | 3.5 | % | |||||||||||||||||||||||||||||||||||
| Revenues by Geography: | |||||||||||||||||||||||||||||||||||||||||
| North America | $ | 3,190 | 75.5 | % | 2.1 | % | 2.2 | % | |||||||||||||||||||||||||||||||||
| United Kingdom | 337 | 8.0 | % | 2.4 | % | 4.1 | % | ||||||||||||||||||||||||||||||||||
| Continental Europe | 437 | 10.3 | % | 7.9 | % | 10.5 | % | ||||||||||||||||||||||||||||||||||
Europe - Total | 774 | 18.3 | % | 5.4 | % | 7.6 | % | ||||||||||||||||||||||||||||||||||
| Rest of World | 261 | 6.2 | % | 3.2 | % | 7.6 | % | ||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 4,225 | 2.8 | % | 3.5 | % | |||||||||||||||||||||||||||||||||||
| Employee Metrics: | March 31, 2020 | March 31, 2019 | ||||||||||||
Number of employees | 291,700 | 285,800 | ||||||||||||
Notes:
(a)Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See “About Non-GAAP Financial Measures” for more information.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||||||||
| Net income | $ | 367 | $ | 441 | |||||||||||||||||||||||||
| Adjustments for non-cash income and expenses | 316 | 150 | |||||||||||||||||||||||||||
| Changes in assets and liabilities | (186) | (322) | |||||||||||||||||||||||||||
| Net cash provided by operating activities | 497 | 269 | |||||||||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||||||||
| Purchases of property and equipment | (112) | (106) | |||||||||||||||||||||||||||
| Net (purchases) sales of investments | (74) | 659 | |||||||||||||||||||||||||||
Payments for business combinations, net of cash acquired | (86) | (197) | |||||||||||||||||||||||||||
| Net cash (used in) provided by investing activities | (272) | 356 | |||||||||||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||||||||
| Repurchases of common stock | (511) | (771) | |||||||||||||||||||||||||||
| Repayment of term loan borrowings and finance lease obligations | (13) | (2) | |||||||||||||||||||||||||||
| Borrowings under the revolving credit facility | 1,740 | — | |||||||||||||||||||||||||||
| Dividends paid | (121) | (116) | |||||||||||||||||||||||||||
| Issuance of common stock under stock-based compensation plans | 40 | 50 | |||||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 1,135 | (839) | |||||||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (119) | 3 | |||||||||||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 1,241 | (211) | |||||||||||||||||||||||||||
| Cash and cash equivalents, beginning of period | 2,645 | 1,161 | |||||||||||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 3,886 | $ | 950 | |||||||||||||||||||||||||
SUPPLEMENTAL CASH FLOW INFORMATION
(in millions)
| Three Months Ended | ||||||||||||||||||||
Stock Repurchases under Board of Directors' authorized stock repurchase program: | March 31, 2020 | March 31, 2019 | ||||||||||||||||||
| Number of shares repurchased | 8.5 | 9.5 | ||||||||||||||||||
| Remaining authorized balance | $ | 1,858 | ||||||||||||||||||
Reconciliation of Free Cash Flow Non-GAAP Financial Measure
(in millions)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 497 | $ | 269 | |||||||||||||||||||||||||
Purchases of property and equipment | (112) | (106) | |||||||||||||||||||||||||||
| Free cash flow | $ | 385 | $ | 163 | |||||||||||||||||||||||||
First Quarter 2020 Financial Results and Highlights May 7, 2020
Forward-Looking Statements This press release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to future events that may not prove to be accurate. These statements include, but are not limited to, express or implied forward-looking statements relating to our expectations regarding the impact of the COVID-19 pandemic on our business, our expectations regarding the success of our actions to contain the ransomware attack and to protect the integrity of our systems and data, the impact of the ransomware attack on our clients, business, reputation and financial results, opportunities in the marketplace, our cost structure, investment in and growth of our business, our realignment plans, the timing, cost and impact of the 2020 Fit for Growth Plan, our and our clients’ shift to digital solutions and services and our anticipated financial performance. These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions, the ongoing assessment of the ransomware attack, legal, reputational and financial risks resulting from cyberattacks, including the ransomware attack, the effectiveness of business continuity plans following the ransomware attack and during the COVID-19 pandemic, the impact of the COVID-19 pandemic, changes in the regulatory environment, including with respect to immigration and taxes, and the other factors discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Cognizant undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law. 2
Results Summary • $4.2B, increased 2.8% (3.5% CC1) Y/Y, including a $23M (~50bps) Y/Y headwind from REVENUE decision to exit certain content-related services GAAP Operating Margin of 13.7%, increased 60 bps Y/Y OPERATING MARGIN • • Adjusted Operating Margin1 15.1%, declined 90 bps Y/Y NET INCOME • GAAP net income of $367M, declined 17% Y/Y DILUTED EARNINGS • GAAP diluted EPS of $0.67, declined 13% Y/Y PER SHARE • Adjusted Diluted EPS1 of $0.96, increased 5% Y/Y • Free cash flow1 of $385M represented ~105% of GAAP net income FREE CASH FLOW • Repurchased 8.5M shares for $511M & CAPITAL RETURN • ~$1.9B remaining under current repurchase authorization 1 Constant currency revenue growth, Adjusted Operating Margin, Adjusted Diluted Earnings Per Share (“Adjusted Diluted EPS”) and free cash flow are not measurements of financial performance prepared in accordance with GAAP. See “About Non-GAAP Financial Measures” at the end of this earnings supplement for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable 3
Our Response to COVID-19 "Our priorities remain the health and safety of our associates and the business continuity of our clients. We are committed to helping our clients as they navigate unprecedented business challenges as well as – Brian Humphries, Chief Executive Officer supporting the efforts of governments globally to contain the spread of the virus.” Employees Clients Society Financial Increased communication, dedicated Providing critical services to a life sciences Committed $10 million to global COVID-19 Eliminating non-essential costs, tightly resources and support for safety, well- supplier fast-tracking the development of related causes, and shifted focus of local managing hiring and employee costs, being and remote work COVID-19 testing community grants to pandemic-related efforts including rigorous bench management Financial consideration for those most Built a technology platform to support the Cognizant physicians volunteering on medical Enhancing financial flexibility with $1.74B affected, and enhanced benefits for all, U.S. Paycheck Protection Program on hotline for Indian citizens in addition +2,700 drawdown of revolving credit facility including relaxed sick leave policies for behalf of a banking client Cognizant medical professionals, including quarantine and isolation doctors, nurses and pharmacists supporting front-line healthcare workers Heightened workplace safety measures, Helping major hospitals and healthcare Created an easy-to-use Coronavirus Scenario planning to ensure appropriate including on-site medical staff, social providers, including in New York City, health monitoring app response to demand environment distancing measures and increasing protect staff and deliver quality care using cleaning practices in common and digital technologies co-working spaces “I would like to personally thank you for your commitment, which have kept our technology services – CTO, Financial Services client running whilst being under severe stress. Times like these give true meaning to the word “partnership.” 4
Revenue and GAAP & Adjusted Diluted EPS $ In Millions Except Per Share Amounts $4,284 $4,248 $4,225 $4,129 $4,141 $4,078 $4,110 $4,006 $3,912 $1.05 $1.05 $1.08 $1.07 $0.98 $0.94 $0.91 $0.94 $0.96 Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 Revenue Adjusted Diluted EPS Revenue Growth Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 ’19 Q3 ’19 Q4 ’19 Q1 ‘20 Y/Y 10.3% 9.2% 8.3% 7.9% 5.1% 3.4% 4.2% 3.8% 2.8% Y/Y CC 8.2% 8.2% 9.0% 8.8% 6.8% 4.7% 5.1% 4.2% 3.5% GAAP DILUTED EPS $0.88 $0.78 $0.82 $ 1.12 $0.77 $0.90 $0.90 $0.72 $0.67 ADJUSTED DILUTED EPS $0.94 $1.05 $1.05 $0.98 $0.91 $0.94 $ 1.08 $1.07 $0.96 5
Revenue Performance: Q1 2020 Segments Geography $ IN MILLIONS $ IN MILLIONS COMMUNICATIONS, REST OF WORLD MEDIA & TECHNOLOGY1 +3.2% Y/Y +5.2% Y/Y +7.6% Y/Y CC +6.3% Y/Y CC EUROPE $261 $626 FINANCIAL +5.4% Y/Y SERVICES +7.6% Y/Y CC $1,451 +1.0% Y/Y $774 +1.8% Y/Y CC PRODUCTS & RESOURCES +4.4% Y/Y $954 +5.3% Y/Y CC $3,190 $1,194 NORTH AMERICA +2.1% Y/Y +2.2% Y/Y CC HEALTHCARE +2.5% Y/Y +2.7% Y/Y CC 6 1 Our strategic decision in 2019 to exit certain content-related services negatively impacted Q1 2020 CMT revenue by approximately ($23) million representing a (~390bps) impact to year-over-year growth
GAAP & Adjusted Operating Margin 19.2% 18.5% 17.7% 17.7% 18.3% 16.7% 16.8% 17.0% 17.3% 17.0% 16.0% 16.1% 15.7% 14.9% 14.6% 15.1% 13.1% 13.7% Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 GAAP Operating Margin Adjusted Operating Margin 7
Financial Services Revenue Q1 ‘20 Geography $ IN MILLIONS $ IN MILLIONS REST OF WORLD +0.8% Y/Y $1,492 +5.3% Y/Y CC $1,469 $1,473 $1,461 $1,464 $1,468 $1,451 $1,451 $128 $1,436 EUROPE +6.9% Y/Y +8.4% Y/Y CC $311 Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 $1,012 Revenue Growth NORTH AMERICA Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19 Q2 ‘19 Q3 ‘19 Q4 ‘19 Q1 ‘20 (0.6%) Y/Y and CC Y/Y 6.2% 4.5% 2.6% 1.7% (1.7%) 0.3% 1.9% 1.2% 1.0% Y/Y CC 3.9% 3.5% 3.5% 2.8% 0.2% 1.7% 3.0% 1.5% 1.8% BANKING Revenue growth driven by the Samlink deal in Europe, partially offset by weakness in several large clients which impacted North America and UK performance INSURANCE Modest year-over-year revenue decline in-line with expectations impacted by weakness in North America 8
Healthcare Revenue Q1 ‘20 Geography $ IN MILLIONS $ IN MILLIONS REST OF WORLD $1,221 +6.3% Y/Y $1,202 $1,194 EUROPE +8.9% Y/Y CC $1,189 $1,175 $1,156 $1,165 +29.9% Y/Y $17 $1,121 $1,134 +31.5% Y/Y CC $139 Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 $1,038 Revenue Growth Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19 Q2 ‘19 Q3 ‘19 Q4 ‘19 Q1 ‘20 NORTH AMERICA (0.4%) Y/Y and CC Y/Y 11.8% 10.1% 9.6% 6.8% 3.9% (1.9%) (1.2%) 1.6% 2.5% Y/Y CC 11.1% 9.8% 9.7% 7.0% 4.6% (1.5%) (0.9%) 1.8% 2.7% HEALTHCARE Year-over-year revenue decline moderated as 2019 headwinds continue to impact North America business LIFE SCIENCES Strong year-over-year revenue growth in Europe, supported by revenue from the Zenith acquisition and digital operations services and solutions 9
Products & Resources Revenue Q1 ‘20 Geography $ IN MILLIONS $ IN MILLIONS REST OF WORLD (1.6%) Y/Y $966 $963 $954 $914 $927 +2.7% Y/Y CC $863 $891 $821 $840 $63 EUROPE (3.3%) Y/Y $202 (0.6%) Y/Y CC Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 $689 Revenue Growth Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19 Q2 ‘19 Q3 ‘19 Q4 ‘19 Q1 ‘20 NORTH AMERICA +7.5% Y/Y and CC Y/Y 11.4% 12.4% 11.5% 13.9% 11.3% 10.4% 11.9% 8.1% 4.4% Y/Y CC 8.2% 10.7% 12.3% 15.4% 13.8% 12.3% 13.4% 8.6% 5.3% Growth strongest in North America driven by client adoption and integration of digital technologies across retail and consumer goods, and PRODUCTS & RESOURCES manufacturing, logistics, energy and utilities; partially offset by softness globally in travel and hospitality 10
Communications, Media & Technology Revenue Q1 ‘20 Geography $ IN MILLIONS $ IN MILLIONS REST OF WORLD +15.2% Y/Y +20.3% Y/Y CC $632 $626 $585 $595 $607 $615 $541 $562 $509 $53 EUROPE (3.9%) Y/Y (0.8%) Y/Y CC $122 Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 $451 Revenue Growth NORTH AMERICA Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19 Q2 ‘19 Q3 ‘19 Q4 ‘19 Q1 ‘20 +6.9% Y/Y and CC Y/Y 18.4% 15.8% 17.1% 18.4% 16.9% 12.2% 9.4% 8.0% 5.2% Y/Y CC 15.1% 14.5% 18.1% 20.1% 19.6% 14.1% 10.6% 9.0% 6.3% Content Impact1 ~(2.0%) ~(3.9%) CMT Overall strong North America performance across communications, media and technology, partially offset by the ramp down of certain content-related services 11 1 Content Impact represents year-over-year impact to revenue growth from strategic decision in 2019 to exit certain content-related services. In Q4 ’19 and Q1 ’20 the year-over-year dollar impact was ($11) and ($23) million, respectively.
Employee Metrics Headcount and Annualized Attrition NUMBER OF EMPLOYEES IN THOUSANDS 24% 22% 23% 22% 19% 23% 21% 20% 19% 288.2 289.9 274.2 268.9 281.6 285.8 292.5 291.7 261.4 Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 Headcount Quarterly Annualized Attrition Utilization 92% 93% 93% 92% 91% 92% 92% 92% 91% 83% 83% 83% 83% 83% 83% 84% 85% 83% Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 Offshore Excluding Trainees % Onsite % 12
Cash Flow, Balance Sheet & Capital Allocation $ IN MILLIONS $118 $116 $116 $116 $633 $121 $267 $110 $771 $111 $118 $1,054 $632 $163 $511 $477 $116 $259 $45 $316 $35 $239 $197 $146 $86 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Acquisitions Share Purchases Dividends Paid $ IN MILLIONS Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 ’20 FREE CASH FLOW $292 $549 $768 $606 $163 $479 $620 $845 $385 CASH AND SHORT-TERM $4,989 $4,247 $4,763 $4,511 $3,668 $3,003 $3,077 $3,424 $4,282 INVESTMENTS1 1 Q1 ’18 to Q4 ’19 short-term investments included restricted time deposits in India. In Q1 ’20, the restricted time deposits in the amount of $393 million were reclassified to long-term investments. 13
Revenue & Operating Metrics REVENUE BY… Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4 ‘19 Q1 ‘20 SERVICE LINE OUTSOURCING 42.0% 42.9% 42.3% 41.8% 41.4% 41.1% 40.4% 40.1% 39.7% CONSULTING & TECH SERVICES 58.0% 57.1% 57.7% 58.2% 58.6% 58.9% 59.6% 59.9% 60.3% CONTRACT TYPE FIXED BID 38.9% 36.2% 36.4% 36.6% 35.7% 35.7% 36.3% 37.3% 36.8% TIME & MATERIAL 52.6% 52.9% 52.6% 52.0% 52.4% 51.7% 51.8% 50.5% 50.9% TRANSACTION BASED 8.5% 10.9% 11.0% 11.4% 11.9% 12.5% 11.9% 12.2% 12.3% CUSTOMER CONCENTRATION TOP 5 9.0% 8.6% 8.7% 8.9% 8.8% 8.0% 7.9% 7.8% 8.0% TOP 10 15.9% 15.4% 15.5% 15.6% 15.7% 14.5% 14.4% 14.0% 14.1% 14
2020 Assumptions • Expected to remain volatile and uncertain, with particular weakness in Q2 given additional impact from ransomware incident • Travel & hospitality, retail, auto, energy, and media & entertainment (~20% of revenue) seeing heightened COVID-19 impact REVENUE • In addition to demand challenges, anticipate Q2 ransomware impact of $50-70M • Momentum in Q1 contracts awarded and pipeline growth highlights strategy and client-centricity is resonating • Expect secular trends of core modernization and cloud to accelerate post-crisis • Demand uncertainty and increased costs from COVID-19 and ransomware incident will require additional cost actions, including reduced variable expenses and tight management of utilization MARGIN • Q2 flow through of ransomware impact of $50-70M • Continued execution of 2020 Fit For Growth Plan to deliver ~$450M gross annualized savings in 2020 • Expect Adjusted Operating Margin below 16-17% in 2020 • Strong balance sheet, including net cash1 of $1.8B LIQUIDITY & • Flexibility to navigate near-term volatility while investing for the future CAPITAL DEPLOYMENT • Suspended share repurchase activity (~$1.9B remains under current authorization) • Continue to evaluate M&A opportunities to support long-term strategy 1 Net cash is not a measurement of financial performance prepared in accordance with GAAP. See “About Non-GAAP Financial Measures” at the end of this earnings supplement for more information and reconciliations to the most directly comparable GAAP financial measures. 15
APPENDIX: About Non-GAAP Financial Measures
About Non-GAAP Financial Measures To supplement our financial results presented in accordance with GAAP, this earnings supplement includes references to the following measures defined by the Securities and Exchange Commission as non-GAAP financial measures: Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS, free cash flow, net cash and constant currency revenue growth. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non- GAAP financial measures used by other companies. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of our non-GAAP financial measures to the corresponding GAAP measures should be carefully evaluated. Our non-GAAP financial measures, Adjusted Operating Margin, Adjusted Income From Operations and Adjusted Diluted EPS exclude unusual items. Additionally, Adjusted Diluted EPS excludes net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. The income tax impact of each item is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period’s foreign currency exchange rates measured against the comparative period's reported revenues. Net cash is defined as cash and cash equivalents and short-term investments less short-term and long-term debt. We believe providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For our internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for our executive officers and for making comparisons of our operating results to those of our competitors. Therefore, it is our belief that the use of non-GAAP financial measures excluding certain costs provides a meaningful supplemental measure for investors to evaluate our financial performance. Accordingly, we believe that the presentation of our non-GAAP measures, when read in conjunction with our reported GAAP results, can provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations. A limitation of using non-GAAP financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and may exclude costs that are recurring such as our net non- operating foreign currency exchange gains or losses. In addition, other companies may calculate non-GAAP financial measures differently than us, thereby limiting the usefulness of these non-GAAP financial measures as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from our non-GAAP financial measures to allow investors to evaluate such non-GAAP financial measures. 17
Reconciliations of Non-GAAP Financial Measures (In millions, except per share amounts) Three Months Ended: Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, 2018 2018 2018 2018 2019 2019 2019 2019 2020 GAAP income from operations $ 693 $ 670 $ 745 $ 693 $ 539 $ 619 $ 669 $ 626 $ 579 Realignment charges (a) 1 - 11 7 2 49 65 53 20 2020 Fit for Growth Plan restructuring charges (b) - - - - - - - 48 35 COVID-19 Charges (c) - - - - - - - - 6 Incremental accrual related to the India Defined Contribution - - - - 117 - - - - Obligation (d) Initial funding of Cognizant U.S. Foundation (e) - 100 - - - - - - - Adjusted income from operations $ 694 $ 770 $ 756 $ 700 $ 658 $ 668 $ 734 $ 727 $ 640 GAAP operating margin 17.7% 16.7% 18.3% 16.8% 13.1% 14.9% 15.7% 14.6% 13.7% Realignment charges - - 0.2% 0.2% - 1.2% 1.6% 1.3% 0.5% 2020 Fit for Growth Plan restructuring charges - - - - - - - 1.1% 0.8% COVID-19 Charges - - - - - - - - - 0.1% Incremental accrual related to the India Defined Contribution - - - - 2.9% - - - - Obligation Initial funding of Cognizant U.S. Foundation - 2.5% - - - - - - - Adjusted operating margin 17.7% 19.2% 18.5% 17.0% 16.0% 16.1% 17.3% 17.0% 15.1% GAAP diluted earnings per share $ 0.88 $ 0.78 $ 0.82 $ 1.12 $ 0.77 $ 0.90 $ 0.90 $ 0.72 $ 0.67 Effect of above adjustments, pre-tax - 0.17 0.02 0.01 0.20 0.09 0.12 0.18 0.11 Effect of non-operating foreign currency exchange (gains) 0.06 0.14 0.21 (0.14) (0.01) (0.03) 0.09 0.08 0.19 losses, pre-tax (f) Tax effect of above adjustments (g) - (0.04) 0.01 (0.01) (0.05) (0.02) (0.03) (0.05) (0.01) Effect of the equity method investment impairment (h) - - - - - - - 0.10 - Effect of the India Tax Law (i) - - - - - - - 0.04 - Effect of net incremental income tax expense related to the Tax - - (0.01) - - - - - - Reform Act (j) Adjusted diluted earnings per share $ 0.94 $ 1.05 $ 1.05 $ 0.98 $ 0.91 $ 0.94 $ 1.08 $ 1.07 $ 0.96 18 Please refer to page 19, 20 and 21 of this earnings supplement for corresponding Non-GAAP notes.
Reconciliations of Non-GAAP Financial Measures Notes: (a) During the first quarter of 2020, we incurred realignment charges that include $6 million in employee retention costs and $14 million in professional fees. The total costs related to the realignment are reported in "Restructuring charges" in our unaudited consolidated statements of operations. (b) During the first quarter of 2020, we incurred restructuring charges as part of our 2020 Fit for Growth Plan that include $26 million in employee separation costs, $5 million in facility exit costs and $4 million in employee retention costs. These charges include $11 million of costs incurred related to our exit from certain content-related services. The total costs related to the 2020 Fit for Growth Plan are reported in "Restructuring charges" in our unaudited consolidated statements of operations. (c) During the first quarter of 2020, we incurred costs in response to the COVID-19 pandemic that include a one-time bonus to our employees at the designation of associate and below in both India and the Philippines and costs to enable our employees to work remotely and provide medical staff and extra cleaning services for our facilities. Substantially all of the costs related to the pandemic are reported in "Cost of revenues" in our unaudited consolidated statements of operations. (d) During the first quarter of 2019, a ruling of the Supreme Court of India interpreting certain statutory defined contribution obligations of employees and employers (the “India Defined Contribution Obligation”) altered historical understandings of such obligations, extending them to cover additional portions of the employee’s income. As a result, the ongoing contributions of our affected employees and the Company have increased. In the first quarter of 2019, we accrued $117 million with respect to prior periods, assuming retroactive application of the Supreme Court’s ruling. There is significant uncertainty as to how the liability should be calculated as it is impacted by multiple variables, including the period of assessment, the application with respect to certain current and former employees and whether interest and penalties may be assessed. Since the ruling, a variety of trade associations and industry groups have advocated to the Indian government, highlighting the harm to the information technology sector, other industries and job growth in India that would result from a retroactive application of the ruling. It is possible that the Indian government will review the matter and there is a substantial question as to whether the Indian government will apply the Supreme Court’s ruling on a retroactive basis. As such, the ultimate amount of our obligation may be materially different from the amount accrued. The incremental accrual related to the India Defined Contribution Obligation is reported in "Selling, general and administrative expenses" in our unaudited consolidated statement of operations. (e) During the second quarter of 2018, we provided $100 million of initial funding to Cognizant U.S. Foundation. This cost is reported in "Selling, general and administrative expenses" in our unaudited consolidated statement of operations. (f) Non-operating foreign currency exchange gains and losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, are reported in "Foreign currency exchange gains (losses), net" in our unaudited consolidated statements of operations. 19
Reconciliations of Non-GAAP Financial Measures (g) Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income: Three Months Ended Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, 2018 2018 2018 2018 2019 2019 2019 2019 2020 Tax impacts of non-GAAP adjustments: Realignment charges $ - $ - $ 3 $ 2 $ - $ 13 $ 17 $ 13 $ 5 2020 Fit for Growth restructuring charges - - - - - - - 13 9 COVID-19 Charges - - - - - - - - 2 Incremental accrual related to the India Defined - - - - 31 - - - - Contribution Obligation Cognizant U.S. Foundation funding - 28 - - - - - - - Foreign currency exchange gains and losses (1) (8) (6) 3 1 - (2) - (10) The effective tax rate related to each of our non-GAAP adjustments varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions (h) During the fourth quarter of 2019, we determined that the carrying value of one of our equity method investments exceeded its fair value and therefore recorded an impairment charge of $57 million within the caption "Income (loss) from equity method investments" in our consolidated statements of operations. (i) During the fourth quarter of 2019, the Government of India enacted a new tax regime ("India Tax Law") effective retroactively to April 1, 2019 that enables domestic companies to elect to be taxed at a lower income tax rate of 25.17%, as compared to the current income tax rate of 34.94%. Once a company elects into the lower income tax rate, a company may not benefit from any tax holidays associated with Special Economic Zones and certain other tax incentives, including Minimum Alternative Tax credit carryforwards, and may not reverse its election. As a result of the enactment of the India Tax Law, we recorded a one-time net income tax expense of $21 million due to the revaluation to the lower income tax rate of our India net deferred income tax assets that are expected to reverse after we elect into the new tax regime. 20
Reconciliations of Non-GAAP Financial Measures (j) During the third quarter of 2018, we finalized our calculation of the one-time net income tax expense related to the enactment of the Tax Cuts and Jobs Act (“Tax Reform Act”) and recognized a $5 million income tax benefit, which reduced our provision for income taxes. Reconciliation of free cash flow Three Months Ended Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 30, Mar 31, (in millions) 2018 2018 2018 2018 2019 2019 2019 2019 2020 Net cash provided by operating activities $ 388 $ 640 $ 862 $ 702 $ 269 $ 575 $ 717 $ 938 $ 497 Purchases of property and equipment (96) (91) (94) (96) (106) (96) (97) (93) (112) Free cash flow $ 292 $ 549 $ 768 $ 606 $ 163 $ 479 $ 620 $ 845 $ 385 Reconciliation of net cash As of Dec 30, Mar 31, (in millions) 2019 2020 Cash and cash equivalents 2,645 3,886 Short-term investments (a) 779 396 Less: Short-term debt 38 38 Long-term debt 700 2,430 Net cash $ 2,686 $ 1,814 Note: (a) As of December 31, 2019, $414 million in restricted time deposits were classified as short-term investments. As of March 31, 2020, the restricted deposits in the amount of $393 million were reclassified to long-term investments and therefore are not included in net cash as of that date. The above tables serve to reconcile the Non-GAAP financial measures to the most directly comparable GAAP measures. 21