UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2004
o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to
Commission File Number 0-24429
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
Delaware
13-3728359
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
500 Glenpointe Centre West, Teaneck, New Jersey
07666
(Address of Principal Executive Offices)
(Zip Code)
Registrants telephone number, including area code
|
(201) 801-0233 | |
|
|
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes: þ | No: o |
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yes: þ | No: o |
Indicate the number of shares outstanding of each of the Registrants classes of common stock, as
of November 1, 2004:
Class
Number of Shares
Class A Common Stock, par value $.01 per share
132,963,380
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
Note 1 Interim Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions
Corporation (Cognizant or the Company) in accordance with generally
accepted accounting principles in the United States of America and Article 10
of Regulation S-X under the Securities and Exchange Act of 1934, as amended,
and should be read in conjunction with the Companys consolidated financial
statements (and notes thereto) included in the Companys Annual Report on Form
10-K for the year ended December 31, 2003. In the opinion of the Companys
management, all adjustments considered necessary for a fair presentation of the
accompanying unaudited condensed consolidated financial statements have been
included, and all adjustments are of a normal and recurring nature. Operating
results for the interim periods are not necessarily indicative of results that
may be expected to occur for the entire year. Certain prior period amounts
have been restated to conform to the presentation of the Companys financial
statements for fiscal year 2004.
On April 12, 2004, the Board of Directors declared a conditional
two-for-one stock split to be effected by a 100% stock dividend payable on or
about June 17, 2004 to stockholders of record as of May 27, 2004. The stock
split was subject to stockholder approval at the Companys May 26, 2004 Annual
Meeting of Stockholders of an amendment to the Restated Certificate of
Incorporation to increase the number of authorized shares of Class A common
stock. On May 26, 2004, the Companys stockholders approved such amendment to
the Restated Certificate of Incorporation and as a result, a 100% stock
dividend was paid on June 17, 2004 to stockholders of record as of May 27,
2004. The stock split has been reflected in the accompanying unaudited
condensed consolidated financial statements, and all applicable references as
to the number of outstanding common shares and per share information have been
restated to reflect the stock split as if it occurred at the beginning of the
earliest period presented. Stockholders equity accounts have been restated to
reflect a $653 reclassification of an amount equal to the par value of the
increase in issued shares of Class A common stock from the additional
paid-in-capital account to the Class A common stock account. The amendment to
the Restated Certificate of Incorporation increased the number of authorized
shares of Class A common stock to 325,000,000 and eliminated the authorization
of Class B common stock.
Note 2 Split-Off from IMS Health and Related Party Transactions
On February 13, 2003 (the Split-Off Date), IMS Health Incorporated (IMS
Health) distributed all of the Cognizant Class B common stock that IMS Health
owned (a total of 67,745,400 shares) in an exchange offer to IMS Health
stockholders (the Split-Off). In connection with the Split-Off, Cognizant
was obligated under the provisions of an Intercompany Agreement with IMS Health
to pay certain costs associated with the Split-Off. During the nine months
ended September 30, 2003, Cognizant incurred direct and incremental costs of
$2,010 related to the Split-Off. This amount was in addition to the
approximately $1,700, which was
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recorded in the fourth quarter of 2002. Such costs included direct legal,
accounting, printing and other costs. In addition, costs incurred in the first
quarter of 2003 include a non-cash charge of approximately $488 calculated in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and Related Interpretations (APB No. 25) related
to the retention, acceleration and extended life of Cognizant common stock
options by two former Directors of Cognizant who resigned on the Split-Off Date
as a condition of the Split-Off. As of the Split-Off Date, such former
Directors were Officers of IMS Health. Cognizant did not receive any proceeds
from the IMS Health exchange offer.
As a result of the Split-Off, IMS Health and its affiliates are no longer
related parties of Cognizant as of the Split-Off Date. Only services rendered
to or received from IMS Health and its affiliates during the period from
January 1, 2003 to the Split-Off Date are classified as related party
transactions. During the period from January 1, 2003 through the Split-Off
Date, the Company recognized related party revenue of $2,575 and incurred costs
of $28 for services provided by IMS Health to the Company.
The Company has a strategic relationship with The Trizetto Group Inc.
(Trizetto) that includes helping its healthcare customers integrate
Trizettos products with their existing information systems and, within
Trizetto, supporting further development of these software applications. As of
the Split-Off Date, IMS Health owned approximately 26.4% of the outstanding
common stock of Trizetto. The Company recorded revenues from Trizetto of
approximately $831 from January 1, 2003 through the Split-Off Date and recorded
expenses related to Trizetto commissions of approximately $9 from January 1,
2003 through the Split-Off Date.
Note 3 Acquisition
On February 27, 2004, the Company acquired Ygyan Consulting Private Ltd.
(Ygyan), an India-based SAP services provider, for approximately $1,720
(including approximately $62 of estimated direct deal costs). Ygyan was
acquired to increase the Companys SAP service capabilities.
The Company has accounted for the acquisition as a business combination
under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations and has made a preliminary assessment of the
allocation of the purchase price to the tangible and intangible assets and
liabilities acquired. Based upon that preliminary assessment, the Company
expects that the amortization of such intangible assets will not have a
material effect on the Companys results of operations. The operating results
of Ygyan have been included in the unaudited condensed consolidated financial
statements since the acquisition date. The Ygyan acquisition was not material
to the Companys consolidated results of operations, cash flows or financial
condition.
Note 4 Investment in Short-Term Bank Deposits
The Companys investments in bank deposits mature in less than one year.
These short-term cash investments are valued at cost, which approximates fair
value.
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Note 5 Income Taxes
The Companys Indian subsidiary, Cognizant India, is an export-oriented
company, which under the Indian Income Tax Act of 1961, is entitled to claim
tax holidays for a period of ten years with respect to its export profits.
Substantially all of the earnings of Cognizant India are attributable to export
profits and are therefore currently substantially exempt from Indian income
tax. These tax holidays began to expire in April 2004 and under current law
will be completely phased out by March of 2009. The incremental Indian taxes
related to the portion of the Indian tax holiday that expired in 2004 have been
incorporated into the Companys 2004 effective income tax rate. Such income
taxes are estimated to be less than $10 million for 2004. The principal
difference between the effective rates during the 2004 and 2003 periods and the
Companys United States federal statutory rate is the effect of the tax holiday
in India.
Note 6 Employee Stock-Based Employee Compensation Plans
On May 26, 2004, the Company adopted the 2004 Employee Stock Purchase Plan
(the Purchase Plan) that provides for the issuance of up to 3,000,000 shares
of Class A common stock to eligible employees. The Purchase Plan provides for
eligible employees to designate, in advance of specified purchase periods, a
percentage of compensation to be withheld from their pay and applied toward the
purchase of such number of whole shares of Class A common stock as can be
purchased at a price of 90% of the lesser of (a) the fair market value of a
share of Class A common stock on the first date of the purchase period; or (b)
the fair market value of a share of Class A common stock on the last date of
the purchase period. No employee can purchase more than $25 worth of stock
annually, and no stock can be purchased by any person which would result in the
purchaser owning more than five percent or more of the total combined voting
power or value of all classes of stock of the Company.
At September 30, 2004, the Company had four stock-based employee
compensation plans. The Company accounts for these plans under the recognition
and measurement principles of APB No. 25. Except as noted below, no
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share for the three
months and nine months ended September 30, 2004 and 2003, if the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
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Note 7 Commitments and Contingencies
The Company has expanded its plans to construct additional fully-owned
development centers to now include over 900,000 square feet as compared to
previous plans, announced in December 2003, to add 600,000 square feet of
space. The new facilities will be located in Chennai, Pune, Calcutta and
Bangalore, India. The total construction expenditure related to this expanded
program is estimated to be approximately $76,000, an increase of approximately
$34,000, when compared to the expansion program announced in December 2003. As
of September 30, 2004, the Company has entered into fixed capital commitments
of $2,168 related to this India development center expansion program, of which
$1,330 has been spent to date.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Companys quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Companys engagements involve projects that are critical to the operations of
its customers businesses and provide benefits that are difficult to quantify.
Any failure in a customers computer system could result in a claim for
substantial damages against the Company, regardless of the Companys
responsibility for such failure. Although the Company attempts to
contractually limit its liability for damages arising from negligent acts,
errors, mistakes, or omissions in rendering its software development and
maintenance services, there can be no assurance that the limitations of
liability set forth in its contracts will be enforceable in all instances or
will otherwise protect the Company from liability for damages. Although the
Company has general liability insurance coverage, including coverage for errors
or omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that exceed available insurance coverage or changes in the
Companys insurance policies, including premium increases or the imposition of
large deductible
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or co-insurance requirements, could have a material adverse effect on the
Companys business, results of operations, cash flows and financial condition.
In connection with the Split-Off, the Company entered into a Distribution
Agreement, dated January 7, 2003, with IMS Health (the Distribution
Agreement), that provides, among other things, that IMS Health and the Company
will comply with, and not take any action during the relevant time period that
is inconsistent with, the representations made to and relied upon by McDermott,
Will & Emery in connection with rendering its opinion regarding the U.S.
federal income tax consequences of the exchange offer. In addition, pursuant
to the Distribution Agreement, the Company indemnified IMS Health for any tax
liability to which they may be subject as a result of the exchange offer but
only to the extent that such tax liability resulted solely from a breach in the
representations the Company made to and were relied upon by McDermott, Will &
Emery in connection with rendering its opinion regarding the U.S. federal
income tax consequences of the exchange offer. If the Company breaches any of
its representations in connection with the Distribution Agreement, the related
indemnification liability could be material to the Companys results of
operations, financial position and cash flows.
Note 8 Segment Information
The Company, operating globally, provides IT services for medium and large
businesses. North American operations consist primarily of IT services in the
United States and Canada. European operations consist of IT services
principally in the United Kingdom, The Netherlands, Germany, Switzerland and
Ireland. Asian operations consist of IT services principally in India,
Singapore, Japan and Australia. The Company is managed on a geographic basis.
Accordingly, regional sales managers, sales managers, account managers, project
teams and facilities are segmented geographically and decisions by the
Companys chief operating decision maker regarding the allocation of assets and
assessment of performance are based on such geographic segmentation. In
accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, information about the Companys operations and total
assets in North America, Europe and Asia for the three and nine month periods
ended September 30, 2004 and September 30, 2003 are as follows:
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During the three-month period ended September 30, 2004, JPMorgan Chase and
another customer, each individually accounted for more than 10.0% of revenues
and during the nine-month period ended September 30, 2004, JPMorgan Chase was
the only customer to account for more than 10.0% of revenues. No customer
accounted for more than 10.0% of revenues for the three and nine-month periods
ended September 30, 2003.
Note 9 Foreign Currency Forward Contract
During July 2004, the Company entered into a foreign currency forward
contract, with a six-month term and notional amount of $12,500, to sell the
Indian Rupee for U.S. dollars. We have entered into this forward contract to
manage a portion of the Companys foreign currency risk related to Indian Rupee
denominated asset balances, primarily cash investments, at our
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Indian subsidiary, Cognizant India. Movement in the exchange rate for the
Indian Rupee results in foreign currency gains or losses upon remeasurement of
Cognizant Indias financial statements into its functional currency, the U.S.
dollar. Our objective is to reduce foreign currency exposure to appreciation
or depreciation in the value of the Indian Rupee by offsetting a portion of
such exposure with gains or losses on the forward contract, referred to above.
At the end of each accounting period, the foreign currency forward
contract will be marked-to-market and recorded at fair value with unrealized
gains and losses reported along with foreign currency gains or losses in the
caption other income (expense), net on the Companys unaudited condensed
consolidated statement of income. At September 30, 2004, the fair value of the
foreign currency forward contract was a liability of $149. For the three and
nine-month periods ended September 30, 2004, the unrealized loss on the foreign
currency forward contract has been recorded as part of aggregate foreign
currency transaction losses of $259 and $39, respectively.
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Overview
We are a leading provider of custom IT services related to IT design,
development, integration and maintenance services primarily for Fortune 1000
companies located in the United States and Europe. Our core competencies
include web-centric applications, data warehousing, component-based development
and legacy and client-server systems. We provide IT services using an
integrated on-site/offshore business model. This seamless on-site/offshore
business model combines technical and account management teams located on-site
at the customer location and offshore at dedicated development centers located
in India and Ireland.
During the three and nine months ended September 30, 2004, our revenue
increased to $155.4 million and $413.9 million, respectively, compared to $98.1
million and $260.1 million for the three and nine months ended September 30,
2003. Net income increased to $26.1 million and $69.6 million, respectively or
$0.18 and $0.49 per diluted share during the three and nine months ended
September 30, 2004 compared to $16.0 million and $39.6 million, respectively or
$0.12 and $0.30 per diluted share during the three and nine months ended
September 30, 2003. Our revenue growth was driven by continued strong demand
for our application management, and application development and integration
services. Application management revenue increased by 45.6%, or approximately
$25.8 million, from approximately $56.5 million during the three months ended
September 30, 2003 to approximately $82.3 million during the three months ended
September 30, 2004 and increased by 45.3%, or approximately $70.3 million, from
approximately $155.1 million during the nine months ended September 30, 2003 to
approximately $225.4 million during the nine months ended September 30, 2004.
Application development and integration services increased by 75.8% and 79.6%,
or approximately $31.5 million and $83.5 million, from approximately $41.6
million and $105.0 million during the three and nine months ended September 30,
2003 to approximately $73.1 million and $188.5 million during the three and
nine months ended September 30, 2004. As of September 30, 2004, our number of
active clients increased to 219 compared to 213 at June 30, 2004 and 153 at
December 31, 2003. We anticipate that a significant portion of our revenue
growth for the remainder of 2004 will come from an increased level of work at
existing clients. We continue to see an increased level of interest for
offshore services in Northern Europe. During the three months ended September
30, 2004, our operating margin increased to 19.9% compared to 19.6% for the
three months ended September 30, 2003. This was consistent with our targeted
operating margin range of 19% to 20% of total revenues. Currently, it is our
intent to reinvest earnings in excess of our targeted operating margin range
back into the business principally to expand our service capabilities and sales
and marketing efforts.
At September 30, 2004, we had cash and cash equivalents and short-term
bank deposits of $270.4 million, an increase of $76.2 million compared to
December 31, 2003. Our most recent building plans provide for construction of
approximately 900,000 square feet of space in new fully-owned development
centers located in Chennai, Pune, Calcutta and Bangalore, India. This
supercedes our previous plans, announced in December 2003, which included
600,000 square feet of new space. Total construction costs related to this
program are currently estimated to be approximately $76.0 million, which we
expect to fund from current operations. We believe
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our financial condition will remain strong. In addition, we will continue
to consider acquisitions of companies that can improve our capabilities in
certain market niches or geographic areas.
On June 29, 2004, we announced our plans to wind-down operations at our
development center located in Limerick, Ireland and close the facility by March
31, 2005. We decided to close this facility due to the increased cost structure
resulting from the significant appreciation in the value of the Euro against
the US dollar since the facility was acquired in 2002. All work currently
performed in this facility will be transferred to Cognizants operations in
North America and India. Currently, we expect to incur during 2004 and 2005
incremental costs of approximately $1.5 million associated with the closure of
this facility. For the nine months ended September 30, 2004, we have recorded
expenses of approximately $1.3 million primarily for severance, retention
bonuses and an obligation to repay funds previously received through local job
grant programs and made payments of approximately $0.4 million for severance
and retention bonuses. Approximately 50 employees are affected by the closure.
On April 12, 2004, our Board of Directors declared a conditional
two-for-one stock split to be effected by a 100% stock dividend payable on or
about June 17, 2004 to stockholders of record as of May 27, 2004. The stock
split was subject to stockholder approval at the May 26, 2004 Annual Meeting of
Stockholders of an amendment to our Restated Certificate of Incorporation to
increase the number of authorized shares of Class A common stock. On May 26,
2004, our stockholders approved such amendment to our Restated Certificate of
Incorporation and as a result, a 100% stock dividend was paid on June 17, 2004
to stockholders of record as of May 27, 2004. The stock split has been
reflected in the accompanying consolidated financial statements, and all
applicable references as to the number of outstanding common shares and per
share information have been restated to reflect the stock split as if it
occurred at the beginning of the earliest period presented. Stockholders
equity accounts have been restated to reflect a reclassification of
approximately $0.7 million of an amount equal to the par value of the increase
in issued shares of Class A common stock from the additional paid-in-capital
account to the Class A common stock account.
Critical Accounting Estimates and Risks
Managements discussion and analysis of our financial condition and
results of operations are based on our unaudited condensed consolidated
financial statements that have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the amounts reported for assets and liabilities,
including the recoverability of tangible and intangible assets, disclosure of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses during the reported period.
On an on-going basis, we evaluate our estimates. The most significant estimates
relate to the recognition of revenue and profits based on the percentage of
completion method of accounting for certain fixed-bid contracts, the allowance
for doubtful accounts, income taxes, valuation of goodwill and other long-lived
assets and contingencies. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. The actual amounts will differ from the estimates used in
the preparation of the accompanying
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unaudited condensed consolidated financial statements. Our significant
accounting policies are described in Note 2 to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2003.
We believe the following critical accounting policies require higher level
of management judgments and estimates than others in preparing the unaudited
condensed consolidated financial statements:
Revenue Recognition
. Revenues related to our fixed-price contracts are
recognized as the service is performed using the percentage-of-completion
method of accounting, under which the total contract revenue during the term of
an agreement is recognized on the basis of the percentage that each contracts
cost to date bears to the total estimated cost. Estimates of total contract
revenues and costs are continuously monitored during the term of the contract,
and recorded revenues and costs are subject to revision as the contract
progresses. Such revisions may result in increases or decreases to revenues
and income and are reflected in the consolidated financial statements in the
periods in which they are first identified.
Allowance for Doubtful Accounts.
We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. The allowance for doubtful accounts is determined by
evaluating the relative credit-worthiness of each customer based upon market
capitalization and other information, including the aging of the receivables.
If the financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Income Taxes.
Determining the consolidated provision for income tax
expense, deferred tax assets and liabilities and related valuation allowance,
if any, involves judgment. As a global company, we are required to calculate
and provide for income taxes in each of the jurisdictions where we operate.
This involves estimating current tax exposures in each jurisdiction as well as
making judgments regarding the recoverability of deferred tax assets. Tax
exposures can involve complex issues and may require an extended period to
resolve. In the period of resolution, adjustments may need to be recorded that
result in increases or decreases to income. Changes in the geographic mix or
estimated level of annual pre-tax income can also affect the overall effective
income tax rate.
On an on-going basis, we evaluate whether a valuation allowance is needed
to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and on-going
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event we determine that we will be able to realize
deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we will not be able
to realize all or part of the net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income or equity (if
the deferred tax asset is related to tax benefits from stock option benefits
that have not been realized) in the period such determination was made.
Our Indian subsidiary, Cognizant India, is an export-oriented company,
which, under the Indian Income Tax Act of 1961, is entitled to claim tax
holidays for a period of ten years with
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respect to Cognizant Indias export profits. Substantially all of the
earnings of Cognizant India are attributable to export profits and are
therefore currently entitled to a 100% exemption from Indian income tax. These
tax holidays began to expire in April 2004 and, under current law, will be
completely phased out by March of 2009. Prior to 2002, it was managements
intent to repatriate all accumulated earnings from India to the United States;
accordingly, we provided for deferred income taxes on all such undistributed
earnings through December 31, 2001. During the first quarter of 2002, we made a
strategic decision to pursue an international strategy that includes expanded
infrastructure investments in India and geographic expansion in Europe and
Asia. As a component of this strategy, we intend to use 2002 and future Indian
earnings to expand operations outside of the United States instead of
repatriating these earnings to the United States. Accordingly, effective
January 1, 2002, pursuant to Accounting Principles Board Opinion No. 23,
Accounting for Income Taxes Special Areas we no longer accrue incremental
U.S. taxes on all foreign earnings recognized in 2002 and subsequent periods as
these earnings are considered to be indefinitely reinvested outside of the
United States. As of September 30, 2004, the amount of unrepatriated Indian
earnings upon which no incremental U.S. taxes have been recorded is
approximately $137.7 million. While we have no plans to do so, if such
earnings are repatriated in the future or are no longer deemed to be
indefinitely reinvested, we will accrue the applicable amount of taxes
associated with such earnings and may pay taxes at a substantially higher rate
than the effective rate in 2004. Due to the various methods by which such
earnings could be repatriated in the future, it is not currently practicable to
determine the amount of applicable taxes that would result from such
repatriation or whether the amount of previously accrued deferred taxes on
earnings recognized prior to 2002 will require adjustment.
Goodwill.
We evaluate goodwill for impairment at least annually, or as
circumstances warrant. When determining the fair value of our reporting units,
we utilize various assumptions, including projections of future cash flows.
Any adverse changes in key assumptions about our businesses and their prospects
or an adverse change in market conditions may cause a change in the estimation
of fair value and could result in an impairment charge.
Long-lived Assets
. In accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which was adopted in 2002, we review for impairment long-lived assets
and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In general, we will recognize an impairment loss when the sum of
undiscounted expected future cash flows is less than the carrying amount of
such asset. The measurement for such an impairment loss is then based on the
fair value of the asset.
Risks.
Most of our IT development centers, including a substantial
majority of our employees, are located in India. As a result, we may be subject
to certain risks associated with international operations, including risks
associated with foreign currency exchange rate fluctuations and risks
associated with the application and imposition of protective legislation and
regulations relating to import and export or otherwise resulting from foreign
policy or the variability of foreign economic or political conditions.
Additional risks associated with international operations include difficulties
in enforcing intellectual property rights, the burdens of complying with a wide
variety of foreign laws, potential geo-political and other risks associated
with terrorist activities and local and cross border conflicts, potentially
adverse tax
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consequences, tariffs, quotas and other barriers. We are also subject to
risks associated with our overall compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. The inability of our independent auditor to provide
us with an unqualified report as to the adequacy of our internal controls over
financial reporting as of December 31, 2004 and for future year ends could
result in adverse consequences to us, including, but not limited to, a loss of
investor confidence in the reliability of our financial statements, which could
cause the market price of our stock to decline. See Item 1 Business -
Additional Factors That May Affect Future Results in our Annual Report on Form
10-K for the year ended December 31, 2003 for discussion of additional risks
that may affect our business, operations or financial results.
Forward Looking Statements
The statements contained in this Quarterly Report on Form 10-Q that are
not historical facts are forward-looking statements (within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended) that involve
risks and uncertainties. Such forward-looking statements may be identified by,
among other things, the use of forward-looking terminology such as believes,
expects, may, will, should or anticipates or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. From time to time, we or our
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings
made by us with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of one of our authorized executive
officers. These forward-looking statements, such as statements regarding
anticipated future revenues, contract percentage completions, capital
expenditures, and other statements regarding matters that are not historical
facts, involve predictions. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. There are a number of important factors that could
cause our results to differ materially from those indicated by such
forward-looking statements, which include general economic conditions, and the
factors discussed in our Annual Report on Form 10-K for the year ended December
31, 2003 and other filings with the Securities and Exchange Commission. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Results of Operations
Three Months Ended September 30, 2004 Compared to Three Months Ended
September 30, 2003
The following table sets forth, for the periods indicated, certain
financial data expressed for the three months ended September 30:
(Dollars in thousands)
- 16 -
Revenue.
Revenue increased by 58.4%, or approximately $57.3 million, from
approximately $98.1 million during the three months ended September 30, 2003 to
approximately $155.4 million during the three months ended September 30, 2004.
This increase resulted primarily from increased revenue from existing customers
and revenue from new customers added since September 30, 2003, including
acquisitions. Specifically, demand for application development and integration
services increased significantly due to continued strength in our customers
discretionary spending. In the third quarter of 2004, JPMorgan Chase and a
second customer each individually accounted for sales in excess of 10% of
revenues, while in the corresponding period of 2003 no customer accounted for
sales in excess of 10% of revenues. This second customer is not expected to
account for more than 10% of sales on a full-year basis for the year ended
December 31, 2004.
Gross Profit.
Our cost of revenues consists primarily of the cost of
salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions related to revenues. Our cost of
revenues increased by 59.7%, or approximately $31.6 million, from approximately
$53.0 million during the three months ended September 30, 2003 to approximately
$84.6 million during the three months ended September 30, 2004. The increase
was due primarily to costs resulting from an increase in the number of our
technical professionals from approximately 7,000 employees at September 30,
2003 to approximately 13,000 employees at September 30, 2004. The increased
number of our technical professionals is a direct result of greater demand for
our services. Our gross profit increased by 56.9%, or approximately $25.7
million, from approximately $45.1 million during the three months ended
September 30, 2003 to approximately $70.8 million during the three months ended
September 30, 2004.
Gross profit margin decreased from 46.0% of revenues during the three
months ended September 30, 2003 to 45.6% of revenues during the three months
ended September 30, 2004. The decrease in gross profit margin was due
primarily to the effect of a higher incentive compensation accrual in 2004 as
compared to 2003.
Selling, General and Administrative Expenses.
Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs as well as depreciation and amortization expense. Selling,
general and administrative expenses, including depreciation and
- 17 -
amortization, increased by 54.5%, or approximately $14.1 million, from
approximately $25.9 million during the three months ended September 30, 2003 to
approximately $40.0 million during the three months ended September 30, 2004,
and decreased as a percentage of revenue from 26.4% to 25.7%. The percentage
decrease in such expenses was due primarily to leveraging of prior investment
on our sales and marketing activities resulting in increased revenue growth
partially offset by the effect of a higher incentive compensation accrual in
2004 as compared to 2003.
Income from Operations.
Income from operations increased 60.2%, or
approximately $11.6 million, from approximately $19.3 million during the three
months ended September 30, 2003 to approximately $30.9 million during the three
months ended September 30, 2004, representing operating margins of 19.6% and
19.9% of revenues, respectively. The increase in operating margin was due
primarily to the decrease in selling, general and administrative expenses,
including depreciation and amortization, as a percentage of total revenues
discussed above.
Other Income/Expense, Net.
Other income/expense, net consists primarily
of interest income and foreign currency transaction gains or losses. Interest
income increased from $0.6 million during the three months ended September 30,
2003 to approximately $1.3 million during the three months ended September 30,
2004 due primarily to higher invested cash balances and an increased portion of
this balance held in foreign currencies which earn slightly higher interest
rates.
Provision for Income Taxes
. The provision for income taxes increased from
approximately $3.9 million during the three months ended September 30, 2003 to
approximately $5.8 million during the three months ended September 30, 2004.
The effective tax rate of 19.7% for the three months ended September 30, 2003
decreased to 18.3% for the three months ended September 30, 2004 primarily due
to the non-deductible split-off costs recorded in 2003 and the effect of
Indias replacement in 2003 of a dividend withholding tax on the shareholder
with a corporate level dividend tax partially offset by the expiration in 2004
of the Indian tax holiday on export profits generated from one of our software
development centers in India and the increase during 2004 of the corporate tax
rate in India to approximately 36.6% from approximately 35.9%.
Net Income.
Net income increased from approximately $16.0 million for the
three months ended September 30, 2003 to approximately $26.1 million for the
three months ended September 30, 2004, representing 16.3% and 16.8% of
revenues, respectively. The increase in net income as a percentage of revenues
compared to the prior period was primarily due to the leveraging of our
selling, general and administrative expenses and decrease in the effective
income tax rate in 2004.
- 18 -
Nine months Ended September 30, 2004 Compared to Nine months Ended
September 30, 2003
The following table sets forth, for the periods indicated, certain
financial data expressed for the nine months ended September 30:
(Dollars in thousands)
Revenue.
Revenue increased by 59.1%, or approximately $153.8 million,
from approximately $260.1 million during the nine months ended September 30,
2003 to approximately $413.9 million during the nine months ended September 30,
2004. This increase resulted primarily from increased revenue from existing
customers and revenue from new customers added since September 30, 2003,
including acquisitions. Specifically, demand for application development and
integration services increased significantly due to continued strength in our
customers discretionary spending. During the nine months ended September 30,
2004, JPMorgan Chase accounted for sales in excess of 10% of revenues, while in
the corresponding period of 2003 no customer accounted for sales in excess of
10% of revenues.
Gross Profit.
Our cost of revenues consists primarily of the cost of
salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions related to revenues. Our cost of
revenues increased by 59.5%, or approximately $84.0 million, from approximately
$141.1 million during the nine months ended September 30, 2003 to approximately
$225.2 million during the nine months ended September 30, 2004. The increase
was due primarily to costs resulting from an increase in the number of our
technical professionals from approximately 7,000 employees at September 30,
2003 to approximately 13,000 employees at September 30, 2004. The increased
number of our technical professionals is a direct result of greater demand for
our services. Our gross profit increased by 58.7%, or approximately $69.8
million, from approximately $119.0 million during the nine months ended
September 30, 2003 to approximately $188.7 million during the nine months ended
September 30, 2004.
- 19 -
Gross profit margin decreased from 45.7% of revenues during the nine
months ended September 30, 2003 to 45.6% of revenues during the nine months
ended September 30, 2004. The decrease in gross profit margin was primarily
due to the effect of a higher incentive compensation accrual in 2004 as
compared to 2003.
Selling, General and Administrative Expenses.
Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs as well as depreciation and amortization expense. Selling,
general and administrative expenses, including depreciation and amortization,
increased by 56.4%, or approximately $38.4 million, from approximately $68.0
million during the nine months ended September 30, 2003 to approximately $106.4
million during the nine months ended September 30, 2004, and decreased as a
percentage of revenue from 26.2% to 25.7%. The percentage decrease in such
expenses was due to a decrease in depreciation and amortization expense as a
percentage of revenues partially offset by the effect of a higher incentive
compensation accrual in 2004 as compared to 2003.
Income from Operations.
Income from operations increased 61.7%, or
approximately $31.4 million, from approximately $50.9 million during the nine
months ended September 30, 2003 to approximately $82.3 million during the nine
months ended September 30, 2004, representing operating margins of 19.6% and
19.9% of revenues, respectively. The increase in operating margin was due
primarily to the decrease in depreciation and amortization expense discussed
above.
Other Income/Expense, Net.
Other income/expense, net consists primarily
of interest income and foreign currency transaction gains or losses and for the
nine months ended September 30, 2003, non-recurring split-off costs of $2.0
million related to direct and incremental expenses (
e.g.
, legal and accounting
fees, printing and registration costs) incurred by us directly related to our
split-off from IMS Health. Interest income increased from $1.4 million during
the nine months ended September 30, 2003 to approximately $2.9 million during
the nine months ended September 30, 2004. The increase in interest income is
due primarily to higher invested cash balances and an increased portion of this
balance held in foreign currencies which earn slightly higher interest rates.
Provision for Income Taxes
. The provision for income taxes increased from
approximately $10.5 million during the nine months ended September 30, 2003 to
approximately $15.6 million during the nine months ended September 30, 2004.
The effective tax rate of 21.0% for the nine months ended September 30, 2003
decreased to 18.3% for the nine months ended September 30, 2004 primarily due
to the non-deductible split-off costs recorded in 2003 and the effect of
Indias replacement in 2003 of a dividend withholding tax on the shareholder
with a corporate level dividend tax partially offset by the expiration in 2004
of the Indian tax holiday on export profits generated from one of our software
development centers in India and the increase during 2004 of the corporate tax
rate in India to approximately 36.6% from approximately 35.9%.
Net Income.
Net income increased from approximately $39.6 million for the
nine months ended September 30, 2003 to approximately $69.6 million for the
nine months ended September 30, 2004, representing 15.2% and 16.8% of revenues,
respectively. The increase in
- 20 -
net income as a percentage of revenues as compared to the prior period was
primarily due to the absence in 2004 of the one-time non-recurring split-off
costs referred to above and a lower effective income tax rate for 2004 compared
to 2003.
Results by Business Segment
Cognizant, operating globally, provides IT services for medium and large
businesses. North American operations consist primarily of IT services in the
United States and Canada. European operations consist of IT services
principally in the United Kingdom, The Netherlands, Germany, Switzerland and
Ireland. Asian operations consist of IT services principally in India,
Singapore, Japan and Australia. We manage the company on a geographic basis.
Accordingly, regional sales managers, sales managers, account managers, project
teams and facilities are segmented geographically and decisions by our chief
operating decision maker regarding the allocation of assets and assessment of
performance are based on such geographic segmentation. In this regard, revenues
are allocated to each geographic area based on the location of the customer.
Three Months Ended September 30, 2004 Compared to Three Months Ended
September 30, 2003
The following table sets forth, for the periods indicated, operating
results by geographic segment:
(Dollars in thousands)
North American Segment
Revenue
. Revenue increased by 52.9%, or approximately $46.2 million, from
approximately $87.3 million during the third quarter of 2003 to approximately
$133.5 million
- 21 -
during the third quarter of 2004. The increase in revenue was
attributable primarily to greater acceptance of the on-site/offshore consulting
services delivery model as a means of reducing a customers internal IT costs,
as well as sales and marketing activities directed at the U.S. market for our
services.
Income from Operations
. Income from operations increased 55.0%, or
approximately $9.4 million from approximately $17.2 million during the third
quarter of 2003 to approximately $26.6 million during the third quarter of
2004. The increase in operating income was attributable primarily to increased
revenues and achieving leverage on prior sales and marketing investments.
European Segment
Revenue.
Revenue increased by 104.4%, or approximately $10.6 million,
from approximately $10.2 million during the third quarter of 2003 to
approximately $20.8 million during the third quarter of 2004. The increase in
revenue was attributable to the increased acceptance of our services,
particularly in the United Kingdom and additional revenues related to the
acquisition of Infopulse Nederland B.V, or Infopulse in the fourth quarter of
2003.
Income from Operations.
Income from operations increased 107.3%, or
approximately $2.1 million, from approximately $2.0 million during the third
quarter of 2003 as compared to approximately $4.1 million during the third
quarter of 2004. The increase in operating income was attributable primarily
to increased revenues and achieving leverage on prior sales and marketing
investments partially offset by weaker than expected performance at Infopulse.
Asian Segment
Revenue
. Revenue increased by 78.0%, or approximately $0.5 million, from
approximately $0.7 million during the third quarter of 2003 to approximately
$1.2 million during the third quarter of 2004. The increase in revenue was
attributable to the increased acceptance of our services, particularly in Japan
and Singapore, and the acquisition of Ygyan.
Income from Operations.
Income from operations increased 80%, or
approximately $0.1 million, from approximately $0.1 million during the third
quarter of 2003 as compared to approximately $0.2 million during the third
quarter of 2004. The increase in operating income was attributable primarily
to increased revenues and achieving leverage on prior sales and marketing
investments
.
- 22 -
Nine months Ended September 30, 2004 Compared to Nine months Ended
September 30, 2003
The following table sets forth, for the periods indicated, operating
results by geographic segment:
(Dollars in thousands)
North American Segment
Revenue
. Revenue increased by 55.3%, or approximately $127.6 million,
from approximately $230.6 million during the nine months ended September 30,
2003 to approximately $358.2 million during the nine months ended September 30,
2004. The increase in revenue was attributable primarily to greater acceptance
of the on-site/offshore consulting services delivery model as a means of
reducing a customers internal IT costs, as well as sales and marketing
activities directed at the U.S. market for our services.
Income from Operations
. Income from operations increased 60.2%, or
approximately $27.2 million, from approximately $45.2 million during the nine
months ended September 30, 2003 to approximately $72.4 million during the nine
months ended September 30, 2004. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
European Segment
Revenue.
Revenue increased by 90.8%, or approximately $25.0 million, from
approximately $27.5 million during the nine months ended September 30, 2003 to
approximately $52.5 million during the nine months ended September 30, 2004.
The increase in revenue was attributable to the increased acceptance of our
services, particularly in the United Kingdom and additional revenues related to
the acquisition of Infopulse in the fourth quarter of 2003.
- 23 -
Income from Operations.
Income from operations increased 96.7%, or
approximately $5.2 million, from approximately $5.4 million during the nine
months ended September 30, 2003 as compared to approximately $10.6 million
during the nine months ended September 30, 2004. The increase in operating
income was attributable primarily to increased revenues and achieving leverage
on prior sales and marketing investments partially offset by weaker than
expected performance at Infopulse.
Asian Segment
Revenue
. Revenue increased by 62.1%, or approximately $1.2 million, from
approximately $2.0 million during the nine months ended September 30, 2003 to
approximately $3.2 million during the nine months ended September 30, 2004.
The increase in revenue was attributable to the increased acceptance of our
services, particularly in Japan and Singapore, and the acquisition of Ygyan.
Income from Operations.
Income from operations increased 66.6%, or
approximately $0.3 million, from approximately $0.4 million during the nine
months ended September 30, 2003 as compared to approximately $0.6 million
during the nine months ended September 30, 2004. The increase in operating
income was attributable primarily to increased revenues and achieving leverage
on prior sales and marketing investments
.
Liquidity and Capital Resources
At September 30, 2004, we had cash and cash equivalents and short-term
bank deposits of approximately $270.4 million. We have used, and plan to use,
such cash for (i) expansion of existing operations, including our offshore
software development centers; (ii) continued development of new service lines;
(iii) possible acquisitions of related businesses; (iv) formation of joint
ventures; and (v) general corporate purposes, including working capital. As of
September 30, 2004, we had no third party debt and our working capital
increased to $315.7 million compared to $215.9 million as of December 31, 2003.
Accordingly, we do not anticipate any near-term liquidity issues.
During 2004, the Indian income tax holiday related to one of our software
development centers expired. Accordingly, in 2004, we began to accrue Indian
income taxes on export profits generated by this one software development
center. Such income taxes are expected to be less than $10 million for 2004.
Net cash provided by operating activities was approximately $75.5 million
during the nine months ended September 30, 2004 as compared to net cash
provided by operating activities of approximately $42.0 million during the nine
months ended September 30, 2003. This increase is primarily attributed to the
higher level of net income during 2004 as compared to 2003 and the increase in
accrued and other liabilities, partially offset by the increase in the trade
accounts receivable as of September 30, 2004. Trade accounts receivable, net
of allowance, increased from $52.3 million at December 31, 2003 to $86.8
million at September 30, 2004. The increase in trade accounts receivable
during 2004 was due primarily to increased revenue, higher number of days sales
outstanding and the timing of billings during the calendar year. We monitor
turnover, aging and the collection of accounts receivable through the use of
management reports,
- 24 -
which are prepared on a customer basis and evaluated by our finance staff.
At September 30, 2004, our days sales outstanding, including unbilled
receivables, was approximately 61 days compared to approximately 53 days at
December 31, 2003.
Our investing activities used net cash of approximately $43.6 million for
the nine months ended September 30, 2004 as compared to net cash used of
approximately $24.1 million for the same period in 2003. The increase in 2004
as compared to 2003 primarily relates to the investment of a portion of our
cash balances in short-term bank deposits to achieve a higher return on
invested balances.
Our financing activities generated net cash of approximately $23.7 million
for the nine months ended September 30, 2004 as compared to $15.2 million for
the same period in 2003. The increase in net cash provided by financing
activities was primarily related to increased cash proceeds from the exercise
of stock options as compared to the prior year and the absence in 2004 of the
payments of non-recurring split-off costs.
We believe that our available funds and the cash flows expected to be
generated from operations will be adequate to satisfy our current and planned
operations and needs for at least the next 12 months. Our ability to expand
and grow our business in accordance with current plans, to make acquisitions
and form joint ventures and to meet our long-term capital requirements beyond
this 12-month period will depend on many factors, including the rate, if any,
at which our cash flow increases, our ability and willingness to accomplish
acquisitions and joint ventures with capital stock, our continued intent not to
repatriate earnings from India, our ability not to breach the Distribution
Agreement, as discussed below, between IMS Health and us, especially as it
relates to our tax indemnities, and the availability of public and private debt
and equity financing. We cannot be certain that additional financing, if
required, will be available on terms favorable to us, if at all.
During July 2004, we entered into a foreign currency forward contract,
with a six-month term and notional amount of $12.5 million, to sell the Indian
Rupee for U.S. dollars. We have entered into this forward contract to manage a
portion of our foreign currency risk related to Indian Rupee denominated asset
balances, primarily cash investments, at our Indian subsidiary, Cognizant
India. Movement in the exchange rate for the Indian Rupee results in foreign
currency gains or losses upon remeasurement of the Cognizant Indias financial
statements into its functional currency, the U.S. dollar. Our objective is to
reduce foreign currency exposure to appreciation or depreciation in the value
of the Indian Rupee by offsetting a portion of such exposure with gains or
losses on the forward contract, referred to above. The forward contract is
marked to market and recorded at fair value with unrealized gains and losses
reported along with foreign currency gains or losses in the caption other
income (expense), net on our unaudited condensed consolidated statement of
income.
Other than the aforementioned forward contract, we have not engaged in
hedging activities nor have we entered into off-balance sheet transactions,
arrangements or other relationships with unconsolidated entities or other
persons that are likely to affect liquidity or the availability of or
requirements for capital resources.
- 25 -
Commitments and Contingencies
We have expanded our plans to construct additional fully-owned
developments centers to now include over 900,000 square feet of new space as
compared to previous plans, announced in December 2003, to add 600,000 square
feet of space. The new facilities will be located in Chennai, Pune, Calcutta
and Bangalore, India. Total construction costs related to this program are
expected to be approximately $76.0 million, which we expect to fund internally.
As of September 30, 2004, we have entered into fixed capital commitments of
approximately $2.2 million related to this India development center expansion
program, of which approximately $1.3 million has been spent to date.
We are involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on our quarterly or annual operating results, cash
flows, or consolidated financial position. Additionally, many of our
engagements involve projects that are critical to the operations of our
customers business and provide benefits that are difficult to quantify. Any
failure in a customers computer system could result in a claim for substantial
damages against us, regardless of our responsibility for such failure. Although
we attempt to contractually limit our liability for damages arising from
negligent acts, errors, mistakes, or omissions in rendering our application
design, development and maintenance services, there can be no assurance that
the limitations of liability set forth in our contracts will be enforceable in
all instances or will otherwise protect us from liability for damages. Although
we have general liability insurance coverage, including coverage for errors or
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against us that exceed available insurance coverage or changes in our insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on our
quarterly and annual operating results, financial position and cash flows.
In connection with the split-off from IMS Health, we entered into a
Distribution Agreement, dated January 7, 2003, with IMS Health, referred to as
the Distribution Agreement. The Distribution Agreement provides, among other
things, that IMS Health and we will comply with, and not take any action during
the relevant time period that is inconsistent with, the representations made to
and relied upon by McDermott, Will & Emery in connection with rendering its
opinion regarding the U.S. federal income tax consequences of the exchange
offer. In addition, pursuant to the Distribution Agreement, we indemnified IMS
Health for any tax liability to which they may be subject as a result of the
exchange offer but only to the extent that such tax liability resulted solely
from a breach in the representations we made to and were relied upon by
McDermott, Will & Emery in connection with rendering its opinion regarding the
U.S. federal income tax consequences of the exchange offer. If we breach any
of our representations in connection with the Distribution Agreement, the
related indemnification liability could be material to our quarterly and annual
operating results, financial position and cash flows.
- 26 -
Related Party Transactions
As described in Note 2 to the unaudited condensed consolidated financial
statements, on February 13, 2003, referred to as the Split-Off Date, IMS Health
distributed all of the Cognizant Class B common stock that IMS Health owned in
an exchange offer to IMS Health stockholders, referred to as the Split-Off. As
a result of the Split-Off, IMS Health is no longer a related party as of the
Split-Off Date. Accordingly, our revenues from IMS Health subsequent to the
Split-Off Date are classified as third party revenues. During the nine months
ended September 30, 2003, we recognized related party revenues from IMS Health
totaling approximately $2.6 million and incurred costs of approximately $28,000
related to services provided to us by IMS Health.
Foreign Currency Translation
A portion of our costs in India and cash balances are denominated in local
currency and subject to exchange fluctuations, which has not historically had
any material effect on our results of operations or financial position.
Effects of Inflation
Our most significant costs are the salaries and related benefits for our
programming staff and other professionals. Competition in India, the United
States and Europe for professionals with advanced technical skills necessary to
perform our services offered have caused wages to increase at a rate greater
than the general rate of inflation. As with other IT service providers, we
must adequately anticipate wage increases, particularly on our fixed-price
contracts. There can be no assurance that we will be able to recover cost
increases through increases in the prices that we charge for our services in
the United States and elsewhere.
We are exposed to foreign currency exchange rate risk in the ordinary
course of doing business as we transact or hold a portion of our funds in
foreign currencies, particularly the Indian Rupee. Accordingly, we
periodically evaluate the need for hedging strategies to mitigate the effect of
foreign currency fluctuations. During July 2004, we entered into a foreign
currency forward contract, with a six-month term and notional amount of $12.5
million, to sell the Indian Rupee for U.S. dollars. We may continue to enter
into such instruments in the future to reduce foreign currency exposure to
appreciation or depreciation in the value of certain foreign currencies. Other
than the aforementioned forward contract, we have not engaged in hedging
activities nor have we entered into off-balance sheet transactions,
arrangements or other relationships with unconsolidated entities or other
persons that are likely to affect liquidity or the availability of or
requirements for capital resources.
We believe that we do not have exposure to material market risks
associated with changes in interest rates, as we have no variable interest rate
debt outstanding. We do not believe that we have any other material exposure
to market risks associated with interest rates.
- 27 -
Evaluation of disclosure controls and procedures
. Our management, with
the participation of our Chief Executive Officer, or CEO, and Chief Financial
Officer, or CFO, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act) as of September 30, 2004. In designing and evaluating our
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and our management
necessarily applied its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on this evaluation, our CEO and CFO
concluded that, as of September 30, 2004, our disclosure controls and
procedures were (1) designed to ensure that material information relating to
us, including our consolidated subsidiaries, is made known to our CEO and CFO
by others within those entities, particularly during the period in which this
report was being prepared and (2) effective, in that they provide reasonable
assurance that information required to be disclosed by us in the reports that
we file or submit under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms.
Changes in internal controls.
No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
- 28 -
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
$
155,429
$
98,111
$
413,892
$
257,498
2,575
155,429
98,111
413,892
260,073
84,585
52,968
225,153
141,126
70,844
45,143
188,739
118,947
35,889
22,861
94,614
59,624
4,083
3,008
11,776
8,397
30,872
19,274
82,349
50,926
1,267
617
2,922
1,358
(252
)
(21
)
(31
)
(120
)
(2,010
)
1,015
596
2,891
(772
)
31,887
19,870
85,240
50,154
(5,835
)
(3,910
)
(15,599
)
(10,514
)
$
26,052
$
15,960
$
69,641
$
39,640
$
0.20
$
0.13
$
0.53
$
0.32
$
0.18
$
0.12
$
0.49
$
0.30
131,747
125,803
130,248
124,063
10,974
12,361
11,597
10,149
142,721
138,164
141,845
134,212
$
26,052
$
15,960
$
69,641
$
39,640
(128
)
292
177
422
$
25,924
$
16,252
$
69,818
$
40,062
(1)
Reflects a 2-for-1 stock split effected by a 100% stock dividend paid on
June 17, 2004 (See Note 1).
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in thousands, except par values)
September 30,
December 31,
2004
2003
$
250,370
$
194,221
20,021
86,781
52,253
16,952
9,543
23,609
14,066
14,271
8,414
412,004
278,497
70,075
58,438
5,603
4,477
14,627
16,436
4,533
2,741
$
506,842
$
360,589
$
11,739
$
9,423
84,545
53,213
96,284
62,636
16,449
23,883
112,733
86,519
1,326
1,286
167,992
117,811
220,614
150,973
4,177
4,000
394,109
274,070
$
506,842
$
360,589
(1)
Reflects a 2-for-1 stock split effected by a 100% stock dividend paid on
June 17, 2004 (See Note 1).
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine Months Ended
September 30,
2004
2003
$
69,641
$
39,640
11,776
8,397
2,010
267
52
(7,434
)
2,949
26,522
13,228
(34,307
)
(15,669
)
(22,714
)
(16,419
)
(1,539
)
466
2,316
(1,276
)
31,008
8,582
75,536
41,960
(21,791
)
(20,262
)
(43,351
)
23,033
(1,495
)
(3,816
)
(43,604
)
(24,078
)
23,699
18,197
(2,963
)
23,699
15,234
518
422
56,149
33,538
194,221
126,211
$
250,370
$
159,749
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(Unaudited)
(dollar amounts in thousands)
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Three Months
Three Months
Nine months
Nine months
Ended
Ended
Ended
Ended
September 30,
September 30,
September 30,
September 30,
2004
2003
2004
2003
$
26,052
$
15,960
$
69,641
$
39,640
488
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Three Months
Three Months
Nine months
Nine months
Ended
Ended
Ended
Ended
September 30,
September 30,
September 30,
September 30,
2004
2003
2004
2003
(4,587
)
(4,115
)
(12,463
)
(11,766
)
$
21,465
$
11,845
$
57,178
$
28,362
$
0.20
$
0.13
$
0.53
$
0.32
$
0.16
$
0.09
$
0.44
$
0.23
$
0.18
$
0.12
$
0.49
$
0.30
$
0.15
$
0.09
$
0.40
$
0.21
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As of
As of
September 30,
December 31,
2004
2003
$
269,678
$
203,168
30,805
26,045
206,359
131,376
$
506,842
$
360,589
(1)
Revenues and resulting operating income in this schedule are attributed
to regions based upon customer location.
(2)
Application development and integration services represented
approximately 47.0% and 42.4% of revenues during the three months ended
September 30, 2004 and 2003, respectively and approximately 45.5% and
40.4% of revenues during the nine months ended September 30, 2004 and
2003, respectively. Application maintenance services represented
approximately 53.0% and 57.6% of revenues during the three months ended
September 30, 2004 and 2003, respectively and approximately 54.5% and
59.6% of revenues during the nine months ended September 30, 2004 and
2003, respectively.
(3)
Primarily relates to operations in the United States.
(4)
On June 29, 2004, the Company announced that it plans to wind-down
operations at its development center located in Limerick, Ireland and
close the facility by March 31, 2005. The costs associated with the
closure of this facility have been disclosed separately since these costs
were not allocated to a reporting segment in managements internal
reporting. The Company expects to incur during 2004 and 2005 incremental
costs of approximately $1,500 associated with the closure of this
facility. For the nine months ended September 30, 2004, the Company has
recorded expenses of approximately $1,250 primarily for severance,
retention bonuses and an obligation to repay funds previously received
through local job grant programs and made payments of approximately $400
for severance and retention bonuses. Retention bonuses are being expensed
over each eligible employees future service period. As of September 30,
2004, the Company had an accrual of approximately $850 for wind-down
costs. Fixed assets related to this facility are not material and will be
depreciated ratably through March 31, 2005. Approximately 50 employees
are affected by the closure.
Table of Contents
Table of Contents
Item 2.
Managements Discussion and Analysis of Financial Condition and
Results of Operations.
Table of Contents
Table of Contents
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Table of Contents
% of
% of
2004
Revenues
2003
Revenues
Increase
% Increase
$
155,429
100.0
%
$
98,111
100.0
%
$
57,318
58.4
%
84,585
54.4
52,968
54.0
31,617
59.7
70,844
45.6
45,143
46.0
25,701
56.9
Table of Contents
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Three Months Ended
September 30,
2004
2003
Increase
% Increase
$
133,453
$
87,272
$
46,181
52.9
%
20,755
10,153
10,602
104.4
1,221
686
535
78.0
$
155,429
$
98,111
$
26,578
$
17,145
$
9,433
55.0
%
4,133
1,994
2,139
107.3
243
135
108
80.0
(82
)
(82
)
$
30,872
$
19,274
(1)
Represents expenses recorded in the third quarter related to the
wind-down of our development center in Limerick, Ireland. See Note 8 to
the unaudited condensed consolidated financials statements.
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Table of Contents
(1)
Represents expenses related to the wind-down of our development center in
Limerick, Ireland. See Note 8 to the unaudited condensed consolidated
financials statements.
Table of Contents
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Table of Contents
Item 4.
Controls and Procedures.
Table of Contents
PART II. OTHER INFORMATION
- 29 -
Item 6.
Exhibits.
(a)
Exhibits.
Exhibit No.
Description
Form of Stock Option Certificate
Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of principal financial and accounting officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
Certification of principal financial and accounting officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. 1350.
Table of Contents
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 thereunto duly authorized.
Cognizant Technology Solutions Corporation
|
||||
Date: November 8, 2004 | By: | /s/ Lakshmi Narayanan | ||
Lakshmi Narayanan, | ||||
President, Chief Executive Officer and Director (Principal Executive Officer) | ||||
Date: November 8, 2004 | By: | /s/ Gordon Coburn | ||
Gordon Coburn, | ||||
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
(Principal Financial and Accounting Officer) |
||||
-30-
Exhibit 10.1
1999 Incentive Compensation Plan
O ption to Purchase: «SHARES» SHARES
G
ranted to
: «FULL_NAME»
E
mployee ID
: «ID»
D
ate of Grant
: «GRANT_DATE»
E
xercise Price
: «PRICE»
This stock option grant has been executed on behalf of Cognizant Technology Solutions Corporation.
|
|
Gordon Coburn Chief Financial Officer |
This is not a stock certificate or a negotiable instrument. Non-Transferable.
1999 Incentive Compensation Plan
Non Qualified Stock Option Notice
We are pleased to inform you that the Board of Directors has granted you an option to purchase Cognizant Technology Solutions Corporation Class A Common Stock. Your grant has been made under the 1999 Incentive Compensation Plan (the Plan), which together with the terms contained in this Notice, sets forth the terms and conditions of your grant and is incorporated herein by reference. Options vest ratably, over four years, upon the anniversary date of the Date of Grant indicated on the face of this certificate. The Last Date to Exercise is defined as the ten year anniversary of the Date of Grant as indicated on the face of this certificate. A copy of the Plan and related documents are available at Cognizant Online. Printed versions of these documents are also available on request. Please read these documents carefully.
Exercise:
You may exercise this Option, in whole or in part, to purchase a whole number
of vested shares at any time, by following the exercise procedures set up by
the Company. All exercises must take place before the Last Date to Exercise,
or such earlier date as is set out in the Plan following your death,
disability, your retirement or your ceasing to be an employee. The number of
shares you may purchase as of any date cannot exceed the total number of shares
vested by that date, less any shares you have previously acquired by exercising
this Option.
Employment Requirements:
The Plan sets out the terms and conditions that govern this grant in the event
of your termination of employment by way of death, disability, for cause or for
other reasons. In the event your employment is terminated by your death or
disability, you or your estate may exercise an unexercised option during the
shorter of (i) the remaining stated term of the option or (ii) twelve months
after the date of death or disability, but only to the extent that the option
was exercisable at the time of such termination of employment. In the event
your employment is terminated by death or disability, all non-vested options as
of the date of death or disability shall be forfeited. In the event your
employment is terminated for cause, all unexercised options held by you on the
date of termination, whether vested or non-vested shall immediately be
forfeited. In the event your employment is terminated for any other reason,
all non-vested options on the date of your termination shall immediately be
forfeited. Vested options will remain exercisable until the earlier of (i) the
end of the 90-day period following the date of your termination or (ii) the
date the option would otherwise expire.
Taxes and Withholding:
This option is not intended to be an Incentive Stock Option, as defined under
Section 422(b) of the Internal Revenue Code. Any exercise of this option is
normally a taxable event, and if the Company determines that any federal, state
local or foreign tax or withholding payment is required relating to the
exercise or sale of shares arising from this grant, the Company shall have the
right to require such payments from you, or withhold such amounts from other
payments due to you from the Company.
EXHIBIT 31.1
CERTIFICATION
I, Lakshmi Narayanan, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of
Cognizant Technology Solutions Corporation;
2.
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b)
[Paragraph omitted in accordance with SEC transition
instructions contained in SEC Release 34-47986];
c)
Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d)
Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5.
The registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons
performing the equivalent function):
a)
All significant deficiencies and material weaknesses
in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report
financial information; and
b)
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Dated: November 8, 2004
/s/ Lakshmi Narayanan
Lakshmi Narayanan
President, Chief Executive Officer and
Director
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION
I, Gordon Coburn, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of
Cognizant Technology Solutions Corporation;
2.
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b)
[Paragraph omitted in accordance with SEC transition
instructions contained in SEC Release 34-47986];
c)
Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d)
Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5.
The registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons
performing the equivalent function):
a)
All significant deficiencies and material weaknesses
in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report
financial information; and
b)
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Dated: November 8, 2004
/s/ Gordon Coburn
Gordon Coburn
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
In connection with the Form 10-Q of Cognizant Technology Solutions
Corporation (the Company) for the period ended September 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the Report),
the undersigned, Lakshmi Narayanan, President and Chief Executive Officer of
the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Dated: November 8, 2004
/s/ Lakshmi Narayanan
Lakshmi Narayanan
President, Chief Executive Officer and
Director
(Principal Executive Officer)
*
A signed original of this written statement required by Section 906 has
been provided to Cognizant Technology Solutions Corporation and will be
retained by Cognizant Technology Solutions Corporation and furnished to
the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
In connection with the Form 10-Q of Cognizant Technology Solutions
Corporation (the Company) for the period ended September 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the Report),
the undersigned, Gordon Coburn, Executive Vice President, Chief Financial
Officer, Treasurer and Secretary of the Company, hereby certifies, pursuant to
18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Dated: November 8, 2004
/s/ Gordon Coburn
Gordon Coburn
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
*
A signed original of this written statement required by Section 906 has
been provided to Cognizant Technology Solutions Corporation and will be
retained by Cognizant Technology Solutions Corporation and furnished to
the Securities and Exchange Commission or its staff upon request.