UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
| For the fiscal year ended | December 31, 2021 | |||||||||||||
| OR | ||||||||||||||
☐ | 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
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 13-3728359 | ||||||||||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
300 Frank W. Burr Blvd.
Teaneck, New Jersey 07666
(Address of Principal Executive Offices including Zip Code)
Registrant’s telephone number, including area code: (201) 801-0233
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 | CTSH | The Nasdaq Stock Market LLC | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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 ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | ||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | ||||||||
| 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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the registrant’s voting shares of common stock held by non-affiliates of the registrant on June 30, 2021, based on $69.26 per share, the last reported sale price on the Nasdaq Global Select Market of the Nasdaq Stock Market LLC on that date, was $36.4 billion.
The number of shares of Class A common stock, $0.01 par value, of the registrant outstanding as of February 11, 2022 was 524,534,828 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Annual Report on Form 10-K: Portions of the registrant’s definitive Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
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| GLOSSARY | ||||||||||||||
| Defined Term | Definition | ||||
10b5-1 Plan | Trading plan adopted pursuant to Rule 10b5-1 of the Exchange Act | ||||
10th Magnitude | Pamlico 10th Magnitude Blocker LLC, now known as Cognizant 10th Magnitude Blocker, LLC | ||||
| 2009 Incentive Plan | Cognizant Technology Solutions Corporation Amended and Restated 2009 Incentive Compensation Plan | ||||
| 2017 Incentive Plan | Cognizant Technology Solutions Corporation 2017 Incentive Award Plan | ||||
| Adjusted Diluted EPS | Adjusted diluted earnings per share | ||||
| AI | Artificial Intelligence | ||||
| APA | Advance Pricing Agreement | ||||
| ASC | Accounting Standards Codification | ||||
| ASR | Accelerated Stock Repurchase | ||||
| ASU | Accounting Standards Update | ||||
| Bright Wolf | Bright Wolf, LLC | ||||
| CC | Constant Currency | ||||
| Class Action Settlement Loss | Loss recorded in connection with the filing of a settlement agreement that resolved the consolidated putative securities class action against us and certain of our former officers | ||||
| CMT | Communications, Media and Technology | ||||
| Code | The Code on Social Security, 2020 | ||||
| Code Zero | Code Zero, LLC | ||||
| Collaborative Solutions | Collaborative Solutions Holdings, LLC | ||||
| COVID-19 | The novel coronavirus disease | ||||
| COVID-19 Charges | Costs directly related to the COVID-19 pandemic | ||||
| CPI | Consumer Price Index | ||||
| Credit Agreement | Credit agreement with a commercial bank syndicate, as amended | ||||
| Credit Loss Standard | ASC Topic 326 "Financial Instruments - Credit Losses" | ||||
| CTS India | Our principal operating subsidiary in India | ||||
| D&I | Diversity and Inclusion | ||||
| Devbridge | Devbridge Group LLC | ||||
| DevOps | Agile relationship between development and IT operations | ||||
| DOJ | United States Department of Justice | ||||
| DSO | Days Sales Outstanding | ||||
| EI-Technologies | Entrepreneurs et Investisseurs Technologies SAS | ||||
| EPS | Earnings Per Share | ||||
| ESG | Environmental, social and corporate governance | ||||
| ESG Mobility | ESG Mobility GmbH | ||||
| EU | European Union | ||||
| EVP | Employee Value Proposition | ||||
| Exchange Act | Securities Exchange Act of 1934, as amended | ||||
| Executive Transition Costs | Costs associated with our CEO transition and the departure of our President in 2019 | ||||
| FASB | Financial Accounting Standards Board | ||||
| FCPA | Foreign Corrupt Practices Act | ||||
| FS | Financial Services | ||||
| GAAP | Generally Accepted Accounting Principles in the United States of America | ||||
| HC | Healthcare | ||||
| High Court | Madras High Court | ||||
| HR | Human Resources | ||||
| Cognizant | 1 | December 31, 2021 Form 10-K | ||||||
| Hunter | Certain net assets of Hunter Technical Resources, LLC | ||||
| Inawisdom | Inawisdom Limited | ||||
| India Defined Contribution Obligation | Certain statutory defined contribution obligations of employees and employers in India | ||||
| India Tax Law | New tax regime enacted by the Government of India effective April 1, 2019 | ||||
| IP | Intellectual property | ||||
| IoT | Internet of Things | ||||
| IRS | Internal Revenue Service | ||||
| IT | Information Technology | ||||
| ITD | Indian Income Tax Department | ||||
| Lev | Levementum, LLC | ||||
| Linium | The ServiceNow business of Ness Digital Engineering | ||||
| Magenic | Magenic Technologies, LLC | ||||
| MAT | Minimum Alternative Tax | ||||
| New Lease Standard | ASC Topic 842 “Leases” | ||||
| New Signature | BSI Corporate Holdings, Inc. | ||||
| OECD | Organization for Economic Co-operation and Development | ||||
| PSU | Performance Stock Units | ||||
| Purchase Plan | Cognizant Technology Solutions Corporation 2004 Employee Stock Purchase Plan, as amended | ||||
| P&R | Products and Resources | ||||
| ROU | Right of Use | ||||
| RSU | Restricted Stock Units | ||||
| SaaS | Software as a service | ||||
| Samlink | Oy Samlink Ab | ||||
| Samlink Impact | The reduction of revenue and accrual of expenses recorded in 2020 in connection with our settlement offer to exit from a large customer engagement of our Samlink subsidiary | ||||
| SCI | Supreme Court of India | ||||
| SEC | United States Securities and Exchange Commission | ||||
| Second Circuit | United States Court of Appeals for the Second Circuit | ||||
| Servian | SVN HoldCo Pty Limited | ||||
| SEZ | Special Economic Zone | ||||
| SG&A | Selling, general and administrative | ||||
| Syntel | Syntel Sterling Best Shores Mauritius Ltd. | ||||
| Tax on Accumulated Indian Earnings | The income tax expense related to the reversal of our indefinite reinvestment assertion on Indian earnings accumulated in prior years | ||||
| Tax Reform Act | Tax Cuts and Jobs Act | ||||
| Term Loan | Unsecured term loan under the Credit Agreement | ||||
| Third Circuit | United States Court of Appeals for the Third Circuit | ||||
| Tin Roof | Tin Roof Software, LLC | ||||
| TQS | TQS Integration Limited | ||||
| TriZetto | The TriZetto Group, Inc., now known as Cognizant Technology Software Group, Inc. | ||||
| USDC-NJ | United States District Court for the District of New Jersey | ||||
| USDC-SDNY | United States District Court for the Southern District of New York | ||||
| Cognizant | 2 | December 31, 2021 Form 10-K | ||||||
PART I
Item 1. Business
Overview
Cognizant is one of the world’s leading professional services companies, engineering modern business for the digital era. Our services include digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services. Digital services have become an increasingly important part of our portfolio, aligning with our clients' focus on becoming data-enabled, customer-centric and differentiated businesses. We are continuing to invest in digital services with a focus on four key areas: IoT, digital engineering, data and cloud. We tailor our services and solutions to specific industries with an integrated global delivery model that employs client service and delivery teams based at client locations and dedicated global and regional delivery centers. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in a fast-changing world.
Our purpose, vision and values comprise the Cognizant Agenda.
In order to achieve this vision and support our clients, we are focusing our business on four strategic priorities to increase our commercial momentum and accelerate growth. These strategic priorities include:
•Accelerating digital - growing our digital business organically and inorganically;
•Globalizing Cognizant - accelerating the growth of our business in key international markets and diversifying our leadership, capabilities and delivery footprint;
•Repositioning our brand - improving global brand recognition and becoming better known as a global digital partner to the entire C-suite; and
•Increasing our relevance to our clients - leading with thought leadership and capabilities to address clients' business needs.
We seek to drive organic growth through investments in our digital capabilities across industries and geographies, including the extensive training and reskilling of our technical teams and the expansion of our local workforces in the United States and other markets around the world. Additionally, we pursue select strategic acquisitions that can expand our talent, experience and capabilities in key digital areas or in particular geographies or industries. In 2021, we completed seven such acquisitions. See Note 3 to our consolidated financial statements for additional information.
Business Segments
We go to market across our four industry-based business segments. Our clients seek to partner with service providers that have a deep understanding of their businesses, industry initiatives, customers, markets and cultures and the ability to create solutions tailored to meet their individual business needs. Across industries, our clients are confronted with the risk of being disrupted by nimble, digital-native competitors. They are therefore redirecting their focus and investment to digital operating models and embracing DevOps and key technologies that enable quick adjustments to shifts in their markets. We believe that our deep knowledge of the industries we serve and our clients’ businesses has been central to our growth and high client satisfaction, and we continue to invest in those digital capabilities that help to enable our clients to become modern businesses.
| Cognizant | 3 | December 31, 2021 Form 10-K | ||||||
Our business segments are as follows:
| Financial Services (FS) | Healthcare (HC) | Products and Resources (P&R) | Communications, Media and Technology (CMT) | |||||||||||||||||
• Banking • Insurance | • Healthcare • Life Sciences | • Retail and Consumer Goods • Manufacturing, Logistics, Energy and Utilities • Travel and Hospitality | • Communications and Media • Technology | |||||||||||||||||
Our FS segment includes banking, capital markets and insurance companies. Demand in this segment is driven by our clients’ need to serve their customers while being compliant with significant regulatory requirements and adaptable to regulatory change, as well as our clients' adoption and integration of digital technologies, including customer experience enhancement, robotic process automation, analytics and AI in areas such as digital lending, fraud detection and next generation payments. In addition to platforms that drive outcomes at speed, demand is also created by our clients’ desire to reduce complexity through packaged solutions and suppliers with embedded product partners.
Our HC segment consists of healthcare providers and payers as well as life sciences companies, including pharmaceutical, biotech and medical device companies. Demand in this segment is driven by emerging industry trends, including the shift towards consumerism, outcome-based contracting, digital health and delivering integrated seamless, omni-channel, patient-centered experiences. These trends result in increased demand for services that drive operational improvements in areas such as clinical development, pharmacovigilance and manufacturing, as well as claims processing, enrollment, membership and billing. Demand is also created by the adoption and integration of digital technologies such as AI to shape personalized care plans and predictive data analytics to improve clinical trial designs, patient engagement and care outcomes.
Our P&R segment includes manufacturers, retailers and travel and hospitality companies, as well as companies providing logistics, energy and utility services. Demand in this segment is driven by our clients’ focus on improving the efficiency of their operations, the enablement and integration of mobile platforms to support sales and other omni-channel commerce initiatives, and their adoption and integration of digital technologies, such as the application of intelligent systems to manage supply chains and enhance overall customer experiences, and IoT to instrument functions for factories, real estate, fleets and products to increase access to insight-generating data.
Our CMT segment includes information, media and entertainment, communications and technology companies. Demand in this segment is driven by our clients’ need for services related to digital content, the creation of personalized user experiences, acceleration of digital engineering and access to new revenue streams to drive growth.
For the year ended December 31, 2021, the distribution of our revenues across our four industry-based business segments was as follows:
The services we provide are distributed among a number of clients in each of our business segments. A loss of a significant client or a few significant clients in a particular segment could materially reduce revenues for that segment. The services we provide to our larger clients are often critical to their operations and a termination of our services would typically require an extended transition period with gradually declining revenues. Nevertheless, the volume of work performed for specific clients may vary significantly from year to year.
See Note 2 to our consolidated financial statements for additional information related to disaggregation of revenues by client location, service line and contract-type for each of our business segments.
| Cognizant | 4 | December 31, 2021 Form 10-K | ||||||
Services and Solutions
Our services include digital services and solutions, consulting, application services, systems integration, infrastructure services and business process services. Additionally, we develop, license, implement and support proprietary and third-party software products and platforms. Central to our strategy to align with our clients’ need to modernize is our continued investment in digital, with a focus on four key areas: IoT, digital engineering, data and cloud. These four capabilities enable clients to put data at the core of their operations, improve the experiences they offer to their customers, tap into new revenue streams, automate operations, defend against technology-enabled competitors and reduce costs. In many cases, our clients' new digital systems are built on the backbone of their existing legacy systems, which can increase complexity and impact business continuity. The COVID-19 pandemic accelerated our clients' need to modernize their businesses, which has led to increased demand for digital capabilities such as mobile workplace solutions, e-commerce, automation, AI and cybersecurity services and solutions. We believe our deep knowledge of our clients' infrastructure and systems provides us with a significant advantage as we work with them to build new digital capabilities to make their operations more efficient, effective and modern. We deliver all of our services and solutions across our four industry-based business segments to best address our clients' individual needs.
In 2021, our services and solutions were organized into two practice areas: Digital Business & Technology and Digital Business Operations. Our consulting professionals have deep industry-specific expertise and work closely with our practice areas to create modern frameworks, platforms and solutions that leverage a wide range of digital technologies across our clients’ businesses to deliver higher levels of efficiency and new value for their customers.
Digital Business & Technology
Our Digital Business & Technology practice helps clients build modern enterprises that apply the power of cloud, data, software, and IoT to help them perform better and innovate faster. Our clients are able to embrace a new business and technology stack that comprises consumer-grade software, enterprise applications, modernized data and the instrumentation of everything in cloud-first architectures. Areas of focus within this practice are:
•interactive, which leverages our global network of studios that help clients craft new experiences;
•application modernization, which updates legacy applications using agile methodologies and cloud;
•AI and analytics, which drive business growth and efficiencies through a greater understanding of customers and operations;
•IoT, which unlocks greater productivity and new business models;
•experience-driven software engineering, which designs, engineers and delivers modern business software;
•application services;
•quality engineering and assurance; and
•cloud, infrastructure and security.
Digital Business Operations
Our Digital Business Operations practice helps clients build and run modern operating models that are adaptive, efficient, and human-centric. We achieve this through two main vehicles – intelligent process automation and outsourced business process services.
Our intelligent process automation advisory, implementation and managed services experts partner with clients to transform end to end processes, design and manage the next-generation human and digital workforce, enable seamless experiences for customers and employees, and achieve multi-fold productivity increases. Our outsourced business process services help clients transform and run functions and industry-specific processes such as finance and accounting, omni-channel customer care, loan origination, and pharmacovigilance. Outsourced services can help accelerate digital transformation and deliver business outcomes including revenue growth, increased customer satisfaction and cost savings. For digital native clients in areas such as FinTech, InsurTech and MedTech, our outsourced business process services deliver the operational support needed to rapidly scale, innovate and capitalize on opportunities. Areas of focus within this practice are:
•automation, analytics and consulting for business process outsourcing;
•platform-based operations; and
•core business process operations.
| Cognizant | 5 | December 31, 2021 Form 10-K | ||||||
Global Delivery Model
We use a global delivery model, with delivery centers worldwide to provide our full range of services to our clients. Our delivery model includes employees deployed at client sites, local or in-country delivery centers, regional delivery centers and offshore delivery centers, as required to best serve our clients. As we scale our digital services and solutions, we are focused on hiring in the United States and other countries where we deliver services to our clients to expand our in-country delivery capabilities. Our extensive facilities, technology and communications infrastructure are designed to enable the effective collaboration of our global workforce across locations and geographies.
Competition
The markets for our services are highly competitive, characterized by a large number of participants and subject to rapid change. Competitors may include systems integration firms, contract programming companies, application software companies, cloud computing service providers, traditional consulting firms, professional services groups of computer equipment companies, infrastructure management companies, outsourcing companies and boutique digital companies. Our direct competitors include, among others, Accenture, Atos, Capgemini, Deloitte Digital, DXC Technology, EPAM Systems, Genpact, HCL Technologies, IBM Consulting, Infosys Technologies, Tata Consultancy Services and Wipro. In addition, we compete with numerous smaller local companies in the various geographic markets in which we operate.
The principal competitive factors affecting the markets for our services include the provider’s reputation and experience, strategic advisory capabilities, digital services capabilities, performance and reliability, responsiveness to customer needs, financial stability, corporate governance and competitive pricing of services. Accordingly, we rely on the following to compete effectively:
•investments to scale our digital services;
•our recruiting, training and retention model;
•our global delivery model;
•an entrepreneurial culture and approach to our work;
•a broad client referral base;
•investment in process improvement and knowledge capture;
•financial stability and good corporate governance;
•continued focus on responsiveness to client needs, quality of services and competitive prices; and
•project management capabilities and technical expertise.
Intellectual Property
We provide value to our clients based, in part, on our proprietary innovations, methodologies, software, reusable knowledge capital and other IP assets. We recognize the importance of IP and its ability to differentiate us from our competitors. We seek IP protection for many of our innovations and rely on a combination of patent, copyright and trade secret laws, confidentiality procedures and contractual provisions, to protect our IP. We have registered, and applied for the registration of, U.S. and international trademarks, service marks, and domain names to protect our brands, including our Cognizant brand, which is one of our most valuable assets. We own or are licensed under a number of patents, trademarks and copyrights of varying duration, relating to our products and services. We also have policies requiring our employees to respect the IP rights of others. While our proprietary IP rights are important to our success, we believe our business as a whole is not materially dependent on any particular IP right or any particular group of patents, trademarks, copyrights or licenses, other than our Cognizant brand.
Cognizant® and other trademarks appearing in this report are registered trademarks or trademarks of Cognizant and its affiliates in the United States and other countries, or third parties, as applicable.
Workforce
We had approximately 330,600 employees at the end of 2021, with 40,900 in North America, 15,700 in Continental Europe, 8,100 in the United Kingdom and 265,900 in various other locations throughout the rest of the world, including 240,000 in India. This represents an increase of 41,100 employees as compared to December 31, 2020. We utilize subcontractors to provide additional capacity and flexibility in meeting client demand, though the number of subcontractors has historically been immaterial relative to our employee headcount. We are not party to any significant collective bargaining agreements.
| Cognizant | 6 | December 31, 2021 Form 10-K | ||||||
We balance the portion of our employees in the United States and other jurisdictions that rely on visas with consideration of the needs of our business to fulfill client demand and risks to our business from potential changes in immigration laws and regulations that may increase the costs associated with and ability to staff employees on visas to work in-country. Currently, less than 50% of our employees in the United States hold H-1B and L-1 visas.
Engaging Our People
As a global professional services company, Cognizant competes on the basis of the knowledge, experience, insights, skills and talent of its employees and the value they can provide to our clients. We aim for our employees to feel motivated, engaged, and empowered to do their best work through careers they find meaningful. In a market where competition for skilled IT professionals is intense, we focus on the following:
•Engagement & Retention: Cognizant aims to provide a compelling employee value proposition, or EVP, that inspires current and potential employees from all backgrounds and geographies. In 2021, we strengthened the articulation of our EVP and took targeted actions across the employee lifecycle to enhance the employee experience. We also trained top leaders, people managers, our HR team and other critical functions to deliver the EVP through their roles.
We regularly assess employee sentiment through third-party engagement surveys, leader listening sessions and interactions on our internal channels. On an annual basis, after each engagement survey, we develop and communicate clear action plans to continue to build on our strengths and address shortfalls.
We regularly monitor employee retention levels. Competition for skilled employees in the current labor market is intense, and we experienced significantly elevated attrition during 2021. We continue to enhance our pay-for-performance approach and increase our efforts with respect to recruitment, talent management and employee engagement. For the three months ended December 31, 2021 and 2020, our annualized attrition rate, including both voluntary and involuntary, was 34.6% and 19.0%, respectively. Our attrition rate for the years ended December 31, 2021 and 2020, including both voluntary and involuntary, was 30.8% and 20.6%, respectively. Our attrition is weighted towards our more junior employees. In 2021, voluntary attrition constituted the vast majority of our attrition for the period. In comparison, voluntary attrition in 2020 represented only approximately half of our attrition for the period as our personnel actions taken under our Fit for Growth Plan increased involuntary attrition while voluntary attrition was suppressed due to the COVID-19 pandemic.
•Advancing Diversity & Inclusion: We strive to continually improve upon D&I over the long term. A diverse and inclusive workforce strengthens our ability to innovate and to understand our clients’ needs and aspirations.
Highlights from our D&I efforts include:
–Global D&I organization embedded within our HR function to drive accountability through our people processes and systems;
–Global D&I training and programs, including allyship and inclusive mindset training for leaders;
–Progressive hiring policies, including a diverse candidate pipeline initiative to ensure a more diverse interview slate at the Vice President level and above; and
–Seven global affinity groups that welcome, nurture and provide safe spaces in which our employees can share their unique interests and aspirations.
As of December 31, 2021, women accounted for 38% of our workforce as compared to 36% as of December 31, 2020.
In our 2021 engagement survey, D&I continued to score higher than external benchmark, showing as a consistent strength for our company.
•High Performance Culture: We aim to create a work environment where every person is inspired to achieve, driven to perform and rewarded for their contributions. Our culture of meritocracy fosters individual and team high performance to fuel our growth.
Highlights include:
–Regular, performance-based promotions and merit increases as one lever to engage high-performing talent. During the 2021 cycle, we were proud to promote employees across all levels and provide merit increases to a significant number of our employees;
| Cognizant | 7 | December 31, 2021 Form 10-K | ||||||
–An internal job moves initiative, launched in 2021, focused on encouraging high performing employees to find their next job at Cognizant. This program is enhancing career velocity and bringing fresh thinking to our clients as employees take on new lateral and next-level opportunities across the Company; and
–Continuously fostering a culture focused on recognition, Cognizant has created programs to reward all levels of employees through both monetary recognition as well as peer driven non-monetary recognition.
•Learning & Development: Clients count on us to know their industries, businesses, and technology environments, readily gain new digital skills and insights, and apply our knowledge to help them increase their competitiveness. We facilitate upward and cross-career growth through role and skill-based training and a robust learning ecosystem for employees at all levels.
Highlights include:
–Robust technical programs that reskill and upskill our employees with a focus on building digital skills in areas such as IoT, digital engineering, data and cloud;
–The 2021 launch of the Cognizant Integrated Higher Education Program in India, a collaboration with premier institutions that empowers employees to earn a Masters of Technology degree while remaining employed with Cognizant. As part of the initiative, Cognizant sponsors an employee’s final semester fee, as well as offers a loan to cover course fees for the first year;
–Several innovative pre-employment training programs for graduates and early to mid-career professionals that focus on cultivating technology skills required for the next-generation workforce; and
–Recognition of our talent development approach by leading learning and development organizations, such as the Association for Talent Development, the Brandon Hall Group and the Learning and Performance Institute.
•Leadership Development & Talent Management: Cognizant continuously fosters and builds its pipeline of diverse, high-performing leaders who have the breadth and versatility to drive our growth. To do this, we focus on engaging senior talent and enabling their success through continuous assessment and high impact development opportunities.
Highlights include:
–Targeted talent programs for key pools that include various training opportunities, digital leadership programs, custom leadership development initiatives and leadership transition programs to equip employees for taking on a leadership role;
–Fast-tracking high-performing and high-potential leadership talent through personalized assessments, executive coaching and executive education programs;
–Accelerating a diverse leadership pipeline through programs like Propel, an initiative focused on priming the next level of women leaders within Cognizant. In 2021, we reached a critical milestone, exceeding our pledge to put 1,000 women leaders globally through the program;
–More than 600 leaders have participated in our LEAD@Cognizant partnership with Harvard University, which is a 4.5-month leadership capability program designed exclusively for Cognizant leaders to learn, practice and internalize how to set the course, connect the dots, inspire followership and deliver results through strategic alignment, collaboration and building high performing teams; and
–Periodic talent processes such as talent reviews aim to help individuals develop in role and prepare for the future, while strengthening our leadership pipeline overall.
•Supporting Wellbeing at Work and Home: We offer benefits to care for the diverse needs of our employees and keep them feeling resilient, innovative and engaged. These include total compensation programs, health benefits, overall well-being and family care, tax savings programs, income protection and financial planning resources. As we continue to face evolving environmental and health challenges, we continually review and enhance our offerings to improve the competitiveness of our total compensation programs, including our health benefit offerings.
Highlights include:
–Our WorkFlex program, which provides employees greater flexibility to complete their required hours outside their standard schedule or to transition to a part-time schedule to accommodate personal priorities;
–Various benefits to support employee mental health, including a robust Employee Assistance Program, peer support through trained employees who serve as mental health champions, and mental health insurance
| Cognizant | 8 | December 31, 2021 Form 10-K | ||||||
coverage in most countries. In the United States, we also provide access to third party mental health platforms, including Ginger and eMindful; and
–The launch of Operation C3 in April 2021, as the second wave of the COVID-19 pandemic gripped India. This initiative facilitated vaccination for our Indian employees and their dependents, and set up vaccination drives across the country to help senior citizens, physically challenged dependents, and mothers with infants. Operation C3 also provided critical medical equipment to hospitals, helped to boost oxygen supplies and more.
Governmental Regulation and Environmental Matters
As a result of the size, breadth and geographic diversity of our business, our operations are subject to a variety of laws and regulations in the jurisdictions in which we operate, including with respect to import and export controls, temporary work authorizations or work permits and other immigration laws, content requirements, trade restrictions, tariffs, taxation, anti-corruption, the environment, government affairs, internal and disclosure control obligations, data privacy, intellectual property, employee and labor relations. For additional information, see Part I, Item 1A. Risk Factors.
Information About Our Executive Officers
The following table identifies our current executive officers:
| Name | Age | Capacities in Which Served | In Current Position Since | |||||||||||||||||
Brian Humphries (1) | 48 | Chief Executive Officer | 2019 | |||||||||||||||||
Jan Siegmund (2) | 57 | Chief Financial Officer | 2020 | |||||||||||||||||
Robert Telesmanic (3) | 55 | Senior Vice President, Controller and Chief Accounting Officer | 2017 | |||||||||||||||||
John Kim(4) | 54 | Executive Vice President, General Counsel, Chief Corporate Affairs Officer and Secretary | 2021 | |||||||||||||||||
Rebecca Schmitt (5) | 48 | Executive Vice President, Chief People Officer | 2020 | |||||||||||||||||
Balu Ganesh Ayyar (6) | 60 | Executive Vice President and President, Digital Operations | 2019 | |||||||||||||||||
Gregory Hyttenrauch (7) | 54 | Executive Vice President and President, North America | 2021 | |||||||||||||||||
Ursula Morgenstern (8) | 56 | Executive Vice President and President, Global Growth Markets | 2020 | |||||||||||||||||
Rajesh Nambiar (9) | 54 | Executive Vice President and President, Digital Business and Technology | 2021 | |||||||||||||||||
Andrew Stafford (10) | 57 | Executive Vice President, Head of Global Delivery | 2020 | |||||||||||||||||
(1)Brian Humphries has been our Chief Executive Officer and a member of the Board of Directors since April 2019. Prior to joining Cognizant, he served as Chief Executive Officer of Vodafone Business, a division of Vodafone Group, from 2017 until 2019. Mr. Humphries joined Vodafone from Dell Technologies where he served as President and Chief Operating Officer of Dell’s Infrastructure Solutions Group from 2016 to 2017, President of Dell’s Global Enterprise Solutions from 2014 to 2016, and Vice President and General Manager, EMEA Enterprise Solutions from 2013 to 2014. Before joining Dell, Mr. Humphries was with Hewlett-Packard where his roles from 2008 to 2013 included Senior Vice President, Emerging Markets, Senior Vice President, Strategy and Corporate Development, and Chief Financial Officer of HP Services. The early part of his career was spent with Compaq and Digital Equipment Corporation. Mr. Humphries brings to the Board extensive leadership and global operations management experience from having served at public companies in the technology sector. He holds a bachelor’s degree in Business Administration from the University of Ulster, Northern Ireland.
(2)Jan Siegmund has been our Chief Financial Officer since September 2020. Prior to joining Cognizant, Mr. Siegmund spent over 19 years with Automatic Data Processing (ADP), where he served as Corporate Vice President and Chief Financial Officer from 2012 to 2019 and Chief Strategy Officer and President of the Added Value Services Division from 1999 to 2012. He began his career at McKinsey & Company as a Senior Engagement Manager. Mr. Siegmund is a member of the Board of Directors of The Western Union Company, where he is Chair of the Audit Committee and a member of the Compliance Committee. He holds a master’s degree in Industrial Engineering from Technical University Karlsruhe, Germany, a master’s degree in Economics from the University of California, Santa Barbara and a doctorate in Economics from Technical University of Dresden, Germany.
(3)Robert Telesmanic has been our Senior Vice President, Controller and Chief Accounting Officer since January 2017, a Senior Vice President since 2010 and our Corporate Controller since 2004. Prior to that, he served as our Assistant Corporate Controller from 2003 to 2004. Prior to joining Cognizant, Mr. Telesmanic spent over 14 years with Deloitte &
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Touche LLP. Mr. Telesmanic has a Bachelor of Science degree from New York University and an MBA degree from Columbia University.
(4)John Kim has been our Executive Vice President, General Counsel, Chief Corporate Affairs Officer and Secretary since March 2021. Previously, he served as our Senior Vice President and Deputy General Counsel, Global Commercial Contracts. Prior to joining Cognizant in 2019, Mr. Kim held a variety of senior leadership roles at Capgemini from January 2012 to November 2019, including Global Head of Big Deals. Prior to Capgemini, Mr. Kim served as U.S. Counsel for WNS Global Services from July 2009 to June 2011 and held a variety of leadership roles at Cendant Travel Distribution Services (now known as Travelport) from January 2001 to June 2006, including General Counsel and Chief Compliance Officer. He holds a bachelor’s degree in English Literature from Columbia University and obtained his law degree from Cornell Law School.
(5)Rebecca (Becky) Schmitt has been our Executive Vice President, Chief People Officer since February 2020. Prior to joining Cognizant, Ms. Schmitt was the Chief People Officer of Sam’s Club, a division of Walmart, Inc. from October 2018 through January 2020. Prior to that, she served as SVP, Chief People Officer, US eCommerce & Corporate Functions for Walmart from October 2016 through September 2018 and as VP, HR - Technology from February 2016 until October 2016. Prior to joining Walmart, Ms. Schmitt spent over 20 years with Accenture plc in various human resources roles, culminating in her role as HR Managing Director, North America Business from March 2014 through February 2016. Ms. Schmitt has a Bachelor of Arts degree from University of Michigan, Ann Arbor.
(6)Balu Ganesh Ayyar has been our Executive Vice President and President, Digital Operations since August 2019. Prior to joining Cognizant, Mr. Ayyar was the CEO of Mphasis, a global IT services company listed in India, from 2009 to 2017. Prior to Mphasis, Mr. Ayyar spent nearly two decades with Hewlett-Packard, holding a variety of leadership roles across multiple geographies.
(7)Gregory Hyttenrauch has been our Executive Vice President and President, North America since January 2021. Prior to that he served as our Executive Vice President and President, Cognizant Digital Systems & Technology from December 2019 to January 2021. Prior to joining Cognizant, Mr. Hyttenrauch served as Director, Global Cloud and Security Services for Vodafone from October 2015 to November 2019. Prior to Vodafone, Mr. Hyttenrauch held a variety of senior leadership positions at Capgemini from 2008 to 2015, including Deputy CEO, Global Infrastructure Services, and Global Sales Officer and CEO of the UK and Nordic Outsourcing Business Unit. Before joining Capgemini, Mr. Hyttenrauch held positions with CSC and EDS. He began his career with 13 years in the Canadian military, rising to the rank of captain. Mr. Hyttenrauch holds a bachelor’s degree in Mechanical Engineering from the Royal Military College of Canada and an MBA in International Management from the University of Ottawa.
(8)Ursula Morgenstern has been our Executive Vice President and President, Global Growth Markets, which covers all of Cognizant’s markets outside of North America, since December 2020. Prior to joining Cognizant, Ms. Morgenstern spent 16 years with Atos, a multinational IT services and consulting company in various management roles from 2004 to 2020, most recently as Head of Atos Central Europe from April 2020 to October 2020, CEO of Atos Germany from March 2018 to October 2020, and Global Head of Business and Platform Solutions from July 2015 to February 2018. Before Atos, Ms. Morgenstern was a partner with KPMG from 1998 to 2002. Her other previous roles include General Manager of K&V Information Systems from 1996 to 1998 and Project Manager for Kiefer & Veittinger from 1991 to 1996. She holds a bachelor’s degree in Business Management from the University of Mannheim and an MBA from York University (Toronto).
(9)Rajesh Nambiar has been our Executive Vice President and President, Digital Business and Technology and Chairman of Cognizant India since June 2021. Previously, he served as our Executive Vice President and Chairman of Cognizant India. Prior to joining Cognizant in November 2020, Mr. Nambiar served as Chairman and President of Ciena India from May 2019 to October 2020. Mr. Nambiar was General Manager and Global Leader of Application Services at IBM from January 2017 to April 2019 and Managing Partner, Global Delivery and Services Integration Hub at IBM from January 2015 to December 2016. He held a variety of other senior leadership roles at IBM from November 2006 to December 2014. He began his career at Tata Consultancy Services where he worked for more than 17 years. Mr. Nambiar holds a master’s degree in Statistics from the Indian Statistical Institute in Kolkata and is a graduate of Harvard Business School’s Advanced Management Program.
(10)Andrew (Andy) Stafford has been our Head of Global Delivery since July 2020. Prior to joining Cognizant, he held a variety of executive positions, including Group Chief Operating Officer of Computacenter PLC from July 2017 to November 2018, and was Global Head of Services and Delivery for Unisys Inc. from April 2016 to May 2017. Mr. Stafford also spent nearly two decades with Accenture, first from 1988 to 1997 and then again from 2005 to 2013, in various leadership roles, the most recent being Senior Managing Director (Global Lead) from July 2012 to November 2013 and Managing Director of the Asia Pacific Region from 2009 to 2012. In between stints at Accenture, he was the Chief Operating Officer at Xchanging from September 2001 to November 2003, Chief Technology Officer at Virgin.com from September 2000 to March 2001, and he also spent time at Deloitte Consulting and Computacenter PLC. He holds a bachelor's degree in Electrical Engineering and Electronics from the University of Manchester Institute of Science and Technology in Manchester, England.
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None of our executive officers is related to any other executive officer or to any of our Directors. Our executive officers are appointed annually by the Board of Directors and generally serve until their successors are duly appointed and qualified.
Corporate History
We began our IT development and maintenance services business in early 1994 as an in-house technology development center for The Dun & Bradstreet Corporation and its operating units. In 1996, we were spun-off from The Dun & Bradstreet Corporation and, in 1998, we completed an initial public offering to become a public company.
Available Information
We make available the following public filings with the SEC free of charge through our website at www.cognizant.com as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC:
•our Annual Reports on Form 10-K and any amendments thereto;
•our Quarterly Reports on Form 10-Q and any amendments thereto; and
•our Current Reports on Form 8-K and any amendments thereto.
No information on our website is incorporated by reference into this Form 10-K or any other public filing made by us with the SEC.
Item 1A. Risk Factors
We face various important risks and uncertainties, including those described below, that could adversely affect our business, results of operations and financial condition and, as a result, cause a decline in the trading price of our common stock.
Risks Related to our Business and Operations
Our results of operations could be adversely affected by economic and political conditions globally and in particular in the markets in which our clients and operations are concentrated.
Global macroeconomic conditions have a significant effect on our business as well as the businesses of our clients. Volatile, negative or uncertain economic conditions could cause our clients to reduce, postpone or cancel spending on projects with us and could make it more difficult for us to accurately forecast client demand and have available the right resources to profitably address such client demand. Clients may reduce demand for services quickly and with little warning, which may cause us to incur extra costs where we have employed more personnel than client demand supports.
Our business is particularly susceptible to economic and political conditions in the markets where our clients or operations are concentrated. Our revenues are highly dependent on clients located in the United States and Europe, and any adverse economic, political or legal uncertainties or adverse developments, including due to the uncertainty related to the COVID-19 pandemic, may cause clients in these geographies to reduce their spending and materially adversely impact our business. Many of our clients are in the financial services and healthcare industries, so any decrease in growth or significant consolidation in these industries or regulatory policies that restrict these industries may reduce demand for our services. Economic and political developments in India, where a significant majority of our operations and technical personnel are located, or in other countries where we maintain delivery operations, may also have a significant impact on our business and costs of operations. As a developing country, India has experienced and may continue to experience high inflation and wage growth, fluctuations in gross domestic product growth and volatility in currency exchange rates, any of which could materially adversely affect our cost of operations. Additionally, we benefit from governmental policies in countries that encourage foreign investment and promote the ease of doing business, such as tax incentives, and any change in policy or circumstances that results in the elimination of such benefits or degradation of the rule of law, or imposition of new adverse restrictions or costs on our operations could have a material adverse effect on our business, results of operations and financial condition.
The COVID-19 pandemic has had a significant and continuing adverse impact upon, and this or other pandemics may have a material adverse impact upon, our business, liquidity, results of operations and financial condition.
The ongoing global COVID-19 pandemic has caused and continues to cause significant loss of life and interruption to the global economy and has resulted in the curtailment of activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease, including through business and transportation shutdowns and restrictions on people’s movement and congregation. Among other things, many of our and our clients’ offices have been closed and employees have been working from home and many consumer-facing businesses have closed or are operating at a significantly reduced level to observe various social distancing requirements and government-mandated measures. The overall result has included a dramatic reduction in activity in the global economy and significant adverse impacts to the financial markets, including the trading price of our common stock in the past and potentially in the future.
The COVID-19 pandemic has had a significant and continuing adverse impact upon, and this or other pandemics may have a material adverse impact upon, our business, liquidity, results of operations and financial condition, including as a result of the following:
•Reduced client demand for services – The vast majority of our business is with clients in the United States, the United Kingdom and other countries in Europe, all regions that have been hard hit by the pandemic. The COVID-19 pandemic at times reduced, and other future pandemics could reduce, demand for our services, particularly in regions that have been hit hard by the pandemic and from clients in the retail, consumer goods, travel and hospitality, and communications and media industries. Future client demand for services will depend on the course of the pandemic, including whether COVID-19 vaccines will be sufficiently effective against variant viruses of COVID-19, other factors such as measures taken by governments and businesses in affected areas that could negatively impact our clients and our business, and any economic disruption from new waves of pandemic infections.
•Delivery challenges – Due to the closures of many of our clients' facilities, including as a result of various orders from national, state or local governments, we have faced and may continue to face, in the near term or in future pandemics, challenges in delivering services to our clients and satisfying contractually agreed upon service levels. The pandemic, particularly in India, but also in the Philippines and other countries where we have near-shore or
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offshore delivery operations for clients, as well as our in-country offices and offices of clients where our employees may normally work, has impacted and may continue to impact our ability to deliver services to clients. Our work-from-home arrangements for many of our employees may increase our exposure to security breaches or cyberattacks. A significant worsening of the pandemic, particularly in India, or a future security incident during the pandemic, could materially impair our ability to deliver services to clients to an extent that may have a material adverse impact to our business, liquidity, results of operations and financial condition.
•Increased costs – We could face increased costs in the future depending on developments relating to the pandemic, including as a result of the resurgence or persistence of the COVID-19 pandemic and the emergence of vaccine resistant strains of the virus.
•Diversion of and strain on management and other corporate resources – Addressing the significant personal and business challenges presented by the pandemic, including various business continuity measures and the need to enable work-from-home arrangements for many of our employees, has demanded significant management time and attention and strained other corporate resources, and is expected to continue to do so. Among other things, this may adversely impact our client and associate development and our ability to execute our strategy and various transformation initiatives.
•Reduced employee morale and productivity – The significant personal and business challenges presented by a pandemic, including the COVID-19 pandemic, such as the potentially life-threatening health risks to employees and their families and friends, the closures of schools and the unavailability of various services our employees may rely upon, such as childcare, have been and may be a cause of employee morale concerns and may adversely impact employee productivity. It is important for key groups of our employees to resume regular face-to-face collaboration, the absence of which can negatively impact client and employee engagement and development and our ability to execute our strategy, and these employees may be unable to do so due to ongoing concerns of infection.
The COVID-19 pandemic continues to evolve. The ultimate extent to which the pandemic impacts our business, liquidity, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the delivery, adoption and effectiveness of vaccines, future variants of the COVID-19 virus and any resulting impact on the effectiveness of vaccines, the availability of effective treatments for the disease, the duration and extent of the pandemic and waves of infection, travel restrictions and social distancing, the duration and extent of business closures and business disruptions and the effectiveness of actions taken to contain, treat and prevent the disease. If we or our clients experience prolonged shutdowns or other business disruptions, our business, liquidity, results of operations, financial condition and the trading price of our common stock may be materially adversely affected, and our ability to access the capital markets may be limited.
If we are unable to attract, train and retain skilled employees to satisfy client demand, including highly skilled technical personnel and personnel with experience in key digital areas, as well as senior management to lead our business globally, our business and results of operations may be materially adversely affected.
Our success is dependent, in large part, on our ability to keep our supply of skilled employees, including project managers, IT engineers and senior technical personnel, in particular those with experience in key digital areas, in balance with client demand around the world and on our ability to attract and retain senior management with the knowledge and skills to lead our business globally. In 2021, we experienced unprecedented attrition, which was considered industry-wide. As a result, we hired over a hundred thousand new employees and needed to reskill, retain, integrate and motivate our workforce of over 300,000 employees with diverse skills and expertise in order to serve client demands across the globe, respond quickly to rapid and ongoing technological, industry and macroeconomic developments and grow and manage our business. While we believe the level of attrition in 2021 was unusual, we believe it will remain elevated through 2022 and possibly beyond, which could materially adversely affect our business. We also must continue to maintain an effective senior leadership team that, among other things, is effective in executing on our strategic goals and growing our digital business. The loss of senior executives, or the failure to attract, integrate and retain new senior executives as the needs of our business require, could have a material adverse effect on our business and results of operations.
Competition for skilled labor is intense and, in some jurisdictions and service areas in which we operate and, in particular, in key digital areas, there are more open positions than qualified persons to fill these positions. Our business has experienced and may continue to experience significant employee attrition, which has caused us to incur increased costs to hire new employees with the desired skills. While we strive to adjust pricing to reduce the impact of compensation increases on our operating margin, we may not be successful in recovering these increases, which could adversely affect our profitability and operating margin. Costs associated with recruiting and training employees are significant. If we are unable to hire or deploy employees with the needed skillsets or if we are unable to adequately equip our employees with the skills needed, this could materially adversely affect our business. Additionally, if we are unable to maintain an employee environment that is
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competitive and appealing, it could have an adverse effect on engagement and retention, which may materially adversely affect our business.
We face challenges related to growing our business organically as well as inorganically through acquisitions, and we may not be able to achieve our targeted growth rates.
Achievement of our targeted growth rates requires continued significant organic growth of our business as well as inorganic growth through acquisitions. To achieve such growth, we must, among other things, continue to significantly expand our global operations, increase our product and service offerings, in particular with respect to digital, and scale our infrastructure to support such business growth. Continued business growth increases the complexity of our business and places significant strain on our management, employees, operations, systems, delivery, financial resources, and internal financial control and reporting functions, which we will have to continue to develop and improve to sustain such growth. Our ability to successfully manage change associated with the various business transformation initiatives is critical for the overall strategy execution. We must continually recruit and train new employees, retain and reskill, as necessary, existing sales, technical, finance, marketing and management employees with the knowledge, skills and experience that our business model requires and effectively manage our employees worldwide to support our culture, values, strategies and goals. Additionally, we expect to continue pursuing strategic and targeted acquisitions and investments to enhance our offerings of services and solutions or to enable us to expand our talent, experience and capabilities in key digital areas or in particular geographies or industries. We may not be successful in identifying suitable opportunities, completing targeted transactions or achieving the desired results, and such opportunities may divert our management's time and focus away from our core business. We may face challenges in effectively integrating acquired businesses into our ongoing operations and in assimilating and retaining employees of those businesses into our culture and organizational structure. If we are unable to manage our growth effectively, complete acquisitions of the number, magnitude and nature we have targeted, or successfully integrate any acquired businesses into our operations, we may not be able to achieve our targeted growth rates or improve our market share, profitability or competitive position generally or in specific markets or services.
We may not be able to achieve our profitability goals and maintain our capital return strategy.
Our goals for profitability and capital return rely upon a number of assumptions, including our ability to improve the efficiency of our operations and make successful investments to grow and further develop our business. Our profitability depends on the efficiency with which we run our operations and the cost of our operations, especially the compensation and benefits costs of our employees. We have incurred, and may continue to incur, substantial costs related to implementing our strategy to optimize such costs, and we may not realize the ultimate cost savings that we expect. We may not be able to efficiently utilize our employees if increased regulation, policy changes or administrative burdens of immigration, work visas or client worksite placement prevents us from deploying our employees on a timely basis, or at all, to fulfill the needs of our clients. Increases in wages and other costs, including as a result of attrition, may put pressure on our profitability. Fluctuations in foreign currency exchange rates can also have adverse effects on our revenues, income from operations and net income when items denominated in other currencies are translated or remeasured into U.S. dollars for presentation of our consolidated financial statements. We have entered into foreign exchange forward contracts intended to partially offset the impact of the movement of the exchange rates on future operating costs and to mitigate foreign currency risk on foreign currency denominated net monetary assets. However, the hedging strategies that we have implemented, or may in the future implement, to mitigate foreign currency exchange rate risks may not reduce or completely offset our exposure to foreign exchange rate fluctuations and may expose our business to unexpected market, operational and counterparty credit risks. We are particularly susceptible to wage and cost pressures in India and the exchange rate of the Indian rupee relative to the currencies of our client contracts due to the fact that the substantial majority of our employees are in India while our contracts with clients are typically in the local currency of the country where our clients are located. If we are unable to improve the efficiency of our operations, our operating margin may decline and our business, results of operations and financial condition may be materially adversely affected. Failure to achieve our profitability goals could adversely affect our business, financial condition and results of operations.
With respect to capital return, our ability and decisions to pay dividends and repurchase shares depend on a variety of factors, including the cash flow generated from operations, our cash and investment balances, our net income, our overall liquidity position, potential alternative uses of cash, such as acquisitions, and anticipated future economic conditions and financial results. Failure to carry out our capital return strategy may adversely impact our reputation with shareholders and shareholders’ perception of our business and the trading price of our common stock.
Our failure to meet specified service levels or milestones required by certain of our client contracts may result in our client contracts being less profitable, potential liability for penalties or damages or reputational harm.
Many of our client contracts include clauses that tie our compensation to the achievement of agreed-upon performance standards or milestones. Failure to satisfy these requirements could significantly reduce our fees under the contracts, increase
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the cost to us of meeting performance standards or milestones, delay expected payments, subject us to potential damage claims under the contract terms or harm our reputation. The use of new technologies in our offerings can expose us to additional risks if those technologies fail to work as predicted, which could lead to cost overruns, project delays, financial penalties, or damage to our reputation. Clients also often have the right to terminate a contract and pursue damages claims for serious or repeated failure to meet these service commitments. Some of our contracts provide that a portion of our compensation depends on performance measures such as cost-savings, revenue enhancement, benefits produced, business goals attained and adherence to schedule. These goals can be complex and may depend on our clients’ actual levels of business activity or may be based on assumptions that are later determined not to be achievable or accurate. As such, these provisions may increase the variability in revenues and margins earned on those contracts and have in the past resulted, and could in the future, result in significant losses on such contracts.
We face intense and evolving competition and significant technological advances that our service offerings must keep pace with in the rapidly changing markets we compete in.
The markets we serve and operate in are highly competitive, subject to rapid change and characterized by a large number of participants, as described in “Part I, Item 1. Business-Competition.” In addition to large, global competitors, we face competition in many geographic markets from numerous smaller, local competitors that may have more experience with operations in these markets, have well-established relationships with our desired clients, or be able to provide services and solutions at lower costs or on terms more attractive to clients than we can. Consolidation activity may also result in new competitors with greater scale, a broader footprint or vertical integration that makes them more attractive to clients as a single provider of integrated products and services. In addition, concurrent use by many clients of multiple professional service providers means that we are required to be continually competitive on the quality, scope and pricing of our offerings or face a reduction or elimination of our business. If we are not able to successfully apply market level pricing and manage discounts, we may face downward pressure on gross margins and profitability.
Our success depends on our ability to continue to develop and implement services and solutions that anticipate and respond to rapid and continuing changes in technology to serve the evolving needs of our clients. Examples of areas of significant change include digital-, cloud- and security-related offerings, which are continually evolving, as well as developments in areas such as AI, augmented reality, automation, blockchain, IoT, quantum computing and as-a-service solutions. If we do not sufficiently invest in new technologies, successfully adapt to industry developments and changing demand, and evolve and expand our business at sufficient speed and scale to keep pace with the demands of the markets we serve, we may be unable to develop and maintain a competitive advantage and execute on our growth strategy, which would materially adversely affect our business, results of operations and financial condition.
Our relationships with our third party alliance partners, who supply us with necessary components to the services and solutions we offer our clients, are also critical to our ability to provide many of our services and solutions that address client demands. There can be no assurance that we will be able to maintain such relationships or that such components will be available on the expected timelines or for anticipated prices. Among other things, such alliance partners may in the future decide to compete with us, form exclusive or more favorable arrangements with our competitors or otherwise reduce our access to their products impairing our ability to provide the services and solutions demanded by clients.
We face legal, reputational and financial risks if we fail to protect client and/or Cognizant data from security breaches and/or cyberattacks.
In order to provide our services and solutions, we depend on global information technology networks and systems, to process, transmit, host and securely store electronic information (including our confidential information and the confidential information of our clients) and to communicate among our locations around the world and with our clients, suppliers and alliance partners (including numerous cloud service providers). Security breaches, employee malfeasance, or human or technological error create risks of shutdowns or disruptions of our operations and potential unauthorized access and/or disclosure of our or our clients’ sensitive data, which in turn could jeopardize projects that are critical to our operations or the operations of our clients’ businesses and have other adverse impacts on our business or the business of our clients.
Like other global companies, we and our clients, suppliers, alliance partners (including numerous cloud service providers) and other vendors we interact with face threats to data and systems, including by nation state threat actors, insider threats, perpetrators of random or targeted malicious cyberattacks, computer viruses, malware, worms, bot attacks or other destructive or disruptive software and attempts to misappropriate client information and cause system failures and disruptions. For example, in April 2020, we announced a security incident involving a Maze ransomware attack. The attack resulted in unauthorized access to certain data and caused significant disruption to our business.
A security compromise of our information systems, or of those of businesses with which we interact, that results in confidential information being accessed by unauthorized or improper persons, could harm our reputation and expose us to
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regulatory actions, client attrition due to reputational concerns or otherwise, containment and remediation expenses, and claims brought by our clients or others for breaching contractual confidentiality and security provisions or data protection laws. Monetary damages imposed on us could be significant and may impose costs in excess of insurance policy limits or not be covered by our insurance at all. Techniques used by bad actors to obtain unauthorized access, disable or degrade service, or sabotage systems continuously evolve and may not immediately produce signs of intrusion, and we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, a security breach could require that we expend substantial additional resources related to the security of our information systems, diverting resources from other projects and disrupting our businesses. Any remediation measures that we have taken or that we may undertake in the future in response to the security incident announced in April 2020 or other security threats may be insufficient to prevent future attacks.
We are required to comply with increasingly complex and changing data security and privacy regulations in the United States, the United Kingdom, the European Union and in other jurisdictions in which we operate that regulate the collection, use and transfer of personal data. These laws can include stringent compliance obligations regarding the handling of personal data as well as potential for significant financial penalties for noncompliance. The Court of Justice of the European Union decision in the Schrems II ruling in July 2020 on data transfer requirements has caused significant uncertainty for businesses transferring data outside of the European Union, which will likely result in continuing compliance and remediation costs.
In the United States, federal sectoral laws, such as the Health Insurance Portability and Accountability Act, and recently enacted state legislation, such as the California Consumer Privacy Act, and its successor the California Privacy Rights Act that will go into effect on January 1, 2023, impose or will impose extensive privacy requirements on organizations that handle personal data. Proposals for federal privacy legislation continue and other new state privacy sectoral laws such as Virginia and Colorado are on the horizon. Additionally, in India, the Personal Data Protection Bill, 2019 continues to make progress through the Indian Parliament. If enacted in its current form it would impose stringent obligations on the handling of personal data, including certain localization requirements for sensitive data. Penalties align with those in other regimes with proposed fines of up to 4% of annual turnover, as defined in the bill. Other countries have enacted or are considering enacting data localization laws that require certain data to stay within their borders. We may also face audits or investigations by one or more domestic or foreign government agencies or our clients pursuant to our contractual obligations relating to our compliance with these regulations. Complying with changing regulatory requirements requires us to incur substantial costs, exposes us to potential regulatory action or litigation, and may require changes to our business practices in certain jurisdictions, any of which could materially adversely affect our business operations and operating results.
If our risk management, business continuity and disaster recovery plans are not effective and our global delivery capabilities are impacted, our business and results of operations may be materially adversely affected and we may suffer harm to our reputation.
Our business model is dependent on our global delivery capabilities, which include coordination between our delivery centers in India, our other global and regional delivery centers, the offices of our clients and our associates worldwide. System failures, outages and operational disruptions may be caused by factors outside of our control, such as hostilities, political unrest, terrorist attacks, natural disasters (including events that may be caused or exacerbated by climate change), and public health emergencies and pandemics, such as the COVID-19 pandemic, affecting the geographies where our people, equipment and clients are located. For example, we have substantial global delivery operations in Chennai, India, a city that has experienced severe rains and flooding as a result of climate change. Our risk management, business continuity and disaster recovery plans may not be effective at predicting or mitigating the effects of such disruptions, particularly in the case of catastrophic events or longer term, increasingly severe developments that occur as a result of climate change. Any such disruption may result in lost revenues, a loss of clients and reputational damage, which would have an adverse effect on our business, results of operations and financial condition.
A substantial portion of our employees in the United States, United Kingdom, European Union and other jurisdictions rely on visas to work in those areas such that any restrictions on such visas or immigration more generally or increased costs of obtaining such visas or increases in the wages we are required to pay employees on visas may affect our ability to compete for and provide services to clients in these jurisdictions, which could materially adversely affect our business, results of operations and financial condition.
A substantial portion of our employees in the United States and in many other jurisdictions, including countries in Europe, rely upon temporary work authorization or work permits, which makes our business particularly vulnerable to changes and variations in immigration laws and regulations, including written changes and policy changes to the manner in which the laws and regulations are interpreted or enforced, and potential enforcement actions and penalties that might cause us to lose access to such visas. The political environment in the United States, the United Kingdom and other countries in recent years has included significant support for anti-immigrant legislation and administrative changes. Many of these recent changes have resulted in, and various proposed changes may result in, increased difficulty in obtaining timely visas that could impact our
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ability to staff projects, including as a result of visa application rejections and delays in processing applications, and significantly increased costs for us in obtaining visas or as a result of prevailing wage requirements for our employees on visas. For example, in the United States, the prior presidential administration adopted a number of policy changes and executive orders designed to limit immigration and the ability of immigrants to be employed, including increased scrutiny of the issuance of new and the renewal of existing H-1B visa applications and the placement of H-1B visa workers on third party worksites, increases to the prevailing wage requirements that set a minimum level of compensation for visa holders and, for entities where 15% or more of the workers in the United States hold H-1B and L-1 visas, increases in the visa costs for such entities. While a number of these policy changes and executive orders failed to be enforced or enacted into law, the current administration has continued to explore visa and immigration reform. There continues to be political support for potential new laws and regulations relating to visas or immigration and the implementation of these or similar measures in the future may have a material adverse impact on companies like ours that have a substantial percentage of our employees on visas. Our principal operating subsidiary in the United States utilizes a high number of skilled workers holding H-1B and L-1 visas and, as a result, may be subject to increased costs if any such laws, regulations, policy changes or executive orders go into effect. In the EU, many countries continue to implement new regulations to move into compliance with the EU Directive of 2014 to harmonize immigration rules for intracompany transferees in most EU member states and to facilitate the transfer of managers, specialists and graduate trainees both into and within the region. The changes have had significant impact on mobility programs and have led to new notification and documentation requirements for companies sending employees to EU countries. Recent changes or any additional adverse revisions to immigration laws and regulations in the jurisdictions in which we operate may cause us delays, staffing shortages, additional costs or an inability to bid for or fulfill projects for clients, any of which could have a material adverse effect on our business, results of operations and financial condition.
Legal, Regulatory and Legislative Risks
Anti-outsourcing legislation, if adopted, and negative perceptions associated with offshore outsourcing could impair our ability to serve our clients and materially adversely affect our business, results of operations and financial condition.
The practice of outsourcing services to organizations operating in other countries is a topic of political discussion in the United States, which is our largest market, as well as other regions in which we have clients. For example, measures aimed at limiting or restricting outsourcing by U.S. companies have been put forward for consideration by the U.S. Congress and in state legislatures to address concerns over the perceived association between offshore outsourcing and the loss of jobs domestically. If any such measure is enacted, our ability to provide services to our clients could be impaired.
In addition, from time to time there has been publicity about purported negative experiences associated with offshore outsourcing, such as alleged domestic job loss and theft and misappropriation of sensitive client data, particularly involving service providers in India. Current or prospective clients may elect to perform certain services themselves or may be discouraged from utilizing global service delivery providers like us due to negative perceptions that may be associated with using global service delivery models or firms. Any slowdown or reversal of existing industry trends toward global service delivery would seriously harm our ability to compete effectively with competitors that provide the majority of their services from within the country in which our clients operate.
We are subject to numerous and evolving legal and regulatory requirements and client expectations in the many jurisdictions in which we operate, and violations of, unfavorable changes in or an inability to meet such requirements or expectations could harm our business.
We provide services to clients and have operations in many parts of the world and in a wide variety of different industries, subjecting us to numerous, and sometimes conflicting, laws and regulations on matters as diverse as trade controls and sanctions, immigration (including temporary work authorizations or work permits), content requirements, trade restrictions, tariffs, taxation, antitrust laws, anti-corruption laws (including the FCPA and the U.K. Bribery Act), the environment, government affairs, internal and disclosure control obligations, data privacy, intellectual property, employment and labor relations. We face significant regulatory compliance costs and risks as a result of the size and breadth of our business. For example, we may experience increased costs in 2022 and future years for employment and post-employment benefits in India as a result of the issuance of the Code in late 2020. In addition, we may face costs and risks associated with uncertainty as to the ongoing regulatory impact of the United Kingdom’s exit from the European Union.
We are also subject to a wide range of potential enforcement actions, audits or investigations regarding our compliance with these laws or regulations in the conduct of our business, and any finding of a violation could subject us to a wide range of civil or criminal penalties, including fines, debarment, or suspension or disqualification from government contracting, prohibitions or restrictions on doing business, loss of clients and business, legal claims by clients and damage to our reputation.
| Cognizant | 17 | December 31, 2021 Form 10-K | ||||||
We commit significant financial and managerial resources to comply with our internal control over financial reporting requirements, but we have in the past identified and may in the future identify material weaknesses or deficiencies in our internal control over financial reporting that cause us to incur incremental remediation costs in order to maintain adequate controls. For example, in recent years we had to spend significant resources on conducting an internal investigation and cooperating with investigations by the DOJ and the SEC, both concluded in 2019, focused on whether certain payments relating to Company-owned facilities in India were made in violation of the FCPA and other applicable laws.
Governmental bodies, investors, clients and businesses are increasingly focused on ESG issues, which has resulted and may in the future continue to result in the adoption of new laws and regulations, reporting requirements and changing buying practices. If we fail to comply with new laws, regulations or reporting requirements or keep pace with ESG trends and developments or fail to meet the expectations of our clients and investors, our reputation and business could be adversely impacted.
Changes in tax laws or in their interpretation or enforcement, failure by us to adapt our corporate structure and intercompany arrangements to enhance our global tax profile or adverse outcomes of tax audits, investigations or proceedings could have a material adverse effect on our effective tax rate, results of operations and financial condition.
The interpretation of tax laws and regulations in the many jurisdictions in which we operate and the related tax accounting principles are complex and require considerable judgment to determine our income taxes and other tax liabilities worldwide. Tax laws and regulations affecting us and our clients, including applicable tax rates, and the interpretation and enforcement of such laws and regulations are subject to change as a result of economic, political and other factors, and any such changes or changes in tax accounting principles could increase our effective worldwide income tax rate and have a material adverse effect on our net income and financial condition. We routinely review and update our corporate structure and intercompany arrangements, including transfer pricing policies, consistent with applicable laws and regulations, to align with our evolving business operations and enhance our global tax profile across the numerous jurisdictions, such as the United States, India and the United Kingdom, in which we operate. Failure to successfully adapt our corporate structure and intercompany arrangements to align with our evolving business operations and enhance our global tax profile may increase our worldwide effective tax rate and have a material adverse effect on our earnings and financial condition.
The following are several examples of changes in tax laws that may impact us:
•The Tax Reform Act was enacted in December 2017 and made a number of significant changes to the corporate tax regime in the United States. We anticipate that the U.S. Treasury department will continue to issue interpretive guidance which may modify relevant aspects of the tax regime. The U.S. federal government is also considering further tax reform that could increase corporate tax rates.
•The OECD has been working on a Base Erosion and Profit Shifting project and is expected to continue to issue guidelines and proposals that may change numerous long-standing tax principles. The changes recommended by the OECD have been or are being adopted by many of the countries in which we do business and could lead to disagreements among jurisdictions over the proper allocation of profits among them. The OECD has also undertaken a new project focused on “Addressing the Tax Challenges of the Digitalization of the Economy.” This project has proposed implementing a global model for minimum taxation, which may impact multinational businesses. Similarly, the European Commission and various jurisdictions have introduced proposals to or passed laws that impose a separate tax on specified digital services. These recent and potential future tax law changes create uncertainty and may materially adversely impact our provision for income taxes.
Our worldwide effective income tax rate may increase as a result of these recent developments, changes in interpretations and assumptions made, additional guidance that may be issued and ongoing and future actions the Company has or may take with respect to our corporate structure and intercompany arrangements.
Additionally, we are subject from time to time to tax audits, investigations and proceedings. Tax authorities have disagreed, and may in the future disagree, with our judgments, and are taking increasingly aggressive positions, including with respect to our intercompany transactions. For example, we are currently involved in an ongoing dispute with the ITD in which the ITD asserts that we owe additional taxes for two transactions by which CTS India repurchased shares from its shareholders, as more fully described in Note 11 to the consolidated financial statements. Adverse outcomes in any such audits, investigations or proceedings could increase our tax exposure and cause us to incur increased expense, which could materially adversely affect our results of operations and financial condition.
| Cognizant | 18 | December 31, 2021 Form 10-K | ||||||
Our business subjects us to considerable potential exposure to litigation and legal claims and could be materially adversely affected if we incur legal liability.
We are subject to, and may become a party to, a variety of litigation or other claims and suits that arise from time to time in the conduct of our business. Our business is subject to the risk of litigation involving current and former employees, clients, alliance partners, subcontractors, suppliers, competitors, shareholders, government agencies or others through private actions, class actions, whistleblower claims, administrative proceedings, regulatory actions or other litigation. While we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to various exclusions as well as caps on amounts recoverable.
Our client engagements expose us to significant potential legal liability and litigation expense if we fail to meet our contractual obligations or otherwise breach obligations to third parties or if our subcontractors breach or dispute the terms of our agreements with them and impede our ability to meet our obligations to our clients. For example, third parties could claim that we or our clients, whom we typically contractually agree to indemnify with respect to the services and solutions we provide, infringe upon their IP rights. Any such claims of IP infringement could harm our reputation, cause us to incur substantial costs in defending ourselves, expose us to considerable legal liability or prevent us from offering some services or solutions in the future. We may have to engage in legal action to protect our own IP rights, and enforcing our rights may require considerable time, money and oversight, and existing laws in the various countries in which we provide services or solutions may offer only limited protection.
We also face considerable potential legal liability from a variety of other sources. Our acquisition activities have in the past and may in the future be subject to litigation or other claims, including claims from employees, clients, stockholders, or other third parties. We have also been the subject of a number of putative securities class action complaints and putative shareholder derivative complaints relating to the matters that were the subject of our now concluded internal investigation into potential violations of the FCPA and other applicable laws, and may be subject to such legal actions for these or other matters in the future. See "Part I, Item 3. Legal Proceedings" for more information. We establish reserves for these and other matters when a loss is considered probable and the amount can be reasonably estimated; however, the estimation of legal reserves and possible losses involves significant judgment and may not reflect the full range of uncertainties and unpredictable outcomes inherent in litigation, and the actual losses arising from particular matters may exceed our estimates and materially adversely affect our results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We have sales and marketing offices, innovation labs, and digital design and consulting centers in major business markets, including New York, London, Paris, Melbourne, and Singapore, among others, which are used to support our clients across all four of our business segments. In total, we have offices and operations in approximately 100 cities and 35 countries around the world, with our worldwide headquarters located in a leased facility in Teaneck, New Jersey in the United States.
We utilize a global delivery model with delivery centers worldwide, including in-country, regional and global delivery centers. We have over 29 million square feet of owned and leased facilities for our delivery centers. Our largest delivery center presence is in India, representing 88% of our total delivery centers on a square-foot basis, with the largest presence in Chennai (10 million square feet), Hyderabad (4 million square feet), Pune (3 million square feet), Kolkata (3 million square feet) and Bangalore (2 million square feet). We also have a significant number of delivery centers in other countries, including the United States, Philippines, Canada, Mexico and countries throughout Europe.
We believe our current facilities are adequate to support our operations in the immediate future, and that we will be able to obtain suitable additional facilities on commercially reasonable terms as needed.
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Not applicable.
| Cognizant | 19 | December 31, 2021 Form 10-K | ||||||
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock trades on the Nasdaq Stock Market under the symbol “CTSH”. As of December 31, 2021, the approximate number of holders of record of our Class A common stock was 111 and the approximate number of beneficial holders of our Class A common stock was 451,800.
Cash Dividends
During 2021, we paid quarterly cash dividends of $0.24 per share, or $0.96 per share in total for the year. In January 2022, our Board of Directors approved a cash dividend of $0.27 per share with a record date of February 18, 2022 and a payment date of March 1, 2022. We intend to continue to pay quarterly cash dividends in accordance with our capital allocation framework. However, future dividend payments depend on a variety of factors, including our cash flow generated from operations, cash and investment balances, net income, overall liquidity position, potential alternative uses of cash, such as acquisitions, and anticipated future economic conditions and financial results.
Issuer Purchases of Equity Securities
Our stock repurchase program, allows for the repurchase of up to $9.5 billion, excluding fees and expenses, of our Class A common stock through open market purchases, including under a 10b5-1 Plan or in private transactions, including through ASR agreements entered into with financial institutions, in accordance with applicable federal securities laws. The repurchase program does not have an expiration date. The timing of repurchases and the exact number of shares to be purchased are determined by management, in its discretion, or pursuant to 10b5-1 Plan, and will depend upon market conditions and other factors.
During the three months ended December 31, 2021, we repurchased $66 million of our Class A common stock under our stock repurchase program. The following table sets out the stock repurchase activity under our stock repurchase program during the fourth quarter of 2021 and the approximate dollar value of shares that may yet be purchased under the program as of December 31, 2021.
| Month | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in millions) | ||||||||||||||||||||||
| October 1, 2021 - October 31, 2021 | — | $ | — | — | $ | 2,185 | ||||||||||||||||||||
| November 1, 2021 - November 30, 2021 | 179,882 | 79.56 | 179,882 | 2,171 | ||||||||||||||||||||||
| December 1, 2021 - December 31, 2021 | 619,075 | 82.91 | 619,075 | 2,119 | ||||||||||||||||||||||
| Total | 798,957 | $ | 82.16 | 798,957 | ||||||||||||||||||||||
We regularly purchase shares in connection with our stock-based compensation plans as shares of our Class A common stock are tendered by employees for payment of applicable statutory tax withholdings. For the three months ended December 31, 2021, we purchased 0.3 shares at an aggregate cost of $20 million in connection with employee tax withholding obligations.
| Cognizant | 20 | December 31, 2021 Form 10-K | ||||||
Performance Graph
The following graph compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the S&P 500 Index and the S&P 500 Information Technology Index for the period beginning December 31, 2016 and ending on the last day of our last completed fiscal year. The stock performance shown on the graph below is not indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN(1)(2)
Among Cognizant, the S&P 500 Index and the S&P 500 Information Technology Index
| Company / Index | Base Period 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | ||||||||||||||||||||||||||||||||
| Cognizant Technology Solutions Corp | $ | 100 | $ | 127.57 | $ | 115.25 | $ | 114.01 | $ | 152.69 | $ | 167.41 | ||||||||||||||||||||||||||
| S&P 500 Index | 100 | 121.83 | 116.49 | 153.17 | 181.35 | 233.41 | ||||||||||||||||||||||||||||||||
| S&P 500 Information Technology Index | 100 | 138.83 | 138.43 | 208.05 | 299.37 | 402.73 | ||||||||||||||||||||||||||||||||
(1)Graph assumes $100 invested on December 31, 2016 in our Class A common stock, the S&P 500 Index and the S&P 500 Information Technology Index.
(2)Cumulative total return assumes reinvestment of dividends.
Item 6. [Reserved]
| Cognizant | 21 | December 31, 2021 Form 10-K | ||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| Executive Summary | ||||||||||||||
Cognizant is one of the world’s leading professional services companies, engineering modern business for the digital era. Our services include digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services. Digital services have become an increasingly important part of our portfolio, aligning with our clients' focus on becoming data-enabled, customer-centric and differentiated businesses. We are continuing to invest in digital services with a focus on four key areas: IoT, digital engineering, data and cloud. We tailor our services and solutions to specific industries with an integrated global delivery model that employs client service and delivery teams based at client locations and dedicated global and regional delivery centers. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in a fast-changing world.
2021 Financial Results
| Revenue | ||
| Income from Operations | ||
| Operating Margin | ||
| Diluted EPS | ||
| GAAP | GAAP | Adjusted1 | GAAP | Adjusted1 | GAAP | Adjusted1 | ||||||||||||||||||||||||||||||||
Revenue up $1,855 million or 11.1% from 2020; 10.0% in constant currency1 | Income from Operations up $712 million or 33.7% from 2020 | Income from Operations up $452 million or 18.9% from 2020 | Operating margin up 260 bps from 2020 | Operating margin up 100 bps from 2020 | Diluted EPS up $1.48 or 57.6% from 2020 | Diluted EPS up $0.70 or 20.5% from 2020 | ||||||||||||||||||||||||||||||||
During the year ended December 31, 2021, revenues increased by $1,855 million as compared to the year ended December 31, 2020, representing growth of 11.1%, or 10.0% on a constant currency basis1. Our recently completed acquisitions contributed 320 basis points to our revenue growth. Revenue growth also reflected our clients' continued adoption and integration of digital technologies and was aided by the negative impact on 2020 revenues of the COVID-19 pandemic. Revenue growth in the Healthcare segment was driven by increased demand for our services from our pharmaceutical clients while continued adoption and integration of digital technologies across our manufacturing, logistics, energy and utilities clients drove revenue growth in the Products and Resources segment. Revenues in the Communications, Media and Technology segment benefited from our technology clients' growing demand for services related to digital content. Our 2020 revenue was negatively affected by the Samlink Impact, which contributed approximately 70 basis points to our 2021 revenue growth. We continue to experience pricing pressure on our non-digital services as our clients, particularly those in the Financial Services segment, optimize the cost of supporting their legacy systems and operations.
Our operating margin and Adjusted Operating Margin1 increased to 15.3% and 15.4%, respectively, for the year ended December 31, 2021 from 12.7% and 14.4%, respectively, for the year ended December 31, 2020. Our 2021 GAAP and Adjusted Operating Margins benefited from savings generated by the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan and a decrease in travel and entertainment costs. These benefits were partially offset by investments intended to drive and support organic revenue growth, including additions to our sales organization and initiatives to reposition our brand, as well as the negative impact on margin of our recently completed acquisitions, increased subcontractor and compensation costs as a result of significantly elevated attrition and costs related to the modernization of our
1 Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures.
| Cognizant | 22 | December 31, 2021 Form 10-K | ||||||
core IT systems. Our 2020 operating margins were adversely impacted by the decline in revenues brought on by the COVID-19 pandemic, the Samlink Impact and the April 2020 ransomware attack. Our 2020 GAAP operating margin was also negatively impacted by costs related to our restructuring program that concluded at the end of 2020 and COVID-19 Charges.
During the fourth quarter of 2021, we reached a settlement agreement with the final customer involved in our previously disclosed proposed exit from a large customer engagement of our Samlink subsidiary and additionally entered into an agreement to sell this subsidiary. We reached settlement agreements with the other two customers to this engagement in the second quarter of 2021. The financial terms of the final settlement agreements with the three customers did not materially differ from our original 2020 offer and, accordingly, the impact to our 2021 consolidated statement of operations was immaterial. In 2020, in connection with our settlement offer, we recorded a reduction of revenues of $118 million and additional expenses of $33 million, or, jointly, the Samlink Impact. This negatively impacted both our 2020 GAAP and Adjusted Diluted EPS2 by $0.27. The sale of our Samlink subsidiary closed on February 1, 2022. In 2021, our Samlink subsidiary had $113 million in revenues.
In the third quarter of 2021, the parties to the consolidated putative securities class action suit filed a settlement agreement that resolved the consolidated putative securities class action against us and certain of our former officers. As a result, we recorded a $20 million Class Action Settlement Loss in "Selling, general and administrative expenses" in our consolidated financial statements. The loss is excluded from Adjusted Operating Margin2 and Adjusted Diluted EPS2. For further information see Note 15 to our consolidated financial statements.
Business Outlook
As we seek to increase our commercial momentum and accelerate growth, our four strategic priorities are:
•Accelerating digital - growing our digital business organically and inorganically;
•Globalizing Cognizant - accelerating the growth of our business in key international markets and diversifying our leadership, capabilities and delivery footprint;
•Repositioning our brand - improving our global brand recognition and becoming better known as a global digital partner to the entire C-suite; and
•Increasing our relevance to our clients - leading with thought leadership and capabilities to address clients' business needs.
We continue to expect the long-term focus of our clients to be on their digital transformation into software-driven, data-enabled, customer-centric and differentiated businesses. The COVID-19 pandemic accelerated our clients' need to modernize their business, which has led to increased demand for digital capabilities. In 2021, we completed seven acquisitions intended to expand our talent, experience and capabilities in key digital areas or in particular geographies or industries.
As our clients seek to optimize the cost of supporting their legacy systems and operations, our non-digital services have been and may continue to be subject to pricing pressure. In addition, our clients will likely continue to contend with industry-specific changes driven by evolving digital technologies, uncertainty in the regulatory environment, industry consolidation and convergence as well as international trade policies and other macroeconomic factors, which could affect their demand for our services.
As a global professional services company, we compete on the basis of the knowledge, experience, insights, skills and talent of our employees and the value they can provide to our clients. Our success is dependent, in large part, on our ability to keep our supply of skilled employees, in particular those with experience in key digital areas, in balance with client demand. Competition for skilled employees in the current labor market is intense, and we experienced significantly elevated voluntary attrition during 2021. For the three months ended December 31, 2021, our annualized attrition rate, including both voluntary and involuntary, was 34.6% as compared to 19.0% for the three months ended December 31, 2020. For the year ended December 31, 2021, our attrition rate, including both voluntary and involuntary, was 30.8% as compared to 20.6% for the year ended December 31, 2020. Challenges attracting and retaining highly qualified personnel have negatively impacted our ability to satisfy client demand and achieve our full revenue potential. We expect this impact to continue in 2022. Further, our ongoing and anticipated future efforts with respect to recruitment, talent management and employee engagement may not be successful and may result in increased delivery costs during 2022. Our most significant costs are the salaries and related benefits for our employees. In certain regions, competition for employees with the advanced technical skills necessary to perform our services has caused wages to increase at a rate greater than the general rate of inflation. While we strive to adjust pricing to reduce the
2 Adjusted Operating Margin and Adjusted Diluted EPS are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures.
| Cognizant | 23 | December 31, 2021 Form 10-K | ||||||
impact of compensation increases on our operating margin, we may not be successful in fully recovering these increases, which could adversely affect our profitability and operating margin.
Our future results may be affected by potential tax law changes and other potential regulatory changes, including possible U.S. corporate income tax reform and potentially increased costs for employment and post-employment benefits in India as a result of the Code on Social Security, 2020. For additional information, see Part I, Item 1A. Risk Factors.
Environmental, Social and Corporate Governance
We believe environmental and social considerations are increasingly important to our clients and the talent we seek to attract and retain. As a company committed to improving everyday life, ESG is an important part of our business and that of our clients. Cognizant’s vision is to become the preeminent technology services provider to the leaders of the world’s Global 2000 companies. Our ESG program is designed to support that vision and aligns with our clients’ increasing focus on ESG. In 2021, we took the following steps to advance our ESG agenda:
•In February 2021, we announced an initiative to advance economic mobility, educational opportunity, diversity, equity, and inclusion, and health and well‑being in communities around the world through new philanthropic funding and in-kind contributions;
•In April 2021, as the second wave of the COVID-19 pandemic gripped India, we launched Operation C3. This initiative facilitated vaccination for our Indian employees and their dependents, and set up vaccination drives across the country to help senior citizens, physically challenged dependents, and mothers with infants. Operation C3 also provided critical medical equipment to hospitals, helped to boost oxygen supplies and more;
•In June 2021, we issued our first ESG report with assured greenhouse gas emissions data;
•In October 2021, we announced our commitment to achieve net zero emissions by 2030. This pledge calls for reducing emissions by 50% from the Company's global operations and supply chain by 2030, and by 90% by 2040; and
•In October 2021, we launched “All Belong,” an initiative led by our executive committee and global D&I team designed to strengthen employee engagement, showcase our affinity groups, and recognize employees who exemplify inclusion.
| Cognizant | 24 | December 31, 2021 Form 10-K | ||||||
| Results of Operations | ||||||||||||||
For a discussion of our results of operations for the year ended December 31, 2019, including a year-to-year comparison between 2020 and 2019, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report Form 10-K for the year ended December 31, 2020.
The Year Ended December 31, 2021 Compared to The Year Ended December 31, 2020
The following table sets forth certain financial data for the years ended December 31:
| % of | % of | Increase / Decrease | ||||||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share data) | 2021 | Revenues | 2020 | Revenues | $ | % | ||||||||||||||||||||||||||||||||
| Revenues | $ | 18,507 | 100.0 | $ | 16,652 | 100.0 | $ | 1,855 | 11.1 | |||||||||||||||||||||||||||||
Cost of revenues(1) | 11,604 | 62.7 | 10,671 | 64.1 | 933 | 8.7 | ||||||||||||||||||||||||||||||||
Selling, general and administrative expenses(1) | 3,503 | 18.9 | 3,100 | 18.6 | 403 | 13.0 | ||||||||||||||||||||||||||||||||
Restructuring charges | — | — | 215 | 1.3 | (215) | (100.0) | ||||||||||||||||||||||||||||||||
Depreciation and amortization expense | 574 | 3.1 | 552 | 3.3 | 22 | 4.0 | ||||||||||||||||||||||||||||||||
| Income from operations | 2,826 | 15.3 | 2,114 | 12.7 | 712 | 33.7 | ||||||||||||||||||||||||||||||||
Other income (expense), net | 1 | (18) | 19 | (105.6) | ||||||||||||||||||||||||||||||||||
Income before provision for income taxes | 2,827 | 15.3 | 2,096 | 12.6 | 731 | 34.9 | ||||||||||||||||||||||||||||||||
Provision for income taxes | (693) | (704) | 11 | (1.6) | ||||||||||||||||||||||||||||||||||
| Income (loss) from equity method investments | 3 | — | 3 | * | ||||||||||||||||||||||||||||||||||
| Net income | $ | 2,137 | 11.5 | $ | 1,392 | 8.4 | $ | 745 | 53.5 | |||||||||||||||||||||||||||||
Diluted EPS | $ | 4.05 | $ | 2.57 | $ | 1.48 | 57.6 | |||||||||||||||||||||||||||||||
Other Financial Information 3 | ||||||||||||||||||||||||||||||||||||||
Adjusted Income From Operations and Adjusted Operating Margin | $ | 2,846 | 15.4 | $ | 2,394 | 14.4 | $ | 452 | 18.9 | |||||||||||||||||||||||||||||
Adjusted Diluted EPS | $ | 4.12 | $ | 3.42 | $ | 0.70 | 20.5 | |||||||||||||||||||||||||||||||
(1) Exclusive of depreciation and amortization expense.
* Not meaningful
| Revenues - Overall | ||
During 2021, revenues increased by $1,855 million as compared to 2020, representing growth of 11.1%, or 10.0% on a constant currency basis3. Our recently completed acquisitions contributed 320 basis points to our revenue growth. Our revenue growth also reflected our clients' continued adoption and integration of digital technologies and was aided by the negative impact on 2020 revenues of the COVID-19 pandemic. Our 2020 revenue was negatively affected by the Samlink Impact, which contributed approximately 70 basis points to our 2021 revenue growth. We continue to experience pricing pressure on our non-digital services as our clients, particularly those in the Financial Services segment, optimize the cost of supporting their legacy systems and operations. Revenues from clients added during 2021, including those related to acquisitions, were $341 million.
3 Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
| Cognizant | 25 | December 31, 2021 Form 10-K | ||||||
| Revenues - Reportable Business Segments | ||
The following charts set forth revenues and change in revenues by business segment and geography for the year ended December 31, 2021 as compared to the year ended December 31, 2020:
| Financial Services | Healthcare | |||||||||||||||||||||||||||||||||||||||||||||||||
| Increase / (Decrease) | Increase / (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | Revenues | $ | % | CC %4 | Revenues | $ | % | CC %4 | ||||||||||||||||||||||||||||||||||||||||||
| North America | $ | 4,204 | 191 | 4.8 | 4.4 | $ | 4,571 | 390 | 9.3 | 9.3 | ||||||||||||||||||||||||||||||||||||||||
| United Kingdom | 547 | 84 | 18.1 | 12.5 | 168 | 11 | 7.0 | 2.3 | ||||||||||||||||||||||||||||||||||||||||||
| Continental Europe | 745 | 116 | 18.4 | 14.4 | 477 | 43 | 9.9 | 7.0 | ||||||||||||||||||||||||||||||||||||||||||
| Europe - Total | 1,292 | 200 | 18.3 | 13.6 | 645 | 54 | 9.1 | 5.7 | ||||||||||||||||||||||||||||||||||||||||||
| Rest of World | 555 | 39 | 7.6 | 5.2 | 121 | 41 | 51.3 | 50.9 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,051 | 430 | 7.6 | 6.3 | $ | 5,337 | 485 | 10.0 | 9.6 | ||||||||||||||||||||||||||||||||||||||||
| Products and Resources | Communications, Media and Technology | |||||||||||||||||||||||||||||||||||||||||||||||||
| Increase / (Decrease) | Increase / (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | Revenues | $ | % | CC %4 | Revenues | $ | % | CC %4 | ||||||||||||||||||||||||||||||||||||||||||
| North America | $ | 2,937 | 287 | 10.8 | 10.5 | $ | 1,924 | 187 | 10.8 | 10.7 | ||||||||||||||||||||||||||||||||||||||||
| United Kingdom | 471 | 100 | 27.0 | 19.0 | 456 | 112 | 32.6 | 26.1 | ||||||||||||||||||||||||||||||||||||||||||
| Continental Europe | 539 | 126 | 30.5 | 25.7 | 158 | (19) | (10.7) | (14.5) | ||||||||||||||||||||||||||||||||||||||||||
| Europe - Total | 1,010 | 226 | 28.8 | 22.5 | 614 | 93 | 17.9 | 12.3 | ||||||||||||||||||||||||||||||||||||||||||
| Rest of World | 329 | 67 | 25.6 | 22.7 | 305 | 80 | 35.6 | 34.3 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,276 | 580 | 15.7 | 13.9 | $ | 2,843 | 360 | 14.5 | 13.2 | ||||||||||||||||||||||||||||||||||||||||
Financial Services - revenues increased 7.6%, or 6.3% on a constant currency basis4 | ||
| Banking | é | $307M | ||||||
| Insurance | é | $123M | ||||||
Revenue growth in this segment benefited from the 2020 Samlink Impact, which contributed approximately 220 basis points to our 2021 revenue growth, recently completed acquisitions and the negative impact on 2020 revenues of the COVID-19 pandemic. Revenue growth also reflects the growing demand for our digital services partially offset by clients' continued focus on cost optimization of supporting their legacy systems and operations. Revenues from clients added, including those related to acquisitions, since December 31, 2020 were $77 million.4
Healthcare - revenues increased 10.0%, or 9.6% on a constant currency basis4 | ||
Revenue growth among our life sciences clients was driven by increased demand for our services among pharmaceutical companies while revenue growth among our healthcare customers benefited from increased demand by health insurance customers for our integrated software solutions. Additionally, revenue growth reflected the negative impact on 2020 revenues of the COVID-19 pandemic. Revenues from clients added since December 31, 2020 were $45 million.
| Healthcare | é | $231M | ||||||
| Life Sciences | é | $254M | ||||||
4 Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.
| Cognizant | 26 | December 31, 2021 Form 10-K | ||||||
Products and Resources - revenues increased 15.7%, or 13.9% on a constant currency basis5 | ||
| Manufacturing, Logistics, Energy and Utilities | é | $383M | |||||||||
| Retail and Consumer Goods | é | $155M | |||||||||
| Travel and Hospitality | é | $42M | |||||||||
Revenues from our manufacturing, logistics, energy and utilities clients benefited from our clients' adoption and integration of digital technologies. Revenue growth in this segment included approximately 500 basis points related to recently completed acquisitions. Additionally, revenue growth reflected the negative impact of the COVID-19 pandemic on our 2020 revenue in this segment. Revenues from clients added, including those related to acquisitions, since December 31, 2020 were $113 million.5
Communications, Media and Technology - revenues increased 14.5%, or 13.2% on a constant currency basis5 | ||
Revenues reflected growing demand from our technology clients for services related to digital content, primarily driven by our largest clients in this segment, and were negatively impacted by 190 basis points due to our exit from certain content-related services. Revenue growth in this segment included approximately 650 basis points related to recently completed acquisitions and also reflected the negative impact to our 2020 revenue of the COVID-19 pandemic. Revenues from clients added, including those related to acquisitions, since December 31, 2020 were $106 million.
| Communications and Media | é | $150M | ||||||||||||
| Technology | é | $210M | ||||||||||||
| Revenues - Geographic Markets | ||
Revenues of $18,507 million by geographic market were as follows for the year ended December 31, 2021:
2021 as compared to 2020 | Increase / (Decrease) | |||||||||||||||||||
| (Dollars in millions) | $ | % | CC %5 | |||||||||||||||||
| North America | $ | 1,055 | 8.4 | 8.2 | ||||||||||||||||
| United Kingdom | 307 | 23.0 | 16.6 | |||||||||||||||||
| Continental Europe | 266 | 16.1 | 12.2 | |||||||||||||||||
| Europe - Total | 573 | 19.2 | 14.2 | |||||||||||||||||
| Rest of World | 227 | 21.0 | 18.8 | |||||||||||||||||
| Total revenues | $ | 1,855 | 11.1 | 10.0 | ||||||||||||||||
North America continues to be our largest market, representing 73.7% of total revenues and 56.9% of total growth for the year ended December 31, 2021. Revenue growth across all regions benefited from our recently completed acquisitions and was also aided by the negative impact on our 2020 revenues of the COVID-19 pandemic. All regions also benefited from favorable foreign currency exchange rate movements. A significant portion of revenue growth in our Continental Europe and Rest of World regions was driven by our German and Australian markets, respectively, which both benefited from recent acquisitions. In addition, revenue growth in Continental Europe benefited 770 basis points from the 2020 Samlink Impact.
5 Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.
| Cognizant | 27 | December 31, 2021 Form 10-K | ||||||
| Cost of Revenues (Exclusive of Depreciation and Amortization Expense) | ||
| é | $933M | ||||||||||
| ê | 1.4% as a % of revenue | ||||||||||
¡ % of Revenues | |||||||||||
Our cost of revenues consists primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, project-related immigration and travel for technical personnel, subcontracting and equipment costs relating to revenues. The decrease in cost of revenues, as a percentage of revenues, was due primarily to savings from the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan, the adverse Samlink Impact in 2020, a decrease in travel and entertainment costs as a result of a reduction in travel due to the COVID-19 pandemic as well as the negative impact on our 2020 results from the pandemic and the April 2020 ransomware attack, partially offset by increased subcontractor and compensation costs as a result of significantly elevated employee attrition levels.
SG&A Expenses (Exclusive of Depreciation and Amortization Expense) | ||
SG&A expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, immigration, travel, marketing, communications, management, finance, administrative and occupancy costs. The increase, as a percentage of revenues, was due primarily to investments intended to drive and support organic revenue growth, including additions to our sales organization and initiatives to reposition our brand, as well as increased costs as a result of our recently completed acquisitions and costs related to the modernization of our core IT systems, partially offset by a reduction in expenses attributable to the COVID-19 pandemic and the April 2020 ransomware attack.
| é | $403M | ||||||||||
| é | 0.3% as a % of revenue | ||||||||||
¡ % of Revenues | |||||||||||
| Depreciation and Amortization Expense | ||
Depreciation and amortization expense increased by 4.0% during 2021 as compared to 2020 primarily due to amortization of intangibles from recently completed acquisitions.
Operating Margin and Adjusted Operating Margin6 - Overall | ||
Our 2021 GAAP and Adjusted Operating Margins6 benefited from savings generated by the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan and a decrease in travel and entertainment costs. These benefits were partially offset by investments intended to drive and support organic revenue growth, including additions to our sales organization and initiatives to reposition our brand, as well as the negative impact on margin of our recently completed acquisitions, increased subcontractor and compensation costs as a result of significantly elevated employee attrition and costs related to the modernization of our core IT systems. Our 2020 operating margins were adversely impacted by the decline in revenues brought on by the COVID-19 pandemic, the Samlink Impact and the April 2020 ransomware attack. Our 2020 GAAP operating margin was also negatively impacted by costs related to our restructuring program that concluded at the end of 2020 and COVID-19 Charges.
6 Adjusted Income From Operations and Adjusted Operating Margin are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
| Cognizant | 28 | December 31, 2021 Form 10-K | ||||||
Excluding the impact of applicable designated cash flow hedges, the appreciation of the Indian rupee against the U.S. dollar negatively impacted our operating margin by approximately 5 basis points in 2021, while in 2020 the depreciation of the Indian rupee against the U.S. dollar positively impacted our operating margin by approximately 92 basis points. Each additional 1.0% change in exchange rate between the Indian rupee and the U.S. dollar will have the effect of moving our operating margin by approximately 18 basis points, excluding the impact of our cash flow hedges.
We enter into foreign exchange derivative contracts to hedge certain Indian rupee denominated payments in India. These hedges are intended to mitigate the volatility of the changes in the exchange rate between the U.S. dollar and the Indian rupee. In 2021, the settlement of our cash flow hedges positively impacted our operating margin by approximately 35 basis points. The impact of the settlement of our cash flow hedges was immaterial in 2020.
We finished the year ended December 31, 2021 with approximately 330,600 employees as compared to 289,500 employees for the year ended December 31, 2020. Annualized attrition, including both voluntary and involuntary, was approximately 34.6% for the three months ended December 31, 2021. Attrition, including both voluntary and involuntary, was approximately 30.8% for the year ended December 31, 2021. In 2021, voluntary attrition was significantly elevated and constituted the vast majority of our attrition for the period. By comparison, voluntary attrition in the year ended December 31, 2020 represented only approximately half of our attrition for the period as our personnel actions taken under our Fit for Growth Plan increased involuntary attrition while voluntary attrition was suppressed due to the COVID-19 pandemic. Attrition in all periods presented is weighted towards our more junior level employees.
| * Annualized attrition | ||||||||
| Segment Operating Profit | ||
Segment operating profit and operating margin percentage were as follows:
Across all our business segments, operating margins benefited from savings from the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan, the decrease in travel and entertainment costs due to COVID-19 related reductions in travel and the negative impact on our 2020 results of the COVID-19 pandemic and the April 2020 ransomware attack. In 2021, segment operating margins were negatively impacted by increased subcontractor and compensation costs as a result of significantly elevated employee attrition levels. The 2020 operating margin in our Financial Services segment includes the 2020 adverse Samlink Impact.
Total segment operating profit was as follows for the year ended December 31:
| (Dollars in millions) | 2021 | % of Revenues | 2020 | % of Revenues | Increase / (Decrease) | ||||||||||||||||||||||||
| Total segment operating profit | $ | 5,557 | 30.0 | $ | 4,704 | 28.2 | $ | 853 | |||||||||||||||||||||
| Less: unallocated costs | 2,731 | 2,590 | 141 | ||||||||||||||||||||||||||
| Income from operations | $ | 2,826 | 15.3 | $ | 2,114 | 12.7 | $ | 712 | |||||||||||||||||||||
The increase of $141 million in unallocated costs for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to increased costs as a result of our recently completed acquisitions and costs related to initiatives to reposition our brand and the modernization of our core IT systems. Unallocated costs in 2020 included restructuring costs, COVID-19 Charges and costs related to the April 2020 ransomware attack.
| Cognizant | 29 | December 31, 2021 Form 10-K | ||||||
| Other Income (Expense), Net | ||
Total other income (expense), net consists primarily of foreign currency exchange gains and losses, interest income and interest expense. The following table sets forth total other income (expense), net for the years ended December 31:
| (in millions) | 2021 | 2020 | Increase / Decrease | ||||||||||||||
| Foreign currency exchange (losses) | $ | (33) | $ | (53) | $ | 20 | |||||||||||
| Gains (losses) on foreign exchange forward contracts not designated as hedging instruments | 13 | (63) | 76 | ||||||||||||||
| Foreign currency exchange (losses), net | (20) | (116) | 96 | ||||||||||||||
| Interest income | 30 | 119 | (89) | ||||||||||||||
| Interest expense | (9) | (24) | 15 | ||||||||||||||
| Other, net | — | 3 | (3) | ||||||||||||||
| Total other income (expense), net | $ | 1 | $ | (18) | $ | 19 | |||||||||||
The foreign currency exchange gains and losses were primarily attributed to the remeasurement of the Indian rupee denominated net monetary assets and liabilities in our U.S. dollar functional currency India subsidiaries and, to a lesser extent, the remeasurement of other net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. The gains and losses on our foreign exchange forward contracts not designated as hedging instruments related to the realized and unrealized gains and losses on foreign exchange forward contracts entered into to offset foreign currency exposure to non-U.S. dollar denominated net monetary assets and liabilities. As of December 31, 2021, the notional value of our undesignated hedges was $847 million. The decrease in interest income of $89 million was primarily attributable to lower invested balances in India, which generate higher yields. Our invested balances in India are lower in 2021 as a result of our repatriation of cash from India in the fourth quarter of 2020.
| Provision for Income Taxes | ||
| ê | $11M | ||||||||||
¡ Effective Income Tax Rate ê 9.1% | |||||||||||
The effective tax rate decreased primarily as a result of:
•our decision in 2020 to reverse our indefinite reinvestment assertion on Indian earnings accumulated in prior years which resulted in a $140 million Tax on Accumulated Indian Earnings recorded as income tax expense in 2020;
•the 2020 Samlink Impact, which was not deductible for tax purposes;
•the discrete benefit in 2021 of the settlement of the IRS examination for tax years 2012 through 2016 as described in Note 11 to our consolidated financial statements; and
•lower non-deductible foreign currency exchange losses in our consolidated statement of operations in 2021.
| Net Income | ||
The increase in net income was driven by higher income from operations and lower foreign currency exchange losses, partially offset by lower interest income.
| é | $745M | |||||||
¡ % of Revenues | ||||||||
Non-GAAP Financial Measures
Portions of our disclosure include non-GAAP financial measures. 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
| Cognizant | 30 | December 31, 2021 Form 10-K | ||||||
prepared in accordance with GAAP. The reconciliations of our non-GAAP financial measures to the corresponding GAAP measures, set forth below, 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. 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. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment.
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. We believe that the presentation of our non-GAAP financial measures along with reconciliations to the most comparable GAAP measure, as applicable, 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.
The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the years ended December 31:
| (Dollars in millions, except per share data) | 2021 | % of Revenues | 2020 | % of Revenues | |||||||||||||||||||
GAAP income from operations and operating margin | $ | 2,826 | 15.3 | % | $ | 2,114 | 12.7 | % | |||||||||||||||
Class Action Settlement Loss (1) | 20 | 0.1 | — | — | |||||||||||||||||||
Realignment charges (2) | — | — | 42 | 0.3 | |||||||||||||||||||
2020 Fit for Growth Plan restructuring charges (3) | — | — | 173 | 1.0 | |||||||||||||||||||
COVID-19 Charges (4) | — | — | 65 | 0.4 | |||||||||||||||||||
Adjusted Income From Operations and Adjusted Operating Margin | 2,846 | 15.4 | 2,394 | 14.4 | |||||||||||||||||||
| GAAP diluted EPS | $ | 4.05 | $ | 2.57 | |||||||||||||||||||
Effect of above adjustments, pre-tax | 0.04 | 0.52 | |||||||||||||||||||||
Effect of non-operating foreign currency exchange losses (gains), pre-tax (5) | 0.03 | 0.22 | |||||||||||||||||||||
Tax effect of above adjustments (6) | — | (0.15) | |||||||||||||||||||||
Tax on Accumulated Indian Earnings (7) | — | 0.26 | |||||||||||||||||||||
| Adjusted Diluted EPS | $ | 4.12 | $ | 3.42 | |||||||||||||||||||
| Net cash provided by operating activities | $ | 2,495 | $ | 3,299 | |||||||||||||||||||
| Purchases of property and equipment | (279) | (398) | |||||||||||||||||||||
| Free cash flow | $ | 2,216 | $ | 2,901 | |||||||||||||||||||
(1) During 2021, we recorded the Class Action Settlement Loss in "Selling, general and administrative expenses" in our consolidated financial statements. See Note 15 to our consolidated financial statements for additional information.
(2) As part of our realignment program, during 2020, we incurred employee retention costs and certain professional fees. See Note 4 to our consolidated financial statements for additional information.
| Cognizant | 31 | December 31, 2021 Form 10-K | ||||||
(3) As part of our 2020 Fit for Growth plan, during 2020, we incurred certain employee separation, employee retention and facility exit costs and other charges. See Note 4 to our consolidated financial statements for additional information.
(4) During 2020, we incurred costs in response to the COVID-19 pandemic including a one-time bonus to our employees at the designation of associate and below in both India and the Philippines, certain costs to enable our employees to work remotely and costs to provide medical staff and extra cleaning services for our facilities. Most of the costs related to the pandemic are reported in "Cost of revenues" in our consolidated statement of operations.
(5) 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 consolidated statements of operations.
(6) Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income:
| For the years ended December 31, | |||||||||||
| (in millions) | 2021 | 2020 | |||||||||
| Non-GAAP income tax benefit (expense) related to: | |||||||||||
| Class Action Settlement Loss | $ | 6 | $ | — | |||||||
| Realignment charges | — | 11 | |||||||||
| 2020 Fit for Growth Plan restructuring charges | — | 45 | |||||||||
| COVID-19 Charges | — | 17 | |||||||||
| Foreign currency exchange gains and losses | (5) | 6 | |||||||||
(7) In 2020, we reversed our indefinite reinvestment assertion on Indian earnings accumulated in prior years and recorded $140 million in income tax expense.
| Liquidity and Capital Resources | ||||||||||||||
Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. As of December 31, 2021, we had cash, cash equivalents and short-term investments of $2,719 million. Additionally, as of December 31, 2021, we had available capacity under our credit facilities of approximately $1,925 million.
The following table provides a summary of our cash flows for the years ended December 31:
| (in millions) | 2021 | 2020 | Increase / Decrease | |||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 2,495 | $ | 3,299 | $ | (804) | ||||||||||||||
| Investing activities | (2,164) | (1,238) | (926) | |||||||||||||||||
Financing activities | (1,203) | (2,009) | 806 | |||||||||||||||||
Other Cash Flow Information7 | ||||||||||||||||||||
| Free cash flow | 2,216 | 2,901 | (685) | |||||||||||||||||
Operating activities7
The decrease in cash provided by operating activities in 2021 compared to 2020 was primarily driven by the deferrals of certain non-income tax payments due to COVID-19 pandemic regulatory relief in 2020, a portion of which was remitted in 2021, and higher incentive-based compensation payouts in 2021.
We monitor turnover, aging and the collection of trade accounts receivable by client. Our DSO calculation includes trade accounts receivable, net of allowance for credit losses, and contract assets, reduced by the uncollected portion of our deferred revenue. DSO was 69 days as of December 31, 2021 and 70 days as of December 31, 2020.
Investing activities
The increase in cash used in investing activities in 2021 compared to 2020 was primarily driven by net purchases of investments as compared to sales in 2020, partially offset by lower payments for acquisitions and capital expenditures.
7 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.
| Cognizant | 32 | December 31, 2021 Form 10-K | ||||||
Financing activities
The decrease in cash used in financing activities in 2021 compared to 2020 is primarily due to lower repurchases of common stock in 2021.
We have a Credit Agreement providing for a $750 million Term Loan and a $1,750 million unsecured revolving credit facility, which are due to mature in November 2023. We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan. See Note 10 to our consolidated financial statements. We believe that we currently meet all conditions set forth in the Credit Agreement to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the revolving credit facility as of December 31, 2021 and through the date of this filing. As of December 31, 2021, we had no outstanding balance on our revolving credit facility.
In February 2021, our India subsidiary renewed its one-year 13 billion Indian rupee ($175 million at the December 31, 2021 exchange rate) working capital facility, which requires us to repay any balances drawn down within 90 days from the date of disbursement. There is a 1.0% prepayment penalty applicable to payments made within 30 days of disbursement. This working capital facility contains affirmative and negative covenants and may be renewed annually in February. As of December 31, 2021, there was no balance outstanding under the working capital facility.
Capital Allocation Framework
| Acquisitions | |||||
| Share Repurchases | |||||
| Dividend payments | |||||
Our capital allocation framework anticipates the deployment of approximately 50% of our free cash flow8 for acquisitions, 25% for share repurchases and 25% for dividend payments. We review our capital allocation framework on an ongoing basis, considering the potential impacts of COVID-19 pandemic, our financial performance and liquidity position, investments required to execute our strategic plans and initiatives, acquisition opportunities, the economic outlook, regulatory changes and other relevant factors. As these factors may change over time, the actual amounts expended on stock repurchase activity, dividends, and acquisitions, if any, during any particular period cannot be predicted and may fluctuate from time to time.
Other Liquidity and Capital Resources Information
We seek to ensure that our worldwide cash is available in the locations in which it is needed. As part of our ongoing liquidity assessments, we regularly monitor the mix of our domestic and international cash flows and cash balances. We evaluate on an ongoing basis what portion of the non-U.S. cash, cash equivalents and short-term investments is needed locally to execute our strategic plans and what amount is available for repatriation back to the United States.
We expect our operating cash flows, cash and short-term investment balances, together with our available capacity under our revolving credit facilities, to be sufficient to meet our operating requirements, pay our purchase commitments and Tax Reform Act transition tax payments and service our debt for the next twelve months. Our Tax Reform Act transition tax payments are due in annual installments of $50 million, $94 million, $126 million and $157 million through 2025. We also have purchase commitments of approximately $263 million which will be paid over the next two years. See Note 7 to our consolidated financial statements for a description of our operating lease obligations.
Our ability to expand and grow our business in accordance with current plans, make acquisitions, meet our long-term capital requirements beyond a twelve-month period and execute our capital allocation framework will depend on many factors, including the rate, if any, at which our cash flow increases, our ability and willingness to pay for acquisitions with capital stock 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 and conditions acceptable to us, if at all.
8 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.
| Cognizant | 33 | December 31, 2021 Form 10-K | ||||||
| Critical Accounting Estimates | ||||||||||||||
Management’s discussion and analysis of our financial condition and results of operations is based on our accompanying consolidated financial statements that have been prepared in accordance with GAAP. We base our estimates on historical experience, current trends and on various other assumptions that are believed to be relevant at the time our consolidated financial statements are prepared. We evaluate our estimates on a continuous basis. However, the actual amounts may differ from the estimates used in the preparation of our consolidated financial statements.
We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our consolidated financial statements as they require the most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Changes to these estimates could have a material effect on our results of operations and financial condition. Our significant accounting policies are described in Note 1 to our consolidated financial statements.
Revenue Recognition. Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized using the cost to cost method, if the right to invoice is not representative of the value being delivered. The cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information. Such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known. Net changes in estimates of such future costs and contract losses were immaterial to the consolidated results of operations for the periods presented.
Income Taxes. Determining the consolidated provision for income tax expense, deferred income tax assets (and related valuation allowance, if any) and liabilities requires significant judgment. We are required to calculate and provide for income taxes in each of the jurisdictions where we operate. Changes in the geographic mix of income before taxes or estimated level of annual pre-tax income can affect our overall effective income tax rate. In addition, transactions between our affiliated entities are arranged in accordance with applicable transfer pricing laws, regulations and relevant guidelines. As a result, and due to the interpretive nature of certain aspects of these laws and guidelines, we have pending applications for APAs before the taxing authorities in some of our most significant jurisdictions. It could take years for the relevant taxing authorities to negotiate and conclude these applications. The consolidated provision for income taxes may change period to period based on changes in facts and circumstances, such as settlements of income tax audits or finalization of our applications for APAs.
Our provision for income taxes also includes the impact of reserves established for uncertain income tax positions, as well as the related interest, which may require us to apply judgment to complex issues and may require an extended period of time to resolve. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final outcome of these matters will not differ from our recorded amounts. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. To the extent that the final outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
Business Combinations, Goodwill and Intangible Assets. Goodwill and intangible assets, including indefinite-lived intangible assets, arise from the accounting for business combinations. We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired, liabilities assumed, including any contingent consideration, and any noncontrolling interest in the acquiree to properly allocate purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price utilizes estimates and assumptions in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets, including the timing and amount of forecasted revenues and cash flows, anticipated growth rates, client attrition rates and the discount rate reflecting the risk inherent in future cash flows.
We exercise judgment to allocate goodwill to the reporting units expected to benefit from each business combination. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, regulatory environment, established business plans, operating performance indicators or competition. Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit.
| Cognizant | 34 | December 31, 2021 Form 10-K | ||||||
We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. Under the income approach, we estimate projected future cash flows, the timing of such cash flows and long-term growth rates, and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on a market participant weighted-average cost of capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.
Based on our most recent evaluation of goodwill performed during the fourth quarter of 2021, we concluded that the goodwill in each of our reporting units were not at risk of impairment. As of December 31, 2021, our goodwill balance was $5,620 million.
We review our finite-lived assets, including our finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The carrying amount may not be recoverable when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset groups. The impairment loss is determined as the amount by which the carrying amount of the asset group exceeds its fair value. Assessing the fair value of asset groups involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows and discount rates reflecting the risk inherent in future cash flows.
| Recently Adopted and New Accounting Pronouncements | ||||||||||||||
| Forward Looking Statements | ||||||||||||||
The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Exchange Act) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believe,” “expect,” “may,” “could,” “would,” “plan,” “intend,” “estimate,” “predict,” “potential,” “continue,” “should” or “anticipate” 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 SEC, in press releases or in oral statements made by or with the approval of one of our authorized executive officers. These forward-looking statements, such as statements regarding our anticipated future revenues or operating margin, earnings, capital expenditures, impacts to our business, financial results and financial condition as a result of the COVID-19 pandemic, the competitive marketplace for talent and future attrition trends, anticipated effective income tax rate and income tax expense, liquidity, access to capital, capital return strategy, investment strategies, cost management, plans and objectives, including those related to our digital practice areas, investment in our business, potential acquisitions, industry trends, client behaviors and trends, the outcome of and costs associated with regulatory and litigation matters, the appropriateness of the accrual related to the India Defined Contribution Obligation and other statements regarding matters that are not historical facts, are based on our current expectations, estimates and projections, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Actual results, performance, achievements and outcomes could differ materially from the results expressed in, or anticipated 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, including:
•economic and political conditions globally and in particular in the markets in which our clients and operations are concentrated;
•the continuing impact of the COVID-19 pandemic, or other future pandemics, on our business, results of operations, liquidity and financial condition;
•our ability to attract, train and retain skilled employees, including highly skilled technical personnel to satisfy client demand and senior management to lead our business globally;
•challenges related to growing our business organically as well as inorganically through acquisitions, and our ability to achieve our targeted growth rates;
•our ability to achieve our profitability goals and maintain our capital return strategy;
| Cognizant | 35 | December 31, 2021 Form 10-K | ||||||
•our ability to meet specified service levels or milestones required by certain of our contracts;
•intense and evolving competition and significant technological advances that our service offerings must keep pace with in the rapidly changing markets we compete in;
•legal, reputation and financial risks if we fail to protect client and/or our data from security breaches and/or cyber attacks;
•the effectiveness of our risk management, business continuity and disaster recovery plans and the potential that our global delivery capabilities could be impacted;
•restrictions on visas, in particular in the United States, United Kingdom and EU, or immigration more generally or increased costs of such visas or the wages we are required to pay employees on visas, which may affect our ability to compete for and provide services to our clients;
•risks related to anti-outsourcing legislation, if adopted, and negative perceptions associated with offshore outsourcing, both of which could impair our ability to serve our clients;
•risks and costs related to complying with numerous and evolving legal and regulatory requirements and client expectations in the many jurisdictions in which we operate;
•potential changes in tax laws, or in their interpretation or enforcement, failure by us to adapt our corporate structure and intercompany arrangements to achieve global tax efficiencies or adverse outcomes of tax audits, investigations or proceedings;
•potential exposure to litigation and legal claims in the conduct of our business; and
You are advised to consult any further disclosures we make on related subjects in the reports we file with the SEC, including this report in the sections titled “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We undertake 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 laws.
| Cognizant | 36 | December 31, 2021 Form 10-K | ||||||
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
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, including the use of derivative financial instruments, to mitigate the effect of foreign currency exchange rate fluctuations and expect to continue to use such instruments in the future to reduce foreign currency exposure to changes in the value of certain foreign currencies. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures.
Revenues from our clients in the United Kingdom, Continental Europe and Rest of World represented 8.9%, 10.3% and 7.1%, respectively, of our 2021 revenues, and are typically denominated in currencies other than the U.S. dollar. Accordingly, our revenues may be affected by fluctuations in the exchange rates, primarily the British pound and the Euro, as compared to the U.S. dollar.
A significant portion of our costs in India are denominated in the Indian rupee, representing 21.2% of our global operating costs during 2021, and are subject to foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations have an impact on our results of operations.
We have entered into a series of foreign exchange forward and option contracts that are designated as cash flow hedges of certain Indian rupee denominated payments in India. These U.S. dollar / Indian rupee hedges are intended to partially offset the impact of movement of exchange rates on future operating costs. As of December 31, 2021, the notional value and weighted average contract rates of these contracts by year of maturity were as follows:
| Notional Value (in millions) | Weighted Average Contract Rate (Indian rupee to U.S. dollar) | ||||||||||
| 2022 | $ | 1,643 | 78.7 | ||||||||
| 2023 | 880 | 80.9 | |||||||||
| Total | $ | 2,523 | 79.4 | ||||||||
As of December 31, 2021, the net unrealized gain on our outstanding foreign exchange forward and option contracts designated as cash flow hedges was $66 million. Based upon a sensitivity analysis at December 31, 2021, which estimates the fair value of the contracts assuming certain market exchange rate fluctuations, a 10.0% change in the foreign currency exchange rate against the U.S. dollar with all other variables held constant would have resulted in a change in the fair value of our foreign exchange forward and option contracts designated as cash flow hedges of approximately $249 million.
A portion of our balance sheet is exposed to foreign currency exchange rate fluctuations, which may result in non-operating foreign currency exchange gains or losses upon remeasurement. In 2021, we reported foreign currency exchange losses, exclusive of hedging losses, of approximately $33 million, which were primarily attributed to the remeasurement of net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. We use foreign exchange forward contracts that are scheduled to mature in 2022 to provide an economic hedge against balance sheet exposure to certain monetary assets and liabilities denominated in currencies other than the functional currency of the subsidiary. At December 31, 2021, the notional value of these outstanding contracts was $847 million and the net unrealized loss was $4 million. Based upon a sensitivity analysis of our foreign exchange forward contracts at December 31, 2021, which estimates the fair value of the contracts assuming certain market exchange rate fluctuations, a 10.0% change in the foreign currency exchange rate against the U.S. dollar with all other variables held constant would have resulted in a change in the fair value of approximately $21 million.
Interest Rate Risk
We have a Credit Agreement providing for a $750 million unsecured Term Loan and a $1,750 million unsecured revolving credit facility, which are due to mature in November 2023. We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan.
The Credit Agreement requires interest to be paid, at our option, at either the ABR, the Eurocurrency Rate or the Daily Simple RFR (each as defined in the Credit Agreement), plus, in each case, an Applicable Margin (as defined in the Credit Agreement). Initially, the Applicable Margin is 0.875% with respect to Eurocurrency Rate and Daily Simple RFR and 0.00%
| Cognizant | 37 | December 31, 2021 Form 10-K | ||||||
with respect to ABR loans. Subsequently, the Applicable Margin with respect to Eurocurrency Rate and Daily Simple RFR may range from 0.75% to 1.125%, depending on our public debt ratings (or, if we have not received public debt ratings, from 0.875% to 1.125%, depending on our Leverage Ratio, which is the ratio of indebtedness for borrowed money to Consolidated EBITDA, as defined in the Credit Agreement). The Term Loan is a Eurocurrency loan. Thus, our debt exposes us to market risk from changes in interest rates. We performed a sensitivity analysis to determine the effect of interest rate fluctuations on our interest expense. A 10.0% change in interest rates, with all other variables held constant, would have an immaterial effect on our reported interest expense.
Information provided by the sensitivity analysis of foreign currency risk and interest rate risk does not necessarily represent the actual changes that would occur under normal market conditions.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list of the financial statements filed herewith is found in Part IV, “Item 15. Exhibits, Financial Statements and Financial Statement Schedule.”
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer and our chief financial officer, 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 of 1934, as amended) as of December 31, 2021. Based on this evaluation, our chief executive officer and our chief financial officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the Company’s independent registered public accounting firm and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort.
| Cognizant | 38 | December 31, 2021 Form 10-K | ||||||
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended, and is a process designed by, or under the supervision of, our chief executive and chief financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on its evaluation, our management has concluded that, as of December 31, 2021, our internal control over financial reporting was effective. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this annual report, has issued an attestation report on our internal control over financial reporting, as stated in their report which is included on page F-2.
Inherent Limitations of Internal Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
| Cognizant | 39 | December 31, 2021 Form 10-K | ||||||
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information relating to our executive officers in response to this item is contained in part under the caption “Information About Our Executive Officers” in Part I of this Annual Report on Form 10-K.
We have adopted a written code of ethics, entitled “Code of Ethics,” that applies to all of our directors, executive officers and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. We make available our code of ethics free of charge through our website which is located at www.cognizant.com. We intend to post on our website all disclosures that are required by law or Nasdaq Stock Market listing standards concerning any amendments to, or waivers from, any provision of our code of ethics.
The remaining information required by this item will be included in our definitive proxy statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 11. Executive Compensation
The information required by this item will be included in our definitive proxy statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in our definitive proxy statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our definitive proxy statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 14. Principal Accountant Fees and Services
The information required by this item will be included in our definitive proxy statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
| Cognizant | 40 | December 31, 2021 Form 10-K | ||||||
PART IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | (1) Consolidated Financial Statements. Reference is made to the Index to Consolidated Financial Statements on Page F-1. | ||||
| (2) Consolidated Financial Statement Schedule. Reference is made to the Index to Financial Statement Schedule on Page F-1. | |||||
| (3) Exhibits. | |||||
Schedules other than as listed above are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.
EXHIBIT INDEX
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Date | Filed or Furnished Herewith | ||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 000-24429 | 3.1 | 6/7/2018 | ||||||||||||||||||||||||||||||||||
| 3.2 | 8-K | 000-24429 | 3.1 | 9/20/2018 | ||||||||||||||||||||||||||||||||||
| 4.1 | S-4/A | 333-101216 | 4.2 | 1/30/2003 | ||||||||||||||||||||||||||||||||||
| 4.2 | 10-K | 000-24429 | 4.2 | 2/14/2020 | ||||||||||||||||||||||||||||||||||
| 10.1† | 10-Q | 000-24429 | 10.1 | 8/7/2013 | ||||||||||||||||||||||||||||||||||
| 10.2† | Form of Amended and Restated Executive Employment and Non-Disclosure, Non-Competition, and Invention Assignment Agreement, between the Company and each of the following Executive Officers: Brian Humphries, Jan Siegmund, Becky Schmitt, Robert Telesmanic, Balu Ganesh Ayyar, Gregory Hyttenrauch, Ursula Morgenstern, Andrew Stafford and John Kim | 10-K | 000-24429 | 10.3 | 2/27/2018 | |||||||||||||||||||||||||||||||||
| 10.3† | 10-K | 000-24429 | 10.4 | 2/19/2019 | ||||||||||||||||||||||||||||||||||
| 10.4† | 8-K | 000-24429 | 10.1 | 7/29/2020 | ||||||||||||||||||||||||||||||||||
| 10.5† | 10-K | 000-24429 | 10.6 | 2/12/2021 | ||||||||||||||||||||||||||||||||||
| 10.6† | Filed | |||||||||||||||||||||||||||||||||||||
| 10.7† | Filed | |||||||||||||||||||||||||||||||||||||
| 10.8† | 10-Q | 000-24429 | 10.1 | 11/8/2004 | ||||||||||||||||||||||||||||||||||
| Cognizant | 41 | December 31, 2021 Form 10-K | ||||||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Date | Filed or Furnished Herewith | ||||||||||||||||||||||||||||||||
| 10.9† | 10-Q | 000-24429 | 10.1 | 5/4/2015 | ||||||||||||||||||||||||||||||||||
| 10.10† | 8-K | 000-24429 | 10.1 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.11† | 8-K | 000-24429 | 10.2 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.12† | 8-K | 000-24429 | 10.3 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.13† | 8-K | 000-24429 | 10.4 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.14† | 8-K | 000-24429 | 10.5 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.15† | 8-K | 000-24429 | 10.6 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.16† | 8-K | 000-24429 | 10.7 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.17† | 8-K | 000-24429 | 10.8 | 7/6/2009 | ||||||||||||||||||||||||||||||||||
| 10.18† | 8-K | 000-24429 | 10.1 | 6/7/2017 | ||||||||||||||||||||||||||||||||||
| 10.19† | 10-Q | 000-24429 | 10.2 | 8/3/2017 | ||||||||||||||||||||||||||||||||||
| 10.20† | 10-Q | 000-24429 | 10.3 | 8/3/2017 | ||||||||||||||||||||||||||||||||||
| 10.21† | 10-Q | 000-24429 | 10.4 | 8/3/2017 | ||||||||||||||||||||||||||||||||||
| 10.22† | 10-Q | 000-24429 | 10.5 | 8/3/2017 | ||||||||||||||||||||||||||||||||||
| 10.23† | 10-Q | 000-24429 | 10.1 | 5/8/2020 | ||||||||||||||||||||||||||||||||||
| 10.24† | 10-Q | 000-24429 | 10.2 | 5/8/2020 | ||||||||||||||||||||||||||||||||||
| 10.25 | 8-K | 000-24429 | 10.1 | 3/14/2017 | ||||||||||||||||||||||||||||||||||
| 10.26 | 8-K | 000-24429 | 10.1 | 11/9/2018 | ||||||||||||||||||||||||||||||||||
| 10.27 | Filed | |||||||||||||||||||||||||||||||||||||
| 10.28† | 10-Q | 000-24429 | 10.1 | 7/30/2020 | ||||||||||||||||||||||||||||||||||
| Cognizant | 42 | December 31, 2021 Form 10-K | ||||||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Date | Filed or Furnished Herewith | ||||||||||||||||||||||||||||||||
| 21.1 | Filed | |||||||||||||||||||||||||||||||||||||
| 23.1 | Filed | |||||||||||||||||||||||||||||||||||||
| 31.1 | Filed | |||||||||||||||||||||||||||||||||||||
| 31.2 | Filed | |||||||||||||||||||||||||||||||||||||
| 32.1 | Furnished | |||||||||||||||||||||||||||||||||||||
| 32.2 | Furnished | |||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Filed | ||||||||||||||||||||||||||||||||||||
| † | A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K. | ||||
Item 16. Form 10-K Summary
None.
| Cognizant | 43 | December 31, 2021 Form 10-K | ||||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||||||||
| By: | /S/ BRIAN HUMPHRIES | |||||||
| Brian Humphries, | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: | February 16, 2022 | |||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
/s/ BRIAN HUMPHRIES | Chief Executive Officer and Director (Principal Executive Officer) | February 16, 2022 | ||||||||||||
| Brian Humphries | ||||||||||||||
/s/ JAN SIEGMUND | Chief Financial Officer (Principal Financial Officer) | February 16, 2022 | ||||||||||||
| Jan Siegmund | ||||||||||||||
/s/ ROBERT TELESMANIC | Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | February 16, 2022 | ||||||||||||
| Robert Telesmanic | ||||||||||||||
/s/ MICHAEL PATSALOS-FOX | Chairman of the Board and Director | February 16, 2022 | ||||||||||||
| Michael Patsalos-Fox | ||||||||||||||
/s/ ZEIN ABDALLA | Director | February 16, 2022 | ||||||||||||
| Zein Abdalla | ||||||||||||||
/s/ VINITA BALI | Director | February 16, 2022 | ||||||||||||
| Vinita Bali | ||||||||||||||
/s/ MAUREEN BREAKIRON-EVANS | Director | February 16, 2022 | ||||||||||||
| Maureen Breakiron-Evans | ||||||||||||||
/s/ ARCHANA DESKUS | Director | February 16, 2022 | ||||||||||||
| Archana Deskus | ||||||||||||||
/s/ JOHN M. DINEEN | Director | February 16, 2022 | ||||||||||||
| John M. Dineen | ||||||||||||||
/s/ LEO S. MACKAY, JR. | Director | February 16, 2022 | ||||||||||||
| Leo S. Mackay, Jr. | ||||||||||||||
/s/ JOSEPH M. VELLI | Director | February 16, 2022 | ||||||||||||
| Joseph M. Velli | ||||||||||||||
/s/ SANDRA S. WIJNBERG | Director | February 16, 2022 | ||||||||||||
| Sandra S. Wijnberg | ||||||||||||||
| Cognizant | 44 | December 31, 2021 Form 10-K | ||||||
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE