01—Abstract
Summary
Summary of the 10-K filed February 25, 2014. Cited figures are marked; the original filing is the authoritative source.
Cognizant Technology Solutions (CTSH) closed fiscal 2013 with revenue of $8,843.2 milliona, up 20.4% from $7,346.5 million in 2012, and net income of $1,228.6 million, up 16.9%.
GAAP diluted EPS was $4.03b versus $3.44, and non-GAAP diluted EPS was $4.38 versus $3.74. GAAP operating margin improved to 19.0% from 18.5%, and non-GAAP operating margin (excluding stock-based compensation and acquisition-related charges) rose to 20.6% from 20.2%. Growth was broad-based: Financial Services (42.0% of revenue) grew 22.5%, Manufacturing/Retail/Logistics grew 24.7%, Healthcare grew 17.1%, and Europe grew 32.1%.
Active clients rose to about 1,197 from 821, and strategic clients to 243. Management said it reinvests profits above a 19% to 20% non-GAAP operating margin into the business. The balance sheet is strong, with $3.75 billionc of cash, cash equivalents and short-term investments, no third-party debt, and working capital of $4.37 billion.
Stockholders' equity reached $6.14 billiond. Operating cash flow was $1.42 billion. However, $2.51 billion of cash is held outside the U.S., and the company has indefinitely reinvested foreign earnings.
Free cash flow was also reduced by heavy India facility investment and $179 million of buybacks, with $502 million remaining under the repurchase authorization. Key risks for investors include concentration in North America (77.6% of revenue) and in the financial services sector, heavy dependence on India-based talent and rupee exposure (cash flow hedges carry a $354.9 million net unrealized loss), U.S. immigration and anti-outsourcing legislation, and fixed-price contracts (34.0% of revenue). The company also has a pending two-for-one stock split, declared February 4, 2014, with distribution expected around March 7, 2014.
02—Key points
Key Highlights
- Revenue grew 20.4% to $8.84 billion in 2013, with all four business segments growing at double-digit rates.
- GAAP diluted EPS rose 17.2% to $4.03; non-GAAP diluted EPS rose 17.1% to $4.38.
- GAAP operating margin expanded to 19.0% from 18.5%, and non-GAAP operating margin reached 20.6%, supported by rupee depreciation and revenue growth outpacing headcount growth.
- Europe revenue grew 32.1% (24.3% excluding 2013 acquisitions), and Manufacturing/Retail/Logistics grew 24.7%.
- Balance sheet is net-cash with $3.75 billion in cash and short-term investments, no third-party debt, and $4.37 billion in working capital.
- Cash flow from operations reached $1.42 billion, up 21.4%, and the company repurchased $179 million of stock during the year.
- A two-for-one stock split was declared on February 4, 2014, with distribution expected around March 7, 2014.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 25, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $8.84B$7.35B | +20.4% |
| SG&A Expenses | $1.73B$1.56B | +10.9% |
| Operating Income | $1.68B$1.36B | +23.2% |
| Interest Expense | $0$0 | — |
| Net Income | $1.23B$1.05B | +16.9% |
| EPS (Basic) | $2.03$1.74 | +16.7% |
| EPS (Diluted) | $2.02$1.72 | +17.4% |
| Shares Outstanding (Basic) | 604.00M602.58M | +0.2% |
| Shares Outstanding (Diluted) | 609.70M611.72M | −0.3% |
05—Questions
Frequently Asked Questions
How concentrated is Cognizant's revenue by customer, geography and industry?
No single customer exceeded 10% of 2013 revenue, and the top five and top ten customers accounted for 13.2% and 22.6%, respectively. North America represented 77.6% of revenue, Europe 17.9%, and the rest of the world 4.6%. Financial Services was the largest segment at 42.0% of revenue, which increases exposure to sector-specific downturns.
What currency and India-related risks affect margins?
A large share of costs is incurred in Indian rupees, about 27.3% of global operating costs in 2013, while revenue is primarily in U.S. dollars. A 1% change in the rupee-dollar rate moves operating margin by about 22 basis points. The company hedges with forward contracts, but these hedges produced $163.0 million of losses in 2013 that reduced operating margin by 184 basis points. The net unrealized loss on outstanding hedges was $354.9 million at year end.
Is the company's cash position accessible for domestic use or acquisitions?
Most of the $2.51 billion of cash held outside the U.S. is considered indefinitely reinvested abroad. Repatriating it would generally trigger U.S. income taxes, so it is not readily available for U.S. needs without additional tax cost. The company stated it has no current plans to repatriate these funds and expects operating cash flow to cover its needs over the next twelve months.
What regulatory risks could affect the offshore delivery model?
U.S. H-1B and L-1 visa restrictions could limit staffing of onsite projects, and H-1B caps were reached for fiscal 2014. Additional H-1B fees run through September 2015. Anti-outsourcing legislation is debated in the U.S. Congress and state legislatures, and EU transfer-of-undertakings rules could increase costs in Europe. Changes in India's tax holidays or the Minimum Alternative Tax could also affect earnings.
06—Continue