01—Abstract
Summary
Summary of the 10-K filed February 19, 2019. Cited figures are marked; the original filing is the authoritative source.
Cognizant (CTSH) closed 2018 with revenue of $16.125 billiona, up 8.9% year over year (8.5% in constant currency), and GAAP income from operations of $2.801 billion, a 17.4% operating margin versus 16.8% in 2017.
Net income rose 39.7% to $2.101 billionb, but the comparison is flattered by the 2017 one-time $617 million Tax Reform charge, which pushed that year's effective tax rate to 43.4%. The 2018 effective rate fell to 25.0%. Diluted EPS was $3.60 versus $2.53.
Growth was broad: Healthcare (+9.5%), Products and Resources (+12.3%) and Communications, Media and Technology (+17.4%) led, while Financial Services lagged at +3.7% as banking clients shifted spend toward captives and digital transformation. Europe grew 18.3%, North America (76% of revenue) grew 7.4%, and the company completed five acquisitions for about $1.1 billionc. Capital allocation and balance-sheet items matter for investors.
Cognizant returned $3.7 billiond to shareholders over 2017-2018, above its $3.4 billion target, and shares outstanding fell from 588 million to 577 million. Free cash flow was $2.215 billion, and the new plan directs about 50% of free cash flow to dividends and buybacks and about 25% to acquisitions. The $5.5 billion repurchase authorization runs through 2020, with $2.5 billion remaining.
Cash and short-term investments were $4.5 billion, but $423 million is restricted by an Indian tax dispute, and $2.7 billion sits offshore. The main overhangs are the Indian Income Tax Department dispute, which asserts about $475 million plus related claims for two share repurchase transactions and has no reserve recorded. Also significant are the ongoing securities class action and derivative suits tied to the FCPA investigation, which was resolved in February 2019 for about $28 million.
Management also flagged rising attrition (20.8% annual turnover), tighter U.S. visa rules, and a Brexit-related drag. The filing was issued alongside a CEO transition, with Brian Humphries replacing Francisco D'Souza effective April 1, 2019.
02—Key points
Key Highlights
- Revenue reached $16.1B (+8.9%; +8.5% constant currency), with Communications, Media and Technology growing fastest at +17.4% and Europe up 18.3%.
- GAAP operating margin expanded to 17.4% from 16.8%, driven by the resource pyramid optimization, higher utilization, and corporate spend containment.
- Net income rose 39.7% to $2.1B and diluted EPS to $3.60, though 2017 was depressed by a one-time $617M Tax Reform charge; the 2018 effective tax rate was 25.0% versus 43.4%.
- Free cash flow was $2.2B and the company returned $3.7B to shareholders over 2017-2018, exceeding its $3.4B target; the new plan allocates about 50% of FCF to dividends and buybacks.
- Financial Services grew only 3.7% as banking clients moved work to captives, and segment margin slipped to 30.1% from 31.4%.
- Material contingent exposure: an Indian tax dispute (about $475M for the 2016 remittance plus a 2013 transaction) with no reserve recorded, and $423M of cash restricted pending resolution.
- Attrition rose to 20.8% from 19.6%, and leadership changed with Brian Humphries succeeding Francisco D'Souza as CEO effective April 1, 2019.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 19, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $16.13B$14.81B | +8.9% |
| SG&A Expenses | $3.01B$2.70B | +11.5% |
| Operating Income | $2.80B$2.48B | +12.9% |
| Interest Expense | $27.00M$23.00M | +17.4% |
| Net Income | $2.10B$1.50B | +39.7% |
| EPS (Basic) | $3.61$2.54 | +42.1% |
| EPS (Diluted) | $3.60$2.53 | +42.3% |
| Shares Outstanding (Basic) | 582.00M593.00M | −1.9% |
| Shares Outstanding (Diluted) | 584.00M595.00M | −1.8% |
05—Questions
Frequently Asked Questions
How did Cognizant perform financially in 2018?
Revenue grew 8.9% to $16.1 billion, GAAP operating income rose 12.9% to $2.8 billion, and operating margin improved to 17.4%. Net income increased 39.7% to $2.1 billion, though part of that gain reflects the absence of the large 2017 Tax Reform charge.
What is the status of the Indian tax dispute?
The Indian Income Tax Department claims Cognizant owes roughly $475 million on the 2016 India Cash Remittance, plus additional claims on a 2013 share repurchase. The company believes it has paid all applicable taxes and has recorded no reserve. The matter is pending before the Madras High Court, and $423 million of time deposits remain restricted during the dispute. An adverse outcome could materially affect results and cash flows.
How is Cognizant returning capital to shareholders?
The company paid $0.20 quarterly dividends in 2018 and declared $0.80 per share for the year. Under its new plan starting in 2019, about 50% of free cash flow goes to dividends and buybacks and about 25% to acquisitions. Its $5.5 billion buyback authorization runs through December 2020, with $2.5 billion remaining at year-end 2018.
Are there remaining legal risks from the FCPA investigation?
The DOJ and SEC investigations concluded in February 2019 with a payment of about $28 million, which was already accrued. However, securities class action and shareholder derivative lawsuits are still pending, and the company cannot estimate potential losses, so no accrual has been recorded. It expects to keep incurring legal and indemnification costs.
What risks do investors should watch in the coming year?
Key risks include slowing demand from banking clients, rising employee attrition and wage pressure in India, tighter U.S. and EU immigration rules affecting visa-dependent staffing, potential anti-outsourcing legislation, currency swings between the rupee and the dollar (each 1% move changes operating margin by about 18 basis points), and the unresolved Indian tax dispute.
06—Continue