01—Abstract
Summary
Summary of the 10-K filed February 12, 2021. Cited figures are marked; the original filing is the authoritative source.
Cognizant (CTSH) reported a mixed 2020 as the COVID-19 pandemic, a Maze ransomware attack, and its Fit for Growth restructuring weighed on results.
Revenue declined 0.8% to $16.65 billiona (-0.7% in constant currency), with Financial Services down 4.2% and Healthcare (+3.3%) and Communications, Media and Technology (+1.4%) growing. GAAP operating margin fell to 12.7% from 14.6%, and adjusted operating margin to 14.4% from 16.6%. GAAP net income dropped 24.4% to $1.39 billion, and diluted EPS fell to $2.57 from $3.29 (adjusted diluted EPS $3.42 vs. $3.99).
The decline was driven partly by a $140 millionb tax charge on accumulated Indian earnings and a $118 million revenue hit from a proposed exit of a large European financial services engagement. Cash generation and capital return remained strong. Operating cash flow rose to $3.30 billion from $2.50 billion, and the company returned $2.03 billion to shareholders through buybacks and dividends.
It ended the year with $2.72 billionc in cash and short-term investments, a $9.5 billion repurchase authorization ($2.8 billion remaining), and a dividend increase to $0.24 per quarter. Post-year-end, the company agreed to or completed several acquisitions (Linium, Servian, Magenic) totaling roughly $565 million in preliminary purchase price.
Key investor considerations include a pending $854 milliond jury verdict in Cognizant's favor against Syntel (not recorded until realizable, as appeal is expected), unresolved Indian tax disputes with the ITD, ongoing securities class action litigation tied to the former FCPA investigation, and continued reliance on the Indian rupee cost base and H-1B visa workforce. Management guided to roughly $530 million in annualized savings from the Fit for Growth Plan in 2021.
02—Key points
Key Highlights
- Revenue fell 0.8% to $16.65 billion; North America remained 75.6% of revenue, and Healthcare was the only segment with meaningful growth at 3.3%.
- GAAP operating margin declined to 12.7% from 14.6%; adjusted operating margin declined to 14.4% from 16.6%, reflecting higher incentive comp accruals, COVID-19 charges and the ransomware impact.
- GAAP diluted EPS fell 21.9% to $2.57; adjusted diluted EPS fell 14.3% to $3.42, which excludes restructuring, COVID-19 and Indian tax items.
- Operating cash flow increased 32% to $3.30 billion, aided by improved receivables collections and deferred payments; DSO improved to 70 days from 73.
- Returned $2.03 billion to shareholders in 2020 ($1.55 billion buybacks, $480 million dividends); $2.8 billion remains under the $9.5 billion repurchase program, and the quarterly dividend rises to $0.24.
- Recorded a $140 million tax charge after reversing its indefinite reinvestment assertion on Indian earnings, and a $854 million Syntel jury verdict in its favor is not yet recognized pending appeal.
- Headcount fell by 3,000 to 289,500, and the company announced a 2020 Fit for Growth Plan with $221 million in charges targeting roughly $530 million in annualized 2021 savings.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 12, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $16.65B$16.78B | −0.8% |
| SG&A Expenses | $3.10B$2.97B | +4.3% |
| Operating Income | $2.11B$2.45B | −13.8% |
| Interest Expense | $24.00M$26.00M | −7.7% |
| Net Income | $1.39B$1.84B | −24.4% |
| EPS (Basic) | $2.58$3.30 | −21.8% |
| EPS (Diluted) | $2.57$3.29 | −21.9% |
| Shares Outstanding (Basic) | 540.00M559.00M | −3.4% |
| Shares Outstanding (Diluted) | 541.00M560.00M | −3.4% |
05—Questions
Frequently Asked Questions
Why did Cognizant's profitability decline in 2020?
Operating margin fell due to higher incentive-based compensation accrual rates, investments to drive growth, the COVID-19 revenue decline, the ransomware attack's costs, and the proposed exit of a large European financial services engagement (a $118 million revenue reduction and $33 million of expenses). Partial offsets included lower travel costs, restructuring savings, and a weaker Indian rupee.
What is the status of the Syntel litigation and how might it affect results?
A jury awarded Cognizant $854 million, including $570 million in punitive damages, on October 27, 2020. Management expects Syntel to appeal and will not record the gain until it is realizable, so investors should not assume a future earnings benefit until the appeal is resolved.
What are the main risks to the company's future growth and earnings?
Risks include pricing pressure as clients move legacy work in-house, reduced demand from retail, travel and communications/media clients hit by COVID-19, rupee-related cost volatility, potential changes to H-1B and other immigration rules affecting a workforce where over 50% of its principal U.S. subsidiary's employees hold H-1B or L-1 visas, and the unresolved ITD tax dispute involving approximately $452 million plus an additional $523 million matter.
How strong is the balance sheet and capital return capacity?
At year-end Cognizant held $2.72 billion in cash and short-term investments, had roughly $1.93 billion of available credit facility capacity, and had $703 million of term loan debt maturing mostly in 2023. Operating cash flow of $3.30 billion comfortably funded $2.03 billion of shareholder returns and the $565 million of early 2021 acquisitions.
06—Continue