01—Abstract
Summary
Summary of the 10-K filed February 16, 2022. Cited figures are marked; the original filing is the authoritative source.
Cognizant (CTSH) closed 2021 with revenue of $18.51 billiona, up 11.1% from $16.65 billion in 2020 (10.0% in constant currency).
Acquisitions contributed about 320 basis points of that growth, and the company completed seven acquisitions during the year. GAAP operating margin expanded 260 bps to 15.3%, and adjusted operating margin rose 100 bps to 15.4%, helped by savings from the 2020 Fit for Growth cost program and lower travel costs. GAAP diluted EPS was $4.05b, up 57.6%, and adjusted diluted EPS was $4.12, up 20.5%.
The gap between GAAP and adjusted EPS narrowed largely because 2020 included restructuring, COVID-related and Indian earnings tax charges that did not recur. The main headwind was elevated employee attrition, which reached 30.8%c for the full year and 34.6% annualized in Q4, versus 20.6% in 2020. Management expects this pressure to persist through 2022, with rising compensation costs that may not be fully recovered through pricing.
Management also flagged continued pricing pressure on non-digital legacy services in Financial Services. Cognizant ended the year with about 330,600 employees, and free cash flow fell to $2.2 billiond from $2.9 billion, reflecting deferred tax payments and higher incentive payouts. The company retains a strong balance sheet, with $2.7 billion in cash and short-term investments, and it returned $1.3 billion through buybacks and dividends.
Remaining risks include the unresolved Indian tax disputes with the ITD, a $443 million assessment on the 2016 share repurchase, and a $570 million Syntel judgment that is on appeal and not yet recorded as a gain. For investors, the filing shows a return to healthy growth and margin recovery, with the key questions being whether attrition and wage inflation can be offset by pricing and productivity, and how the Healthcare, Products & Resources and CMT segments sustain their momentum.
02—Key points
Key Highlights
- Revenue grew 11.1% to $18.51B (10.0% constant currency), with acquisitions adding 320 bps; seven acquisitions were completed in 2021.
- GAAP operating margin rose 260 bps to 15.3%; adjusted operating margin rose 100 bps to 15.4%.
- GAAP diluted EPS was $4.05 (up 57.6%); adjusted diluted EPS was $4.12 (up 20.5%).
- Segment performance: Products & Resources +15.7%, CMT +14.5%, Healthcare +10.0%, Financial Services +7.6%.
- Attrition was 30.8% for the year (34.6% annualized in Q4) versus 20.6% in 2020, a key cost and delivery headwind expected to continue into 2022.
- Free cash flow declined to $2.22B from $2.90B; cash and short-term investments were $2.72B at year-end.
- Capital returns: $0.96 per share in dividends in 2021 (quarterly dividend raised to $0.27), with a $9.5B repurchase authorization and $2.1B remaining.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2021filed February 16, 2022Financial Statements
FY2021 against FY2020
| Line item | FY2021FY2020 | Change |
|---|---|---|
| Revenue | $18.51B$16.65B | +11.1% |
| SG&A Expenses | $3.50B$3.10B | +13.0% |
| Operating Income | $2.83B$2.11B | +33.7% |
| Interest Expense | $9.00M$24.00M | −62.5% |
| Net Income | $2.14B$1.39B | +53.5% |
| EPS (Basic) | $4.06$2.58 | +57.4% |
| EPS (Diluted) | $4.05$2.57 | +57.6% |
| Shares Outstanding (Basic) | 527.00M540.00M | −2.4% |
| Shares Outstanding (Diluted) | 528.00M541.00M | −2.4% |
05—Questions
Frequently Asked Questions
Why did GAAP EPS rise so much in 2021?
GAAP diluted EPS rose $1.48 to $4.05, driven mainly by 33.7% higher income from operations. 2020 was depressed by restructuring charges, COVID-related costs, the Samlink settlement and a $140 million Tax on Accumulated Indian Earnings. Those items did not recur in 2021, though lower interest income partly offset the gains.
How significant is employee attrition for the outlook?
Attrition is a material risk. Management said 2021 attrition was unusually high and expects it to remain elevated through 2022. Replacing staff raises hiring and training costs, and wage increases may not be fully recovered through pricing, which could pressure margins.
What legal and tax risks could affect future results?
The ITD dispute over the 2013 and 2016 share repurchases seeks about 33 billion rupees (about $443 million) on the 2016 transaction; Cognizant has not recorded reserves. The Syntel judgment of $570 million is on appeal to the Second Circuit and will not be recognized until realizable. The India Defined Contribution Obligation remains uncertain, with a $117 million accrual from 2019 that could change.
Is the dividend and buyback program secure?
The company paid $0.96 per share in 2021 and approved a $0.27 quarterly dividend for 2022, and it intends to continue quarterly payments under its capital allocation framework. Buybacks were lighter, at $771 million, with $2.1 billion remaining under the program. The framework targets roughly 50% of free cash flow for acquisitions, 25% for buybacks and 25% for dividends, and it is subject to review based on liquidity and economic conditions.
What drove the decline in free cash flow?
Operating cash flow fell to $2.5 billion from $3.3 billion. The decline reflected the deferral of non-income tax payments under COVID-19 relief, a portion of which was paid in 2021, plus higher incentive compensation payouts. Capital expenditures also dropped to $279 million from $398 million, which partly offset the decline.
06—Continue