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EX-31.1 - EXHIBIT 31.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3113-31x2016.htm
EX-32.1 - EXHIBIT 32.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3213-31x2016.htm
EX-32.2 - EXHIBIT 32.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3223-31x2016.htm
EX-31.2 - EXHIBIT 31.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3123-31x2016.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
ý
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2016
¨
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.)
 
 
Glenpointe Centre West
500 Frank W. Burr Blvd.
Teaneck, New Jersey
 
07666
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (201) 801-0233
 
 
 
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  ý    No:  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No:  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  ý
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of April 29, 2016:
Class
 
Number of Shares
Class A Common Stock, par value $.01 per share
 
605,869,539

 
 
 


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
 
 
 
Page
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 



PART I. FINANCIAL INFORMATION
 
Item 1.    Condensed Consolidated Financial Statements (Unaudited).
 
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in millions, except par values)
 
 
March 31,  
 2016

December 31, 
 2015
Assets



Current assets:



Cash and cash equivalents
$
1,523.8


$
2,125.2

Short-term investments
2,927.9


2,824.3

Trade accounts receivable, net of allowances of $49.1 and $39.0, respectively
2,319.1


2,252.6

Unbilled accounts receivable
432.2


369.0

Other current assets
367.9


337.5

Total current assets
7,570.9


7,908.6

Property and equipment, net of accumulated depreciation of $1,135.6 and $1,079.1, respectively
1,270.0


1,271.4

Goodwill
2,461.8


2,404.7

Intangible assets, net
862.3


864.3

Deferred income tax assets, net
295.0


347.8

Other noncurrent assets
275.9


264.2

Total assets
$
12,735.9


$
13,061.0

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable
$
213.2


$
165.3

Deferred revenue
349.6


323.7

Short-term debt
162.5


406.3

Accrued expenses and other current liabilities
1,325.1


1,818.4

Total current liabilities
2,050.4


2,713.7

Deferred revenue, noncurrent
67.6


49.3

Deferred income tax liabilities, net
9.1


3.3

Long-term debt
858.4


876.8

Other noncurrent liabilities
138.1


139.8

Total liabilities
3,123.6


3,782.9

Commitments and contingencies (See Note 10)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.10 par value, 15.0 shares authorized, none issued

 

Class A common stock, $0.01 par value, 1,000.0 shares authorized, 606.2 and 609.0 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
6.1

 
6.1

Additional paid-in capital
301.4

 
453.0

Retained earnings
9,366.4

 
8,925.2

Accumulated other comprehensive income (loss)
(61.6
)
 
(106.2
)
Total stockholders’ equity
9,612.3


9,278.1

Total liabilities and stockholders’ equity
$
12,735.9


$
13,061.0

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

1


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
 
 
Three Months Ended 
 March 31,
 
2016
 
2015
Revenues
$
3,202.0


$
2,911.4

Operating expenses:



Cost of revenues (exclusive of depreciation and amortization expense shown separately below)
1,915.4


1,727.2

Selling, general and administrative expenses
646.2


610.8

Depreciation and amortization expense
86.4


73.1

Income from operations
554.0


500.3

Other income (expense), net:



Interest income
30.6


18.0

Interest expense
(5.1
)

(5.0
)
Foreign currency exchange gains (losses), net
9.1


(2.2
)
Other, net
0.5


(0.5
)
Total other income (expense), net
35.1


10.3

Income before provision for income taxes
589.1


510.6

Provision for income taxes
147.9


127.7

Net income
$
441.2


$
382.9

Basic earnings per share
$
0.73


$
0.63

Diluted earnings per share
$
0.72


$
0.62

Weighted average number of common shares outstanding - Basic
608.0


609.6

Dilutive effect of shares issuable under stock-based compensation plans
3.8

 
4.3

Weighted average number of common shares outstanding - Diluted
611.8


613.9

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

2


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
 
 
Three Months Ended 
 March 31,
 
2016
 
2015
Net income
$
441.2

 
$
382.9

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
19.5

 
(40.8
)
Change in unrealized gains and losses on cash flow hedges, net of taxes
19.7

 
42.2

Change in unrealized gains and losses on available-for-sale securities, net of taxes
5.4

 
2.4

Other comprehensive income (loss)
44.6

 
3.8

Comprehensive income
$
485.8

 
$
386.7

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)

 
For the Three Months Ended 
 March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
441.2

 
$
382.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
87.7

 
75.6

Provision for doubtful accounts
5.4

 
(4.9
)
Deferred income taxes
68.6

 
29.0

Stock-based compensation expense
53.5

 
45.8

Excess tax benefits on stock-based compensation plans
(3.2
)
 
(7.5
)
Other
(2.1
)
 
(5.1
)
Changes in assets and liabilities:
 
 
 
Trade accounts receivable
(55.2
)
 
(110.7
)
Other current assets
(77.8
)
 
(41.4
)
Other noncurrent assets
(12.8
)
 
(1.0
)
Accounts payable
48.1

 
28.3

Deferred revenues, current and noncurrent
41.2

 
74.5

Other current and noncurrent liabilities
(525.8
)
 
(276.2
)
Net cash provided by operating activities
68.8

 
189.3

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(63.7
)
 
(58.0
)
Purchases of investments
(1,096.0
)
 
(719.7
)
Proceeds from maturity or sale of investments
1,001.8

 
413.7

Business combinations, net of cash acquired
(70.5
)
 

Net cash (used in) investing activities
(228.4
)
 
(364.0
)
Cash flows from financing activities:
 
 
 
Issuance of common stock under stock-based compensation plans
49.4

 
36.7

Excess tax benefits on stock-based compensation plans
3.2

 
7.5

Repurchases of common stock
(257.4
)
 
(38.4
)
Repayment of term loan borrowings and capital lease obligations
(13.0
)
 
(13.1
)
Net change in notes outstanding under the revolving credit facility
(250.0
)
 
(550.0
)
Net cash (used in) financing activities
(467.8
)
 
(557.3
)
Effect of exchange rate changes on cash and cash equivalents
26.0

 
(6.7
)
(Decrease) in cash and cash equivalents
(601.4
)
 
(738.7
)
Cash and cash equivalents, beginning of year
2,125.2

 
2,010.1

Cash and cash equivalents, end of period
$
1,523.8

 
$
1,271.4

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Interim Condensed Consolidated Financial Statements
The terms “Cognizant,” “we,” “our,” “us” and “the Company” refer to Cognizant Technology Solutions Corporation unless the context indicates otherwise. We have prepared the accompanying unaudited condensed consolidated financial statements included herein in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2015. In our opinion, all adjustments considered necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire year.
During the three months ended March 31, 2016, we repurchased 4.3 million shares of our Class A common stock for $244.6 million under our existing stock repurchase program approved by our Board of Directors. As of March 31, 2016, the remaining available balance under the Board authorization was $193.3 million. Additional stock repurchases were made in connection with our stock-based compensation plans, whereby Company shares were tendered by employees for payment of applicable statutory tax withholdings. During the three months ended March 31, 2016, such repurchases totaled 0.2 million shares at an aggregate cost of $12.8 million.

Recently Adopted Accounting Pronouncements.

In April 2015, the Financial Accounting Standards Board, or FASB, issued an update related to the presentation of debt issuance costs. The updated standard requires debt issuance costs, other than costs incurred to secure lines of credit, be presented in the balance sheet as a direct deduction from the carrying value of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by this update. The guidance is effective on a retrospective basis for fiscal years, and interim periods within those years, beginning on or after January 1, 2016. Thus, we have adopted this guidance as of January 1, 2016. We conformed prior period's presentation to current period's presentation on our consolidated statement of financial position. The adoption of this standard impacted financial statement presentation only and had no effect on our financial condition or results of operations.

In April 2015, the FASB issued an update to the standard on internal-use software providing guidance to customers in evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the updated standard requires the customer to account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer is required to account for the arrangement as a service contract. The update is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2016. A company can elect to adopt the update either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We have adopted this update prospectively beginning January 1, 2016. The adoption of this update had no material effect on our financial condition or results of operations.

New Accounting Pronouncements.

In May 2014, the FASB issued a standard on revenue from contracts with customers. The new standard sets forth a single comprehensive model for recognizing and reporting revenue. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The standard is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2018. Early adoption is permitted but not before periods beginning on or after January 1, 2017. In March and April 2016, the FASB issued updates to the new revenue standard to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net, identifying performance obligations, and accounting for licenses of intellectual property with the same effective date. The standard allows for two methods of adoption: the full retrospective adoption, which requires the standard to be applied to each prior period presented, or the modified retrospective adoption, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. We are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures.


5




In January 2016, the FASB issued an update to the standard on financial instruments. The update significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements.  The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. Upon adoption, entities will be required to make a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value will apply prospectively to all equity investments that exist as of the date of adoption.  Early adoption of certain sections of this update is permitted. We are currently evaluating the effect the update will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued a standard on lease accounting. The new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2019. Upon adoption, entities will be required to use a modified retrospective transition which provides for certain practical expedients. Entities are required to apply the new standard at the beginning of the earliest comparative period presented. Early adoption of this new standard is permitted. We are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued an update to the standard on derivatives and hedging on the effect of derivative contract novations on existing hedge accounting relationships. As it relates to derivative instruments, novation refers to replacing one of the parties to a derivative instrument with a new party, which may occur for a variety of reasons such as: financial institution mergers, intercompany transactions, an entity exiting a particular derivatives business or relationship, or because of laws or regulatory requirements. The update clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedge accounting relationship provided that all other hedge accounting criteria continue to be met. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2017. Upon adoption, the entities can choose to apply on either a prospective basis or a modified retrospective basis. Early adoption of this update is permitted. We are currently evaluating the effect the update will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued an update to the standard on stock compensation, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2017. Upon adoption, entities will be required to apply a modified retrospective, prospective or retrospective transition method depending on the specific section of the guidance being adopted. Early adoption of this update is permitted. We are currently evaluating the effect the update will have on our consolidated financial statements and related disclosures.

Note 2 — Business Combinations
During the three months ended March 31, 2016, we completed two business combinations for total consideration of approximately $69.2 million (net of cash acquired). One of these transactions was an acquisition of a global consulting and technology services company that strengthens and expands our digital capabilities to deliver cloud-based IT infrastructure services. The second transaction included an acquisition of a delivery center in Lithuania to enhance our delivery capabilities in Europe and a multi-year service agreement.


6


These acquisitions were included in our unaudited condensed consolidated financial statements as of the date on which the businesses were acquired and were not material to our operations, financial position or cash flow. We have preliminarily allocated the purchase price related to these transactions to tangible and intangible assets and liabilities, including non-deductible goodwill, based on their fair values. Specifically-identified intangible assets and goodwill acquired were as follows:
 
Fair Value
 
Useful Life
 
(in millions)
 
 
Non-deductible goodwill
51.9

 
 
Customer relationship intangible assets
21.1

 
7-8 years
Other intangible assets
0.2

 
1 year
The primary items that generated the aforementioned goodwill are the value of the acquired assembled workforces and synergies between the acquired companies and us, neither of which qualify as an amortizable intangible asset.


Note 3 — Short-term Investments

Our short-term investments were as follows:
 
March 31, 2016
 
December 31, 2015
 
(in millions)
Available-for-sale investment securities:
 
 
 
U.S. Treasury and agency debt securities
$
598.9

 
$
527.1

Corporate and other debt securities
394.0

 
360.5

Certificates of deposit and commercial paper
719.1

 
754.0

Asset-backed securities
241.9

 
229.6

Municipal debt securities
121.1

 
121.3

Mutual funds
22.6

 
22.3

Total available-for-sale investment securities
2,097.6

 
2,014.8

Time deposits
830.3

 
809.5

Total short-term investments
$
2,927.9

 
$
2,824.3

Our available-for-sale investment securities consist of U.S. dollar denominated investments primarily in U.S. Treasury notes, U.S. government agency debt securities, municipal debt securities, non-U.S. government debt securities, U.S. and international corporate bonds, certificates of deposit, commercial paper, debt securities issued by supranational institutions, mutual funds invested in fixed income securities, and asset-backed securities, including Government National Mortgage Association (GNMA) mortgage backed securities and securities backed by auto loans, credit card receivables, and other receivables. Our investment guidelines are to purchase securities which are investment grade at the time of acquisition. We monitor the credit ratings of the securities in our portfolio on an ongoing basis.
Available-for-Sale Investment Securities
The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at March 31, 2016 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
U.S. Treasury and agency debt securities
$
596.6

 
$
2.3

 
$

 
$
598.9

Corporate and other debt securities
392.9

 
1.3

 
(0.2
)
 
394.0

Certificates of deposit and commercial paper
718.6

 
0.5

 

 
719.1

Asset-backed securities
241.7

 
0.4

 
(0.2
)
 
241.9

Municipal debt securities
120.6

 
0.5

 

 
121.1

Mutual funds
25.7

 

 
(3.1
)
 
22.6

Total available-for-sale investment securities
$
2,096.1

 
$
5.0

 
$
(3.5
)
 
$
2,097.6


7


The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at December 31, 2015 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
U.S. Treasury and agency debt securities
$
528.9

 
$

 
$
(1.8
)
 
$
527.1

Corporate and other debt securities
361.9

 
0.1

 
(1.5
)
 
360.5

Certificates of deposit and commercial paper
754.0

 
0.1

 
(0.1
)
 
754.0

Asset-backed securities
230.3

 
0.1

 
(0.8
)
 
229.6

Municipal debt securities
121.2

 
0.2

 
(0.1
)
 
121.3

Mutual funds
25.3

 
0.1

 
(3.1
)
 
22.3

Total available-for-sale investment securities
$
2,021.6

 
$
0.6

 
$
(7.4
)
 
$
2,014.8

The fair value and related unrealized losses of available-for-sale investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of March 31, 2016:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in millions)
U.S. Treasury and agency debt securities
$
43.0

 
$

 
$

 
$

 
$
43.0

 
$

Corporate and other debt securities
99.0

 
(0.2
)
 
3.1

 

 
102.1

 
(0.2
)
Asset-backed securities
103.9

 
(0.1
)
 
10.5

 
(0.1
)
 
114.4

 
(0.2
)
Municipal debt securities
22.4

 

 

 

 
22.4

 

Mutual funds
1.1

 
(0.2
)
 
21.5

 
(2.9
)
 
22.6

 
(3.1
)
Total
$
269.4

 
$
(0.5
)
 
$
35.1

 
$
(3.0
)
 
$
304.5

 
$
(3.5
)

The fair value and related unrealized losses of available-for-sale investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of December 31, 2015:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in millions)
U.S. Treasury and agency debt securities
$
475.7

 
$
(1.8
)
 
$

 
$

 
$
475.7

 
$
(1.8
)
Corporate and other debt securities
315.1

 
(1.5
)
 
3.1

 

 
318.2

 
(1.5
)
Certificates of deposit and commercial paper
271.5

 
(0.1
)
 

 

 
271.5

 
(0.1
)
Asset-backed securities
199.4

 
(0.7
)
 
11.4

 
(0.1
)
 
210.8

 
(0.8
)
Municipal debt securities
56.5

 
(0.1
)
 

 

 
56.5

 
(0.1
)
Mutual funds

 

 
21.1

 
(3.1
)
 
21.1

 
(3.1
)
Total
$
1,318.2

 
$
(4.2
)
 
$
35.6

 
$
(3.2
)
 
$
1,353.8

 
$
(7.4
)
The unrealized losses for the above securities as of March 31, 2016 and December 31, 2015 are primarily attributable to changes in interest rates. As of March 31, 2016, we do not consider any of the investments to be other-than-temporarily impaired. The gross unrealized gains and losses in the above tables were recorded, net of tax, in accumulated other comprehensive income (loss).

8


The contractual maturities of our fixed income available-for-sale investment securities as of March 31, 2016 are set forth in the following table:
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
815.6

 
$
816.2

Due after one year up to two years
573.7

 
575.1

Due after two years up to three years
384.4

 
386.5

Due after three years up to four years
55.0

 
55.3

Asset-backed securities
241.7

 
241.9

Fixed income available-for-sale investment securities
$
2,070.4

 
$
2,075.0

Asset-backed securities were excluded from the maturity categories because the actual maturities may differ from the contractual maturities since the underlying receivables may be prepaid without penalties. Further, actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
Proceeds from sales of available-for-sale investment securities and the gross gains and losses that have been included in earnings as a result of those sales were as follows:
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
(in millions)
Proceeds from sales of available-for-sale investment securities
$
561.6

 
$
181.8

 
 
 
 
Gross gains
$
0.3

 
$
0.4

Gross losses
(0.3
)
 
(0.1
)
Net realized gains on sales of available-for-sale investment securities
$

 
$
0.3


Note 4 — Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were as follows:
 
March 31, 2016
 
December 31, 2015
 
(in millions)
Compensation and benefits
$
807.3

 
$
1,272.0

Income taxes
11.6

 
17.1

Professional fees
75.3

 
69.6

Travel and entertainment
28.0

 
29.8

Customer volume incentives
217.3

 
236.1

Derivative financial instruments
8.0

 
10.9

Other
177.6

 
182.9

Total accrued expenses and other current liabilities
$
1,325.1

 
$
1,818.4



9


Note 5 — Debt
On November 20, 2014, we entered into a credit agreement with a commercial bank syndicate providing for a $1,000.0 million unsecured term loan and a $750.0 million unsecured revolving credit facility. The term loan was used to pay a portion of the cash consideration in connection with the 2014 acquisition of TZ US Parent, Inc., or TriZetto. The revolving credit facility is available for general corporate purposes. The term loan and the revolving credit facility both mature on November 20, 2019. All notes drawn to date under the revolving credit facility have been less than 90 days in duration. We are required under the credit agreement to make scheduled quarterly principal payments on the term loan.
Short-term Debt
The following summarizes our short-term debt balances as of:
 
 
March 31, 2016
 
December 31, 2015
 
 
(in millions)
Notes outstanding under revolving credit facility
 
$
100.0

 
$
350.0

Term loan - current maturities
 
62.5

 
56.3

Total short-term debt
 
$
162.5

 
$
406.3

Long-term Debt
The following summarizes our long-term debt balances as of:
 
 
March 31, 2016
 
December 31, 2015
 
 
(in millions)
Term loan, due 2019
 
$
925.0

 
$
937.5

Less:
 
 
 
 
Current maturities
 
(62.5
)
 
(56.3
)
Deferred financing costs
 
(4.1
)
 
(4.4
)
Long-term debt, net
 
$
858.4

 
$
876.8


In accordance with the recently adopted FASB update, we have presented debt issuance costs in the balance sheet as a direct deduction from the carrying value of that debt liability. As this guidance is effective on a retrospective basis, we conformed prior period's presentation to current period's presentation on our consolidated statement of financial position.

Note 6 — Income Taxes
Our Indian subsidiaries, collectively referred to as Cognizant India, are primarily export-oriented and are eligible for certain income tax holiday benefits granted by the government of India for export activities conducted within Special Economic Zones, or SEZs, for periods of up to 15 years. Our Indian profits ineligible for SEZ benefits are subject to corporate income tax at the rate of 34.6%. In addition, all Indian profits, including those generated within SEZs, are subject to the Minimum Alternative Tax, or MAT, at the rate of 21.3%. Any MAT paid is creditable against future Indian corporate income tax, subject to limitations.
Our effective income tax rates were as follows:
 
Three Months Ended 
 March 31,
 
2016
 
2015
Effective income tax rate
25.1
%
 
25.0
%
For the 2016 and 2015 periods, the principal reason for the difference between our effective income tax rates and the U.S. federal statutory rate is the effect of the Indian tax holiday and earnings taxed in countries that have lower rates than the United States.


10


Note 7 — Derivative Financial Instruments
In the normal course of business, we use foreign exchange forward contracts to manage foreign currency exchange rate risk. The estimated fair value of the foreign exchange forward contracts considers the following items: discount rate, timing and amount of cash flow and counterparty credit risk. Derivatives may give rise to credit risks from the possible non-performance by counterparties. Credit risk is generally limited to the fair value of those contracts that are favorable to us. We have limited our credit risk by entering into derivative transactions only with highly-rated financial institutions, limiting the amount of credit exposure with any one financial institution and conducting an ongoing evaluation of the creditworthiness of the financial institutions with which we do business. In addition, all the assets and liabilities related to our foreign exchange forward contracts set forth in the below table are subject to International Swaps and Derivatives Association, or ISDA, master netting arrangements or other similar agreements with each individual counterparty. These master netting arrangements generally provide for net settlement of all outstanding contracts with the counterparty in the case of an event of default or a termination event. We have presented all the assets and liabilities related to our foreign exchange forward contracts on a gross basis, with no offsets, in our accompanying unaudited condensed consolidated statements of financial position. There is no financial collateral (including cash collateral) posted or received by us related to our foreign exchange forward contracts.
The following table provides information on the location and fair values of derivative financial instruments included in our unaudited condensed consolidated statement of financial position as of:
 
 
 
 
March 31, 2016
 
December 31, 2015
Designation of Derivatives
 
Location on Statement of
Financial Position
 
Assets
 
Liabilities
 
Assets  
 
Liabilities
 
 
 
 
(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments
 
Other current assets
 
$
16.4

 
$

 
$
7.2

 
$

 
 
Other noncurrent assets
 
5.9

 

 
1.6

 

 
 
Accrued expenses and other current liabilities
 

 
4.9

 

 
9.7

 
 
Other noncurrent liabilities
 

 
7.3

 

 
13.5

 
 
Total
 
22.3

 
12.2

 
8.8

 
23.2

Foreign exchange forward contracts – Not designated as hedging instruments
 
Other current assets
 
0.3

 

 
0.4

 

 
 
Accrued expenses and other current liabilities
 

 
3.1

 

 
1.2

 
 
Total
 
0.3

 
3.1

 
0.4

 
1.2

Total
 
 
 
$
22.6

 
$
15.3

 
$
9.2

 
$
24.4


11


Cash Flow Hedges
We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of Indian rupee denominated payments in India. These contracts are intended to partially offset the impact of movement of exchange rates on future operating costs and are scheduled to mature each month during 2016, 2017, and 2018. Under these contracts, we purchase Indian rupees and sell U.S. dollars. The changes in fair value of these contracts are initially reported in the caption “Accumulated other comprehensive income (loss)” in our consolidated statements of financial position and are subsequently reclassified to earnings in the same period the hedge contract matures. As of March 31, 2016, we estimate that $9.0 million, net of tax, of the net gains related to derivatives designated as cash flow hedges recorded in accumulated other comprehensive income (loss) is expected to be reclassified into earnings within the next 12 months.
The notional value of our outstanding contracts by year of maturity and the net unrealized gains (losses) included in accumulated other comprehensive income (loss) for such contracts were as follows as of:
 
March 31, 2016
 
December 31, 2015
 
(in millions)
2016
$
915.0

 
$
1,215.0

2017
1,005.0

 
900.0

2018
360.0

 
330.0

Total notional value of contracts outstanding
$
2,280.0

 
$
2,445.0

Net unrealized gains (losses) included in accumulated other comprehensive income (loss), net of taxes
$
8.0

 
$
(11.7
)
Upon settlement or maturity of the cash flow hedge contracts, we record the related gain or loss, based on our designation at the commencement of the contract, with the hedged Indian rupee denominated expense reported within cost of revenues and selling, general and administrative expenses. Hedge ineffectiveness was immaterial for all periods presented.
The following table provides information on the location and amounts of pre-tax (losses) on our cash flow hedges for the three months ended March 31:
 
Change in
Derivative Gains/Losses Recognized
in Accumulated Other
Comprehensive Income (Loss)
(effective portion)
 
Location of Net Derivative
(Losses) Reclassified
from Accumulated Other
Comprehensive Income (Loss)
into Income
(effective portion)
 
Net (Loss) Reclassified
from Accumulated Other
Comprehensive Income (Loss)
into Income
(effective portion)
 
2016
 
2015
 
 
 
2016
 
2015
 
(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments
$
22.0

 
$
34.7

 
Cost of revenues
 
$
(2.1
)
 
$
(11.2
)
 
 
 
 
 
Selling, general and administrative expenses
 
(0.4
)
 
(2.5
)
 
 
 
 
 
Total
 
$
(2.5
)
 
$
(13.7
)
The activity related to the change in net unrealized gains (losses) on our cash flow hedges included in accumulated other comprehensive income (loss) is presented in Note 9.

12


Other Derivatives
We use foreign exchange forward contracts, which have not been designated as hedges, to hedge balance sheet exposure to certain monetary assets and liabilities denominated in currencies other than the functional currency of our foreign subsidiaries. We entered into a series of foreign exchange forward contracts that are primarily to purchase U.S. dollars and sell Indian rupees and are scheduled to mature in 2016. Realized gains or losses and changes in the estimated fair value of these derivative financial instruments are recorded in the caption "Foreign currency exchange gains (losses), net" in our consolidated statements of operations.
Additional information related to our outstanding foreign exchange forward contracts not designated as hedging instruments is as follows:
 
March 31, 2016
 
December 31, 2015
 
Notional
 
Market Value

 
Notional
 
Market Value

 
(in millions)
Contracts outstanding
$
193.6

 
$
(2.8
)
 
$
165.5

 
$
(0.8
)
The following table provides information on the location and amounts of realized and unrealized pre-tax gains and losses on our other derivative financial instruments for the three months ended March 31, 2016 and 2015:
 
Location of Net (Losses) on
Derivative Instruments
 
Amount of Net (Losses) on Derivative Instruments
 
 
 
Three Months Ended March 31,
 
 
 
2016
 
2015
 
 
 
(in millions)
Foreign exchange forward contracts – Not designated as hedging instruments
Foreign currency exchange gains (losses), net

 
$
(2.8
)
 
$
(1.8
)
The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.

Note 8 — Fair Value Measurements
We measure our cash equivalents, investments and foreign exchange forward contracts at fair value. The authoritative guidance defines fair value as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

13


The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of March 31, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
260.9

 
$

 
$

 
$
260.9

Time deposits

 
323.0

 

 
323.0

Certificates of deposit and commercial paper

 
134.0

 

 
134.0

Total cash equivalents
260.9

 
457.0

 

 
717.9

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
830.3

 

 
830.3

Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Treasury and agency debt securities
540.2

 
58.7

 

 
598.9

Corporate and other debt securities

 
394.0

 

 
394.0

Certificates of deposit and commercial paper

 
719.1

 

 
719.1

Asset-backed securities

 
241.9

 

 
241.9

Municipal debt securities

 
121.1

 

 
121.1

Total available-for-sale investment securities(1)
540.2

 
1,534.8

 

 
2,075.0

Total short-term investments(1)
540.2

 
2,365.1

 

 
2,905.3

Derivative financial instruments - foreign exchange forward contracts:
 
 
 
 
 
 
 
Other current assets

 
16.7

 

 
16.7

Accrued expenses and other current liabilities

 
(8.0
)
 

 
(8.0
)
Other noncurrent assets

 
5.9

 

 
5.9

Other noncurrent liabilities

 
(7.3
)
 

 
(7.3
)
Total
$
801.1

 
$
2,829.4

 
$

 
$
3,630.5

________________
(1)
Excludes mutual funds which are valued based on the net asset value, or NAV, of the fund and were $22.6 million at March 31, 2016.


14


The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2015:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
495.9

 
$

 
$

 
$
495.9

Total cash equivalents
495.9

 

 

 
495.9

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
809.5

 

 
809.5

Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Treasury and agency debt securities
463.7

 
63.4

 

 
527.1

Corporate and other debt securities

 
360.5

 

 
360.5

Certificates of deposit and commercial paper

 
754.0

 

 
754.0

Asset-backed securities

 
229.6

 

 
229.6

Municipal debt securities

 
121.3

 

 
121.3

Total available-for-sale investment securities(1)
463.7

 
1,528.8

 

 
1,992.5

Total short-term investments(1)
463.7

 
2,338.3

 

 
2,802.0

Derivative financial instruments - foreign exchange forward contracts:
 
 
 
 
 
 
 
Other current assets

 
7.6

 

 
7.6

Accrued expenses and other current liabilities

 
(10.9
)
 

 
(10.9
)
Other noncurrent assets

 
1.6

 

 
1.6

Other noncurrent liabilities

 
(13.5
)
 

 
(13.5
)
Total
$
959.6

 
$
2,323.1

 
$

 
$
3,282.7

________________
(1)
Excludes mutual funds which are valued based on the net asset value, or NAV, of the fund and were $22.3 million at December 31, 2015.


We measure the fair value of money market funds and U.S. Treasury securities based on quoted prices in active markets for identical assets and therefore classify these assets as Level 1. The fair value of commercial paper, certificates of deposit, U.S. government agency securities, municipal debt securities, U.S. and international corporate bonds and foreign government debt securities is measured based on relevant trade data, dealer quotes, or model-driven valuations using significant inputs derived from or corroborated by observable market data, such as yield curves and credit spreads. We measure the fair value of our asset-backed securities using model-driven valuations based on significant inputs derived from or corroborated by observable market data such as dealer quotes, available trade information, spread data, current market assumptions on prepayment speeds and defaults and historical data on deal collateral performance. The carrying value of the time deposits approximated fair value as of March 31, 2016 and December 31, 2015.
We estimate the fair value of each foreign exchange forward contract by using a present value of expected cash flows model. This model calculates the difference between the current market forward price and the contracted forward price for each foreign exchange contract and applies the difference in the rates to each outstanding contract. The market forward rates include a discount and credit risk factor. The amounts are aggregated by type of contract and maturity.
During the three months ended March 31, 2016 and the year ended December 31, 2015, there were no transfers among Level 1, Level 2, or Level 3 financial assets and liabilities.

15


Note 9 — Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component were as follows for the three months ended March 31, 2016:
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
(in millions)
Foreign currency translation adjustments:
 
 
 
 
 
Beginning balance
$
(89.9
)
 
$

 
$
(89.9
)
Change in foreign currency translation adjustments
19.5

 

 
19.5

Ending balance
$
(70.4
)
 
$

 
$
(70.4
)
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investment securities:
 
 
 
 
 
Beginning balance
$
(6.8
)
 
$
2.2

 
$
(4.6
)
Net unrealized gains arising during the period
8.3

 
(2.9
)
 
5.4

Reclassification of net (gains) to Other, net

 

 

Net change
8.3

 
(2.9
)
 
5.4

Ending balance
$
1.5

 
$
(0.7
)
 
$
0.8

 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
Beginning balance
$
(14.4
)
 
$
2.7

 
$
(11.7
)
Unrealized gains arising during the period
22.0

 
(4.2
)
 
17.8

Reclassifications of losses to:
 
 
 
 
 
Cost of revenues
2.1

 
(0.5
)
 
1.6

Selling, general and administrative expenses
0.4

 
(0.1
)
 
0.3

Net change
24.5

 
(4.8
)
 
19.7

Ending balance
$
10.1

 
$
(2.1
)
 
$
8.0

 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
Beginning balance
$
(111.1
)
 
$
4.9

 
$
(106.2
)
Other comprehensive income (loss)
52.3

 
(7.7
)
 
44.6

Ending balance
$
(58.8
)
 
$
(2.8
)
 
$
(61.6
)




16


Changes in accumulated other comprehensive income (loss) by component were as follows for the three months ended March 31, 2015:
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
(in millions)
Foreign currency translation adjustments:
 
 
 
 
 
Beginning balance
$
(34.8
)
 
$

 
$
(34.8
)
Change in foreign currency translation adjustments
(40.8
)
 

 
(40.8
)
Ending balance
$
(75.6
)
 
$

 
$
(75.6
)
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investment securities:
 
 
 
 
 
Beginning balance
$
(2.4
)
 
$
0.8

 
$
(1.6
)
Net unrealized gains arising during the period
4.2

 
(1.7
)
 
2.5

Reclassification of net (gains) to Other, net
(0.3
)
 
0.2

 
(0.1
)
Net change
3.9

 
(1.5
)
 
2.4

Ending balance
$
1.5

 
$
(0.7
)
 
$
0.8

 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
Beginning balance
$
(102.6
)
 
$
15.9

 
$
(86.7
)
Net unrealized gains arising during the period
34.7

 
(3.7
)
 
31.0

Reclassifications of losses to:
 
 
 
 
 
Cost of revenues
11.2

 
(2.0
)
 
9.2

Selling, general and administrative expenses
2.5

 
(0.5
)
 
2.0

Net change
48.4

 
(6.2
)
 
42.2

Ending balance
$
(54.2
)
 
$
9.7

 
$
(44.5
)
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
Beginning balance
$
(139.8
)
 
$
16.7

 
$
(123.1
)
Other comprehensive income (loss)
11.5

 
(7.7
)
 
3.8

Ending balance
$
(128.3
)
 
$
9.0

 
$
(119.3
)

Note 10 — Commitments and Contingencies

As of March 31, 2016, we had outstanding fixed capital commitments of approximately $76.2 million related to our India development center expansion program to build new state-of-the-art IT development and delivery centers.
We are involved in various claims and legal actions arising in the ordinary course of business. We accrue a liability when a loss is considered probable and the amount can be reasonably estimated. In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, if decided adversely, is not expected to have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, many of our engagements involve projects that are critical to the operations of our customers’ business and provide benefits that are difficult to quantify. Any failure in a customer’s systems or our failure to meet our contractual obligations to our clients, including any breach involving a customer’s confidential information or sensitive data, or our obligations under applicable laws or regulations could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Although we attempt to contractually limit our liability for damages arising from negligent acts, errors, mistakes, or omissions in rendering our services, there can be no assurance that the limitations of liability set forth in our contracts will be enforceable in all instances or will otherwise protect us from liability for damages. Although we have general liability insurance coverage, including coverage for errors or omissions, there can be no assurance that such coverage will cover all types of claims, continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

17


In the normal course of business and in conjunction with certain client engagements, we have entered into contractual arrangements through which we may be obligated to indemnify clients or other parties with whom we conduct business with respect to certain matters. These arrangements can include provisions whereby we agree to hold the indemnified party and certain of their affiliated entities harmless with respect to third-party claims related to such matters as our breach of certain representations or covenants, or out of our intellectual property infringement, our gross negligence or willful misconduct or certain other claims made against certain parties. Payments by us under any of these arrangements are generally conditioned on the client making a claim and providing us with full control over the defense and settlement of such claim. It is not possible to determine the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Historically, we have not made payments under these indemnification agreements and therefore they have not had any impact on our operating results, financial position, or cash flows. However, if events arise requiring us to make payment for indemnification claims under our indemnification obligations in contracts we have entered, such payments could have material impact on our business, results of operations, financial condition and cash flows.

Note 11 — Segment Information
Our reportable segments are:
Financial Services, which includes customers providing banking/transaction processing, capital markets and insurance services;
Healthcare, which includes healthcare providers and payers as well as life sciences customers, including pharmaceutical, biotech and medical device companies;
Manufacturing/Retail/Logistics, which includes consumer goods, manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services; and
Other, which is an aggregation of industry segments each of which, individually, represents less than 10% of consolidated revenues and segment operating profit. The Other reportable segment includes our information, media and entertainment services, communications and high technology operating segments. Our sales managers, account executives, account managers and project teams are aligned in accordance with the specific industries they serve.
Our chief operating decision maker evaluates the Company’s performance and allocates resources based on segment revenues and operating profit. Segment operating profit is defined as income from operations before unallocated costs. Generally, operating expenses for each operating segment have similar characteristics and are subject to the same factors, pressures and challenges. However, the economic environment and its effects on industries served by our operating segments may affect revenue and operating expenses to differing degrees. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as a per seat charge for use of the development and delivery centers. Certain selling, general and administrative expenses, excess or shortfall of incentive compensation for delivery personnel as compared to target, stock-based compensation expense, a portion of depreciation and amortization and the impact of the settlements of our cash flow hedges are not allocated to individual segments in internal management reports used by the chief operating decision maker. Accordingly, such expenses are excluded from segment operating profit and are separately disclosed as “unallocated costs” and adjusted only against our total income from operations. Additionally, management has determined that it is not practical to allocate identifiable assets by segment, since such assets are used interchangeably among the segments.

18


Revenues from external customers and segment operating profit, before unallocated expenses, for the Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other reportable segments were as follows:
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
(in millions)
Revenues:
 
 
 
Financial Services
$
1,285.7

 
$
1,161.1

Healthcare
914.1

 
879.1

Manufacturing/Retail/Logistics
632.5

 
548.9

Other
369.7

 
322.3

Total revenue
$
3,202.0

 
$
2,911.4

                                                                                     Segment Operating Profit:
 
 
 
Financial Services
$
423.0

 
$
347.4

Healthcare
295.2

 
245.1

Manufacturing/Retail/Logistics
219.4

 
181.3

Other
121.6

 
92.0

Total segment operating profit
1,059.2

 
865.8

Less: unallocated costs
505.2

 
365.5

Income from operations
$
554.0

 
$
500.3


Geographic Area Information
Revenue and long-lived assets, by geographic area, are as follows:
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
(in millions)
Revenues: (1)
 
 
 
North America(2)
$
2,497.3

 
$
2,292.0

United Kingdom
298.8

 
285.1

Rest of Europe
226.6

 
190.8

Europe - Total
525.4

 
475.9

Rest of World (3) 
179.3

 
143.5

Total
$
3,202.0

 
$
2,911.4

 
As of
 
March 31, 2016
 
December 31, 2015
 
(in millions)
Long-lived Assets: (4)
 
 
 
North America(2)
$
240.8

 
$
242.4

Europe
34.3

 
32.2

Rest of World (3)(5) 
994.9

 
996.8

Total
$
1,270.0

 
$
1,271.4

________________
(1)
Revenues are attributed to regions based upon customer location.
(2)
Substantially all relates to operations in the United States.
(3)
Includes our operations in Asia Pacific, the Middle East and Latin America.
(4)
Long-lived assets include property and equipment, net of accumulated depreciation and amortization.
(5)
Substantially all of these long-lived assets relate to our operations in India.

19


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Summary
We are a leading provider of information technology (IT), consulting and business process services, dedicated to helping the world’s leading companies build stronger businesses. Our clients engage us to help them operate more efficiently, provide solutions to critical business and technology problems, and help them drive technology-based innovation and growth. Our core competencies include: business, process, operations and IT consulting, application development and systems integration, enterprise information management, application testing, application maintenance, IT infrastructure services, and business process services. We tailor our services to specific industries and utilize an integrated global delivery model. This seamless global sourcing model combines industry-specific expertise, client service teams based on-site at the client locations and delivery teams located at dedicated near-shore and offshore global delivery centers.
The following table sets forth key financial results for the three months ended March 31, 2016 and 2015:
 
 
 
 
 
 
Increase
 
 
2016
 
2015
 
$
 
%
 
 
(Dollars in millions, except per share data)
Revenue
 
$
3,202.0

 
$
2,911.4

 
$
290.6

 
10.0
Net income
 
441.2

 
382.9

 
58.3

 
15.2
Diluted earnings per share
 
0.72

 
0.62

 
0.10

 
16.1
Non-GAAP diluted earnings per share1
 
0.80

 
0.71

 
0.09

 
12.7
The key drivers of our revenue growth during the three months ended March 31, 2016 were as follows:
Solid performance across our Financial Services, Manufacturing/Retail/Logistics and Other business segments with revenue growth of 10.7%, 15.2% and 14.7%, respectively. Revenue growth for our Healthcare business segment was 4.0%, as the demand for our services in this segment was negatively impacted by the trend towards consolidation within the healthcare industry;
Sustained strength in the North American market where revenues grew 9.0% as compared to the quarter ended March 31, 2015;
Continued penetration of the European and Rest of World (primarily the Asia Pacific) markets. Revenue from our customers outside the United States was negatively affected by the strength of the U.S. dollar against the British pound, the Euro and other currencies. In Europe, we experienced revenue growth of 10.4%, after a negative currency impact of 4.3%, as compared to the quarter ended March 31, 2015. Revenue from our Rest of World customers increased 24.9%, after a negative currency impact of 6.3%, as compared to the quarter ended March 31, 2015;
Increased customer spending on discretionary projects;
Expansion of our service offerings, including consulting and digital services, such as next generation IT solutions and platform-based solutions;
Continued expansion of the market for global delivery of IT and business process services; and
Increased penetration at existing customers, including strategic clients.
We saw a continued demand from our customers for a broad range of services, including IT strategy and business consulting, application development and systems integration, enterprise information management, application testing, application maintenance, infrastructure services, and business process services. In addition, we are seeing a continued customer interest in digital solutions and increased demand for data mobility, mobile enterprise solutions and security services. We are also seeing an increase in demand for larger, more complex projects that are transformational for our customers, including managed services contracts. Such contracts may have longer sales cycles and ramp-up periods and could lead to greater variability in our period to period operating results. We increased the number of strategic clients by 8 during the quarter, bringing the total number of our strategic clients to 308. We define a strategic client as one offering the potential to generate at least $5 million to $50 million or more in annual revenues at maturity.
___________
1
Non-GAAP diluted earnings per share is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and a reconciliation to the most directly comparable GAAP financial measure.

20


Our operating margin increased slightly to 17.3% for the quarter ended March 31, 2016 compared to 17.2% for the quarter ended March 31, 2015. The increase in our operating margin was due to decreases in certain operating expenses, including travel and professional services, and the impact of the depreciation of the Indian rupee against the U.S. dollar, partially offset by increases in compensation and benefit costs (inclusive of the impact of higher incentive-based compensation accrual rates) for the quarter ended March 31, 2016 as compared to the 2015 period.
Our non-GAAP operating margin for the quarter ended March 31, 2016 increased slightly to 19.9%2 compared to 19.8%2 for the quarter ended March 31, 2015. The increase in our non-GAAP operating margin was due to decreases in certain operating expenses, including travel and professional services, and the impact of the depreciation of the Indian rupee against the U.S. dollar, partially offset by increases in compensation and benefit costs (inclusive of the impact of higher incentive-based compensation accrual rates) for the quarter ended March 31, 2016 as compared to the 2015 period. Historically, we have invested our profits above the 19% to 20% non-GAAP operating margin level back into our business, which we believe is a significant contributing factor to our strong revenue growth. This investment is primarily focused in the areas of hiring client partners and relationship personnel with specific industry experience or domain expertise, training our technical staff in a broader range of service offerings, strengthening our business analytics and digital technology capabilities, strengthening and expanding our portfolio of services, continuing to expand our geographic presence for both sales and delivery, as well as recognizing and rewarding employee performance by means of enhanced incentive-based compensation. In addition, this investment includes maintaining a level of resources, trained in a broad range of service offerings, to be well positioned to respond to our customer requests to take on additional projects. We expect to continue to invest amounts in excess of our targeted operating margin levels back into the business.
We finished the first quarter of 2016 with approximately 233,000 employees, which is an increase of approximately 15,300 as compared to March 31, 2015. The increase in the number of our service delivery staff and the related infrastructure costs to meet the demand for our services are the primary drivers of the increase in our operating expenses in 2016. Annualized turnover, including both voluntary and involuntary, was approximately 14.6% for the three months ended March 31, 2016. The majority of our turnover occurs in India. As a result, annualized attrition rates on-site at clients are below our global attrition rate. In addition, attrition is weighted towards the more junior members of our staff. We have experienced increases in compensation and benefit costs, including incentive-based compensation costs, in India which may continue in the future; however, historically, this has not had a material impact on our results of operations as we have been able to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, the mix of our professional staff as well as utilization levels, and achieving other operating efficiencies.
At March 31, 2016, we had cash, cash equivalents and short-term investments of $4,451.7 million, working capital of $5,520.5 million and debt outstanding of $1,020.9 million. We believe our cash from operations and capital resources on hand provide sufficient liquidity to continue to make investments to expand and grow our business, and meet our debt repayment obligations.
During the remainder of 2016, barring any unforeseen events, we expect the following factors to affect our business and our operating results:
Demand from our customers to help them meet their dual mandate of simultaneously achieving cost savings while investing in transformation and innovation;
Continued focus by customers on directing IT spending towards cost containment projects, such as application maintenance, infrastructure services and business process services;
Secular changes driven by evolving digital technologies and regulatory changes;
Demand from our banking customers may continue to be negatively affected by the current macroeconomic conditions affecting the industry;
Demand from our healthcare customers may continue to be negatively affected by the recent trend towards consolidation within the healthcare industry;
Volatility in foreign currency rates; and
Continued uncertainty in the world economy.


__________
2
Non-GAAP operating margin is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and a reconciliation to the most directly comparable GAAP financial measure.

21


In response to this environment, we plan to:
Continue to invest in our talent base and new service offerings, including digital technologies and new delivery models;
Partner with our existing customers to garner an increased portion of our customers’ overall IT spend by providing innovative solutions;
Focus on growing our business in Europe, the Middle East, the Asia Pacific and Latin America regions, where we believe there are opportunities to gain market share;
Increase our strategic customer base across all of our business segments;
Opportunistically look for acquisitions that may improve our overall service delivery capabilities, expand our geographic presence and/or enable us to enter new areas of technology;
Focus on operating discipline in order to appropriately manage our cost structure; and
Locate most of our new development center facilities in tax incentivized areas.
Business Segments
Our four reportable business segments are:
Financial Services, which includes customers providing banking/transaction processing, capital markets and insurance services;
Healthcare, which includes healthcare providers and payers as well as life sciences customers, including pharmaceutical, biotech and medical device companies;
Manufacturing/Retail/Logistics, which includes consumer goods manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services; and
Other, which is an aggregation of industry operating segments each of which, individually, represents less than 10.0% of consolidated revenues and segment operating profit. The Other reportable segment includes our information, media and entertainment services, communications, and high technology operating segments.
Our chief operating decision maker evaluates Cognizant’s performance and allocates resources based on segment revenues and operating profit. Segment operating profit is defined as income from operations before unallocated costs. Generally, operating expenses for each operating segment have similar characteristics and are subject to the same factors, pressures and challenges. However, the economic environment and its effects on industries served by our operating segments may affect revenue and operating expenses to differing degrees. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as a per seat charge for use of the development and delivery centers. Certain selling, general and administrative expenses, excess or shortfall of incentive compensation for delivery personnel as compared to target, stock-based compensation expense, a portion of depreciation and amortization and a portion of the impact of the settlements of our cash flow hedges are not allocated to individual segments in internal management reports used by the chief operating decision maker. Accordingly, such expenses are excluded from segment operating profit.
We provide a significant volume of services to many customers in each of our business segments. Therefore, a loss of a significant customer or a few significant customers in a particular segment could materially reduce revenues for that segment. However, no individual customer accounted for sales in excess of 10% of our consolidated revenues for the periods ended March 31, 2016 and 2015. In addition, the services we provide to our larger customers are often critical to the operations of such customers and we believe that a termination of our services would require an extended transition period with gradually declining revenues.


22


Results of Operations
Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015
The following table sets forth, for the periods indicated, certain financial data for the three months ended March 31:
 
 
 
% of
 
 
 
% of
 
Increase
(Decrease)
 
2016
 
Revenues
 
2015
 
Revenues
 
$
 
%
 
(Dollars in millions, except per share data)
Revenues
$
3,202.0

 
100.0
 
$
2,911.4

 
100.0
 
$
290.6

 
10.0
Cost of revenues(1)
1,915.4

 
59.8
 
1,727.2

 
59.3
 
188.2

 
10.9
Selling, general and administrative expenses(1)
646.2

 
20.2
 
610.8

 
21.0
 
35.4

 
5.8
Depreciation and amortization expense
86.4

 
2.7
 
73.1

 
2.5
 
13.3

 
18.2
Income from operations
554.0

 
17.3
 
500.3

 
17.2
 
53.7

 
10.7
Other income (expense), net
35.1

 
 
 
10.3

 
 
 
24.8

 
240.8
Income before provision for income taxes
589.1

 
18.4
 
510.6

 
17.5
 
78.5

 
15.4
Provision for income taxes
147.9

 
 
 
127.7

 
 
 
20.2

 
15.8
Net income
$
441.2

 
13.8
 
$
382.9

 
13.2
 
$
58.3

 
15.2
Diluted earnings per share
$
0.72

 
 
 
$
0.62

 
 
 
$
0.10

 

Other Financial Information (2)
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP income from operations and non-GAAP operating margin
$
636.6

 
19.9
 
$
576.8

 
19.8
 
$
59.8

 
10.4
Non-GAAP diluted earnings per share
$
0.80

 
 
 
$
0.71

 
 
 
$
0.09

 
 
_____________________
(1)
Exclusive of depreciation and amortization expense.
(2)
Non-GAAP income from operations, non-GAAP operating margin and non-GAAP diluted earnings per share are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and a reconciliation to the most directly comparable GAAP financial measure.
Revenue - Overall. Revenue increased 10.0%, or $290.6 million, to $3,202.0 million during the three months ended March 31, 2016 from $2,911.4 million during the three months ended March 31, 2015. The increase in revenue was primarily attributed to services related to integration of digital technologies to align with shifts in consumer preferences, increased customer spending on discretionary projects, continued interest in using our global delivery model as a means to reduce overall IT and operations costs and continued penetration in all our geographic markets. Revenue from customers added since March 31, 2015 was $93.5 million and represented 32.2% of the period over period revenue increase.
Our consulting and technology services revenues for the three months ended March 31, 2016 increased by approximately 12.9% compared to the three months ended March 31, 2015 and represented approximately 57.8% of total revenues for the three months ended March 31, 2016. Our outsourcing services revenue for the three months ended March 31, 2016 increased by approximately 6.2% and constituted approximately 42.2% of total revenues for the three months ended March 31, 2016. While both consulting and technology services revenue and outsourcing services revenue grew, we continue to see a shift in customer spending from legacy application maintenance toward project-based work, including digital and other transformational programs.
Revenues from our top five customers as a percentage of total revenues were 10.5% and 11.2% for the quarters ended March 31, 2016 and 2015, respectively. Revenues from our top ten customers as a percentage of total revenues were 17.7% and 19.0% for the quarters ended March 31, 2016 and 2015, respectively. As we continue to add new customers and increase our penetration at existing customers, we expect the percentage of revenues from our top five and top ten customers to decline over time.

23


Revenue - Reportable Segments. Revenues by reportable business segment were as follows for the three months ended March 31:
 
 
2016
 
2015
 
Increase
$
 
%
 
 
(Dollars in millions)
Financial Services
 
$
1,285.7

 
$
1,161.1

 
$
124.6

 
10.7
Healthcare
 
914.1

 
879.1

 
35.0

 
4.0
Manufacturing/Retail/Logistics
 
632.5

 
548.9

 
83.6

 
15.2
Other
 
369.7

 
322.3

 
47.4

 
14.7
Total revenue
 
$
3,202.0

 
$
2,911.4

 
$
290.6

 
10.0

Revenue from our Financial Services segment grew 10.7% or $124.6 million for the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. Our banking and insurance customers contributed $59.5 million and $65.1 million, respectively, to the period over period revenue increase. In this segment, revenue from customers added since March 31, 2015 was $26.3 million and represented 21.1% of the period over period revenue increase in this segment. Key areas of focus for our Financial Services customers included the adoption and integration of digital technologies to align with shifts in consumer preferences, cost optimization, regulatory compliance driven initiatives, cyber security and vendor consolidation. We believe demand from certain of our banking customers has been and may continue to be negatively affected by the current macroeconomic conditions affecting the industry.
Revenue from our Healthcare segment grew 4.0% or $35.0 million for the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. Our life sciences and healthcare customers contributed $31.3 million and $3.7 million, respectively, to the period over period revenue growth. Revenue from customers added since March 31, 2015 was $18.3 million and represented 52.2% of the period over period revenue increase in this segment. The increase in revenue from our healthcare payer customers was driven by our customers' cost optimization initiatives. The demand for our services has been and may continue to be affected by the trend towards consolidation within the healthcare industry. We believe that in the long term the healthcare industry continues to present a growth opportunity due to factors which are transforming the industry, including the changing regulatory environment, increasing focus on medical costs, and the consumerization of healthcare.
Revenue from our Manufacturing/Retail/Logistics segment grew 15.2% or $83.6 million for the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. Our retail and hospitality customers and our manufacturing and logistics customers contributed $57.6 million and $26.0 million, respectively, to the period over period revenue increase. Revenue from customers added since March 31, 2015 was $26.0 million and represented 31.1% of the period over period revenue increase in this segment. Demand within this segment continues to be driven by increased adoption of digital technologies to align with shifts in consumer preferences, omni channel commerce implementation and integration efforts, analytics, supply chain consulting and implementation initiatives and product transformation.
Revenue from our Other segment grew 14.7% or $47.4 million for the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. In the first quarter of 2016, growth within Other was driven by increased adoption of digital technologies, platform engineering for cloud solutions and an overall increase in discretionary spending. Revenue growth in this segment was strong among our technology customers, where revenue increased by $29.9 million, and our telecommunications customers, where revenue increased by $10.3 million. Revenue from customers added since March 31, 2015 was $22.9 million and represented 48.3% of the period over period revenue increase in this segment.

24


Revenue - Geographic Markets. Revenues by geographic market were as follows for the three months ended March 31:
 
 
2016
 
2015
 
Increase
 
$
 
%
 
 
(Dollars in millions)
North America
 
$
2,497.3

 
$
2,292.0

 
$
205.3

 
9.0
United Kingdom
 
298.8

 
285.1

 
13.7

 
4.8
Rest of Europe
 
226.6

 
190.8

 
35.8

 
18.8
Europe - Total
 
525.4

 
475.9

 
49.5

 
10.4
Rest of World
 
179.3

 
143.5

 
35.8

 
24.9
Total Revenue
 
$
3,202.0

 
$
2,911.4

 
$
290.6

 
10.0
    
North America continues to be our largest market, representing 78.0% of total revenue for the first quarter of 2016, and accounting for $205.3 million of the $290.6 million total revenue increase from the first quarter of 2015.
The revenue growth in Europe and Rest of World markets was driven by an increase in customer discretionary spending and customer adoption and integration of digital technologies to align with shifts in consumer preferences. In the first quarter of 2016, revenue from our customers in Europe grew 10.4%, after a negative currency impact of 4.3% compared to the same period in 2015. Revenue from our Rest of World customers grew 24.9%, after a negative currency impact of 6.3% in the first quarter of 2016, and was primarily driven by the India, Singapore and Australia markets. We believe that Europe, the Middle East, the Asia Pacific and Latin America regions will continue to be areas of significant investment for us as we see these regions as long-term growth opportunities.
Cost of Revenues (Exclusive of Depreciation and Amortization Expense). Our cost of revenues consists primarily of salaries, incentive-based compensation, stock-based compensation expense, payroll taxes, employee benefits, immigration and project-related travel for technical personnel, subcontracting and sales commissions related to revenues. Our cost of revenues increased by 10.9% or $188.2 million during the first quarter of 2016 as compared to the first quarter of 2015. The increase was due primarily to an increase in compensation and benefits costs (inclusive of the impact of higher incentive-based compensation accrual rates), partially offset by the decrease in professional services costs and the depreciation of the Indian rupee against the U.S. dollar in 2016 as compared to the 2015 period. For the three months ended March 31, 2016, compensation and benefit costs increased primarily as a result of the increase in the number of our service delivery personnel, and higher incentive-based compensation costs in 2016 as compared to 2015.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, payroll taxes, employee benefits, immigration, travel, marketing, communications, management, finance, administrative and occupancy costs. Selling, general and administrative expenses, including depreciation and amortization, increased by 7.1% or $48.7 million during the first quarter of 2016 as compared to the first quarter of 2015. Selling, general and administrative expenses, including depreciation and amortization, decreased as a percentage of revenue to 22.9% in the first quarter of 2016 as compared to 23.5% in the first quarter of 2015. The decrease as a percentage of revenue was due primarily to decreases in certain operating expenses, including travel and professional services and the impact of the depreciation of the Indian rupee against the U.S. dollar, partially offset by increases in compensation and benefits costs (inclusive of the impact of higher incentive-based compensation accrual rates) in 2016 as compared to the 2015 period.
Income from Operations and Operating Margin - Overall. Income from operations increased