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EX-32.2 - EXHIBIT 32.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3229-30x2016.htm
EX-32.1 - EXHIBIT 32.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3219-30x2016.htm
EX-31.2 - EXHIBIT 31.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3129-30x2016.htm
EX-31.1 - EXHIBIT 31.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit3119-30x2016.htm
EX-10.1 - EXHIBIT 10.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORPctshexhibit1019-30x2016.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 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  ☒   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  ☒    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
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  ☒
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of October 31, 2016:
Class
 
Number of Shares
Class A Common Stock, par value $.01 per share
 
606,704,575

 
 
 


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
 
 
 
Page
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
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)
 
 
September 30,  
 2016

December 31, 
 2015
Assets



Current assets:



Cash and cash equivalents
$
1,550.3


$
2,125.2

Short-term investments
3,308.3


2,824.3

Trade accounts receivable, net of allowances of $45.2 and $39.0, respectively
2,492.1


2,252.6

Unbilled accounts receivable
423.6


369.0

Other current assets
425.5


337.5

Total current assets
8,199.8


7,908.6

Property and equipment, net of accumulated depreciation of $1,255.3 and $1,079.1, respectively
1,323.3


1,271.4

Goodwill
2,482.0


2,404.7

Intangible assets, net
936.9


864.3

Deferred income tax assets, net
385.3


347.8

Equity method investment
60.6

 

Other noncurrent assets
328.8


264.2

Total assets
$
13,716.7


$
13,061.0

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable
$
171.5


$
165.3

Deferred revenue
281.7


323.7

Short-term debt
75.0


406.3

Accrued expenses and other current liabilities
1,772.5


1,818.4

Total current liabilities
2,300.7


2,713.7

Deferred revenue, noncurrent
158.3


49.3

Deferred income tax liabilities, net
3.7


3.3

Long-term debt
821.6


876.8

Other noncurrent liabilities
140.1


139.8

Total liabilities
3,424.4


3,782.9

Commitments and contingencies (See Note 11)

 

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, 606.6 and 609.0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
6.1

 
6.1

Additional paid-in capital
279.2

 
453.0

Retained earnings
10,063.2

 
8,925.2

Accumulated other comprehensive income (loss)
(56.2
)
 
(106.2
)
Total stockholders’ equity
10,292.3


9,278.1

Total liabilities and stockholders’ equity
$
13,716.7


$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
3,453.2


$
3,187.0


$
10,025.1


$
9,183.5

Operating expenses:







Cost of revenues (exclusive of depreciation and amortization expense shown separately below)
2,077.4


1,934.6


6,030.5


5,506.6

Selling, general and administrative expenses
700.5


627.1


2,000.6


1,849.9

Depreciation and amortization expense
91.9


82.5


265.7


238.4

Income from operations
583.4


542.8


1,728.3


1,588.6

Other income (expense), net:







Interest income
27.2


20.7


85.4


56.3

Interest expense
(4.9
)

(4.3
)

(14.6
)

(13.4
)
Foreign currency exchange gains (losses), net
6.9


(15.8
)

(4.2
)

(28.4
)
Other, net
0.3


(0.4
)

1.7


(0.7
)
Total other income (expense), net
29.5


0.2


68.3


13.8

Income before provision for income taxes
612.9


543.0


1,796.6


1,602.4

Provision for income taxes
(168.9
)

(145.8
)

(659.2
)

(402.2
)
Income from equity method investment
0.4

 

 
0.6

 

Net income
$
444.4


$
397.2


$
1,138.0


$
1,200.2

Basic earnings per share
$
0.73


$
0.65


$
1.88


$
1.97

Diluted earnings per share
$
0.73


$
0.65


$
1.87


$
1.96

Weighted average number of common shares outstanding - Basic
606.2


608.8


606.8


609.4

Dilutive effect of shares issuable under stock-based compensation plans
2.3

 
3.9

 
2.9

 
4.1

Weighted average number of common shares outstanding - Diluted
608.5


612.7


609.7


613.5

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
444.4

 
$
397.2

 
$
1,138.0

 
$
1,200.2

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
0.5

 
(16.8
)
 
(8.6
)
 
(34.4
)
Change in unrealized gains and losses on cash flow hedges, net of taxes
41.0

 
(6.8
)
 
52.4

 
42.3

Change in unrealized gains and losses on available-for-sale securities, net of taxes
(2.0
)
 
0.8

 
6.2

 
1.9

Other comprehensive income (loss)
39.5

 
(22.8
)
 
50.0

 
9.8

Comprehensive income
$
483.9

 
$
374.4

 
$
1,188.0

 
$
1,210.0

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 Nine Months Ended 
 September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
1,138.0

 
$
1,200.2

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
278.4

 
242.0

Provision for doubtful accounts
9.2

 
8.4

Deferred income taxes
(44.2
)
 
(107.3
)
Stock-based compensation expense
165.4

 
141.6

Excess tax benefits on stock-based compensation plans
(19.0
)
 
(19.0
)
Other
9.2

 
27.9

Changes in assets and liabilities:
 
 
 
Trade accounts receivable
(261.2
)
 
(190.6
)
Other current assets
(84.2
)
 
(7.6
)
Other noncurrent assets
(51.0
)
 
(40.1
)
Accounts payable
11.9

 
16.8

Deferred revenues, current and noncurrent
(57.2
)
 
11.5

Other current and noncurrent liabilities
(72.9
)
 
179.5

Net cash provided by operating activities
1,022.4

 
1,463.3

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(212.8
)
 
(198.7
)
Purchases of investments
(4,215.5
)
 
(2,093.9
)
Proceeds from maturity or sale of investments
3,740.6

 
1,262.2

Payments for business combinations, net of cash acquired and equity method investment
(185.0
)
 

Net cash (used in) investing activities
(872.7
)
 
(1,030.4
)
Cash flows from financing activities:
 
 
 
Issuance of common stock under stock-based compensation plans
134.6

 
98.9

Excess tax benefits on stock-based compensation plans
19.0

 
19.0

Repurchases of common stock
(492.2
)
 
(383.2
)
Repayment of term loan borrowings and capital lease obligations
(41.0
)
 
(39.6
)
Net change in notes outstanding under the revolving credit facility
(350.0
)
 
(650.0
)
Net cash (used in) financing activities
(729.6
)
 
(954.9
)
Effect of exchange rate changes on cash and cash equivalents
5.0

 
(11.4
)
(Decrease) in cash and cash equivalents
(574.9
)
 
(533.4
)
Cash and cash equivalents, beginning of year
2,125.2

 
2,010.1

Cash and cash equivalents, end of period
$
1,550.3

 
$
1,476.7

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.

In August 2016, the Company announced that its Board of Directors approved an expansion of its stock repurchase program. The Board of Directors increased the Company's stock repurchase authorization under the program from $2.0 billion to $3.0 billion and extended the term of the stock repurchase program from December 31, 2017 to December 31, 2018.

During the nine months ended September 30, 2016, we repurchased 7.6 million shares of our Class A common stock for $439.5 million under our existing stock repurchase program approved by our Board of Directors. As of September 30, 2016, the remaining available balance under the Board of Directors authorization was $998.4 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 nine months ended September 30, 2016, such repurchases totaled 0.9 million shares at an aggregate cost of $52.7 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 update 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. In 2016, the FASB issued four amendments to the new standard. The new standard, as amended, 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. 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

5


disclosures. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impacts relate to our accounting for software license contracts and other complex fixed-price contracts. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the standard may vary and will be dependent on contract-specific terms.

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. We expect the requirement to recognize a right-of-use asset and a lease liability to have a material impact on the presentation of our consolidated statements of financial position.

In March 2016, the FASB issued an update to the standard on derivatives and hedging, which clarifies 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, entities can choose to apply the update on either a prospective basis or a modified retrospective basis. We do not expect the adoption of this amendment to have a material effect on our consolidated statements of financial position or results of operations.

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 excess tax benefits and deficiencies, 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. We are currently evaluating the effect the update will have on our consolidated financial statements and related disclosures. We expect the requirements to recognize excess tax benefits and deficiencies on stock awards in the income tax provision and to present the excess tax benefits and deficiencies in operating activities in the statement of cash flows to be the primary effects of this standard on our consolidated financial statements.

In June 2016, the FASB issued an update to the standard on financial instruments, which amends the guidance on the impairment of financial instruments. The update changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded by introducing an approach based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2021. Early adoption is permitted beginning on or after January 1, 2020. Upon adoption, entities will be required to use a modified retrospective transition approach. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

In August 2016, the FASB issued an update to the standard on the statement of cash flows, which clarifies the presentation and classification of certain cash receipts and cash payments. The update addresses specific cash flow issues, including, but not limited to, debt prepayment or debt extinguishment costs, contingent consideration payments made after a

6


business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. Early adoption is permitted, including adoption in an interim period, provided that all of the updates are adopted in the same period. Upon adoption, entities will be required to use a retrospective transition approach. We are currently evaluating the impact of the new guidance on our consolidated financial statements. The adoption of this guidance will affect financial statement presentation only and will have no effect on our financial position or results of operations.

In October 2016, the FASB issued an update to the standard on income taxes, which requires the recognition of current and deferred income taxes when an intra-entity transfer of assets other than inventory occurs. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2017. Early adoption is permitted in the first interim period. Upon adoption, the entities will be required to use a modified retrospective transition approach. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Note 2 — Internal Investigation and Related Matters

On September 30, 2016, we disclosed that we are conducting an internal investigation into whether certain payments relating to Company-owned facilities in India were made improperly and in possible violation of the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable laws. In September 2016, we voluntarily notified the U.S. Department of Justice, or DOJ, and Securities and Exchange Commission, or SEC, and are cooperating fully with both agencies. The investigation is being conducted under the oversight of the Audit Committee, with the assistance of outside counsel. To date, the investigation has identified a total of approximately $5.0 million in payments that may have been improper. During the three months ended September 30, 2016, we recorded an out-of-period correction related to $3.1 million of such payments that were previously capitalized that should have been expensed. The remaining $1.9 million of such payments remains under investigation. The recorded correction resulted in an increase of selling, general and administrative expenses of $3.1 million, a reduction in depreciation and amortization expense of $0.4 million, and a reduction in property and equipment, net of $2.7 million. These prior period corrections and the $1.9 million in payments under investigation were not material to any previously issued annual or any interim financial statements and are not expected to be material to the financial results for the year ending December 31, 2016.

During the closing process for the third quarter of 2016, based on the results of the internal investigation to date, we concluded that as of December 31, 2015 and in subsequent interim periods, we did not maintain an effective control environment. Specifically, we did not maintain an effective tone at the top as certain members of senior management may have participated in or failed to take action to prevent the making of potentially improper payments by either overriding or failing to enforce the controls established by the Company relating to real estate and procurement principally in connection with permits for certain facilities in India. Such actions would be inconsistent with the standards and tone at the top to which our Board of Directors and senior management are committed and would be in violation of the Company’s written code of conduct and procedures established in part to detect and prevent improper payments. Based on the results of the investigation to date, the members of senior management who may have participated in or failed to take action to prevent the making of the identified potentially improper payments are no longer with the Company or in a senior management position.

As a result of the foregoing, we have determined that a material weakness existed as of December 31, 2015, and continues to exist in subsequent interim periods, in our internal control over financial reporting. Accordingly, we have updated the previous conclusion included in Item 9A of our Form 10-K filed with the Securities and Exchange Commission on February 25, 2016 with respect to our disclosure controls and procedures and internal controls over financial reporting to conclude that our disclosure controls and procedures and internal controls over financial reporting as of December 31, 2015 were ineffective. Also, we have updated the previous conclusions included in Item 4 of our Forms 10-Q filed with the Securities and Exchange Commission on May 6, 2016 and August 5, 2016 with respect to our disclosure controls and procedures to conclude that our disclosure controls and procedures as of March 31, 2016 and June 30, 2016, respectively, were ineffective.

We have concluded that we have a material weakness as of September 30, 2016. However, based on the results of the investigation to date, no material adjustments, restatements or other revisions to our previously issued financial statements are required.

7


Note 3 — Business Combinations and Equity Method Investment

Business Combinations

During the nine months ended September 30, 2016, we completed four business combinations for total initial consideration of approximately $124.7 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. The third transaction was an acquisition of tangible property, an assembled workforce and a multi-year service agreement, which qualifies as a business combination under accounting guidance. The fourth transaction was an acquisition of a global consulting company that offers digital innovation, strategy, design and technology services.

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. We finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the date of acquisition. Specifically-identified intangible assets and goodwill acquired were as follows:
 
Fair Value
 
Weighted Average Useful Life
 
(in millions)
 
 
Non-deductible goodwill
75.0

 
 
Customer relationship intangible assets
152.8

 
7.1 years
Other intangible assets
0.7

 
3.9 years

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.

Equity Method Investment

In April 2016, we acquired a 49% ownership interest in a strategic consulting firm specializing in the use of human sciences to help business leaders better understand customer behavior for a purchase price of $59.1 million. We have accounted for this investment as an equity method investment within our consolidated financial statements. In addition, we have the option to buy from the investee, or Call Option, and the investee has the option to sell to us, or Written Put Option, the remaining 51% of the investee at pre-determined purchase prices and contingent on certain performance conditions being satisfied. The Call Option, which has been recorded at cost, and our 49% ownership interest are included within "Equity method investment" in our consolidated statements of financial position. The Written Put Option is included within "Accrued expenses and other current liabilities." If we acquire the remaining 51% of the investee and the investee meets certain performance conditions, we would be obligated to make incremental payments up to a maximum of $100.0 million, in addition to the purchase price for the remaining 51% of the investee.


8


Note 4 — Short-term Investments

Our short-term investments were as follows:
 
September 30, 2016
 
December 31, 2015
 
(in millions)
Trading investment securities:
 
 
 
Mutual funds
$
25.0

 
$

Total trading investment securities
25.0

 

Available-for-sale investment securities:
 
 
 
U.S. Treasury and agency debt securities
616.2

 
527.1

Corporate and other debt securities
411.2

 
360.5

Certificates of deposit and commercial paper
1,032.7

 
754.0

Asset-backed securities
220.4

 
229.6

Municipal debt securities
114.7

 
121.3

Mutual funds

 
22.3

Total available-for-sale investment securities
2,395.2

 
2,014.8

Held-to-maturity investment securities:
 
 
 
Certificates of deposit and commercial paper
29.5

 

Total held-to-maturity investment securities
29.5

 

Other investments:
 
 
 
Time deposits
858.6

 
809.5

Total other investments
858.6

 
809.5

Total short-term investments
$
3,308.3

 
$
2,824.3


Trading Investment Securities

Our trading investment securities consist of a U.S. dollar denominated investment in a fixed income mutual fund. Unrealized gains for the three and nine months ended September 30, 2016 were immaterial. As of December 31, 2015, there were no investment securities in our portfolio classified as trading.

Available-for-Sale Investment Securities

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, 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.

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at September 30, 2016 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
U.S. Treasury and agency debt securities
$
615.5

 
$
1.0

 
$
(0.3
)
 
$
616.2

Corporate and other debt securities
410.3

 
1.1

 
(0.2
)
 
411.2

Certificates of deposit and commercial paper
1,032.3

 
0.8

 
(0.4
)
 
1,032.7

Asset-backed securities
220.1

 
0.4

 
(0.1
)
 
220.4

Municipal debt securities
114.5

 
0.3

 
(0.1
)
 
114.7

Total available-for-sale investment securities
$
2,392.7

 
$
3.6

 
$
(1.1
)
 
$
2,395.2


9


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 September 30, 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
$
210.6

 
$
(0.3
)
 
$

 
$

 
$
210.6

 
$
(0.3
)
Corporate and other debt securities
116.9

 
(0.2
)
 
0.9

 

 
117.8

 
(0.2
)
Certificates of deposit and commercial paper
368.1

 
(0.4
)
 

 

 
368.1

 
(0.4
)
Asset-backed securities
62.8

 
(0.1
)
 
0.6

 

 
63.4

 
(0.1
)
Municipal debt securities
43.0

 
(0.1
)
 
0.6

 

 
43.6

 
(0.1
)
Total
$
801.4

 
$
(1.1
)
 
$
2.1

 
$

 
$
803.5

 
$
(1.1
)

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 September 30, 2016 and December 31, 2015 are primarily attributable to changes in interest rates. At each reporting date, the Company performs an evaluation of impaired available-for-sale securities to determine if the unrealized losses are other-than-temporary. Based on this evaluation as of June 30, 2016, the Company identified an investment in a mutual fund with a fair value of $21.7 million to be other-than-temporarily impaired based on management's intent to sell the investment and accordingly, recognized an impairment loss of $3.0 million in our consolidated statements of operations in the caption "Other, net". During the quarter ending September 30, 2016, the Company sold this investment at a loss of $3.1 million. As of September 30, 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).

10


The contractual maturities of our fixed income available-for-sale investment securities as of September 30, 2016 are set forth in the following table:
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
1,199.2

 
$
1,199.6

Due after one year up to two years
498.6

 
499.2

Due after two years up to three years
373.5

 
374.5

Due after three years up to four years
101.3

 
101.5

Asset-backed securities
220.1

 
220.4

Fixed income available-for-sale investment securities
$
2,392.7

 
$
2,395.2


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Proceeds from sales of available-for-sale investment securities
$
464.7

 
$
168.3

 
$
2,842.8

 
$
596.4

 
 
 
 
 
 
 
 
Gross gains
$
0.5

 
$
0.2

 
$
5.0

 
$
1.1

Gross losses
(3.2
)
 
(0.1
)
 
(3.6
)
 
(0.2
)
Net realized (losses) gains on sales of available-for-sale investment securities
$
(2.7
)
 
$
0.1

 
$
1.4

 
$
0.9


Held-to-Maturity Investment Securities

Our held-to-maturity investment securities consist of Indian rupee denominated investments in certificates of deposit and commercial paper. Our investment guidelines are to purchase securities that are investment grade at the time of acquisition. We monitor the credit ratings of the securities in our portfolio on an ongoing basis.

The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at September 30, 2016 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
Certificates of deposit and commercial paper
29.5

 

 

 
29.5

Total held-to-maturity investment securities
$
29.5

 
$

 
$

 
$
29.5


As of December 31, 2015, there were no investment securities in our portfolio classified as held-to-maturity. As of September 30, 2016, there were no held-to-maturity investment securities in an unrealized loss position. At each reporting date, the Company performs an evaluation of impaired held-to-maturity securities to determine if the unrealized losses are other-than-temporary. As of September 30, 2016, we do not consider any of the investments to be other-than-temporarily impaired. The contractual maturities of our fixed income held-to-maturity investment securities as of September 30, 2016 are all within one year.

During the nine months ended September 30, 2016 and the year ended December 31, 2015, there were no transfers of investments between our trading, available-for-sale and held-to-maturity investment portfolios.

11


Note 5 — Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:
 
September 30, 2016
 
December 31, 2015
 
(in millions)
Compensation and benefits
$
1,116.7

 
$
1,272.0

Income taxes
14.7

 
17.1

Professional fees
88.9

 
69.6

Travel and entertainment
36.9

 
29.8

Customer volume incentives
235.1

 
236.1

Derivative financial instruments
4.5

 
10.9

Other
275.7

 
182.9

Total accrued expenses and other current liabilities
$
1,772.5

 
$
1,818.4


Note 6 — Debt

In 2014, we entered into a credit agreement with a commercial bank syndicate, or the Credit Agreement, 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 in November 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. Irrespective of the modification and waiver discussed below, we believe we were in compliance with all debt covenants and representations as of September 30, 2016.

On November 5, 2016, or the First Amendment Effective Date, we entered into Amendment No. 1 and Limited Waiver No. 1 to the Credit Agreement, or the First Amendment. The First Amendment modifies the representation and warranty in the Credit Agreement relating to compliance with anti-corruption laws to add an exception for actions, proceedings and other matters relating to our internal investigation into whether certain payments relating to our owned facilities in India were made improperly and in possible violation of the FCPA and other applicable laws, or the Disclosed Matters. Pursuant to the First Amendment, the required lenders waive certain defaults or events of default that may have existed prior to the First Amendment Effective Date due to such representation and warranty proving to have been materially incorrect solely as a result of the Disclosed Matters and due to our failure to provide notice thereof to the administrative agent.

Short-term Debt

The following summarizes our short-term debt balances as of:
 
 
September 30, 2016
 
December 31, 2015
 
 
(in millions)
Notes outstanding under revolving credit facility
 
$

 
$
350.0

Term loan - current maturities
 
75.0

 
56.3

Total short-term debt
 
$
75.0

 
$
406.3


12


Long-term Debt

The following summarizes our long-term debt balances as of:
 
 
September 30, 2016
 
December 31, 2015
 
 
(in millions)
Term loan, due 2019
 
$
900.0

 
$
937.5

Less:
 
 
 
 
Current maturities
 
(75.0
)
 
(56.3
)
Deferred financing costs
 
(3.4
)
 
(4.4
)
Long-term debt, net
 
$
821.6

 
$
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 7 — 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.

In May 2016, India enacted the Finance Bill 2016 that, among other things, expanded the applicability of India’s buyback distribution tax to certain share buyback transactions occurring after June 1, 2016. In mid-May, prior to the June 1 effective date of the enactment, our principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion. This transaction, or the India Cash Remittance, was undertaken pursuant to a plan approved by the High Court of Madras and simplified the shareholding structure of our principal operating subsidiary in India. Pursuant to the transaction, our principal Indian operating subsidiary repurchased approximately $1.2 billion of the total $2.8 billion of shares from its U.S. shareholders, resulting in tax expense in the United States and India, while the remaining $1.6 billion was repurchased from its shareholder outside the United States. Net of taxes, the transaction resulted in a remittance of cash to the United States in the amount of $1.0 billion. As a result of this transaction, we will incur an incremental 2016 income tax expense of $237.5 million, including a discrete item recognized in the second quarter of 2016 of $142.6 million relating to the distribution of historic undistributed accumulated foreign earnings. The remaining portion represents the tax on the distribution of current year earnings. Total incremental tax expense of $213.7 million was recognized in the nine months ended September 30, 2016 and approximately $23.8 million will be recognized in the quarter ending December 31, 2016. This transaction is primarily responsible for the increase in our effective income tax rate in 2016 compared to 2015.

The India Cash Remittance did not impact our assertion that our foreign earnings are permanently reinvested outside the United States. In reaching this conclusion, we considered the one-time nature of the India Cash Remittance, our capital needs in the United States, the available sources of liquidity in the United States and our growth plans outside the United States. Thus, other than amounts affected by the India Cash Remittance and amounts for which we have already accrued U.S. taxes, our foreign earnings are deemed to be permanently reinvested outside the United States and we have not provided for U.S. federal income taxes on such earnings.

Our effective income tax rates were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Effective income tax rate
27.6
%
 
26.9
%
 
36.7
%
 
25.1
%

For the 2016 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 India Cash Remittance transaction described above, partially offset by the effect of the Indian tax holiday and earnings taxed in countries that have lower rates than the United States. For the 2015 periods, the principal

13


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.

Note 8 — 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:
 
 
 
 
September 30, 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
 
$
37.5

 
$

 
$
7.2

 
$

 
 
Other noncurrent assets
 
16.8

 

 
1.6

 

 
 
Accrued expenses and other current liabilities
 

 
0.4

 

 
9.7

 
 
Other noncurrent liabilities
 

 
0.1

 

 
13.5

 
 
Total
 
54.3

 
0.5

 
8.8

 
23.2

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

 

 
0.4

 

 
 
Accrued expenses and other current liabilities
 

 
4.1

 

 
1.2

 
 
Total
 

 
4.1

 
0.4

 
1.2

Total
 
 
 
$
54.3

 
$
4.6

 
$
9.2

 
$
24.4


14


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 September 30, 2016, we estimate that $28.5 million, net of tax, of 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:
 
September 30, 2016
 
December 31, 2015
 
(in millions)
2016
$
315.0

 
$
1,215.0

2017
1,125.0

 
900.0

2018
495.0

 
330.0

Total notional value of contracts outstanding
$
1,935.0

 
$
2,445.0

Net unrealized gains (losses) included in accumulated other comprehensive income (loss), net of taxes
$
40.7

 
$
(11.7
)

Upon settlement or maturity of the cash flow hedge contracts, we record the related gains or losses, 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 gains (losses) on our cash flow hedges for the three months ended September 30:
 
Change in
Derivative Gains/Losses Recognized
in Accumulated Other
Comprehensive Income (Loss)
(effective portion)
 
Location of Net Derivative Gains (Losses) Reclassified
from Accumulated Other
Comprehensive Income (Loss)
into Income
(effective portion)
 
Net Gain (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
$
63.2

 
$
(29.1
)
 
Cost of revenues
 
$
7.4

 
$
(17.5
)
 
 
 
 
 
Selling, general and administrative expenses
 
1.4

 
(3.4
)
 
 
 
 
 
Total
 
$
8.8

 
$
(20.9
)


15


The following table provides information on the location and amounts of pre-tax gains (losses) on our cash flow hedges for the nine months ended September 30:
 
Change in
Derivative Gains/Losses Recognized
in Accumulated Other
Comprehensive Income (Loss)
(effective portion)
 
Location of Net Derivative Gains (Losses) Reclassified
from Accumulated Other
Comprehensive Income (Loss)
into Income
(effective portion)
 
Net Gain (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
$
77.7

 
$
(3.4
)
 
Cost of revenues
 
$
8.0

 
$
(42.8
)
 
 
 
 
 
Selling, general and administrative expenses
 
1.5

 
(9.0
)
 
 
 
 
 
Total
 
$
9.5

 
$
(51.8
)

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 10.

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, British pounds and Euros, and are scheduled to mature in 2016 and 2017. 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:
 
September 30, 2016
 
December 31, 2015
 
Notional
 
Market Value

 
Notional
 
Market Value

 
(in millions)
Contracts outstanding
$
195.6

 
$
(4.1
)
 
$
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 and nine months ended September 30, 2016 and 2015:
 
Location of Net Gains (Losses) on
Derivative Instruments
 
Amount of Net Gains (Losses) on Derivative Instruments
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
(in millions)
Foreign exchange forward contracts – Not designated as hedging instruments
Foreign currency exchange gains (losses), net

 
$
(5.5
)
 
$
3.2

 
$
(5.8
)
 
$
1.5


The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.


16


Note 9 — 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.

The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of September 30, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
263.8

 
$

 
$

 
$
263.8

Total cash equivalents
263.8

 

 

 
263.8

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
858.6

 

 
858.6

Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Treasury and agency debt securities
568.3

 
47.9

 

 
616.2

Corporate and other debt securities

 
411.2

 

 
411.2

Certificates of deposit and commercial paper

 
1,032.7

 

 
1,032.7

Asset-backed securities

 
220.4

 

 
220.4

Municipal debt securities

 
114.7

 

 
114.7

Total available-for-sale investment securities
568.3

 
1,826.9

 

 
2,395.2

Held-to-maturity investment securities:
 
 
 
 
 
 
 
Certificates of deposit and commercial paper

 
29.5

 

 
29.5

Total held-to-maturity investment securities

 
29.5

 

 
29.5

Total short-term investments(1)
568.3

 
2,715.0

 

 
3,283.3

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

 
37.5

 

 
37.5

Accrued expenses and other current liabilities

 
(4.5
)
 

 
(4.5
)
Other noncurrent assets

 
16.8

 

 
16.8

Other noncurrent liabilities

 
(0.1
)
 

 
(0.1
)
Total
$
832.1

 
$
2,764.7

 
$

 
$
3,596.8

________________
(1)
Excludes trading securities in mutual funds valued at $25.0 million based on the net asset value, or NAV, of the fund at September 30, 2016.


17


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 valued at $22.3 million based on the net asset value, or NAV, of the fund 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 September 30, 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 nine months ended September 30, 2016 and the year ended December 31, 2015, there were no transfers among Level 1, Level 2, or Level 3 financial assets and liabilities.

18


Note 10 — Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component were as follows for the three and nine months ended September 30, 2016:
 
Three Months
 
Nine Months
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
(in millions)
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(99.0
)
 
$

 
$
(99.0
)
 
$
(89.9
)
 
$

 
$
(89.9
)
Change in foreign currency translation adjustments
0.5

 

 
0.5

 
(8.6
)
 

 
(8.6
)
Ending balance
$
(98.5
)
 
$

 
$
(98.5
)
 
$
(98.5
)
 
$

 
$
(98.5
)
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5.7

 
$
(2.1
)
 
$
3.6

 
$
(6.8
)
 
$
2.2

 
$
(4.6
)
Net unrealized gains arising during the period
(2.9
)
 
1.1

 
(1.8
)
 
10.7

 
(3.4
)
 
7.3

Reclassification of net (gains) to Other, net
(0.3
)
 
0.1

 
(0.2
)
 
(1.4
)
 
0.3

 
(1.1
)
Net change
(3.2
)
 
1.2

 
(2.0
)
 
9.3

 
(3.1
)
 
6.2

Ending balance
$
2.5

 
$
(0.9
)
 
$
1.6

 
$
2.5

 
$
(0.9
)
 
$
1.6

 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(0.6
)
 
$
0.3

 
$
(0.3
)
 
$
(14.4
)
 
$
2.7

 
$
(11.7
)
Unrealized gains (losses) arising during the period
63.2

 
(15.3
)
 
47.9

 
77.7

 
(17.8
)
 
59.9

Reclassifications of gains to:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
(7.4
)
 
1.6

 
(5.8
)
 
(8.0
)
 
1.7

 
(6.3
)
Selling, general and administrative expenses
(1.4
)
 
0.3

 
(1.1
)
 
(1.5
)
 
0.3

 
(1.2
)
Net change
54.4

 
(13.4
)
 
41.0

 
68.2

 
(15.8
)
 
52.4

Ending balance
$
53.8

 
$
(13.1
)
 
$
40.7

 
$
53.8

 
$
(13.1
)
 
$
40.7

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(93.9
)
 
$
(1.8
)
 
$
(95.7
)
 
$
(111.1
)
 
$
4.9

 
$
(106.2
)
Other comprehensive income (loss)
51.7

 
(12.2
)
 
39.5

 
68.9

 
(18.9
)
 
50.0

Ending balance
$
(42.2
)
 
$
(14.0
)
 
$
(56.2
)
 
$
(42.2
)
 
$
(14.0
)
 
$
(56.2
)




19


Changes in accumulated other comprehensive income (loss) by component were as follows for the three and nine months ended September 30, 2015:
 
Three Months
 
Nine Months
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
(in millions)
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(52.4
)
 
$

 
$
(52.4
)
 
$
(34.8
)
 
$

 
$
(34.8
)
Change in foreign currency translation adjustments
(16.8
)
 

 
(16.8
)
 
(34.4
)
 

 
(34.4
)
Ending balance
$
(69.2
)
 
$

 
$
(69.2
)
 
$
(69.2
)
 
$

 
$
(69.2
)
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(0.5
)
 
$

 
$
(0.5
)
 
$
(2.4
)
 
$
0.8

 
$
(1.6
)
Net unrealized gains arising during the period
1.4

 
(0.6
)
 
0.8

 
4.0

 
(1.8
)
 
2.2

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

 

 
(0.9
)
 
0.6

 
(0.3
)
Net change
1.2

 
(0.4
)
 
0.8

 
3.1

 
(1.2
)
 
1.9

Ending balance
$
0.7

 
$
(0.4
)
 
$
0.3

 
$
0.7

 
$
(0.4
)
 
$
0.3

 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(46.0
)
 
$
8.4

 
$
(37.6
)
 
$
(102.6
)
 
$
15.9

 
$
(86.7
)
Net unrealized (losses) arising during the period
(29.1
)
 
5.2

 
(23.9
)
 
(3.4
)
 
3.2

 
(0.2
)
Reclassifications of losses to:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
17.5

 
(3.2
)
 
14.3

 
42.8

 
(7.7
)
 
35.1

Selling, general and administrative expenses
3.4

 
(0.6
)
 
2.8

 
9.0

 
(1.6
)
 
7.4

Net change
(8.2
)
 
1.4

 
(6.8
)
 
48.4

 
(6.1
)
 
42.3

Ending balance
$
(54.2
)
 
$
9.8

 
$
(44.4
)
 
$
(54.2
)
 
$
9.8

 
$
(44.4
)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(98.9
)
 
$
8.4

 
$
(90.5
)
 
$
(139.8
)
 
$
16.7

 
$
(123.1
)
Other comprehensive income (loss)
(23.8
)
 
1.0

 
(22.8