COGNIZANT TECHNOLOGY SOLUTIONS CORP - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3223-31x2017.htm
EX-32.1 - EXHIBIT 32.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3213-31x2017.htm
EX-31.2 - EXHIBIT 31.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3123-31x2017.htm
EX-31.1 - EXHIBIT 31.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3113-31x2017.htm
EX-10.2 - EXHIBIT 10.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit1023-31x2017.htm

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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 March 31, 2017
☐	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 (§232.405 of this chapter) 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth 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	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 April 28, 2017:



Class		Number of Shares
Class A Common Stock, par value $.01 per share		588,996,873

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

TABLE OF CONTENTS



		Page
PART I.	FINANCIAL INFORMATION	1

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1

	Consolidated Statements of Financial Position (Unaudited) as of March 31, 2017 and December 31, 2016	1

	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2017 and 2016	2

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2017 and 2016	3

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2017 and 2016	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	40

PART II.	OTHER INFORMATION	42

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 6.	Exhibits	44

SIGNATURES		45

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited).

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(in millions, except par values)



	March 31, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	1,308		$	2,034
Short-term investments	2,966			3,135
Trade accounts receivable, net of allowances of $58 and $48, respectively	2,644			2,556
Unbilled accounts receivable	395			349
Other current assets	529			526
Total current assets	7,842			8,600
Property and equipment, net	1,306			1,311
Goodwill	2,563			2,554
Intangible assets, net	923			951
Deferred income tax assets, net	458			425
Long-term investments	110			62
Other noncurrent assets	427			359
Total assets	$	13,629		$	14,262
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	189		$	175
Deferred revenue	397			306
Short-term debt	437			81
Accrued expenses and other current liabilities	1,562			1,856
Total current liabilities	2,585			2,418
Deferred revenue, noncurrent	128			151
Deferred income tax liabilities, net	6			6
Long-term debt	772			797
Other noncurrent liabilities	155			162
Total liabilities	3,646			3,534
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 shares authorized, 589 and 608 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively	6			6
Additional paid-in capital	59			358
Retained earnings	9,935			10,478
Accumulated other comprehensive income (loss)	(17		)	(114		)
Total stockholders’ equity	9,983			10,728
Total liabilities and stockholders’ equity	$	13,629		$	14,262

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share data)



	Three Months Ended March 31,
	2017			2016
Revenues	$	3,546		$	3,202
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization expense shown separately below)	2,194			1,915
Selling, general and administrative expenses	686			646
Depreciation and amortization expense	96			87
Income from operations	570			554
Other income (expense), net:
Interest income	32			31
Interest expense	(6		)	(5		)
Foreign currency exchange gains (losses), net	52			9
Other, net	1			—
Total other income (expense), net	79			35
Income before provision for income taxes	649			589
Provision for income taxes	(92		)	(148		)
Income from equity method investment	—			—
Net income	$	557		$	441
Basic earnings per share	$	0.92		$	0.73
Diluted earnings per share	$	0.92		$	0.72
Weighted average number of common shares outstanding - Basic	605			608
Dilutive effect of shares issuable under stock-based compensation plans	2			4
Weighted average number of common shares outstanding - Diluted	607			612

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in millions)



	Three Months Ended March 31,
	2017		2016
Net income	$	557	$	441
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	17		20
Change in unrealized gains and losses on cash flow hedges, net of taxes	79		20
Change in unrealized gains and losses on available-for-sale securities, net of taxes	1		5
Other comprehensive income (loss)	97		45
Comprehensive income	$	654	$	486

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)



	For the Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	557		$	441
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	104			88
Provision for doubtful accounts	9			5
Deferred income taxes	9			69
Stock-based compensation expense	54			54
Other	(55		)	(2		)
Changes in assets and liabilities:
Trade accounts receivable	(86		)	(55		)
Other current assets	20			(78		)
Other noncurrent assets	(31		)	(13		)
Accounts payable	13			48
Deferred revenues, current and noncurrent	67			41
Other current and noncurrent liabilities	(384		)	(526		)
Net cash provided by operating activities	277			72
Cash flows from investing activities:
Purchases of property and equipment	(66		)	(64		)
Purchases of investments	(1,584		)	(1,096		)
Proceeds from maturity or sale of investments	1,747			1,002
Payments for business combinations, net of cash acquired	(6		)	(70		)
Net cash provided by (used in) investing activities	91			(228		)
Cash flows from financing activities:
Issuance of common stock under stock-based compensation plans	61			49
Repurchases of common stock	(1,514		)	(257		)
Repayment of term loan borrowings and capital lease obligations	(21		)	(13		)
Net change in notes outstanding under the revolving credit facility	350			(250		)
Net cash (used in) financing activities	(1,124		)	(471		)
Effect of exchange rate changes on cash and cash equivalents	30			26
(Decrease) in cash and cash equivalents	(726		)	(601		)
Cash and cash equivalents, beginning of year	2,034			2,125
Cash and cash equivalents, end of period	$	1,308		$	1,524

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

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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, 2016. In our opinion, all adjustments considered necessary for a fair statement 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.

Recently Adopted Accounting Pronouncements.

In March 2016, the Financial Accounting Standards Board, or 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. We adopted this update beginning January 1, 2017. The adoption of this update did not have any effect on our financial condition 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. We adopted this update prospectively beginning January 1, 2017. In the first quarter of 2017, we recognized net excess tax benefits on stock-based compensation awards in our income tax provision in the amount of $6 million or approximately $0.01 per share. Additionally, the excess tax benefits and deficiencies have been presented in operating activities in the statement of cash flows in our consolidated financial statements and the prior period presentation has been adjusted to conform to the current period.

In January 2017, the FASB issued an update to the standard on business combinations, which clarifies the definition of a business. The update requires a business to include at least an input and a substantive process that together significantly contribute to the ability to create outputs. The update also states that the definition of a business is not met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2018 with early adoption permitted. We early adopted this update prospectively beginning January 1, 2017. The adoption of this update did not have a material effect on our financial condition or results of operations.

In January 2017, the FASB issued an update to the standard on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020 with early adoption permitted. We early adopted this update prospectively beginning January 1, 2017. The adoption of this update did not have any effect on our financial condition or results of operations.

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New Accounting Pronouncements.

In May 2014, the FASB issued a standard on revenue from contracts with customers. In 2016, the FASB issued five amendments to the new standard. The new standard, as amended, sets forth a single comprehensive model for recognizing and reporting revenues. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenues 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. 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 intend to adopt the standard using the modified retrospective method effective January 1, 2018. While we are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures, we currently believe the most significant impacts primarily relate to changes in the method used to measure progress on our application maintenance and business process services fixed-price contracts, capitalization and amortization of costs to acquire and fulfill a contract, as well as the timing of revenue recognition on our software license contracts. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the standard will be dependent on each contract's 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 for operating leases to have a material impact on the presentation of our consolidated statements of financial position.

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 debt prepayment or debt extinguishment costs, contingent consideration payments made after a 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 March 2017, the FASB issued an update to shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on after January 1, 2019 with early adoption permitted. Upon adoption, entities will be required to use a modified retrospective transition with the cumulative effect adjustment recognized to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effect the amendments will have on our consolidated financial statements and related disclosures.

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Note 2 — Internal Investigation and Related Matters

We are conducting an internal investigation focused on 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 $6 million in payments made between 2010 and 2015 that may have been recorded improperly. During the year ended December 31, 2016, we recorded out-of-period corrections related to $4 million of such payments that were previously capitalized that should have been expensed. These out-of-period corrections and the other $2 million in potentially improper payments were not material to any previously issued financial statements.

Note 3 — Investments

Our investments were as follows:



	March 31, 2017		December 31, 2016
	(in millions)
Short-term investments:
Trading investment securities	$	25	$	25
Available-for-sale investment securities	1,953		2,264
Held-to-maturity investment securities	341		40
Time deposits	647		806
Total short-term investments	$	2,966	$	3,135



Long-term investments:
Equity and cost method investments	$	65	$	62
Held-to-maturity investment securities	45		—
Total long-term investments	$	110	$	62

Trading Investment Securities

Our trading investment securities consist of a U.S. dollar denominated investment in a fixed income mutual fund. Unrealized losses for the three months ended March 31, 2017 were immaterial. There were no realized gains or losses on trading securities during the three months ended March 31, 2017. During the three months ended March 31, 2016, 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 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.

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The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at March 31, 2017 were as follows:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
U.S. Treasury and agency debt securities	$	637	$	1	$	(3	)	$	635
Corporate and other debt securities	452		—		(1		)	451
Certificates of deposit and commercial paper	455		—		—			455
Asset-backed securities	290		—		(1		)	289
Municipal debt securities	123		—		—			123
Total available-for-sale investment securities	$	1,957	$	1	$	(5	)	$	1,953

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at December 31, 2016 were as follows:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
U.S. Treasury and agency debt securities	$	605	$	—	$	(3	)	$	602
Corporate and other debt securities	407		—		(2		)	405
Certificates of deposit and commercial paper	910		1		—			911
Asset-backed securities	232		—		(1		)	231
Municipal debt securities	116		—		(1		)	115
Total available-for-sale investment securities	$	2,270	$	1	$	(7	)	$	2,264

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, 2017:



	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	$	498	$	(3	)	$	—	$	—	$	498	$	(3	)
Corporate and other debt securities	337		(1		)	—		—		337		(1		)
Certificates of deposit and commercial paper	108		—			—		—		108		—
Asset-backed securities	242		(1		)	—		—		242		(1		)
Municipal debt securities	60		—			2		—		62		—
Total	$	1,245	$	(5	)	$	2	$	—	$	1,247	$	(5	)



	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	$	526	$	(3	)	$	—	$	—	$	526	$	(3	)
Corporate and other debt securities	342		(2		)	1		—		343		(2		)
Certificates of deposit and commercial paper	185		—			—		—		185		—
Asset-backed securities	206		(1		)	1		—		207		(1		)
Municipal debt securities	88		(1		)	1		—		89		(1		)
Total	$	1,347	$	(7	)	$	3	$	—	$	1,350	$	(7	)

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The unrealized losses for the above securities as of March 31, 2017 and December 31, 2016 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. As of March 31, 2017, 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)" in our consolidated statements of financial position.

The contractual maturities of our fixed income available-for-sale investment securities as of March 31, 2017 are set forth in the following table:



	Amortized Cost		Fair Value
	(in millions)
Due within one year	$	628	$	629
Due after one year up to two years	481		479
Due after two years up to three years	484		483
Due after three years	74		73
Asset-backed securities	290		289
Total available-for-sale investment securities	$	1,957	$	1,953

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,
	2017			2016
	(in millions)
Proceeds from sales of available-for-sale investment securities	$	1,248		$	562

Gross gains	$	1		$	—
Gross losses	(1		)	—
Net realized gains (losses) on sales of available-for-sale investment securities	$	—		$	—

Held-to-Maturity Investment Securities

Our held-to-maturity investment securities consist of Indian rupee denominated investments primarily in commercial paper, international corporate bonds and government debt securities. 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. We classify these securities with maturities beyond 90 days but less than one year as short-term investments and beyond one year as long-term investments.

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The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at March 31, 2017 were as follows:



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(in millions)
Short-term investments:
Corporate and other debt securities	$	96	$	—	$	—	$	96
Commercial paper	245		—		—		245
Total short-term held-to-maturity investments	341		—		—		341
Long-term investments:
Corporate and other debt securities	45		—		—		45
Total held-to-maturity investment securities	$	386	$	—	$	—	$	386

The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at December 31, 2016 were as follows:



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(in millions)
Short-term investments:
Certificates of deposit and commercial paper	$	40	$	—	$	—	$	40

There were no long-term held-to-maturity investment securities at December 31, 2016.

The fair value and related unrealized losses of held-to-maturity 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, 2017:



	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in millions)
Corporate and other debt securities	$	86	$	—	$	—	$	—	$	86	$	—
Commercial paper	137		—		—		—		137		—
Total	$	223	$	—	$	—	$	—	$	223	$	—

As of December 31, 2016, held-to-maturity investment securities in an unrealized loss position were immaterial. At each reporting date, the Company performs an evaluation of held-to-maturity securities to determine if the unrealized losses are other-than-temporary. As of March 31, 2017, 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 March 31, 2017 are set forth in the following table:



	Amortized Cost		Fair Value
	(in millions)
Due within one year	$	341	$	341
Due after one year up to two years	39		39
Due after two years	6		6
Total held-to-maturity investment securities	$	386	$	386

As of March 31, 2016, there were no investment securities in our portfolio classified as held-to-maturity.

During the three months ended March 31, 2017 and the year ended December 31, 2016, there were no transfers of investments between our trading, available-for-sale and held-to-maturity investment portfolios.

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Note 4 — Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:



	March 31, 2017		December 31, 2016
	(in millions)
Compensation and benefits	$	857	$	1,134
Income taxes	12		10
Professional fees	103		99
Travel and entertainment	34		36
Customer volume incentives	247		258
Derivative financial instruments	13		4
Other	296		315
Total accrued expenses and other current liabilities	$	1,562	$	1,856

Note 5 — Debt

In 2014, we entered into a credit agreement with a commercial bank syndicate, or, as amended, the Credit Agreement, providing for a $1,000 million unsecured term loan and a $750 million unsecured revolving credit facility. 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. We were in compliance with all debt covenants and representations as of March 31, 2017.

Short-term Debt

The following summarizes our short-term debt balances as of:



	March 31, 2017		December 31, 2016
	(in millions)
Notes outstanding under revolving credit facility	$	350	$	—
Term loan - current maturities	87		81
Total short-term debt	$	437	$	81

Long-term Debt

The following summarizes our long-term debt balances as of:



	March 31, 2017			December 31, 2016
	(in millions)
Term loan, due 2019	$	862		$	881
Less:
Current maturities	(87		)	(81		)
Deferred financing costs	(3		)	(3		)
Long-term debt, net of current maturities	$	772		$	797

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.

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Our effective income tax rates were as follows:



	Three Months Ended March 31,
	2017		2016
Effective income tax rate	14.2	%	25.1	%

For the three months ended March 31, 2017, our effective income tax rate decreased primarily due to the recognition in the first quarter of 2017 of income tax benefits previously unrecognized in our consolidated financial statements related to several uncertain tax positions totaling $72 million. The recognition of these benefits in the first quarter of 2017 was based on management’s reassessment regarding whether certain unrecognized tax benefits met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefits. For the 2017 period, 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, earnings taxed in countries that have lower rates than the United States and the recognition in the first quarter of 2017 of previously unrecognized income tax benefits as described above. For the 2016 period, 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.

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 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 consolidated statements of financial position as of:



		March 31, 2017				December 31, 2016
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	$	101	$	—	$	34	$	—
	Other noncurrent assets	54		—		17		—
	Total	155		—		51		—
Foreign exchange forward contracts – Not designated as hedging instruments	Other current assets	1		—		—		—
	Accrued expenses and other current liabilities	—		13		—		4
	Total	1		13		—		4
Total		$	156	$	13	$	51	$	4

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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 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 forecasted Indian rupee denominated payments are recorded in earnings. As of March 31, 2017, we estimate that $77 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 included in accumulated other comprehensive income (loss) for such contracts were as follows as of:



	March 31, 2017		December 31, 2016
	(in millions)
2017	$	975	$	1,320
2018	1,020		1,020
Total notional value of contracts outstanding	$	1,995	$	2,340
Net unrealized gains included in accumulated other comprehensive income (loss), net of taxes	$	118	$	39

Upon settlement or maturity of the cash flow hedge contracts, we record the gains or losses, based on our designation at the commencement of the contract, with the related 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 March 31:



	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 Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (effective portion)
	2017		2016			2017		2016
	(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments	$	124	$	22	Cost of revenues	$	17	$	(2	)
					Selling, general and administrative expenses	3		—
					Total	$	20	$	(2	)

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.

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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, primarily the Indian rupee and the British pound, other than the functional currency of our foreign subsidiaries. These foreign exchange forward contracts are scheduled to mature in 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:



	March 31, 2017					December 31, 2016
	Notional		Fair Value			Notional		Fair Value
	(in millions)
Contracts outstanding	$	412	$	(12	)	$	213	$	(4	)

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:



	Location of Net Gains (Losses) on Derivative Instruments	Amount of Net (Losses) on Derivative Instruments
		2017			2016
		(in millions)
Foreign exchange forward contracts – Not designated as hedging instruments	Foreign currency exchange gains (losses), net	$	(10	)	$	(3	)

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.

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The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of March 31, 2017:



	Level 1		Level 2			Level 3		Total
	(in millions)
Cash equivalents:
Money market funds	$	350	$	—		$	—	$	350
Commercial paper	—		8			—		8
Total cash equivalents	350		8			—		358
Short-term investments:
Time deposits	—		647			—		647
Available-for-sale investment securities:
U.S. Treasury and agency debt securities	544		91			—		635
Corporate and other debt securities	—		451			—		451
Certificates of deposit and commercial paper	—		455			—		455
Asset-backed securities	—		289			—		289
Municipal debt securities	—		123			—		123
Total available-for-sale investment securities	544		1,409			—		1,953
Held-to-maturity investment securities:
Commercial paper	—		245			—		245
Corporate and other debt securities	—		96			—		96
Total short-term held-to-maturity investment securities	—		341			—		341
Total short-term investments⁽¹⁾	544		2,397			—		2,941
Long-term investments:
Held-to-maturity investment securities:
Corporate and other debt securities	—		45			—		45
Total long-term held-to-maturity investment securities	—		45			—		45
Total long-term investments⁽²⁾	—		45			—		45
Derivative financial instruments - foreign exchange forward contracts:
Other current assets	—		102			—		102
Accrued expenses and other current liabilities	—		(13		)	—		(13		)
Other noncurrent assets	—		54			—		54
Total	$	894	$	2,593		$	—	$	3,487

________________


(1)	Excludes trading securities in mutual funds valued at $25 million based on the net asset value, or NAV, of the fund at March 31, 2017.


(2)	Excludes equity and cost method investments of $65 million at March 31, 2017, which are accounted for using the equity method of accounting and at cost, respectively.

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The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2016:



	Level 1		Level 2			Level 3		Total
	(in millions)
Cash equivalents:
Money market funds	$	624	$	—		$	—	$	624
Commercial paper	—		131			—		131
Total cash equivalents	624		131			—		755
Short-term investments:
Time deposits	—		806			—		806
Available-for-sale investment securities:
U.S. Treasury and agency debt securities	558		44			—		602
Corporate and other debt securities	—		405			—		405
Certificates of deposit and commercial paper	—		911			—		911
Asset-backed securities	—		231			—		231
Municipal debt securities	—		115			—		115
Total available-for-sale investment securities	558		1,706			—		2,264
Held-to-maturity investment securities:
Certificates of deposit and commercial paper	—		40			—		40
Total held-to-maturity investment securities	—		40			—		40
Total short-term investments⁽¹⁾	558		2,552			—		3,110
Derivative financial instruments - foreign exchange forward contracts:
Other current assets	—		34			—		34
Accrued expenses and other current liabilities	—		(4		)	—		(4		)
Other noncurrent assets	—		17			—		17
Total	$	1,182	$	2,730		$	—	$	3,912

________________


(1)	Excludes trading securities in mutual funds valued at $25 million based on the net asset value, or NAV, of the fund at December 31, 2016.

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, debt securities issued by supranational institutions, 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, 2017 and December 31, 2016.

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, 2017 and the year ended December 31, 2016, there were no transfers among Level 1, Level 2, or Level 3 financial assets and liabilities.

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Note 9 — Stockholder's Equity

Stock Repurchase Program

Under the Board of Directors' authorized stock repurchase program, the Company is authorized to repurchase its Class A common stock through open market purchases, including under a trading plan adopted pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, or in private transactions, in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares to be purchased are determined by the Company’s management, in its discretion, or pursuant to a Rule 10b5-1 trading plan, and will depend upon market conditions and other factors.

Effective March 1, 2017, the Board of Directors approved the termination of the stock repurchase program then in effect and approved a new stock repurchase program ("New Stock Repurchase Program"). The New Stock Repurchase Program allows for the repurchase of $3,500 million of our outstanding shares of Class A common stock, excluding fees and expenses, through December 31, 2019.

In March 2017, we entered into accelerated share repurchase agreements, referred to collectively as the ASR, with certain financial institutions under our New Stock Repurchase Program. Under the terms of the ASR and in exchange for up-front payments of $1,500 million, the financial institutions initially delivered 21.5 million shares, a portion of the Company's total expected shares to be repurchased under the ASR. The total number of shares ultimately delivered is determined at the end of the applicable purchase periods under the ASR based on the volume-weighted average price of the Company’s common stock during such periods. The ASR purchase periods are scheduled to end during or prior to the third quarter of 2017.

Under the ASR, the shares received are constructively retired and returned to the status of authorized and unissued shares in the periods they are delivered, and the up-front payments are accounted for as a reduction to stockholders’ equity in our consolidated statement of financial position in the period the payments are made. The $1,500 million up-front payments were accounted for as a $400 million reduction in common stock and additional paid-in capital and a $1,100 million reduction in retained earnings in our consolidated statements of financial position in March 2017. We reflected the ASR as a repurchase of common stock in the period delivered for purposes of calculating earnings per share and as forward contracts indexed to our common stock. The forward contracts met all of the applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.

As of March 31, 2017, the remaining available balance under our New Stock Repurchase Program was $2,000 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. We also repurchased a limited number of shares from employees at the repurchase date market price. Combined, for the three months ended March 31, 2017, such repurchases totaled 0.2 million shares at an aggregate cost of $14 million.

Dividends

On May 4, 2017, our Board of Directors approved the Company's declaration of a $0.15 per share dividend with a record date of May 22, 2017 and a payment date of May 31, 2017.

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Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component were as follows for the three months ended March 31, 2017:



	Three Months
	Before Tax Amount			Tax Effect			Net of Tax Amount
	(in millions)
Foreign currency translation adjustments:
Beginning balance	$	(149	)	$	—		$	(149	)
Change in foreign currency translation adjustments	17			—			17
Ending balance	$	(132	)	$	—		$	(132	)

Unrealized gains (losses) on available-for-sale investment securities:
Beginning balance	$	(6	)	$	2		$	(4	)
Net unrealized gains arising during the period	2			(1		)	1
Reclassification of net (gains) to Other, net	—			—			—
Net change	2			(1		)	1
Ending balance	$	(4	)	$	1		$	(3	)

Unrealized gains on cash flow hedges:
Beginning balance	$	51		$	(12	)	$	39
Unrealized gains arising during the period	124			(30		)	94
Reclassifications of net (gains) to:
Cost of revenues	(17		)	4			(13		)
Selling, general and administrative expenses	(3		)	1			(2		)
Net change	104			(25		)	79
Ending balance	$	155		$	(37	)	$	118

Accumulated other comprehensive income (loss):
Beginning balance	$	(104	)	$	(10	)	$	(114	)
Other comprehensive income (loss)	123			(26		)	97
Ending balance	$	19		$	(36	)	$	(17	)

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Changes in accumulated other comprehensive income (loss) by component were as follows for the three months ended March 31, 2016:



	Three Months
	Before Tax Amount			Tax Effect			Net of Tax Amount
	(in millions)
Foreign currency translation adjustments:
Beginning balance	$	(90	)	$	—		$	(90	)
Change in foreign currency translation adjustments	20			—			20
Ending balance	$	(70	)	$	—		$	(70	)

Unrealized gains (losses) on available-for-sale investment securities:
Beginning balance	$	(7	)	$	2		$	(5	)
Net unrealized gains arising during the period	8			(3		)	5
Reclassification of net (gains) to Other, net	—			—			—
Net change	8			(3		)	5
Ending balance	$	1		$	(1	)	$	—

Unrealized (losses) on cash flow hedges:
Beginning balance	$	(14	)	$	2		$	(12	)
Unrealized gains arising during the period	22			(4		)	18
Reclassifications of losses to:
Cost of revenues	2			—			2
Selling, general and administrative expenses	—			—			—
Net change	24			(4		)	20
Ending balance	$	10		$	(2	)	$	8

Accumulated other comprehensive income (loss):
Beginning balance	$	(111	)	$	4		$	(107	)
Other comprehensive income (loss)	52			(7		)	45
Ending balance	$	(59	)	$	(3	)	$	(62	)

Note 10 — Commitments and Contingencies

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. When a material loss contingency is reasonably possible but not probable, we do not record a liability, but instead disclose the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, other than the specific matters described below, if decided adversely, is not expected to have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are conducting an internal investigation focused on whether certain payments relating to Company-owned facilities in India were made improperly and in possible violation of the FCPA and other applicable laws. In September 2016, we voluntarily notified the DOJ and 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 $6 million in payments made between 2010 and 2015 that may have been recorded improperly. During the year ended December 31, 2016, we recorded out-of-period corrections related to $4 million of such payments that were previously capitalized that should have been expensed. These out-of-period corrections and the other $2 million in potentially improper payments were not material to any previously issued financial statements.

On October 5, 2016, October 27, 2016, and November 18, 2016, three putative securities class action complaints were filed in the United States District Court for the District of New Jersey, naming us and certain of our current and former officers as defendants. In an order dated February 3, 2017, the United States District Court for the District of New Jersey consolidated

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the three putative securities class actions into a single action and appointed lead plaintiffs and lead counsel. On April 7, 2017, the lead plaintiffs filed a consolidated amended complaint on behalf of a putative class of stockholders who purchased our common stock during the period between February 27, 2015 and September 29, 2016, naming us and certain of our current and former officers as defendants and alleging violations of the Securities Exchange Act of 1934, as amended, based on allegedly false or misleading statements related to potential violations of the FCPA, our business, prospects and operations, and the effectiveness of our internal controls over financial reporting and our disclosure controls and procedures. The lead plaintiffs seek an award of compensatory damages, among other relief, and their reasonable costs and expenses, including attorneys’ fees. Under a stipulation filed by the parties on February 23, 2017, defendants have until June 6, 2017 to answer or move to dismiss the consolidated amended complaint.

On October 31, 2016, November 15, 2016, and November 18, 2016, three putative shareholder derivative complaints were filed in New Jersey Superior Court, Bergen County, naming us, all of our then current directors and certain of our current and former officers as defendants. On January 24, 2017, the New Jersey Superior Court, Bergen County, consolidated the three putative shareholder derivative actions filed in that court into a single action and appointed lead plaintiff and lead counsel. The complaints assert claims for breach of fiduciary duty, corporate waste, unjust enrichment, abuse of control, mismanagement, and/or insider selling by defendants. On March 16, 2017, the parties filed a stipulation deferring all further proceedings pending a final, non-appealable ruling on the anticipated motion to dismiss the consolidated putative securities class action. On April 26, 2017, in lieu of ordering the stipulation filed by the parties, the New Jersey Superior Court deferred further proceedings by dismissing the consolidated putative shareholder derivative litigation without prejudice but permitting the parties to file a motion to vacate the dismissal in the future. On February 22, 2017, a fourth putative shareholder derivative complaint asserting similar claims was filed in the United States District Court for the District of New Jersey, naming us and certain of our directors as defendants. On April 5, 2017, the United States District Court for the District of New Jersey entered an order staying all proceedings pending a final, non-appealable ruling on the anticipated motion to dismiss the consolidated putative securities class action. On April 7, 2017, a fifth putative shareholder derivative complaint was filed in the United States District Court for the District of New Jersey, naming us, certain of our directors, and certain of our current and former officers as defendants. The complaint in that action asserts claims similar to those in the previously-filed putative shareholder derivative actions, but also adds a claim for violations of the federal securities laws against the individual defendants. All of the putative shareholder derivative complaints allege among other things that certain of our public disclosures were false and misleading by failing to disclose that payments allegedly in violation of the FCPA had been made and by asserting that management had determined that our internal controls were effective. The plaintiffs seek awards of compensatory damages and restitution to us as a result of the alleged violations and their costs and attorneys’ fees, experts’ fees, and other litigation expenses, among other relief.

We are presently unable to predict the duration, scope or result of the internal investigation, the related consolidated putative securities class action, the putative shareholder derivative actions or any other related lawsuit, and any investigations by the DOJ or the SEC, including whether either agency will commence any legal action. As such, we are presently unable to develop a reasonable estimate of a possible loss or range of losses, if any, and thus have not recorded an accrual related to these matters. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships and the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. We expect to incur additional expenses related to remedial measures, and may incur additional expenses related to fines. Furthermore, while the Company intends to defend the lawsuits vigorously, these lawsuits and any other lawsuits are subject to inherent uncertainties, the actual cost of such litigation will depend upon many unknown factors and the outcome of the litigation is necessarily uncertain. As such, these matters could have a material adverse effect on our business, results of operations, cash flows or our financial condition.

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 customers, 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.

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In the normal course of business and in conjunction with certain customer engagements, we have entered into contractual arrangements through which we may be obligated to indemnify customers 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, 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 customer 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 liability 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.

The Company has indemnification and expense advancement obligations pursuant to its Bylaws and indemnification agreements with respect to certain current and former members of senior management and the Company’s directors. In connection with the ongoing internal investigation, the Company has received requests under such indemnification agreements and its Bylaws to provide advances of funds for legal fees and other expenses, and expects additional requests in connection with the investigation and related litigation. The Company has not recorded any liability for these matters as of March 31, 2017 as it cannot estimate the ultimate outcome at this time but has expensed advances made through March 31, 2017. The Company has maintained directors and officers insurance, from which a portion of these expenses may be recoverable, though we have not recorded an insurance receivable as of March 31, 2017.

As of March 31, 2017, we had outstanding fixed capital commitments of approximately $184 million related to our India real estate development program to build new Company owned state-of-the-art technology global delivery centers.

Note 11— Related Party Transactions

Brackett B. Denniston, III, has been the Interim General Counsel and an executive officer of the Company since December 2016. Mr. Denniston is also a Senior Counsel at the law firm of Goodwin Procter LLP, or Goodwin. During the three months ended March 31, 2017, Goodwin performed legal services for the Company for which it earned approximately $2 million. Goodwin has continued to perform such legal services since March 31, 2017 through the date of this filing. Goodwin did not perform any services for the Company during the three months ended March 31, 2016. The provision of legal services by Goodwin was reviewed and approved by our Audit Committee at the time Mr. Denniston was appointed an executive officer of the Company.

Note 12 — Segment Information

Our reportable segments are:


•	Financial Services, which consists of our banking and insurance operating segments;


•	Healthcare, which consists of our healthcare and life sciences operating segments;


•	Products and Resources (previously referred to as Manufacturing/Retail/Logistics), which consists of our retail and consumer goods, manufacturing and logistics, travel and hospitality, and energy and utilities operating segments;


•	Communications, Media and Technology (previously referred to as Other), which includes our communications and media operating segment and our technology operating segment.

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 groups may affect revenues 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 global 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, costs related to our realignment program 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,

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management has determined that it is not practical to allocate identifiable assets by segment, since such assets are used interchangeably among the segments.

Revenues from external customers and segment operating profit, before unallocated expenses, by reportable segment were as follows:



	Three Months Ended March 31,
	2017		2016
	(in millions)
Revenues:
Financial Services	$	1,376	$	1,286
Healthcare	1,003		914
Products and Resources	737		633
Communications, Media and Technology	430		369
Total revenue	$	3,546	$	3,202

Segment Operating Profit:
Financial Services	$	391	$	423
Healthcare	273		295
Products and Resources	203		219
Communications, Media and Technology	121		122
Total segment operating profit	988		1,059
Less: unallocated costs	418		505
Income from operations	$	570	$	554

Geographic Area Information

Revenue and long-lived assets, by geographic area, are as follows:



	Three Months Ended March 31,
	2017		2016
	(in millions)
Revenues: ⁽¹⁾
North America⁽²⁾	$	2,761	$	2,497
United Kingdom	274		299
Rest of Europe	285		226
Europe - Total	559		525
Rest of World ⁽³⁾	226		180
Total	$	3,546	$	3,202



	As of
	March 31, 2017		December 31, 2016
	(in millions)
Long-lived Assets: ⁽⁴⁾
North America⁽²⁾	$	286	$	279
Europe	53		52
Rest of World ⁽³⁾⁽⁵⁾	967		980
Total	$	1,306	$	1,311

________________


(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.

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

Executive Summary

We are one of the world’s leading professional services companies, transforming customers’ business, operating and technology models for the digital era. Our unique industry-based, consultative approach helps customers envision, build and run more innovative and efficient businesses. Our core competencies include: business, process, operations and technology consulting, application development and systems integration, enterprise information management, application testing, application maintenance, information technology, or IT, infrastructure services, and business process services. We tailor our services to specific industries and utilize an integrated global delivery model with customer service teams typically based on site at customer locations and delivery teams located at dedicated global delivery centers.

Our objective is to create value for both our customers and stockholders by enhancing our position as a leading professional services company in the digital era. Digital services is work we do to help our customers win in the digital economy by applying technology and analytics to change consumer experiences to drive sustainable growth, deploying systems of intelligence to automate and improve core business processes, and improving technology systems by deploying cloud and cyber security solutions and as-a-service models to make them simpler, more modern and secure. To accelerate our shift to digital services and solutions, we are deploying the following strategies:


•	Aligning our digital services into three digital practice areas - Digital Business, Digital Operations and Digital Systems and Technology - to address the needs of our customers as they transform their business and technology models.

•

Investing to scale these digital practice areas across our business segments and geographies, including through extensive training and re-skilling of our existing technical teams and expansion of our local workforces in the United States and other local markets around the world where we operate and pursuing select strategic acquisitions, joint ventures, investments and alliances that can expand our intellectual property, industry expertise, geographic reach, and platform and technology capabilities.

•

Continuing development of our core business, which includes application services, IT infrastructure and business process services. Our customers often look for efficiencies in the running of their core operations to help them fund investments in new digital capabilities. We work with them to analyze and identify opportunities for advanced automation and delivery efficiencies. Additionally, we seek to expand the geographic reach of our core portfolio of services.


•	Selectively targeting higher margin work within our core business and unifying our delivery capabilities to allow for more cost-conscious delivery, leveraging automation and scale, improving our utilization and optimizing our pyramid.

In 2017, we began realigning our business by executing on the above strategies and improving the overall efficiency of our operations, with the goal of achieving 22% non-GAAP operating margin¹ in 2019 while continuing to drive revenue growth. During the first quarter of 2017, we incurred severance costs related to the realignment and advisory fees related to non-routine shareholder matters and to the development of our realignment and return of capital programs. These costs are excluded from non-GAAP operating margin¹ and non-GAAP diluted earnings per share¹in the first quarter of 2017.

In May 2017, as part of the realignment, we announced a voluntary separation program for certain groups of employees, which we expect to result in severance costs primarily in the second quarter of 2017. Since the separation program is entirely voluntary, we cannot estimate the total costs related to this program at the time of this filing. The total costs related to the realignment, which will consist primarily of severance costs under the voluntary separation program, advisory fees and lease termination costs, are expected to be incurred primarily in 2017 and will continue to be excluded from non-GAAP operating margin¹ and non-GAAP diluted earnings per share¹.

We have initiated a capital return plan that includes a combination of stock repurchases and cash dividends. As part of this plan, we entered into accelerated stock repurchase agreements, referred to collectively as the ASR, of $1.5 billion in March 2017 and declared a cash dividend of $0.15 per share with a record date of May 22, 2017 and a payment date of May 31, 2017.

_______________


1	Non-GAAP income from operations 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.

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There can be no assurances that we will be successful in achieving the objectives of these plans or that other factors beyond our control, including the various risks set forth in "Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, will not cause us to fail to achieve the targeted improvements.

The following table sets forth summarized operating results for the three months ended March 31, 2017 and 2016:



									Increase (Decrease)
	2017				2016				$		%
	(Dollars in millions, except per share data)
Revenues	$	3,546			$	3,202			$	344	10.7
Income from operations and operating margin	570		16.1	%	554		17.3	%	16		2.9
Net income	557				441				116		26.3
Diluted earnings per share	0.92				0.72				0.20
Other Financial Information²
Non-GAAP income from operations and Non-GAAP operating margin	669		18.9	%	637		19.9	%	32		5.0
Non-GAAP diluted earnings per share	0.84				0.80				0.04

The key drivers of our revenue growth during the three months ended March 31, 2017 as compared to March 31, 2016 were as follows:


•	Solid performance in our Communications, Media and Technology (previously referred to as Other) and Products and Resources (previously referred to as Manufacturing/Retail/Logistics) business segments with revenue growth of 16.5% and 16.4%, respectively;


•	Revenues in our Healthcare business segment grew 9.7% as demand continues to be affected by uncertainty in the regulatory environment;


•	Revenues in our Financial Services business segment grew 7.0% as our banking customers continue to manage their spending under the current macroeconomic conditions;


•	Sustained strength in the North American market where revenues grew 10.6%;


•	Continued penetration of the European and Rest of World (primarily the Asia Pacific) markets.


◦	In Europe, we experienced revenue growth of 6.5%, after a negative currency impact of 7.4%. Our revenues from customers in the United Kingdom declined 8.4%, after a negative currency impact of 11.2%. Revenues from our Rest of Europe customers, which included revenues from new strategic customers acquired in the fourth quarter of 2016, increased 26.1%, after a negative currency impact of 2.4%;


◦	Revenues from our Rest of World customers increased 25.6% with an immaterial currency impact;


•	Increased customer spending on discretionary projects;


•	Expansion of our service offerings, including consulting and digital services, next-generation IT solutions and platform-based solutions;


•	Continued expansion of the market for global delivery of technology and business process services; and


•	Increased penetration at existing customers, including strategic customers.

_______________


2	Non-GAAP income from operations 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.

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Our customers seek to meet a dual mandate of achieving more efficient and effective operations, while investing in digital technologies that are reshaping their business models. Increasingly, the relative emphasis among our customers is shifting towards investment and innovation, as reflected in accelerated demand for our digital services. We also saw 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 customers by 7 during the quarter, bringing the total number of our strategic customers to 336. We define a strategic customer as one offering the potential to generate at least $5 million to $50 million or more in annual revenues at maturity.

Our operating margin decreased to 16.1% for the quarter ended March 31, 2017 from 17.3% for the quarter ended March 31, 2016, while our non-GAAP operating margin for the same period decreased to 18.9%³from 19.9%³. The decreases in both our GAAP and non-GAAP operating margins were due to an increase in compensation and benefits costs (net of lower incentive-based compensation) and increases in certain operating and professional costs, partially offset by a decrease in immigration expense.

As previously disclosed, the Company is conducting an internal investigation focused on 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 Department of Justice, or DOJ, and the 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 $6 million in payments made between 2010 and 2015 that may have been recorded improperly. In the second half of 2016, we recorded an out-of-period correction related to $4 million of such payments that were previously capitalized that should have been expensed. There were no additional adjustments recorded during the three months ended March 31, 2017 related to the amounts under investigation.

In 2016, there were putative securities class action complaints filed, naming us and certain of our current and former officers as defendants and alleging violations of the Securities Exchange Act of 1934, as amended, based on allegedly false or misleading statements related to potential violations of the FCPA, our business, prospects and operations, and the effectiveness of our internal control over financial reporting and our disclosure controls and procedures. Additionally, in 2016 and February and April 2017, putative shareholder derivative complaints were filed, naming us, certain of our directors and certain of our current and former officers as defendants. See the section titled "Part II, Item 1. Legal Proceedings."

During the quarter ended March 31, 2017, we incurred $14 million in costs related to the FCPA investigation and related lawsuits. We expect to continue to incur expenses related to these matters for the remainder of 2017 and future periods, including with respect to remediating the material weakness in our internal control over financial reporting.

The effective income tax rate decreased to 14.2% for the three months ended March 31, 2017 from 25.1% for the three months ended March 31, 2016. The decrease in our effective income tax rate was primarily attributed to the recognition in the first quarter of 2017 of an income tax benefit previously unrecognized in our consolidated financial statements related to several uncertain tax positions totaling $72 million. The recognition of these benefits in the first quarter of 2017 was based on management’s reassessment regarding whether certain unrecognized tax benefits met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefits.

We finished the first quarter of 2017 with approximately 261,200 employees, which is an increase of approximately 28,200 as compared to March 31, 2016. 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 2017. Annualized turnover, including both voluntary and involuntary, was approximately 14.7% for the three months ended March 31, 2017. The majority of our turnover occurs in India. As a result, annualized attrition rates on-site at customers are below our global attrition rate. In addition, attrition is weighted towards the more junior members of our staff.

_______________


3	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.

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During the remainder of 2017, barring any unforeseen events, we expect the following factors to affect our business and our operating results:


•	Demand from our customers for digital services;


•	Our customers' dual mandate of simultaneously achieving cost savings while investing in transformation and innovation;


•	Continued focus by customers on directing technology 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, including potential regulatory changes with respect to immigration and taxes;


•	Demand from our healthcare customers may continue to be negatively affected by the uncertainty in the regulatory environment;


•	Discretionary spending by our retail customers may be affected by weakness in the retail sector;


•	Legal fees and other expenses related to the internal investigation and related matters as described above;


•	Volatility in foreign currency rates; and


•	Continued uncertainty in the U.S. and world economies, including as a result of recent changes in the government administrations in the United States and elsewhere.

In response to this environment, we plan to:


•	Continue to invest in our digital practice areas of focus across industries and geographies;


•	Continue to invest in our talent base, including through local hiring and re-skilling, 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 technology spend by providing innovative solutions;


•	Focus on growing our business in Europe, the Middle East, the Asia Pacific region and Latin America, where we believe there are opportunities to gain market share;


•	Increase our strategic customer base across all of our business segments;


•	Pursue strategic acquisition opportunities that we believe add new technologies, including digital technologies, or platforms that complement our existing services, improve our overall service delivery capabilities, and/or expand our geographic presence;


•	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 reportable segments are:


•	Financial Services, which consists of our banking and insurance operating segments;


•	Healthcare, which consists of our healthcare and life sciences operating segments;


•	Products and Resources (previously referred to as Manufacturing/Retail/Logistics), which consists of our retail and consumer goods, manufacturing and logistics, travel and hospitality, and energy and utilities operating segments;


•	Communications, Media and Technology (previously referred to as Other), which includes our communications and media operating segment and our technology operating segment.

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 groups may affect revenues 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 global 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, costs related to our realignment program 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.

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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, 2017 and 2016. 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.

Results of Operations

COGNIZANT TECHNOLOGY SOLUTIONS CORP - FORM 10-Q - May 5, 2017

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