COGNIZANT TECHNOLOGY SOLUTIONS CORP - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3126-30x2018.htm
EX-32.2 - EXHIBIT 32.2 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3226-30x2018.htm
EX-32.1 - EXHIBIT 32.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3216-30x2018.htm
EX-31.1 - EXHIBIT 31.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit3116-30x2018.htm
EX-10.1 - EXHIBIT 10.1 - COGNIZANT TECHNOLOGY SOLUTIONS CORP	ctshexhibit1016-30x2018.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2018
¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from to

Commission File Number 0-24429

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)



Delaware		13-3728359
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Glenpointe Centre West 500 Frank W. Burr Blvd. Teaneck, New Jersey		07666
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (201) 801-0233

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No: ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ý No: ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, 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	ý	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 ý

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of July 27, 2018:



Class		Number of Shares
Class A Common Stock, par value $.01 per share		580,233,834

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

TABLE OF CONTENTS



		Page
PART I.	FINANCIAL INFORMATION	1

Item 1.	Consolidated Financial Statements (Unaudited)	1

	Consolidated Statements of Financial Position (Unaudited) as of June 30, 2018 and December 31, 2017	1

	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017	2

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017	3

	Consolidated Statements of Stockholders' Equity (Unaudited) for the Six Months Ended June 30, 2018 and 2017	4

	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2018 and 2017	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4.	Controls and Procedures	56

PART II.	OTHER INFORMATION	57

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 6.	Exhibits	58

SIGNATURES		59

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(in millions, except par values)



	June 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	901		$	1,925
Short-term investments	3,346			3,131
Trade accounts receivable, net of allowances of $68 and $65, respectively	3,204			2,865
Unbilled accounts receivable	—			357
Other current assets	852			833
Total current assets	8,303			9,111
Property and equipment, net	1,345			1,324
Goodwill	3,036			2,704
Intangible assets, net	1,060			981
Deferred income tax assets, net	367			418
Long-term investments	80			235
Other noncurrent assets	615			448
Total assets	$	14,806		$	15,221
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	217		$	210
Deferred revenue	308			383
Short-term debt	100			175
Accrued expenses and other current liabilities	1,912			2,071
Total current liabilities	2,537			2,839
Deferred revenue, noncurrent	77			104
Deferred income tax liabilities, net	145			146
Long-term debt	649			698
Long-term income taxes payable	508			584
Other noncurrent liabilities	242			181
Total liabilities	4,158			4,552
Commitments and contingencies (See Note 13)
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, 580 and 588 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively	6			6
Additional paid-in capital	55			49
Retained earnings	10,681			10,544
Accumulated other comprehensive income (loss)	(94		)	70
Total stockholders’ equity	10,648			10,669
Total liabilities and stockholders’ equity	$	14,806		$	15,221

The accompanying notes are an integral part of the unaudited 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 June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues	$	4,006		$	3,670		$	7,918		$	7,216
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization expense shown separately below)	2,417			2,261			4,818			4,455
Selling, general and administrative expenses	805			709			1,516			1,395
Depreciation and amortization expense	114			94			221			190
Income from operations	670			606			1,363			1,176
Other income (expense), net:
Interest income	40			31			81			63
Interest expense	(7		)	(6		)	(13		)	(12		)
Foreign currency exchange gains (losses), net	(80		)	5			(111		)	57
Other, net	—			(1		)	—			—
Total other income (expense), net	(47		)	29			(43		)	108
Income before provision for income taxes	623			635			1,320			1,284
Provision for income taxes	(168		)	(165		)	(345		)	(257		)
Income from equity method investments	1			—			1			—
Net income	$	456		$	470		$	976		$	1,027
Basic earnings per share	$	0.78		$	0.80		$	1.67		$	1.72
Diluted earnings per share	$	0.78		$	0.80		$	1.66		$	1.71
Weighted average number of common shares outstanding - Basic	585			589			586			597
Dilutive effect of shares issuable under stock-based compensation plans	1			2			1			2
Weighted average number of common shares outstanding - Diluted	586			591			587			599
Dividends declared per common share	$	0.20		$	0.15		$	0.40		$	0.15

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in millions)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net income	$	456		$	470		$	976		$	1,027
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(71		)	50			(34		)	67
Change in unrealized gains and losses on cash flow hedges, net of taxes	(87		)	(1		)	(123		)	78
Change in unrealized gains and losses on available-for-sale securities, net of taxes	1			1			(6		)	2
Other comprehensive income (loss)	(157		)	50			(163		)	147
Comprehensive income	$	299		$	520		$	813		$	1,174

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in millions)



	Class A Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2017	588		$	6	$	49		$	10,544		$	70		$	10,669
Cumulative effect of changes in accounting principle⁽¹⁾	—		—		—			122			(1		)	121
Net income	—		—		—			976			—			976
Other comprehensive income (loss)	—		—		—			—			(163		)	(163		)
Common stock issued, stock-based compensation plans	4		—		102			—			—			102
Stock-based compensation expense	—		—		130			—			—			130
Repurchases of common stock	(12	)	—		(226		)	(723		)	—			(949		)
Dividends	—		—		—			(238		)	—			(238		)
Balance, June 30, 2018	580		$	6	$	55		$	10,681		$	(94	)	$	10,648

	Class A Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2016	608		$	6	$	358		$	10,478		$	(114	)	$	10,728
Net income	—		—		—			1,027			—			1,027
Other comprehensive income (loss)	—		—		—			—			147			147
Common stock issued, stock-based compensation plans	4		—		105			—			—			105
Stock-based compensation expense	—		—		109			—			—			109
Repurchases of common stock	(22	)	—		(444		)	(1,100		)	—			(1,544		)
Dividends	—		—		—			(89		)	—			(89		)
Balance, June 30, 2017	590		$	6	$	128		$	10,316		$	33		$	10,483


(1)	Reflects the adoption of accounting standards as described in Note 1.

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)



	For the Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net income	$	976		$	1,027
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	240			207
Provision for doubtful accounts	4			17
Deferred income taxes	51			8
Stock-based compensation expense	130			109
Other	100			(63		)
Changes in assets and liabilities:
Trade accounts receivable	(330		)	(103		)
Other current assets	296			(81		)
Other noncurrent assets	(159		)	(46		)
Accounts payable	(3		)	2
Deferred revenues, current and noncurrent	(47		)	10
Other current and noncurrent liabilities	(230		)	(289		)
Net cash provided by operating activities	1,028			798
Cash flows from investing activities:
Purchases of property and equipment	(187		)	(126		)
Purchases of available-for-sale investment securities	(806		)	(1,622		)
Proceeds from maturity or sale of available-for-sale investment securities	906			1,936
Purchases of held-to-maturity investment securities	(519		)	(662		)
Proceeds from maturity of held-to-maturity investment securities	386			50
Purchases of other investments	(318		)	(213		)
Proceeds from maturity or sale of other investments	205			345
Payments for business combinations, net of cash acquired	(478		)	(6		)
Net cash (used in) investing activities	(811		)	(298		)
Cash flows from financing activities:
Issuance of common stock under stock-based compensation plans	102			104
Repurchases of common stock	(949		)	(1,544		)
Repayment of term loan borrowings and capital lease obligations	(64		)	(42		)
Net change in notes outstanding under the revolving credit facility	(75		)	150
Dividends paid	(236		)	(89		)
Net cash (used in) financing activities	(1,222		)	(1,421		)
Effect of exchange rate changes on cash and cash equivalents	(19		)	44
(Decrease) in cash and cash equivalents	(1,024		)	(877		)
Cash and cash equivalents, beginning of year	1,925			2,034
Cash and cash equivalents, end of period	$	901		$	1,157

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1 — Interim Consolidated Financial Statements

The terms “Cognizant,” “we,” “our,” “us” and “the Company” refer to Cognizant Technology Solutions Corporation and its subsidiaries unless the context indicates otherwise. We have prepared the accompanying unaudited consolidated financial statements included herein in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and Regulation S-X under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The accompanying unaudited 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, 2017. In our opinion, all adjustments considered necessary for a fair statement of the accompanying unaudited 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



Date Issued and Topic	Date Adopted and Method	Description	Impact
May 2014 Revenue	January 1, 2018 Modified Retrospective	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 enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. 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.	See Note 3 for the impact of adoption of this standard.
November 2016 Statement of Cash Flows	January 1, 2018 Retrospective	This update requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. It also requires a reconciliation of such totals to the amounts on the statement of financial position and disclosure as to the nature of the restrictions.	There were no restricted cash balances as of June 30, 2018. The adoption of this update had no impact on our financial statements for the three and six months ended June 30, 2018.
February 2018 Income Statement - Reporting Comprehensive Income	January 1, 2018 In the period of adoption	This update provides an option for entities to reclassify stranded tax effects caused by the newly-enacted Tax Cuts and Jobs Act, or Tax Reform Act, from accumulated other comprehensive income to retained earnings.	We have early adopted this update as of January 1, 2018. The adoption resulted in a decrease of $1 million in accumulated other comprehensive income and a corresponding increase of $1 million to opening retained earnings.

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New Accounting Pronouncements



Date Issued and Topic	Effective Date	Description	Impact
February 2016 Leases	January 1, 2019	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. The standard offers several practical expedients for transition and certain expedients specific to lessees or lessors. The standard allows for two methods of adoption: retrospective to each prior reporting period presented with the cumulative effect of adoption recognized at the beginning of the earliest period presented or retrospective to the beginning of the period of adoption through a cumulative-effect adjustment.	While we are continuing to evaluate the provisions of this standard, the primary effect will be to require recording of right-of-use assets and corresponding lease obligations for current operating leases. We expect the adoption of this standard to have a material impact on our consolidated statement of financial position, but not on the consolidated statements of operations or cash flows. As of December 31, 2017, our undiscounted operating lease commitments were $943 million. We are currently planning to elect the package of practical expedients which permits us to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. We are also evaluating other available practical expedients. We intend to adopt the standard retrospectively to the beginning of the period of adoption through a cumulative-effect adjustment.
March 2017 Nonrefundable Fees and Other Costs	January 1, 2019	This update shortens 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. 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.



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. The investigation is also examining various other payments made in small amounts in India that may not have complied with Company policy or applicable law. 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 2009 and 2016 that may have been improper. During the year ended December 31, 2016, we recorded out-of-period corrections related to $4 million of such payments that had been 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. There were no adjustments recorded during 2018 and 2017 related to the amounts under investigation.

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Note 3 — Revenues

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers,” or the New Revenue Standard, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. For contracts that were modified before the effective date, the Company aggregated the effect of all contract modifications prior to identifying performance obligations and allocating transaction price in accordance with the practical expedient ASC 606-10-65-1-(f)-4. Upon adoption of the New Revenue Standard on January 1, 2018, we recorded a net increase to opening retained earnings of approximately $121 million, after a tax impact of $37 million. The impact of adoption primarily relates to (1) changes in the method used to measure progress on our fixed-price application maintenance, consulting and business process services contracts, (2) the longer period of amortization for costs to fulfill a contract, (3) the timing of revenue recognition and allocation of purchase price on our software license contracts, (4) the reclassification of balances representing receivables, as defined by the New Revenue Standard, from Unbilled accounts receivable to Trade accounts receivable, net, (5) the reclassification of balances representing contract assets, as defined by the New Revenue Standard, from Unbilled accounts receivable to Other current assets, as well as (6) the income tax impact of the above items, as applicable.

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The following tables compare the financial statement line items materially affected by the adoption of the New Revenue Standard as of and for the three and six months ended June 30, 2018 to the pro-forma amounts had the previous guidance been in effect, or Pro-forma Amounts:



	June 30, 2018
	As Reported		Pro-forma Amounts		Impacts of the New Revenue Standard
	(in millions)
Assets:
Trade accounts receivable, net^{(1), (2)}	$	3,204	$	3,082	$	122
Unbilled accounts receivable^{(1), (3)}	—		416		(416		)
Other current assets^{(2), (3)}	852		534		318
Total current assets					24
Other noncurrent assets⁽⁴⁾	615		565		50
Total assets					$	74
Liabilities:
Deferred revenue⁽²⁾	$	308	$	451	$	(143	)
Total current liabilities					(143		)
Deferred revenue, noncurrent⁽²⁾	77		86		(9		)
Deferred income tax liabilities, net⁽⁵⁾	145		95		50
Total liabilities					(102		)
Stockholders’ equity:
Retained earnings	10,681		10,505		176
Total stockholders’ equity					176
Total liabilities and stockholders’ equity					$	74



	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	As Reported			Pro-forma Amounts			Impacts of the New Revenue Standard			As Reported			Pro-forma Amounts			Impacts of the New Revenue Standard
	(in millions)									(in millions)
Revenues⁽²⁾	$	4,006		$	3,975		$	31		$	7,918		$	7,866		$	52
Cost of revenues ⁽⁴⁾	2,417			2,424			(7		)	4,818			4,833			(15		)
Selling, general and administrative expenses	805			805			—			1,516			1,516			—
Depreciation and amortization expense	114			114			—			221			221			—
Income from operations	670			632			38			1,363			1,296			67
Other income (expense), net	(47		)	(47		)	—			(43		)	(43		)	—
Income before provision for income taxes⁽⁵⁾	623			585			38			1,320			1,253			67
Provision for income taxes	(168		)	(161		)	(7		)	(345		)	(332		)	(13		)
Income (loss) from equity method investment	1			1			—			1			1			—
Net income	$	456		$	425		$	31		$	976		$	922		$	54
Basic earnings per share	$	0.78		$	0.73		$	0.05		$	1.67		$	1.57		$	0.10
Diluted earnings per share	$	0.78		$	0.73		$	0.05		$	1.66		$	1.57		$	0.09


(1)	Reflects the reclassification of balances representing receivables, as defined by the New Revenue Standard, from Unbilled accounts receivable to Trade accounts receivable, net.


(2)	Reflects the impact of changes in the method used to measure progress on our fixed-price application maintenance, consulting and business process services contracts and the timing of revenue recognition and allocation of purchase price on our software license contracts.


(3)	Reflects the reclassification of balances representing contract assets, as defined by the New Revenue Standard, from Unbilled accounts receivable to Other current assets.


(4)	Reflects the impact of a longer period of amortization for costs to fulfill a contract.


(5)	Reflects the income tax impact of the above items.

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Revenue Recognition

We recognize revenues as we transfer control of deliverables (products, solutions and services) to our customers in an amount reflecting the consideration to which we expect to be entitled. To recognize revenues, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenues when a performance obligation is satisfied. We account for a contract when it has approval and commitment from all parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience.

We may enter into arrangements that consist of multiple performance obligations. Such arrangements may include any combination of our deliverables. To the extent a contract includes multiple promised deliverables, we apply judgment to determine whether promised deliverables are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised deliverables are accounted for as a combined performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price. Standalone selling price is the price at which we would sell a promised good or service separately to the customer. When not directly observable, we typically estimate standalone selling price by using the expected cost plus a margin approach. We typically establish a standalone selling price range for our deliverables, which is reassessed on a periodic basis or when facts and circumstances change.

For performance obligations where control is transferred over time, revenues are recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the deliverables to be provided. Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered, in accordance with the practical expedient in ASC 606-10-55-18. If our invoicing is not consistent with value delivered, revenues are recognized as the service is performed based on the cost to cost method described above. The cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information; such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately. Revenues related to fixed-price hosting and infrastructure services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered, in accordance with the practical expedient in ASC 606-10-55-18. If our invoicing is not consistent with value delivered, revenues are recognized on a straight-line basis unless revenues are earned and obligations are fulfilled in a different pattern. The revenue recognition method applied to the types of contracts described above provides the most faithful depiction of performance towards satisfaction of our performance obligations; for example, the cost to cost method is used when the value of services provided to the customer is best represented by the costs expended to deliver those services.

Revenues related to our non-hosted software license arrangements that do not require significant modification or customization of the underlying software are recognized when the software is delivered as control is transferred at a point in time. For software license arrangements that require significant functionality enhancements or modification of the software, revenues for the software license and related services are recognized as the services are performed in accordance with the methods described above. In software hosting arrangements, the rights provided to the customer, such as ownership of a license, contract termination provisions and the feasibility of the client to operate the software, are considered in determining whether the arrangement includes a license or a service. Sales and usage-based fees promised in exchange for licenses of intellectual property are not recognized as revenue until the uncertainty related to the variable amounts is resolved. Revenues related to software maintenance and support are generally recognized on a straight-line basis over the contract period.

Revenues related to our time-and-materials, transaction-based or volume-based contracts are recognized over the period the services are provided in a manner that corresponds with the value transferred to the customer to-date relative to the remaining services to be provided.

Revenues also include the reimbursement of out-of-pocket expenses. Our warranties generally provide a customer with assurance that the related deliverable will function as the parties intended because it complies with agreed-upon specifications and is therefore not considered an additional performance obligation in the contract.

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From time to time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Determining whether we control the good or service before it is transferred to the customer may require judgment.

Our contracts may be modified to add, remove or change existing performance obligations. The accounting for modifications to our contracts involves assessing whether the services added to an existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are not distinct are accounted for on a cumulative catch up basis, while those that are distinct are accounted for prospectively, either as a separate contract if the additional services are priced at the standalone selling price, or as a termination of the existing contract and creation of a new contract if not priced at the standalone selling price. Services added to our application development and systems integration service contracts are typically not distinct, while services added to our other contracts, including application maintenance, testing and business process services contracts, are typically distinct.

Incentive revenues, volume discounts, or any other form of variable consideration is estimated using either the sum of probability weighted amounts in a range of possible consideration amounts (expected value), or the single most likely amount in a range of possible consideration amounts (most likely amount), depending on which method better predicts the amount of consideration to which we may be entitled. We include in the transaction price variable consideration only to the extent it is probable that a significant reversal of revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price may involve judgment and are based largely on an assessment of our anticipated performance and all information that is reasonably available to us.

We assess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set up or transition fees paid upfront by our customers to represent a financing component, as such fees are required to encourage customer commitment to the project and protect us from early termination of the contract.

Costs to Fulfill

Recurring operating costs for contracts with customers are recognized as incurred. Certain eligible, nonrecurring costs incurred in the initial phases of our application maintenance, business process outsourcing and infrastructure services contracts (i.e. set-up or transition costs) are capitalized when such costs (1) relate directly to the contract, (2) generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future, and (3) are expected to be recovered. These costs are expensed ratably over the estimated life of the customer relationship, including expected renewals. In determining the estimated life of the customer relationship, we evaluate the average contract term, on a portfolio basis by nature of the services to be provided, and apply judgment to evaluate the rate of technological and industry change. Capitalized amounts are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows are not sufficient to recover the carrying amount of the capitalized costs to fulfill.

The following table presents information related to the capitalized costs to fulfill, such as set-up or transition activities, for the six months ended June 30, 2018. Costs to obtain contracts were immaterial for the periods disclosed.



	Costs to Fulfill
	(in millions)
Balance - January 1, 2018	$	303
Amortization expense	(32		)
Costs capitalized	85
Other	(3		)
Balance - June 30, 2018	$	353

Costs to fulfill are recorded in "Other noncurrent assets" in our consolidated statements of financial position.

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Trade Accounts Receivable and Contract Balances

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). For example, we recognize a receivable for revenues related to our time and materials and transaction or volume-based contracts when earned regardless of whether amounts have been billed. We present such receivables in Trade accounts receivable, net in our consolidated statements of financial position at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.

A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are presented in Other current assets in our consolidated statements of financial position and primarily relate to unbilled amounts on fixed-price contracts utilizing the cost to cost method of revenue recognition. The table below shows significant movements in contract assets:



	Contract Assets
	(in millions)
Balance - January 1, 2018	$	306
Revenues recognized during the period but not billed	259
Amounts reclassified to accounts receivable	(247		)
Balance - June 30, 2018	$	318

Our contract liabilities, or deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize the revenues. The noncurrent portion of deferred revenue is included in other noncurrent liabilities in our consolidated statements of financial position.

The table below shows significant movements in the deferred revenue balances (current and noncurrent) for the period disclosed:



	Deferred Revenue
	(in millions)
Balance - January 1, 2018	$	431
Amounts billed but not recognized as revenues	119
Revenues recognized related to the opening balance of deferred revenue	(163		)
Other	(2		)
Balance - June 30, 2018	$	385

Our contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period. The difference between the opening and closing balances of our contract assets and deferred revenues primarily results from the timing difference between our performance obligations and the customer’s payment. We receive payments from customers based on the terms established in our contracts, which vary by contract type.

Revenues recognized during the six months ended June 30, 2018 for performance obligations satisfied or partially satisfied in previous periods were immaterial.

Remaining Performance Obligations

ASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2018. This disclosure is not required for:


(1)	contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty,


(2)	contracts for which we recognize revenues based on the right to invoice for services performed,


(3)	variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met, or


(4)	variable consideration in the form of a sales-based or usage based royalty promised in exchange for a license of intellectual property.

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Many of our performance obligations meet one or more of these exemptions. As of June 30, 2018, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $1,595 million, of which approximately 64% is expected to be recognized as revenues within 2 years.

Disaggregation of Revenues

The table below presents disaggregated revenues from contracts with customers by customer location, service line and contract-type for each of our business segments. We believe this disaggregation best depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by industry, market and other economic factors.



	Three Months Ended
	June 30, 2018
	Financial Services		Healthcare		Products and Resources		Communications, Media and Technology		Total
	(in millions)
Revenues
Geography:
North America	$	1,056	$	1,060	$	585	$	366	$	3,067
United Kingdom	114		22		89		84		309
Rest of Europe	165		61		109		46		381
Europe - Total	279		83		198		130		690
Rest of World	134		13		57		45		249
Total	$	1,469	$	1,156	$	840	$	541	$	4,006

Service line:
Consulting and technology services	$	885	$	613	$	499	$	289	$	2,286
Outsourcing services	584		543		341		252		1,720
Total	$	1,469	$	1,156	$	840	$	541	$	4,006

Type of contract:
Time and materials	$	953	$	452	$	379	$	335	$	2,119
Fixed-price	460		443		367		179		1,449
Transaction or volume-based	56		261		94		27		438
Total	$	1,469	$	1,156	$	840	$	541	$	4,006

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	Six Months Ended
	June 30, 2018
	Financial Services		Healthcare		Products and Resources		Communications, Media and Technology		Total
	(in millions)
Revenues
Geography:
North America	$	2,100	$	2,083	$	1,157	$	702	$	6,042
United Kingdom	230		45		176		168		619
Rest of Europe	327		122		218		88		755
Europe - Total	557		167		394		256		1,374
Rest of World	273		27		110		92		502
Total	$	2,930	$	2,277	$	1,661	$	1,050	$	7,918

Service line:
Consulting and technology services	$	1,756	$	1,251	$	980	$	567	$	4,554
Outsourcing services	1,174		1,026		681		483		3,364
Total	$	2,930	$	2,277	$	1,661	$	1,050	$	7,918

Type of contract:
Time and materials	$	1,888	$	900	$	748	$	641	$	4,177
Fixed-price	931		954		728		358		2,971
Transaction or volume-based	111		423		185		51		770
Total	$	2,930	$	2,277	$	1,661	$	1,050	$	7,918



Note 4 — Business Combinations

In 2018, we completed two business combinations for total consideration of approximately $492 million, inclusive of contingent consideration. The acquisition of Bolder Healthcare Solutions, a privately-held U.S. provider of revenue cycle management solutions to the healthcare industry expands our healthcare consulting, technology and business process services portfolio and strengthens our position in digital healthcare technology and operations. The acquisition of Hedera Consulting, a privately-held company specializing in business advisory and data analytics services across a number of industries expands our consulting, business insight and digital transformation capabilities in Belgium and the Netherlands.

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These acquisitions were not material, either individually or in the aggregate, to our operations, financial position or cash flow. Accordingly, pro forma results have not been presented. These acquisitions were included in our unaudited consolidated financial statements as of the date on which the businesses were acquired. We have allocated the purchase price related to these transactions to tangible and intangible assets and liabilities, including non-deductible goodwill, based on their estimated fair values. We will 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. The allocations of purchase price to the fair value of the aggregate assets acquired and liabilities assumed were as follows:



	Six Months Ended June 30, 2018
	Fair Value			Weighted Average Useful Life
	(in millions)
Cash	$	10
Current assets	37
Property, plant and equipment and other noncurrent assets	10
Non-deductible goodwill ⁽¹⁾	340
Customer relationship intangible assets	123			9.7 years
Other intangible assets	26			2.4 years
Current liabilities	(15		)
Noncurrent liabilities	(39		)
Purchase price	$	492

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



Note 5 — Realignment Charges

In 2017, we began a realignment of our business to accelerate the shift to digital services and solutions while improving the overall efficiency of our operations. Charges we incurred as part of this realignment were reported in "Selling, general and administrative expenses" in our consolidated statements of operations. The realignment charges are comprised of severance costs, including those related to a voluntary separation program announced in May 2017, lease termination costs and advisory fees related to non-routine shareholder matters and to the development of our realignment and return of capital programs.

Realignment charges were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in millions)
Employee separations	$	—	$	37	$	—	$	39
Advisory fees	—		1		—		10
Lease termination costs	—		1		1		1
Total realignment costs	$	—	$	39	$	1	$	50

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Note 6 — Investments

Our investments were as follows:



	June 30, 2018			December 31, 2017
	(in millions)
Short-term investments:
Equity investment securities	$	25		$	25
Available-for-sale investment securities	1,862			1,972
Held-to-maturity investment securities	987			745
Time deposits	472		⁽¹⁾	389
Total short-term investments	$	3,346		$	3,131



Long-term investments:
Equity and cost method investments	$	74	$	74
Held-to-maturity investment securities	6		161
Total long-term investments	$	80	$	235


(1)	Includes $419 million in restricted time deposits as of June 30, 2018. See Note 9.

Equity Investment Securities

Our equity investment securities consist of a U.S. dollar denominated investment in a fixed income mutual fund. Unrealized losses for the three and six months ended June 30, 2018 and 2017 were immaterial. The value of the fixed income mutual fund is based on the net asset value, or NAV, of the fund, with appropriate consideration of the liquidity and any restrictions on disposition of our investment in the fund. There were no realized gains or losses on equity securities during the three and six months ended June 30, 2018 and 2017.

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.

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at June 30, 2018 were as follows:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
U.S. Treasury and agency debt securities	$	647	$	—	$	(10	)	$	637
Corporate and other debt securities	440		—		(5		)	435
Certificates of deposit and commercial paper	377		—		—			377
Asset-backed securities	306		—		(3		)	303
Municipal debt securities	111		—		(1		)	110
Total available-for-sale investment securities	$	1,881	$	—	$	(19	)	$	1,862

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



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
U.S. Treasury and agency debt securities	$	667	$	—	$	(6	)	$	661
Corporate and other debt securities	439		—		(2		)	437
Certificates of deposit and commercial paper	450		—		—			450
Asset-backed securities	297		—		(2		)	295
Municipal debt securities	130		—		(1		)	129
Total available-for-sale investment securities	$	1,983	$	—	$	(11	)	$	1,972

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 June 30, 2018:



	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	$	517	$	(8	)	$	86	$	(2	)	$	603	$	(10	)
Corporate and other debt securities	321		(4		)	97		(1		)	418		(5		)
Certificates of deposit and commercial paper	99		—			—		—			99		—
Asset-backed securities	212		(2		)	78		(1		)	290		(3		)
Municipal debt securities	86		(1		)	16		—			102		(1		)
Total	$	1,235	$	(15	)	$	277	$	(4	)	$	1,512	$	(19	)



	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	$	519	$	(4	)	$	124	$	(2	)	$	643	$	(6	)
Corporate and other debt securities	297		(1		)	126		(1		)	423		(2		)
Certificates of deposit and commercial paper	49		—			—		—			49		—
Asset-backed securities	193		(1		)	94		(1		)	287		(2		)
Municipal debt securities	107		(1		)	18		—			125		(1		)
Total	$	1,165	$	(7	)	$	362	$	(4	)	$	1,527	$	(11	)

The unrealized losses for the above securities as of June 30, 2018 and December 31, 2017 were primarily attributable to changes in interest rates. At each reporting date, we perform an evaluation of impaired available-for-sale securities to determine if the unrealized losses are other-than-temporary. We do not consider any of the investments to be other-than-temporarily impaired as of June 30, 2018. 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.

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The contractual maturities of our fixed income available-for-sale investment securities as of June 30, 2018 are set forth in the following table:



	Amortized Cost		Fair Value
	(in millions)
Due within one year	$	536	$	535
Due after one year up to two years	526		518
Due after two years up to three years	468		461
Due after three years	45		45
Asset-backed securities	306		303
Total available-for-sale investment securities	$	1,881	$	1,862

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 June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
	(in millions)
Proceeds from sales of available-for-sale investment securities	$	434		$	397	$	559		$	1,645

Gross gains	$	—		$	—	$	—		$	1
Gross losses	(1		)	—		(2		)	(1		)
Net realized (losses) on sales of available-for-sale investment securities	$	(1	)	$	—	$	(2	)	$	—

Held-to-Maturity Investment Securities

Our held-to-maturity investment securities consist of Indian rupee denominated investments primarily in commercial paper, 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.

The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at June 30, 2018 were as follows:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Short-term investments:
Corporate and other debt securities	$	599	$	—	$	(2	)	$	597
Commercial paper	388		—		(1		)	387
Total short-term held-to-maturity investments	987		—		(3		)	984
Long-term investments:
Corporate and other debt securities	6		—		—			6
Total held-to-maturity investment securities	$	993	$	—	$	(3	)	$	990

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



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Short-term investments:
Corporate and other debt securities	$	346	$	—	$	(1	)	$	345
Commercial paper	399		—		(2		)	397
Total short-term held-to-maturity investments	745		—		(3		)	742
Long-term investments:
Corporate and other debt securities	161		—		(1		)	160
Total held-to-maturity investment securities	$	906	$	—	$	(4	)	$	902

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 June 30, 2018:



	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	$	485	$	(2	)	$	31	$	—	$	516	$	(2	)
Commercial paper	387		(1		)	—		—		387		(1		)
Total	$	872	$	(3	)	$	31	$	—	$	903	$	(3	)



	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	$	473	$	(2	)	$	—	$	—	$	473	$	(2	)
Commercial paper	394		(2		)	—		—		394		(2		)
Total	$	867	$	(4	)	$	—	$	—	$	867	$	(4	)

At each reporting date, the Company performs an evaluation of held-to-maturity securities to determine if the unrealized losses are other-than-temporary. We do not consider any of the investments to be other-than-temporarily impaired as of June 30, 2018.

The contractual maturities of our fixed income held-to-maturity investment securities as of June 30, 2018 are set forth in the following table:



	Amortized Cost		Fair Value
	(in millions)
Due within one year	$	987	$	984
Due after two years	6		6
Total held-to-maturity investment securities	$	993	$	990

During the six months ended June 30, 2018 and the year ended December 31, 2017, there were no transfers of investments between our available-for-sale and held-to-maturity investment portfolios.

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Note 7 — Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:



	June 30, 2018

COGNIZANT TECHNOLOGY SOLUTIONS CORP - FORM 10-Q - August 2, 2018

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