NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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 GAAP and 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, 2022. 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.
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Note 2 — Revenues and Trade Accounts Receivable |
Disaggregation of Revenues
The tables below present disaggregated revenues from contracts with clients by client location, service line and contract type for each of the business segments. We believe this disaggregation best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by industry, market and other economic factors. Our consulting and technology services include consulting, application development, systems integration and application testing services as well as software solutions and related services while our outsourcing services include application maintenance, infrastructure and business process services. Revenues are attributed to geographic regions based upon client location, which is the client's billing address. Substantially all revenues in the North America region relate to clients in the United States.
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| | Three Months Ended March 31, 2023 | | |
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(in millions) | | Financial Services | | Health Sciences | | Products and Resources | | Communications, Media and Technology | | Total | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | | | | | |
Geography: | | | | | | | | | | | | | | | | | | | | |
North America | | $ | 1,033 | | | $ | 1,248 | | | $ | 741 | | | $ | 523 | | | $ | 3,545 | | | | | | | | | | | |
United Kingdom | | 162 | | | 37 | | | 132 | | | 147 | | | 478 | | | | | | | | | | | |
Continental Europe | | 152 | | | 124 | | | 150 | | | 35 | | | 461 | | | | | | | | | | | |
Europe - Total | | 314 | | | 161 | | | 282 | | | 182 | | | 939 | | | | | | | | | | | |
Rest of World | | 129 | | | 24 | | | 95 | | | 80 | | | 328 | | | | | | | | | | | |
Total | | $ | 1,476 | | | $ | 1,433 | | | $ | 1,118 | | | $ | 785 | | | $ | 4,812 | | | | | | | | | | | |
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Service line: | | | | | | | | | | | | | | | | | | | | |
Consulting and technology services | | $ | 1,000 | | | $ | 812 | | | $ | 732 | | | $ | 442 | | | $ | 2,986 | | | | | | | | | | | |
Outsourcing services | | 476 | | | 621 | | | 386 | | | 343 | | | 1,826 | | | | | | | | | | | |
Total | | $ | 1,476 | | | $ | 1,433 | | | $ | 1,118 | | | $ | 785 | | | $ | 4,812 | | | | | | | | | | | |
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Type of contract: | | | | | | | | | | | | | | | | | | | | |
Time and materials | | $ | 861 | | | $ | 490 | | | $ | 445 | | | $ | 464 | | | $ | 2,260 | | | | | | | | | | | |
Fixed-price | | 545 | | | 650 | | | 585 | | | 293 | | | 2,073 | | | | | | | | | | | |
Transaction or volume-based | | 70 | | | 293 | | | 88 | | | 28 | | | 479 | | | | | | | | | | | |
Total | | $ | 1,476 | | | $ | 1,433 | | | $ | 1,118 | | | $ | 785 | | | $ | 4,812 | | | | | | | | | | | |
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Cognizant Technology Solutions | 9 | March 31, 2023 Form 10-Q |
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| | Three Months Ended March 31, 2022 | | |
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(in millions) | | Financial Services | | Health Sciences | | Products and Resources | | Communications, Media and Technology | | Total | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | | | | | |
Geography: | | | | | | | | | | | | | | | | | | | | |
North America | | $ | 1,080 | | | $ | 1,195 | | | $ | 761 | | | $ | 533 | | | $ | 3,569 | | | | | | | | | | | |
United Kingdom | | 151 | | | 44 | | | 132 | | | 126 | | | 453 | | | | | | | | | | | |
Continental Europe | | 157 | | | 120 | | | 145 | | | 37 | | | 459 | | | | | | | | | | | |
Europe - Total | | 308 | | | 164 | | | 277 | | | 163 | | | 912 | | | | | | | | | | | |
Rest of World | | 140 | | | 33 | | | 92 | | | 80 | | | 345 | | | | | | | | | | | |
Total | | $ | 1,528 | | | $ | 1,392 | | | $ | 1,130 | | | $ | 776 | | | $ | 4,826 | | | | | | | | | | | |
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Service line: | | | | | | | | | | | | | | | | | | | | |
Consulting and technology services | | $ | 1,057 | | | $ | 804 | | | $ | 754 | | | $ | 448 | | | $ | 3,063 | | | | | | | | | | | |
Outsourcing services | | 471 | | | 588 | | | 376 | | | 328 | | | 1,763 | | | | | | | | | | | |
Total | | $ | 1,528 | | | $ | 1,392 | | | $ | 1,130 | | | $ | 776 | | | $ | 4,826 | | | | | | | | | | | |
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Type of contract: | | | | | | | | | | | | | | | | | | | | |
Time and materials | | $ | 890 | | | $ | 494 | | | $ | 467 | | | $ | 448 | | | $ | 2,299 | | | | | | | | | | | |
Fixed-price | | 557 | | | 618 | | | 572 | | | 292 | | | 2,039 | | | | | | | | | | | |
Transaction or volume-based | | 81 | | | 280 | | | 91 | | | 36 | | | 488 | | | | | | | | | | | |
Total | | $ | 1,528 | | | $ | 1,392 | | | $ | 1,130 | | | $ | 776 | | | $ | 4,826 | | | | | | | | | | | |
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Costs to Fulfill
The following table presents information related to the capitalized costs to fulfill for the three months ended March 31:
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(in millions) | | 2023 | | 2022 |
Beginning balance | | $ | 265 | | | $ | 394 | |
Costs capitalized | | 15 | | | 12 | |
Amortization expense | | (22) | | | (27) | |
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Ending balance | | $ | 258 | | | $ | 379 | |
Costs to obtain contracts were immaterial for the periods disclosed.
Contract Balances
The table below shows movements in contract assets for the three months ended March 31:
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(in millions) | | 2023 | | 2022 |
Beginning balance | | $ | 326 | | | $ | 310 | |
Revenues recognized during the period but not billed | | 248 | | | 259 | |
Amounts reclassified to trade accounts receivable | | (223) | | | (202) | |
Amounts acquired in business combinations | | 9 | | | — | |
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Ending balance | | $ | 360 | | | $ | 367 | |
The table below shows movements in the deferred revenue balances (current and noncurrent) for the three months ended March 31:
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(in millions) | | 2023 | | 2022 |
Beginning balance | | $ | 417 | | | $ | 443 | |
Amounts billed but not recognized as revenues | | 322 | | | 396 | |
Revenues recognized related to the beginning balance of deferred revenue | | (251) | | | (361) | |
Amounts acquired in business combinations | | 13 | | | — | |
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Ending balance | | $ | 501 | | | $ | 478 | |
Revenues recognized during the three months ended March 31, 2023 for performance obligations satisfied or partially satisfied in previous periods were immaterial.
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Cognizant Technology Solutions | 10 | March 31, 2023 Form 10-Q |
Remaining Performance Obligations
As of March 31, 2023, the aggregate amount of transaction price allocated to remaining performance obligations was $3,680 million, of which approximately 50% is expected to be recognized as revenues within 2 years and 80% is expected to be recognized as revenues within 5 years. Disclosure is not required for performance obligations that meet any of the following criteria:
(1)contracts with a duration of one year or less as determined under ASC Topic 606: "Revenue from Contracts with Customers",
(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.
Many of our performance obligations meet one or more of these exemptions and therefore are not included in the remaining performance obligation amount disclosed above.
Trade Accounts Receivable and Allowance for Credit Losses
We calculate expected credit losses for trade accounts receivable based on historical credit loss rates for each aging category as adjusted for the current market conditions and forecasts about future economic conditions. The following table presents the activity in the allowance for credit losses for trade accounts receivable for the three months ended March 31:
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(in millions) | | 2023 | | 2022 |
Beginning balance | | $ | 43 | | | $ | 50 | |
Credit loss expense | | 4 | | | 9 | |
Write-offs charged against the allowance | | (11) | | | (2) | |
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Ending balance | | $ | 36 | | | $ | 57 | |
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Note 3 — Business Combinations |
Acquisitions completed during the three months ended March 31, 2023 were not individually or in the aggregate material to our operations. Accordingly, pro forma results have not been presented. We have allocated the purchase price related to these transactions to tangible and intangible assets acquired and liabilities assumed, including goodwill, based on their estimated fair values.
During the three months ended March 31, 2023, we acquired 100% ownership in each of the following:
•certain net assets of OneSource Virtual, the professional and application management services business of OneSource Virtual, Inc. and OneSource Virtual (UK) Ltd., a leading provider of Workday services, solutions and products, acquired to complement our existing finance and human resources advisory implementation services related to Workday (acquired January 1, 2023), and
•Mobica, an IoT software engineering services provider, acquired to expand our IoT embedded software engineering capabilities (acquired March 10, 2023).
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Cognizant Technology Solutions | 11 | March 31, 2023 Form 10-Q |
The allocations of preliminary purchase price to the fair value of the aggregate assets acquired and liabilities assumed were as follows:
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(in millions) | OneSource Virtual | | Mobica | | Total | | Weighted Average Useful Life |
Cash | $ | — | | | $ | 20 | | | $ | 20 | | | |
Trade accounts receivable | — | | | 10 | | | 10 | | | |
Other current assets | 4 | | | 8 | | | 12 | | | |
Property and equipment and other assets | 1 | | | 6 | | | 7 | | | |
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Non-deductible goodwill | 18 | | | 203 | | | 221 | | | |
Tax-deductible goodwill | 88 | | | — | | | 88 | | | |
Customer relationship assets | 11 | | | 118 | | | 129 | | | 10.9 years |
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Current liabilities | (17) | | | (38) | | | (55) | | | |
Noncurrent liabilities | (1) | | | (2) | | | (3) | | | |
Purchase price | $ | 104 | | | $ | 325 | | | $ | 429 | | | |
Goodwill from our acquisition of OneSource Virtual is expected to benefit all of our reportable segments and has been allocated as such. Goodwill from our acquisition of Mobica has been allocated to our Financial Services, Products and Resources and Communications, Media and Technology segments. 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 identifiable intangible asset. The above allocations are preliminary and will be finalized as soon as practicable within the measurement period, but in no event later than one year following the date of acquisition.
Our investments were as follows:
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(in millions) | March 31, 2023 | | December 31, 2022 |
Short-term investments: | | | |
Equity investment security | $ | 10 | | | $ | 10 | |
Available-for-sale investment securities | — | | | 225 | |
Held-to-maturity investment securities | 12 | | | 24 | |
Time deposits | 1 | | | 51 | |
Total short-term investments | $ | 23 | | | $ | 310 | |
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Long-term investments: | | | |
Other investments | $ | 64 | | | $ | 70 | |
Restricted time deposits(1) | 360 | | | 357 | |
Total long-term investments | $ | 424 | | | $ | 427 | |
Equity Investment Security
Our equity investment security is a U.S. dollar denominated investment in a fixed income mutual fund. Realized and unrealized gains and losses were immaterial for the three months ended March 31, 2023 and 2022.
Available-for-Sale Investment Securities
As of March 31, 2023, we had no available-for-sale investment securities. As of December 31, 2022, the amortized cost and fair value of the available-for-sale investments were each $225 million. Our available-for-sale investment securities consisted of highly rated U.S. dollar denominated investments in certificates of deposit and commercial paper maturing within one year. Unrealized losses were immaterial as of December 31, 2022. There were no realized gains or losses related to the available-for-sale investment securities during the three months ended March 31, 2023 and 2022. There were no sales of available-for sale investment securities during the three months ended March 31, 2023 and 2022.
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Cognizant Technology Solutions | 12 | March 31, 2023 Form 10-Q |
Held-to-Maturity Investment Securities
Our held-to-maturity investment securities consist of Indian rupee denominated investments in commercial paper and international corporate bonds. The basis for the measurement of fair value of the held-to-maturity investment securities is Level 2 in the fair value hierarchy.
The amortized cost and fair value of corporate debt securities as of March 31, 2023 and December 31, 2022 were each $6 million and $12 million, respectively. The amortized cost and fair value of commercial paper securities as of March 31, 2023 and December 31, 2022 were each $6 million and $12 million, respectively.
As of March 31, 2023, $6 million of corporate debt securities and $6 million of commercial paper were in an unrealized loss position. The total unrealized loss was less than $1 million and none of the securities had been in an unrealized loss position for longer than 12 months. As of December 31, 2022, $12 million of corporate debt securities and $12 million of commercial paper were in an unrealized loss position. The total unrealized loss was less than $1 million and none of the securities had been in an unrealized loss position for longer than 12 months.
The securities in our portfolio are highly rated and short-term in nature. As of March 31, 2023, the corporate debt securities were rated AA+ or better and the commercial paper securities were rated A-1+ by CRISIL, an Indian subsidiary of S&P Global, or ICRA, the Indian affiliate of Moody's.
Other Investments
As of March 31, 2023 and December 31, 2022, we had equity method investments of $62 million and $68 million, respectively, primarily related to an investment in the technology sector. As of each of March 31, 2023 and December 31, 2022, we had equity securities without a readily determinable fair value of $2 million.
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Note 5 — Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities were as follows: | | | | | | | | | | | |
(in millions) | March 31, 2023 | | December 31, 2022 |
Compensation and benefits | $ | 1,206 | | | $ | 1,446 | |
Customer volume and other incentives | 251 | | | 222 | |
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Income taxes | 348 | | | 217 | |
Professional fees | 154 | | | 165 | |
Other | 372 | | | 357 | |
Total accrued expenses and other current liabilities | $ | 2,331 | | | $ | 2,407 | |
In 2022, we entered into the Credit Agreement providing for the $650 million Term Loan and a $1,850 million unsecured revolving credit facility, which are each due to mature in October 2027. We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan beginning in December 2023.
The Credit Agreement requires interest to be paid, at our option, at either the Term Benchmark, Adjusted Daily Simple RFR or the ABR Rate (each as defined in the Credit Agreement), plus, in each case, an Applicable Margin (as defined in the Credit Agreement). Initially, the Applicable Margin is 0.875% with respect to Term Benchmark loans and RFR loans and 0.00% with respect to ABR loans. Subsequently, the Applicable Margin with respect to Term Benchmark loans and RFR loans will be determined quarterly and may range from 0.75% to 1.125%, depending on our public debt ratings or, if we have not received public debt ratings, from 0.875% to 1.125%, depending on our Leverage Ratio, which is the ratio of indebtedness for borrowed money to Consolidated EBITDA, as defined in the Credit Agreement. Initially, the Term Loan is a Term Benchmark loan. The Credit Agreement contains customary affirmative and negative covenants as well as a financial covenant. We were in compliance with all debt covenants and representations of the Credit Agreement as of March 31, 2023.
In March 2023, our India subsidiary renewed its working capital facility at 15 billion Indian rupees ($183 million at the March 31, 2023 exchange rate). The facility requires us to repay any balances within 90 days from the date of disbursement. There is a 1.0% prepayment penalty applicable to payments made within 30 days of disbursement. This working capital facility
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Cognizant Technology Solutions | 13 | March 31, 2023 Form 10-Q |
contains affirmative and negative covenants and may be renewed annually. As of March 31, 2023, we have not borrowed funds under this facility or any of its predecessor facilities.
Short-term Debt
As of March 31, 2023 and December 31, 2022, we had $16 million and $8 million, respectively of short-term debt related to current maturities of our Term Loan.
Long-term Debt
The following table summarizes the long-term debt balances as of:
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(in millions) | March 31, 2023 | | December 31, 2022 |
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Term Loan | $ | 650 | | | $ | 650 | |
Less: | | | |
Current maturities | (16) | | | (8) | |
Unamortized deferred financing costs | (4) | | | (4) | |
Long-term debt, net of current maturities | $ | 630 | | | $ | 638 | |
The carrying value of our debt approximated its fair value as of March 31, 2023 and December 31, 2022.
Our effective income tax rates were as follows:
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Effective income tax rate | 21.4 | % | | 23.3 | % | | | | |
In March 2023, we reached an agreement with the IRS, which effectively settled tax years 2017 and 2018. As a result of this effective settlement, in the first quarter of 2023, we recorded a reduction of $42 million to our uncertain tax position balance, which resulted in a $25 million discrete benefit to the provision for income taxes and a $17 million adjustment to our current income tax balance sheet accounts. The effective tax rate for the three months ended March 31, 2023 decreased primarily as a result of this discrete benefit. Tax years that remain subject to examination by the IRS are 2019 onward.
We are involved in two separate ongoing disputes with the ITD in connection with previously disclosed share repurchase transactions undertaken by CTS India in 2013 and 2016 to repurchase shares from its shareholders (non-Indian Cognizant entities) valued at $523 million and $2.8 billion, respectively.
The 2016 transaction was undertaken pursuant to a plan approved by the High Court in Chennai, India, and resulted in the payment of $135 million in Indian income taxes - an amount we believe includes all the applicable taxes owed for this transaction under Indian law. In March 2018, the ITD asserted that it is owed an additional 33 billion Indian rupees ($402 million at the March 31, 2023 exchange rate) on the 2016 transaction. We deposited 5 billion Indian rupees, representing 15% of the disputed tax amount related to the 2016 transaction, with the ITD. As of each of March 31, 2023 and December 31, 2022, the deposit with the ITD was $60 million, presented in "Other noncurrent assets". Additionally, certain time deposits of CTS India were placed under lien in favor of the ITD, representing the remainder of the disputed tax amount. As of March 31, 2023 and December 31, 2022, the balance of deposits under lien was 30 billion Indian rupees, including previously earned interest, or $360 million and $357 million, respectively, as presented in "Long-term investments". The dispute in relation to the 2013 share repurchase transaction is also in litigation. At this time, the ITD has not made specific demands with regards to the 2013 transaction.
In April 2020, we received a formal assessment from the ITD on the 2016 transaction, which is consistent with the ITD's previous assertions. In June 2020, we filed an appeal against this assessment to the CITA. In March 2022, we received a negative decision from the CITA. The matter is currently pending before the Income Tax Appellate Tribunal.
We continue to believe we have paid all applicable taxes owed on both the 2016 and the 2013 transactions and we continue to defend our positions with respect to both matters. Accordingly, we have not recorded any reserves for these matters as of March 31, 2023.
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Cognizant Technology Solutions | 14 | March 31, 2023 Form 10-Q |
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Note 8 — Derivative Financial Instruments |
In the normal course of business, we use foreign exchange forward and option contracts to manage foreign currency exchange rate risk. Derivatives may give rise to credit risk from the possible non-performance by counterparties. Credit risk is limited to the fair value of those contracts that are favorable to us. We have limited our credit risk by limiting the amount of credit exposure with any one financial institution and conducting ongoing evaluation of the creditworthiness of the financial institutions with which we do business. In addition, all the assets and liabilities related to the foreign exchange derivative contracts set forth in the below table are subject to master netting arrangements, such as the International Swaps and Derivatives Association Master Agreement, 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 the foreign exchange derivative contracts, as applicable, on a gross basis, with no offsets, in our unaudited consolidated statements of financial position. There is no financial collateral (including cash collateral) posted or received by us related to the foreign exchange derivative 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:
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(in millions) | | | | March 31, 2023 | | December 31, 2022 |
Designation of Derivatives | | Location on Statement of Financial Position | | Assets | | Liabilities | | Assets | | Liabilities |
Foreign exchange forward and option contracts – Designated as cash flow hedging instruments | | Other current assets | | $ | 5 | | | $ | — | | | $ | 1 | | | $ | — | |
| | Other noncurrent assets | | 3 | | | — | | | 1 | | | — | |
| | Accrued expenses and other current liabilities | | — | | | 26 | | | — | | | 53 | |
| | Other noncurrent liabilities | | — | | | 5 | | | — | | | 17 | |
| | Total | | 8 | | | 31 | | | 2 | | | 70 | |
Foreign exchange forward contracts – Not designated as hedging instruments | | Other current assets | | 2 | | | — | | | 4 | | | — | |
| | Accrued expenses and other current liabilities | | — | | | 10 | | | — | | | 5 | |
| | Total | | 2 | | | 10 | | | 4 | | | 5 | |
Total | | | | $ | 10 | | | $ | 41 | | | $ | 6 | | | $ | 75 | |
Cash Flow Hedges
We have entered into a series of foreign exchange derivative 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 the Indian rupee against the U.S. dollar on future operating costs and are scheduled to mature each month during the remainder of 2023, 2024 and the first three months of 2025. The changes in fair value of these contracts are initially reported in "Accumulated other comprehensive income (loss)" in our unaudited consolidated statements of financial position and are subsequently reclassified to earnings within "Cost of revenues" and "Selling, general and administrative expenses" in our unaudited consolidated statements of operations in the same period that the forecasted Indian rupee denominated payments are recorded in earnings. As of March 31, 2023, we estimate that $16 million, net of tax, of net losses related to derivatives designated as cash flow hedges reported in "Accumulated other comprehensive income (loss)" in our unaudited consolidated statements of financial position is expected to be reclassified into earnings within the next 12 months.
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Cognizant Technology Solutions | 15 | March 31, 2023 Form 10-Q |
The notional value of the outstanding contracts by year of maturity was as follows:
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(in millions) | March 31, 2023 | | December 31, 2022 |
2023 | $ | 1,513 | | | $ | 1,865 | |
2024 | 1,235 | | | 1,010 | |
2025 | 190 | | | — | |
Total notional value of contracts outstanding (1) | $ | 2,938 | | | $ | 2,875 | |
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(1)Includes $20 million notional value of option contracts as of March 31, 2023, with the remaining notional value related to forward contracts. There were no option contracts outstanding as of December 31, 2022.
The following table provides information on the location and amounts of pre-tax gains and losses on our cash flow hedges for the three months ended March 31:
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(in millions) | Change in Derivative Gains and Losses Recognized in Accumulated Other Comprehensive Income (Loss) (effective portion) | | Location of Net (Losses) and Gains Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (effective portion) | | Net (Losses) and Gains Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (effective portion) |
| 2023 | | 2022 | | | | 2023 | | 2022 |
Foreign exchange forward and option contracts – Designated as cash flow hedging instruments | $ | 33 | | | $ | (10) | | | Cost of revenues | | $ | (11) | | | $ | 12 | |
| | | | | SG&A expenses | | (1) | | | 1 | |
| | | | | Total | | $ | (12) | | | $ | 13 | |
The activity related to the change in net unrealized gains and losses on the cash flow hedges included in "Accumulated other comprehensive income (loss)" in our unaudited consolidated statements of stockholders' equity is presented in Note 10. Other Derivatives
We use foreign exchange forward contracts to provide an economic hedge against balance sheet exposures to certain monetary assets and liabilities denominated in currencies other than the functional currency of our foreign subsidiaries. We entered into foreign exchange forward contracts that are scheduled to mature in the second quarter of 2023. 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 unaudited consolidated statements of operations.
Additional information related to the outstanding foreign exchange forward contracts not designated as hedging instruments was as follows:
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(in millions) | March 31, 2023 | | December 31, 2022 |
| Notional | | Fair Value | | Notional | | Fair Value |
Contracts outstanding | $ | 1,505 | | | $ | (8) | | | $ | 1,433 | | | $ | (1) | |
The following table provides information on the location and amounts of realized and unrealized pre-tax gains and losses on the other derivative financial instruments for the three months ended March 31:
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| Location of Net (Losses) Gains on Derivative Instruments | | Amount of Net (Losses) Gains on Derivative Instruments |
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(in millions) | | | 2023 | | 2022 | | | | |
Foreign exchange forward contracts – Not designated as hedging instruments | Foreign currency exchange gains (losses), net | | $ | (10) | | | $ | 13 | | | | | |
The related cash flow impacts of all the derivative activities are reflected as cash flows from operating activities.
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Cognizant Technology Solutions | 16 | March 31, 2023 Form 10-Q |
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Note 9 — Fair Value Measurements |
We measure our cash equivalents, certain investments, contingent consideration liabilities and foreign exchange forward and option contracts at fair value. Fair value is 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 fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
•Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
•Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
•Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The following table summarizes the financial assets and (liabilities) measured at fair value on a recurring basis as of March 31, 2023:
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(in millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents: | | | | | | | |
Money market funds | $ | 554 | | | $ | — | | | $ | — | | | $ | 554 | |
Time deposits | — | | | 604 | | | — | | | 604 | |
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Short-term investments: | | | | | | | |
Time deposits | — | | | 1 | | | — | | | 1 | |
Equity investment security | 10 | | | — | | | — | | | 10 | |
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Other current assets: | | | | | | | |
Foreign exchange forward contracts | — | | | 7 | | | — | | | 7 | |
Long-term investments: | | | | | | | |
Restricted time deposits(1) | — | | | 360 | | | — | | | 360 | |
Other noncurrent assets | | | | | | | |
Foreign exchange forward contracts | — | | | 3 | | | — | | | 3 | |
Accrued expenses and other current liabilities: | | | | | | | |
Foreign exchange forward contracts | — | | | (36) | | | — | | | (36) | |
Contingent consideration liabilities | — | | | — | | | (10) | | | (10) | |
Other noncurrent liabilities: | | | | | | | |
Foreign exchange forward contracts | — | | | (5) | | | — | | | (5) | |
Contingent consideration liabilities | — | | | — | | | (24) | | | (24) | |
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Cognizant Technology Solutions | 17 | March 31, 2023 Form 10-Q |
The following table summarizes the financial assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2022:
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(in millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents: | | | | | | | |
Money market funds | $ | 367 | | | $ | — | | | $ | — | | | $ | 367 | |
Time deposits | — | | | 359 | | | — | | | 359 | |
Commercial paper | — | | | 512 | | | — | | | 512 | |
Short-term investments: | | | | | | | |
Time deposits | — | | | 51 | | | — | | | 51 | |
Equity investment security | 10 | | | — | | | — | | | 10 | |
Available-for-sale investment securities: | | | | | | | |
Certificates of deposit and commercial paper | — | | | 225 | | | — | | | 225 | |
Other current assets: | | | | | | | |
Foreign exchange forward contracts | — | | | 5 | | | — | | | 5 | |
Long-term investments: | | | | | | | |
Restricted time deposits(1) | — | | | 357 | | | — | | | 357 | |
Other noncurrent assets: | | | | | | | |
Foreign exchange forward contracts | — | | | 1 | | | — | | | 1 | |
Accrued expenses and other current liabilities: | | | | | | | |
Foreign exchange forward contracts | — | | | (58) | | | — | | | (58) | |
Contingent consideration liabilities | — | | | — | | | (9) | | | (9) | |
Other noncurrent liabilities: | | | | | | | |
Foreign exchange forward contracts | — | | | (17) | | | — | | | (17) | |
Contingent consideration liabilities | — | | | — | | | (13) | | | (13) | |
The following table summarizes the changes in Level 3 contingent consideration liabilities for the three months ended:
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(in millions) | | March 31, 2023 | | March 31, 2022 |
Beginning balance | | $ | 22 | | | $ | 35 | |
Initial measurement recognized at acquisition | | — | | | 1 | |
Change in fair value recognized in SG&A expenses | | 12 | | | 3 | |
Payments | | — | | | (3) | |
Ending balance | | $ | 34 | | | $ | 36 | |
We measure the fair value of money market funds based on quoted prices in active markets for identical assets and measure the fair value of our equity investment security based on the published daily net asset value at which investors can freely subscribe to or redeem from the fund. The fair value of certificates of deposit and commercial paper 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. The carrying value of the time deposits approximated fair value as of March 31, 2023 and December 31, 2022.
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 forward contract and applies the difference in the rates to each outstanding contract. The market forward rates include a discount and credit risk factor. We estimate the fair value of each foreign exchange option contract by using a variant of the Black-Scholes model. This model uses present value techniques and reflects the time value and intrinsic value based on observable market rates.
We estimate the fair value of contingent consideration liabilities associated with acquisitions using a variation of the income approach, which utilizes one or more significant inputs that are unobservable. This approach calculates the fair value of such liabilities based on the probability-weighted expected performance of the acquired entity against the target performance metric, discounted to present value when appropriate.
During the three months ended March 31, 2023 and the year ended December 31, 2022, there were no transfers among Level 1, Level 2 or Level 3 financial assets and liabilities.
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Cognizant Technology Solutions | 18 | March 31, 2023 Form 10-Q |
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Note 10 — Accumulated Other Comprehensive Income (Loss) |
Changes in "Accumulated other comprehensive income (loss)" by component were as follows for the three months ended March 31, 2023:
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(in millions) | | Before Tax Amount | | Tax Effect | | Net of Tax Amount | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Beginning balance | | $ | (256) | | | $ | 8 | | | $ | (248) | | | | | | | |
Change in foreign currency translation adjustments | | 41 | | | 2 | | | 43 | | | | | | | |
Ending balance | | $ | (215) | | | $ | 10 | | | $ | (205) | | | | | | | |
Unrealized gains and losses on cash flow hedges: | | | | | | | | | | | | |
Beginning balance | | $ | (68) | | | $ | 17 | | | $ | (51) | | | | | | | |
Unrealized gains arising during the period | | 33 | | | (8) | | | 25 | | | | | | | |
Reclassifications of net loss: | | | | | | | | | | | | |
Cost of revenues | | 11 | | | (3) | | | 8 | | | | | | | |
SG&A expenses | | 1 | | | — | | | 1 | | | | | | | |
Net change | | 45 | | | (11) | | | 34 | | | | | | | |
Ending balance | | $ | (23) | | | $ | 6 | | | $ | (17) | | | | | | | |
Accumulated other comprehensive income (loss): | | | | | | | | | | | | |
Beginning balance | | $ | (324) | | | $ | 25 | | | $ | (299) | | | | | | | |
Other comprehensive income (loss) | | 86 | | | (9) | | | 77 | | | | | | | |
Ending balance | | $ | (238) | | | $ | 16 | | | $ | (222) | | | | | | | |
Changes in "Accumulated other comprehensive income (loss)" by component were as follows for the three months ended March 31, 2022:
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(in millions) | | Before Tax Amount | | Tax Effect | | Net of Tax Amount | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Beginning balance | | $ | (22) | | | $ | 2 | | | $ | (20) | | | | | | | |
Change in foreign currency translation adjustments | | (38) | | | 1 | | | (37) | | | | | | | |
Ending balance | | $ | (60) | | | $ | 3 | | | $ | (57) | | | | | | | |
Unrealized gains and losses on cash flow hedges: | | | | | | | | | | | | |
Beginning balance | | $ | 71 | | | $ | (14) | | | $ | 57 | | | | | | | |
Unrealized (losses) arising during the period | | (10) | | | 2 | | | (8) | | | | | | | |
Reclassifications of net (gains) to: | | | | | | | | | | | | |
Cost of revenues | | (12) | | | 2 | | | (10) | | | | | | | |
SG&A expenses | | (1) | | | — | | | (1) | | | | | | | |
Net change | | (23) | | | 4 | | | (19) | | | | | | | |
Ending balance | | $ | 48 | | | $ | (10) | | | $ | 38 | | | | | | | |
Accumulated other comprehensive income (loss): | | | | | | | | | | | | |
Beginning balance | | $ | 49 | | | $ | (12) | | | $ | 37 | | | | | | | |
Other comprehensive income (loss) | | (61) | | | 5 | | | (56) | | | | | | | |
Ending balance | | $ | (12) | | | $ | (7) | | | $ | (19) | | | | | | | |
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Cognizant Technology Solutions | 19 | March 31, 2023 Form 10-Q |
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Note 11— Commitments and Contingencies |
We are involved in various claims and legal proceedings 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. While we do not expect that the ultimate resolution of any existing claims and proceedings (other than the specific matters described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on our financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on results of operations or cash flows for a particular period. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future.
On January 15, 2015, Syntel sued TriZetto and Cognizant in the USDC-SDNY. Syntel’s complaint alleged breach of contract against TriZetto, and tortious interference and misappropriation of trade secrets against Cognizant and TriZetto, stemming from Cognizant’s hiring of certain former Syntel employees. Cognizant and TriZetto countersued on March 23, 2015, for breach of contract, misappropriation of trade secrets and tortious interference, based on Syntel’s misuse of TriZetto confidential information and abandonment of contractual obligations. Cognizant and TriZetto subsequently added federal Defend Trade Secrets Act and copyright infringement claims for Syntel’s misuse of TriZetto’s proprietary technology. The parties’ claims were narrowed by the court and the case was tried before a jury, which on October 27, 2020 returned a verdict in favor of Cognizant in the amount of $855 million, including $570 million in punitive damages. On April 20, 2021, the USDC-SDNY issued a post-trial order that, among other things, affirmed the jury’s award of $285 million in actual damages, but reduced the award of punitive damages from $570 million to $285 million, thereby reducing the overall damages award from $855 million to $570 million. The USDC-SDNY subsequently issued a final judgment consistent with the April 20th order. On May 26, 2021, Syntel filed a notice of appeal to the Second Circuit, and on June 3, 2021 the USDC-SDNY stayed execution of judgment pending appeal. We will not record the gain in our financial statements until it becomes realizable.
On February 28, 2019, a ruling of the SCI interpreting the India Defined Contribution Obligation altered historical understandings of the obligation, extending it to cover additional portions of the employee’s income. As a result, the ongoing contributions of our affected employees and the Company were required to be increased. In the first quarter of 2019, we accrued $117 million with respect to prior periods, assuming retroactive application of the SCI’s ruling, in "Selling, general and administrative expenses" in our unaudited consolidated statement of operations. There is significant uncertainty as to how the liability should be calculated as it is impacted by multiple variables, including the period of assessment, the application with respect to certain current and former employees and whether interest and penalties may be assessed. Since the ruling, a variety of trade associations and industry groups have advocated to the Indian government, highlighting the harm to the information technology sector, other industries and job growth in India that would result from a retroactive application of the ruling. It is possible the Indian government will review the matter and there is a substantial question as to whether the Indian government will apply the SCI’s ruling on a retroactive basis. As such, the ultimate amount of our obligation may be materially different from the amount accrued.
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 at that time as defendants. These actions were consolidated in an order dated January 24, 2017. The complaints assert claims for breach of fiduciary duty, corporate waste, unjust enrichment, abuse of control, mismanagement, and/or insider selling by defendants. On April 26, 2017, 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, April 7, 2017, May 10, 2017 and March 11, 2019, four additional putative shareholder derivative complaints were filed in the USDC-NJ, naming us and certain of our current and former directors and officers at that time as defendants. These actions were consolidated in an order dated May 14, 2019. On August 3, 2020, lead plaintiffs filed a consolidated amended complaint. The consolidated amended complaint asserts claims similar to those in the previously-filed putative shareholder derivative actions. On February 14, 2022, we and certain of our current and former directors and officers moved to dismiss the consolidated amended complaint. On September 27, 2022, the USDC-NJ granted those motions and dismissed the consolidated amended complaint in its entirety with prejudice. Plaintiffs filed a notice of appeal on October 27, 2022.
On June 1, 2021, an eighth putative shareholder derivative complaint was filed in the USDC-NJ, naming us and certain of our current and former directors and officers at that time as defendants. The complaint asserts claims similar to those in the previously-filed putative shareholder derivative actions. On March 31, 2022, we and certain of our current and former directors
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Cognizant Technology Solutions | 20 | March 31, 2023 Form 10-Q |
and officers moved to dismiss the complaint. On November 30, 2022, the USDC-NJ denied without prejudice those motions. The USDC-NJ ordered the parties to conduct limited discovery related to the issue of whether our board of directors wrongfully refused the plaintiff’s earlier litigation demand and, after the conclusion of such limited discovery, to file targeted motions for summary judgment on the issue of wrongful refusal.
We are presently unable to predict the duration, scope or result of the putative shareholder derivative actions. Although the Company continues to defend the putative shareholder derivative actions vigorously, these 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.
We have indemnification and expense advancement obligations pursuant to our bylaws and indemnification agreements with respect to certain current and former members of senior management and the Company’s board of directors. In connection with the matters that were the subject of our previously disclosed internal investigation, the DOJ and SEC investigations and the related litigation, we have received and expect to continue to receive requests under such indemnification agreements and our bylaws to provide funds for legal fees and other expenses. There are no amounts remaining available to us under applicable insurance policies for our ongoing indemnification and advancement obligations with respect to certain of our current and former officers and directors or incremental legal fees and other expenses related to the above matters.
See Note 7 for information relating to the ITD Dispute. Many of our engagements involve projects that are critical to the operations of our clients’ business and provide benefits that are difficult to quantify. Any failure in a client’s systems or our failure to meet our contractual obligations to our clients, including any breach involving a client’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, we retain a significant portion of risk through our insurance deductibles and 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 position and cash flows for a particular period.
In the normal course of business and in conjunction with certain client engagements, we have entered into contractual arrangements through which we may be obligated to indemnify clients or other parties with whom we conduct business with respect to certain matters. These arrangements can include provisions whereby we agree to hold the indemnified party and certain of their affiliated entities harmless with respect to third-party claims related to such matters as our breach of certain representations or covenants, our intellectual property infringement, our gross negligence or willful misconduct or certain other claims made against certain parties. Payments by us under any of these arrangements are generally conditioned on the client making a claim and providing us with full control over the defense and settlement of such claim. It is not possible to determine the maximum potential liability under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Historically, we have not made material payments under these indemnification agreements and therefore they have not had a material 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 a material adverse effect on our business, results of operations, financial position and cash flows for a particular period.
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Note 12 — Segment Information |
We have seven industry-based operating segments, which are aggregated into four reportable business segments:
•Financial Services, which consists of the banking and insurance operating segments;
•Health Sciences, which consists of a single operating segment of the same name;
•Products and Resources, which consists of the retail and consumer goods; manufacturing, logistics, energy, and utilities; and travel and hospitality operating segments; and
•Communications, Media and Technology, which consists of a single operating segment of the same name.
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Cognizant Technology Solutions | 21 | March 31, 2023 Form 10-Q |
Our segments are industry-based, and as such, we report revenue from clients in the segment with which our clients are most closely aligned. Our client partners, account executives and client relationship managers 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 the operating segments may affect revenues and operating expenses to differing degrees.
In the first quarter of 2023, we made certain changes to the internal measurement of segment operating profit for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to reflect a more complete cost of delivery. Specifically, segment operating profit now includes an allocation of both SG&A costs related to our integrated practices and the excess or shortfall of incentive-based compensation for commercial and delivery employees as compared to target, which were previously included in "unallocated costs." We have reported 2023 segment operating profits using the new allocation methodology and have recast the 2022 results to conform to the new methodology.
Corporate expenses, a portion of depreciation and amortization and the impact of the settlements of the 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 included below as “unallocated costs” and adjusted against our total income from operations. Additionally, we do not disclose assets by segment as a significant portion of the assets is used interchangeably among the segments and the chief operating decision maker does not review such information.
For revenues by reportable segment and geographic area, see Note 2. Segment operating profits by reportable segment were as follows for the three ended March 31:
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(in millions) | 2023 | | 2022 | | | | |
Financial Services | $ | 306 | | | $ | 318 | | | | | |
Health Sciences | 327 | | | 296 | | | | | |
Products and Resources | 215 | | | 245 | | | | | |
Communications, Media and Technology | 158 | | | 188 | | | | | |
Total segment operating profit | 1,006 | | | 1,047 | | | | | |
Less: unallocated costs | 304 | | | 323 | | | | | |
Income from operations | $ | 702 | | | $ | 724 | | | | | |
Geographic Area Information
Long-lived assets by geographic area are as follows:
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| As of |
(in millions) | March 31, 2023 | | December 31, 2022 |
Long-lived Assets: (1) | | | |
North America(2) | $ | 355 | | | $ | 354 | |
Europe | 95 | | | 86 | |
Rest of World (3) | 652 | | | 661 | |
Total | $ | 1,102 | | | $ | 1,101 | |
(1)Long-lived assets include property and equipment, net of accumulated depreciation and amortization.
(2)Substantially all relates to the United States.
(3)Substantially all relates to India.
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Note 13 — Subsequent Events |
Dividend
On May 1, 2023, the Board of Directors approved the Company's declaration of a $0.29 per share dividend with a record date of May 19, 2023 and a payment date of May 30, 2023.
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Cognizant Technology Solutions | 22 | March 31, 2023 Form 10-Q |