Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
June 30, 2023
☐
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.)
300 Frank W. Burr Blvd.
Teaneck, New Jersey07666
(Address of Principal Executive Offices including Zip Code)
Registrant’s telephone number, including area code: (201) 801-0233
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.01 par value per share
CTSH
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No: ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes☒ No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large Accelerated Filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 28, 2023:
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Exchange Act) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believe,” “expect,” “may,” “could,” “would,” “plan,” “intend,” “estimate,” “predict,” “potential,” “continue,” “should” or “anticipate” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing.
Such forward-looking statements may be included in various filings made by us with the SEC, in press releases or in oral statements made by or with the approval of one of our authorized executive officers. These forward-looking statements, such as statements regarding our anticipated future revenues or operating margin, earnings, capital expenditures, impacts to our business, financial results and financial condition as a result of the competitive marketplace for talent and future attrition trends, anticipated effective income tax rate and income tax expense, liquidity, financing strategy, access to capital, capital return strategy, investment strategies, cost management, plans and objectives, including those related to the NextGen program, investment in our business, potential acquisitions, industry trends, client behaviors and trends, the outcome of and costs associated with regulatory and litigation matters, the appropriateness of the accrual related to the India Defined Contribution Obligation and other statements regarding matters that are not historical facts, are based on our current expectations, estimates and projections, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Actual results, performance, achievements and outcomes could differ materially from the results expressed in, or anticipated or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including:
•economic and political conditions globally, including inflation and the invasion of Ukraine by Russia, and in particular in the markets in which our clients and operations are concentrated;
•our ability to attract, train and retain skilled employees, including highly skilled technical personnel and personnel with experience in key digital areas and senior management to lead our business globally, at an acceptable cost;
•unexpected terminations of client contracts on short notice or reduced spending by clients for reasons beyond our control;
•challenges related to growing our business organically as well as inorganically through acquisitions, and our ability to achieve our targeted growth rates;
•our ability to successfully implement our NextGen program and the amount of costs, timing of incurring costs, and ultimate benefits of such plans;
•our ability to achieve our profitability goals and maintain our capital return strategy;
•the impact of future pandemics, epidemics or other outbreaks of disease, on our business, results of operations, liquidity and financial condition;
•fluctuations in foreign currency exchange rates, or the failure of our hedging strategies to mitigate such fluctuations;
•our ability to meet specified service levels or milestones required by certain of our contracts;
•intense and evolving competition and significant technological advances that our service offerings must keep pace with in the rapidly changing markets we compete in;
•legal, reputation and financial risks if we fail to protect client and/or our data from security breaches and/or cyber attacks;
•climate change impact on our business;
•the effectiveness of our risk management, business continuity and disaster recovery plans and the potential that our global delivery capabilities could be impacted;
•restrictions on visas, in particular in the United States, United Kingdom and EU, or immigration more generally or increased costs of such visas or the wages we are required to pay employees on visas, which may affect our ability to compete for and provide services to our clients;
•risks related to anti-outsourcing legislation, if adopted, and negative perceptions associated with offshore outsourcing, both of which could impair our ability to serve our clients;
•risks and costs related to complying with numerous and evolving legal and regulatory requirements and client expectations in the many jurisdictions in which we operate;
•potential changes in tax laws, or in their interpretation or enforcement, failure by us to adapt our corporate structure and intercompany arrangements, or adverse outcomes of tax audits, investigations or proceedings;
•potential exposure to litigation and legal claims in the conduct of our business; and
•the factors set forth in "Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
You are advised to consult any further disclosures we make on related subjects in the reports we file with the SEC, including this report in the section titled “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part I, Item 1. Business” in our Annual Report on Form 10-K for the year ended December 31, 2022. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Preferred stock, $0.10 par value, 15 shares authorized, none issued
—
—
Class A common stock, $0.01 par value, 1,000 shares authorized, 505 and 509 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively
5
5
Additional paid-in capital
17
15
Retained earnings
13,022
12,588
Accumulated other comprehensive income (loss)
(141)
(299)
Total stockholders’ equity
12,903
12,309
Total liabilities and stockholders’ equity
$
17,967
$
17,852
The accompanying notes are an integral part of the unaudited 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.
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.
The table below shows movements in the deferred revenue balances (current and noncurrent) for the six months ended June 30:
(in millions)
2023
2022
Beginning balance
$
417
$
443
Amounts billed but not recognized as revenues
277
385
Revenues recognized related to the beginning balance of deferred revenue
(299)
(388)
Amounts acquired in business combinations
13
—
Effect of foreign currency exchange movements
2
(8)
Ending balance
$
410
$
432
Revenues recognized during the six months ended June 30, 2023 for performance obligations satisfied or partially satisfied in previous periods were immaterial.
Remaining Performance Obligations
As of June 30, 2023, the aggregate amount of transaction price allocated to remaining performance obligations was $3,841 million, of which approximately 55% is expected to be recognized as revenues within 2 years and approximately 85% 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 six months ended June 30:
(in millions)
2023
2022
Beginning balance
$
43
$
50
Credit loss expense (1)
9
—
Write-offs charged against the allowance
(15)
(7)
Ending balance
$
37
$
43
(1)Reported in "Selling, general and administrative expenses" in our unaudited consolidated statements of operations.
Note 3 — Business Combinations
Acquisitions completed during the six months ended June 30, 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 six months ended June 30, 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).
The allocations of preliminary purchase price to the fair value of the aggregate assets acquired and liabilities assumed were as follows:
(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
Non-deductible goodwill
18
202
220
Tax-deductible goodwill
88
—
88
Customer relationship assets
11
120
131
10.9 years
Current liabilities
(17)
(9)
(26)
Noncurrent liabilities
(1)
(32)
(33)
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.
Note 4 — Restructuring Charges
In the second quarter of 2023, we initiated the NextGen program aimed at simplifying our operating model, optimizing corporate functions and consolidating and realigning office space to reflect the post-pandemic hybrid work environment.
The total costs related to our NextGen program are reported in "Restructuring charges" in our unaudited consolidated statements of operations. We do not allocate these charges to individual segments in internal management reports used by the chief operating decision maker. Accordingly, such expenses are separately disclosed in our segment reporting as “unallocated costs”. See Note 13.
(in millions)
Three and Six Months Ended June 30, 2023
Employee separation costs
$
78
Facility exit costs (1)
37
Third party and other costs (2)
2
Total restructuring charges
$
117
(1)Facility exit costs include lease restructuring of $26 million, related accelerated depreciation charges of $10 million and impairment of long-lived assets of $1 million.
(2)Third party and other costs include certain non-facility related asset impairments, as well as legal and other professional services fees directly related to the NextGen program.
We expect to record total costs of approximately $350 million in connection with the NextGen program, consisting of approximately $150 million of employee separation costs and $200 million of facility exit and other costs.
Changes in our accrued employee separation costs included in "Accrued expenses and other current liabilities" in our consolidated statements of financial position are presented in the table below for the six months ended June 30.
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 and six months ended June 30, 2023 and 2022.
Available-for-Sale Investment Securities
As of June 30, 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 wereno realized gains or losses related to the available-for-sale investment securities during the six months ended June 30, 2023 and 2022. There were no sales of available-for sale investment securities during the six months ended June 30, 2023 and 2022.
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 June 30, 2023 and December 31, 2022 were each $3 million and $12 million, respectively. The amortized cost and fair value of commercial paper securities as of June 30, 2023 and December 31, 2022 were each $6 million and $12 million, respectively.
As of June 30, 2023, $3 million of corporate debt securities and $3 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 June 30, 2023, the corporate debt securities were rated AAA and the commercial paper securities were rated A-1+ by CRISIL, an Indian subsidiary of S&P Global.
Other Investments
As of June 30, 2023 and December 31, 2022, we had equity method investments of $63 million and $68 million, respectively, primarily related to an investment in the technology sector. As of each of June 30, 2023 and December 31, 2022, we had equity securities without a readily determinable fair value of $2 million.
Note 6 — Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were as follows:
(in millions)
June 30, 2023
December 31, 2022
Compensation and benefits
$
1,305
$
1,446
Customer volume and other incentives
247
222
Income taxes
45
217
Professional fees
154
165
Other
412
357
Total accrued expenses and other current liabilities
$
2,163
$
2,407
Note 7 — Debt
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. Since issuance of the Term Loan, the Term Loan has been 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 June 30, 2023.
In March 2023, our India subsidiary renewed its working capital facility at 15 billion Indian rupees ($183 million at the June 30, 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 contains affirmative and negative covenants and may be renewed annually. As of June 30, 2023, we have not borrowed funds under this facility or any of its predecessor facilities.
Short-term Debt
As of June 30, 2023 and December 31, 2022, we had $24 million and $8 million, respectively of short-term debt related to current maturities of our Term Loan.
The following table summarizes the long-term debt balances as of:
(in millions)
June 30, 2023
December 31, 2022
Term Loan
$
650
$
650
Less:
Current maturities
(24)
(8)
Unamortized deferred financing costs
(4)
(4)
Long-term debt, net of current maturities
$
622
$
638
The carrying value of our debt approximated its fair value as of June 30, 2023 and December 31, 2022.
Note 8 — Income Taxes
Our effective income tax rates were as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Effective income tax rate
21.1
%
24.2
%
21.3
%
23.8
%
In the second quarter of 2023, we reached a settlement related to U.S. state income taxes resulting in a discrete income tax benefit, which decreased our effective income tax rate for the three months ended June 30, 2023 as compared to the same period in 2022.
In March 2023, we reached an agreement with the IRS, which settled tax years 2017 and 2018. As a result of this 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. Tax years that remain subject to examination by the IRS are 2019 onward.
The effective tax rate for the six months ended June 30, 2023 decreased primarily as a result of the discrete benefits related to the two settlements described above.
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 June 30, 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 June 30, 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 June 30, 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 June 30, 2023.
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:
(in millions)
June 30, 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
$
12
$
—
$
1
$
—
Other noncurrent assets
15
—
1
—
Accrued expenses and other current liabilities
—
10
—
53
Other noncurrent liabilities
—
—
—
17
Total
27
10
2
70
Foreign exchange forward contracts – Not designated as hedging instruments
Other current assets
8
—
4
—
Accrued expenses and other current liabilities
—
1
—
5
Total
8
1
4
5
Total
$
35
$
11
$
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 six 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 June 30, 2023, we estimate that $2 million, net of tax, of net gains 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.
The notional value of the outstanding contracts by year of maturity was as follows:
(in millions)
June 30, 2023
December 31, 2022
2023
$
1,075
$
1,865
2024
1,420
1,010
2025
420
—
Total notional value of contracts outstanding (1)
$
2,915
$
2,875
(1)Includes $40 million notional value of option contracts as of June 30, 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 June 30:
(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
$
35
$
(66)
Cost of revenues
$
(4)
$
5
SG&A expenses
(1)
1
Total
$
(5)
$
6
The following table provides information on the location and amounts of pre-tax gains and losses on our cash flow hedges for the six months ended June 30:
(in millions)
Change in Derivative Gains and Losses Recognized in Accumulated Other Comprehensive Income (Loss) (effective portion)
Location of Net (Losses) Gains Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (effective portion)
Net (Losses) 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
$
68
$
(76)
Cost of revenues
$
(15)
$
17
SG&A expenses
(2)
2
Total
$
(17)
$
19
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 11.
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 third 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:
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 and six months ended June 30:
Location of Net (Losses) Gains on Derivative Instruments
Amount of Net (Losses) Gains on Derivative Instruments
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2023
2022
2023
2022
Foreign exchange forward contracts – Not designated as hedging instruments
Foreign currency exchange gains (losses), net
$
(14)
$
32
$
(24)
$
45
The related cash flow impacts of all the derivative activities are reflected as cash flows from operating activities.
Note 10 — 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 June 30, 2023:
The following table summarizes the changes in Level 3 contingent consideration liabilities for the six months ended:
(in millions)
June 30, 2023
June 30, 2022
Beginning balance
$
22
$
35
Initial measurement recognized at acquisition
—
1
Change in fair value recognized in SG&A expenses
13
5
Payments
(9)
(4)
Ending balance
$
26
$
37
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 June 30, 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 six months ended June 30, 2023 and the year ended December 31, 2022, there were no transfers among Level 1, Level 2 or Level 3 financial assets and liabilities.
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 DTSA 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. On May 25, 2023, the Second Circuit issued an opinion affirming in part and vacating in part the judgment of the USDC-SDNY and remanding the case for further proceedings consistent with its opinion. The Second Circuit affirmed the judgment in all respects on liability but vacated the $570 million award that had been based on avoided development costs under the DTSA, and it remanded the case to the USDC-SDNY for further evaluation of damages. We will not record any 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 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 8 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.
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.
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, expenses related to our NextGen program, 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 and six months ended June 30:
Long-lived assets by geographic area are as follows:
As of
(in millions)
June 30, 2023
December 31, 2022
Long-lived Assets: (1)
North America(2)
$
353
$
354
Europe
99
86
Rest of World (3)
635
661
Total
$
1,087
$
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.
Note 14 — Subsequent Events
Dividend
On August 1, 2023, the Board of Directors approved the Company's declaration of a $0.29 per share dividend with a record date of August 21, 2023 and a payment date of August 29, 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Executive Summary
Cognizant is one of the world’s leading professional services companies, engineering modern businesses and delivering strategic outcomes for our clients. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in a fast-changing world. We tailor our services and solutions to specific industries with an integrated global delivery model that employs client service and delivery teams based at client locations and dedicated global and regional delivery centers. Our services include digital services and solutions, consulting, application development, systems integration, quality engineering and assurance, application maintenance, infrastructure and security as well as business process services and automation. Digital services continue to be an important part of our portfolio, aligning with our clients' focus on becoming data-enabled, customer-centric and differentiated businesses.
In the second quarter of 2023, we initiated the NextGen program aimed at simplifying our operating model, optimizing corporate functions and consolidating and realigning office space to reflect the post-pandemic hybrid work environment. Our drive for simplification includes operating with fewer layers in an effort to enhance agility and enable faster decision making. We expect the savings generated by the program to help fund continued investments in our people, revenue growth opportunities and the modernization of our office space.
In connection with the NextGen program, in the second quarter of 2023 we incurred $117 million of employee separation, facility exit and other costs. See Note 4 to our unaudited consolidated financial statements. We currently expect to incur total costs of approximately $350 million with approximately $250 million of such costs anticipated in 2023 and approximately $100 million in 2024. The total costs consist of approximately $150 million of employee severance and other costs primarily related to non-billable and corporate personnel, with approximately $100 million in 2023 and $50 million in 2024, and approximately $200 million of costs related to the consolidation of office space, with approximately $150 million in 2023 and $50 million in 2024. The estimates of the charges and expenditures that we expect to incur in connection with the NextGen program, and the timing thereof, are subject to a number of assumptions, including local law requirements in various jurisdictions, and actual amounts may differ materially from estimates. In addition, we may incur other charges or cash expenditures not currently contemplated due to unanticipated events that may occur in connection with the NextGen program.
Q2 2023 Financial Results1
Revenue
Income from Operations
Operating Margin
Diluted EPS
GAAP
Adjusted1
GAAP
Adjusted1
GAAP
Adjusted1
Revenue down $20 million or 0.4% from Q2 2022; a decline of 0.1% in constant currency1
Income from Operations down $183 million or 24.1% from Q2 2022
Adjusted Income from Operations1 down $66 million or 8.7% from Q2 2022
Operating margin down 370 bps from Q2 2022
Adjusted Operating Margin1 down 130 bps from Q2 2022
Diluted EPS down $0.20 or 18.0% from Q2 2022
Adjusted Diluted EPS1 down $0.04 or 3.5% from Q2 2022
1 Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
During the quarter ended June 30, 2023, revenues decreased by $20 million as compared to the quarter ended June 30, 2022, representing a decline of 0.4%, or a decline of 0.1% on a constant currency basis2. Revenues were negatively impacted by weakness in our Financial Services segment, driven primarily by the banking sector, and our Communications, Media and Technology segment, partially offset by revenue growth in our Products and Resources and Health Sciences segments. Our recently completed acquisitions contributed 130 basis points to revenue growth, primarily benefiting our Communications, Media and Technology and Products and Resources segment.
Our operating margin and Adjusted Operating Margin2 decreased to 11.8% and 14.2%, respectively for the quarter ended June 30, 2023 from operating margin and Adjusted Operating Margin of 15.5% each for the quarter ended June 30, 2022. Our 2023 GAAP and Adjusted Operating Margins were negatively impacted by increased compensation costs, primarily as a result of two merit increase cycles for the majority of our employees since October 2022, partially offset by the benefit of the depreciation of the Indian rupee against the U.S. dollar and an insurance recovery benefit of 60 basis points related to a previously disclosed 2020 cyber incident. In addition, our 2023 GAAP operating margin was negatively impacted by the NextGen charges, as discussed in Note 4 to our unaudited consolidated financial statements, which were excluded from our Adjusted Operating Margin.
As a global professional services company, we compete on the basis of the knowledge, experience, insights, skills and talent of our employees and the value they can provide to our clients. Our success is dependent, in large part, on our ability to keep our supply of skilled employees in balance with client demand. We closely monitor attrition trends focusing on the metric that we believe is most relevant to our business. This metric, which we refer to as Voluntary Attrition - Tech Services, includes all voluntary separations with the exception of employees in our Intuitive Operations and Automation practice. For the trailing twelve months ended June 30, 2023 our Voluntary Attrition - Tech Services was 19.9% as compared to 31.1% for the trailing twelve months ended June 30, 2022. We finished the second quarter of 2023 with approximately 345,600 employees as compared to 341,300 employees at the end of the second quarter of 2022.
Business Outlook
We continue to expect the long-term focus of our clients to be on their digital transformation into software-driven, data-enabled, customer-centric and differentiated businesses.We believe clients will continue to contend with industry-specific changes driven by evolving digital technologies, uncertainty in the regulatory environment, industry consolidation and convergence as well as international trade policies and other macroeconomic factors, including the increasing uncertainty related to the global economy, which could affect their demand for our services.
In 2023, we simplified our strategic priorities to the following:
•Accelerate growth - achieve faster growth by shifting the mindset and operating rhythm of the company;
•Become the employer of choice - steward and attract the best technology talent in the industry; and
•Simplify operations - improve operational execution and efficiency to free up cash to fund people and growth investments.
Guided by these priorities, we initiated the NextGen program in the second quarter of 2023. We currently expect to incur total costs of approximately $350 million in connection with this program, with approximately $250 million of such costs anticipated in 2023 and approximately $100 million in 2024. See "Executive Summary." In addition to the NextGen program, potential tax law and other regulatory changes, including possible U.S. corporate income tax reform and potentially increased costs for employment and post-employment benefits in India as a result of the Code on Social Security, 2020, among other items, may impact our future results.
2 Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
The following table sets forth, for the periods indicated, certain financial data for the three months ended June 30:
% of
% of
Increase / Decrease
(Dollars in millions, except per share data)
2023
Revenues
2022
Revenues
$
%
Revenues
$
4,886
100.0
$
4,906
100.0
$
(20)
(0.4)
Cost of revenues(a)
3,231
66.1
3,119
63.6
112
3.6
Selling, general and administrative expenses(a)
830
17.0
883
18.0
(53)
(6.0)
Restructuring charges
117
2.4
—
—
117
NA
Depreciation and amortization expense
131
2.7
144
2.9
(13)
(9.0)
Income from operations
577
11.8
760
15.5
(183)
(24.1)
Other income (expense), net
10
1
9
*
Income before provision for income taxes
587
12.0
761
15.5
(174)
(22.9)
Provision for income taxes
(124)
(184)
60
(32.6)
Net income
$
463
9.5
$
577
11.8
$
(114)
(19.8)
Diluted earnings per share
$
0.91
$
1.11
$
(0.20)
(18.0)
Other Financial Information3
Adjusted Income from Operations and Adjusted Operating Margin
$
694
14.2
$
760
15.5
$
(66)
(8.7)
Adjusted Diluted EPS
$
1.10
$
1.14
$
(0.04)
(3.5)
(a)Exclusive of depreciation and amortization expense.
NA Not applicable
*Not meaningful
Revenues
During the quarter ended June 30, 2023, revenues decreased by $20 million as compared to the quarter ended June 30, 2022, representing a decline of 0.4%, or a decline of 0.1% on a constant currency basis3. Our recently completed acquisitions contributed 130 basis points to revenue growth.
3Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
Revenues - Reportable Business Segments and Geographic Markets
Revenues of $4,886 million were as follows for the three months ended June 30, 2023:
Q2 2023 as compared to Q2 2022
Increase / (Decrease)
(Dollars in millions)
$
%
CC %4
Financial Services
$
(79)
(5.1)
(4.8)
Health Sciences
32
2.3
2.1
Products and Resources
37
3.2
3.7
CMT
(10)
(1.2)
(0.4)
Total revenues
$
(20)
(0.4)
(0.1)
Q2 2023 as compared to Q2 2022
Increase / (Decrease)
(Dollars in millions)
$
%
CC %4
North America
$
(67)
(1.8)
(1.7)
United Kingdom
15
3.3
3.3
Continental Europe
49
11.0
9.5
Europe - Total
64
7.1
6.3
Rest of World
(17)
(4.9)
—
Total revenues
$
(20)
(0.4)
(0.1)
Recently completed acquisitions contributed 130 basis points to overall revenue growth, including 260 basis points of growth to our Products and Resources segment (primarily in North America) and 380 basis points of growth to our Communications, Media and Technology segment (primarily in Continental Europe).4
In addition:
•Reduced demand for discretionary work negatively impacted revenues, primarily in North America. Banking clients in our Financial Services segment, retail and consumer goods clients in our Products and Resources segment and clients in our Communications, Media and Technology segment were particularly affected;
•North America revenues in the Communications, Media and Technology segment included growing demand for services related to digital content, primarily driven by the largest client in this segment, while growth in our Health Sciences segment benefited from increased demand from North America healthcare payer clients for our integrated software solutions;
•Revenue growth in the United Kingdom was driven by expansion of work with clients in the Financial Services and Communications Media and Technology segments;
•Revenues in the Continental Europe region grew across all segments, led by increased demand from automotive clients within the Products and Resources segment. Revenue growth in this region was positively impacted by foreign currency exchange rate movements; and
•Revenues in our Rest of World region increased in our Products and Resources, Communications, Media and Technology and Health Sciences segments but were offset by weakness in the Financial Services segment and the negative impact of foreign currency exchange rate movements.
4 Constant currency revenue growth is not a measure of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.
Cost of Revenues (Exclusive of Depreciation and Amortization Expense)
é
$112M
é
2.5% as a % of revenues
¡
% of Revenues
Our cost of revenues consists primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, project-related immigration and travel for technical personnel, subcontracting and equipment costs relating to revenues. The increase, as a percentage of revenues, was due to higher compensation costs for delivery personnel, primarily as a result of two merit increase cycles for the majority of our employees since October 2022, partially offset by the benefit of the depreciation of the Indian rupee against the U.S. dollar.
SG&A Expenses (Exclusive of Depreciation and Amortization Expense)
SG&A expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, immigration, travel, marketing, communications, management, finance, administrative and occupancy costs. The decrease, as a percentage of revenues, was primarily due to an insurance recovery benefit of 60 basis points related to a previously disclosed 2020 cyber incident andthe beneficial impact of foreign currency exchange rate movements, partially offset by higher compensation costs, primarily as a result of two merit increase cycles for the majority of our employees since October 2022.
ê
$53M
ê
1.0% as a % of revenues
¡
% of Revenues
Restructuring Charges
Restructuring charges consist of costs related to the NextGen program. Restructuring charges were $117 million or 2.4%, as a percentage of revenue for the three months ended June 30, 2023. For further detail on our restructuring charges see Note 4 to our unaudited consolidated financial statements.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by 9.0%, or 0.2% as a percentage of revenues, during the second quarter of 2023 as compared to the second quarter of 2022, primarily driven by a reduction in amortization expense due to certain intangible assets reaching the end of their useful lives.
Operating Margin and Adjusted Operating Margin5 - Overall
Our 2023 second quarter GAAP operating margin and Adjusted Operating Margin5 were negatively impacted by increased compensation costs, primarily as a result of two merit increase cycles for the majority of our employees since October 2022, partially offset by the benefit of the depreciation of the Indian rupee against the U.S. dollar and an insurance recovery benefit of 60 basis points related to a previously disclosed 2020 cyber incident. In addition, our 2023 GAAP operating margin was negatively impacted by the NextGen charges, as discussed in Note 4 to our unaudited consolidated financial statements, which were excluded from our Adjusted Operating Margin.
5 Adjusted Income from Operations and Adjusted Operating Margin are not measures of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
A predominant portion of our costs in India are denominated in the Indian rupee, representing approximately 24% of our global operating costs during the three months ended June 30, 2023. These costs are subject to foreign currency exchange rate fluctuations, which have an impact on our results of operations. We enter into foreign exchange derivative contracts to hedge certain Indian rupee denominated payments in India. These hedges are intended to mitigate the volatility of the changes in the exchange rate between the U.S. dollar and the Indian rupee. Net of the impact of the hedges, the depreciation of the Indian rupee benefited our operating margin for the three months ended June 30, 2023 by 104 basis points as compared to the three months ended June 30, 2022.
Excluding the impact of applicable designated cash flow hedges, the depreciation of the Indian rupee against the U.S. dollar positively impacted our operating margin by 126 basis points during the three months ended June 30, 2023. Each additional 1.0% change in exchange rate between the Indian rupee and the U.S. dollar will have the effect of moving our operating margin by 20 basis points (excluding the impact of the hedges).The settlement of our cash flow hedges negatively impacted our operating margin by 10 basis points during the three months ended June 30, 2023, compared to a positive impact of 12 basis points during the three months ended June 30, 2022.
Segment Operating Profit
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.
Segment operating profit and operating margin percentage were as follows:
Segment operating profit
%
Segment operating margin
In the second quarter of 2023, segment operating margins across all our segments were negatively impacted by increased compensation costs, primarily as a result of two merit increase cycles for the majority of our employees since October 2022, partially offset by the benefits of the depreciation of the Indian rupee against the U.S. dollar. In addition, segment operating margin in Health Sciences benefited in the second quarter of 2023 from higher margin integrated software solutions for healthcare payer clients, while segment operating margin in Communications, Media and Technology was negatively affected by a decrease in utilization due to a slowdown in revenue growth.
Total segment operating profit and operating margin were as follows for the three months ended June 30:
(Dollars in millions)
2023
% of Revenues
2022
% of Revenues
Increase
Total segment operating profit
$
1,012
20.7
$
1,082
22.1
$
(70)
Less: unallocated costs
435
8.9
322
6.6
113
Income from operations
$
577
11.8
$
760
15.5
$
(183)
The increase in unallocated costs for three months ended June 30, 2023 as compared to June 30, 2022 was primarily driven by the NextGen charges. See Note 4 to our unaudited consolidated financial statements.
The following table sets forth total other income (expense), net for the three months ended June 30:
(in millions)
2023
2022
Increase/ Decrease
Foreign currency exchange gains (losses)
$
5
$
(36)
$
41
(Losses) gains on foreign exchange forward contracts not designated as hedging instruments
(14)
32
(46)
Foreign currency exchange gains (losses), net
(9)
(4)
(5)
Interest income
30
9
21
Interest expense
(10)
(3)
(7)
Other, net
(1)
(1)
—
Total other income (expense), net
$
10
$
1
$
9
The foreign currency exchange losses were attributed to the remeasurement of net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. The (losses) gains on foreign exchange forward contracts not designated as hedging instruments related to the realized and unrealized gains and losses on contracts entered into to offset our foreign currency exposures. As of June 30, 2023, the notional value of our undesignated hedges was $1,511 million. The increase in interest income and interest expense was primarily attributable to higher interest rates in the current period.
Provision for Income Taxes
ê
$60M
¡Effective Income Tax Rate ê3.1%
The effective income tax rate decreased primarily due to a 2023 discrete benefit resulting from a settlement related to U.S. state income taxes.
Net Income
The decrease in net income was primarily driven by lower income from operations, partially offset by higher interest income and a lower effective tax rate.
ê
$114M
¡ê2.3% of Revenues
Non-GAAP Financial Measures
Portions of our disclosure include non-GAAP financial measures. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of non-GAAP financial measures to the corresponding GAAP measures set forth below should be carefully evaluated.
Our non-GAAP financial measures Adjusted Operating Margin and Adjusted Income from Operations excludes unusual items, such as NextGen charges. Our non-GAAP financial measure Adjusted Diluted EPS excludes unusual items, such as NextGen charges, net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. For further detail on the NextGen charges, see Note 4 to our unaudited consolidated financial statements. The income tax impact of each item excluded from Adjusted Diluted EPS is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period’s foreign currency exchange rates measured against the comparative period's reported revenues.
We believe providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for executive officers and for making comparisons of our operating results to those of
our competitors. We believe that the presentation of non-GAAP financial measures, which exclude certain costs, read in conjunction with our reported GAAP results and reconciliations to the most comparable GAAP measure, as applicable, can provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations.
A limitation of using non-GAAP financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures may exclude costs that are recurring such as net non-operating foreign currency exchange gains or losses. In addition, other companies may calculate non-GAAP financial measures differently than us, thereby limiting the usefulness of these non-GAAP financial measures as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP financial measures to allow investors to evaluate such non-GAAP financial measures.
The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the three months ended June 30:
2023
% of Revenues
2022
% of Revenues
GAAP income from operations and operating margin
$
577
11.8
$
760
15.5
NextGen charges(1)
117
2.4
—
—
Adjusted Income from Operations and Adjusted Operating Margin
(1)As part of the NextGen program, during the three months ended June 30, 2023, we incurred employee separation, facility exit and other costs. See Note 4 to our unaudited consolidated financial statements for additional information.
(2)Non-operating foreign currency exchange gains and losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, are reported in "Foreign currency exchange gains (losses), net" in our unaudited consolidated statements of operations.
(3)Presented below are the tax impacts of our non-GAAP adjustment to pre-tax income:
Three Months Ended June 30,
(in millions)
2023
2022
Non-GAAP income tax benefit (expense) related to:
NextGen charges
31
—
Foreign currency exchange gains and losses
—
(14)
The effective tax rate related to non-operating foreign currency exchange gains and losses varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions. As such, the income tax effect of non-operating foreign currency exchange gains and losses shown in the above table may not appear proportionate to the net pre-tax foreign currency exchange gains and losses reported in our unaudited consolidated statements of operations.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
The following table sets forth, for the periods indicated, certain financial data for the six months ended June 30:
% of
% of
Increase / Decrease
(Dollars in millions, except per share data)
2023
Revenues
2022
Revenues
$
%
Revenues
$
9,698
100.0
$
9,732
100.0
$
(34)
(0.3)
Cost of revenues(a)
6,374
65.7
6,216
63.9
158
2.5
Selling, general and administrative expenses(a)
1,665
17.2
1,745
17.9
(80)
(4.6)
Restructuring charges
117
1.2
—
—
117
NA
Depreciation and amortization expense
263
2.7
287
2.9
(24)
(8.4)
Income from operations
1,279
13.2
1,484
15.2
(205)
(13.8)
Other income (expense), net
46
6
40
*
Income before provision for income taxes
1,325
13.7
1,490
15.3
(165)
(11.1)
Provision for income taxes
(282)
(354)
72
(20.3)
Income (loss) from equity method investments
—
4
(4)
(100.0)
Net income
$
1,043
10.8
$
1,140
11.7
$
(97)
(8.5)
Diluted EPS
$
2.05
$
2.18
$
(0.13)
(6.0)
Other Financial Information6
Adjusted Income From Operations and Adjusted Operating Margin
$
1,396
14.4
$
1,484
15.2
$
(88)
(5.9)
Adjusted Diluted EPS
$
2.21
$
2.23
$
(0.02)
(0.9)
(a)Exclusive of depreciation and amortization expense.
NA Not applicable
*Not meaningful
Revenues
During the six months ended June 30, 2023, revenues decreased by $34 million as compared to the six months ended June 30, 2022, representing a decline of 0.3%, or growth of 0.7% on a constant currency basis6. Our recently completed acquisitions contributed 120 basis points to revenue growth.
6 Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures.
Revenues - Reportable Business Segments and Geographic Markets
Revenues of $9,698 million were as follows for the six months ended June 30, 2023:
YTD 2023 as compared to YTD 2022
Increase / (Decrease)
(Dollars in millions)
$
%
CC %7
Financial Services
$
(131)
(4.3)
(3.1)
Health Sciences
73
2.6
2.8
Products and Resources
25
1.1
2.5
CMT
(1)
(0.1)
1.7
Total revenues
$
(34)
(0.3)
0.7
YTD 2023 as compared to YTD 2022
Increase / (Decrease)
(Dollars in millions)
$
%
CC %7
North America
$
(91)
(1.3)
(1.1)
United Kingdom
40
4.4
8.8
Continental Europe
51
5.6
7.3
Europe - Total
91
5.0
8.0
Rest of World
(34)
(4.9)
0.5
Total revenues
$
(34)
(0.3)
0.7
Across all of our segments and geographic markets, revenues for the six months ended June 30, 2023 were negatively impacted by foreign currency exchange rate movements.7Our recently completed acquisitions contributed 120 basis points to revenue growth, including 260 basis points of growth to our Products and Resources segment (primarily in North America) and 290 basis points of growth to our Communications, Media and Technology segment (primarily in the United Kingdom and Continental Europe).
In addition:
•Reduced demand for discretionary work negatively impacted revenues, primarily in North America. Banking clients in our Financial Services segment, retail and consumer goods clients in our Products and Resources segment and clients in our Communications, Media and Technology segment were particularly affected;
•North America revenues in the Communications, Media and Technology segment included growing demand for services related to digital content, primarily driven by the largest client in this segment, while growth in our Health Sciences segment in the region benefited from increased demand from healthcare payer clients for our integrated software solutions;
•Revenue growth in the United Kingdom was driven by expansion of work with clients in the Financial Services and Communications Media and Technology segments;
•Revenues in the Continental Europe region grew across all segments, led by increased demand from automotive clients within the Products and Resources segment; and
•Constant currency revenue growth in the Rest of World region was driven by increased demand from clients in our Products and Resources and Communications, Media and Technology segments, partially offset by weakness in the Financial Services and Health Sciences segments.
7 Constant currency revenue growth is not a measure of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.
Cost of Revenues (Exclusive of Depreciation and Amortization Expense)
é
$158M
é
1.8% as a % of revenues
¡
% of Revenues
Our cost of revenues consists primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, project-related immigration and travel for technical personnel, subcontracting and equipment costs relating to revenues. The increase, as a percentage of revenues, was due to higher compensation costs for delivery personnel, primarily as a result of two merit increase cycles for the majority of our employees since October 2022, partially offset by the benefit of the depreciation of the Indian rupee against the U.S. dollar.
SG&A Expenses (Exclusive of Depreciation and Amortization Expense)
SG&A expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, immigration, travel, marketing, communications, management, finance, administrative and occupancy costs. The decrease, as a percentage of revenues, was primarily due to the beneficial impact of foreign currency exchange rate movements and an insurance recovery benefit related to a previously disclosed 2020 cyber incident, partially offset by higher compensation costs, primarily as a result of two merit increase cycles for the majority of our employees since October 2022.
ê
$80M
ê
0.7%as a % of revenues
¡
% of Revenues
Restructuring Charges
Restructuring charges consist of costs related to the NextGen program. Restructuring charges were $117 million or 1.2%, as a percentage of revenue for the six months ended June 30, 2022. For further detail on our restructuring charges see Note 4 to our unaudited consolidated financial statements.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased 8.4%, and by 0.2% as a percentage of revenues, during the six months ended June 30, 2023 as compared to the 2022 period, primarily driven by a reduction in amortization expense due to certain intangible assets reaching the end of their useful lives.
Operating Margin and Adjusted Operating Margin8- Overall
Our 2023 GAAP operating margin and Adjusted Operating Margin8 were negatively impacted by increased compensation costs, primarily as a result of two merit increase cycles for the majority of our employees since October 2022, partially offset by the benefit of the depreciation of the Indian rupee against the U.S. dollar, pricing actions taken in 2022 and an insurance recovery benefit in the second quarter of 2023 related to a previously disclosed 2020 cyber incident. In addition, our 2023 GAAP operating margin was negatively impacted by the NextGen charges, as discussed in Note 4 to our unaudited consolidated financial statements, which were excluded from our Adjusted Operating Margin.
Net of the impact of applicable designated cash flow hedges, the depreciation of the Indian rupee benefited our operating margin for the six months ended June 30, 2023 by 112 basis points as compared to the six months ended June 30, 2022. Excluding the impact of the hedges, the depreciation of the Indian rupee against the U.S. dollar positively impacted our operating margin by approximately 150 basis points during the six months ended June 30, 2023. The settlement of our cash flow hedges negatively impacted our operating margin by 18 basis points during the six months ended June 30, 2023, compared to a positive impact of 20 basis points during the 2022 period.
8 Adjusted Income from Operations and Adjusted Operating Margin are not measures of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
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.
Segment operating profit and operating margin percentage were as follows:
In the first half of 2023, segment operating margins across all our segments were negatively impacted by increased compensation costs, primarily as a result of two merit increase cycles for the majority of our employees since October 2022, partially offset by the benefits of both the depreciation of the Indian rupee against the U.S. dollar and pricing actions taken in 2022. In addition, segment operating margin in Health Sciences benefited in the first half of 2023 from higher margin integrated software solutions for healthcare payer clients, while segment operating margin in Communications, Media and Technology was negatively affected by a decrease in utilization due to a slowdown in revenue growth.
Total segment operating profit and margin were as follows for the six months ended June 30:
(Dollars in millions)
2023
% of Revenues
2022
% of Revenues
Increase
Total segment operating profit
$
2,018
20.8
$
2,129
21.9
$
(111)
Less: unallocated costs
739
7.6
645
6.7
94
Income from operations
$
1,279
13.2
$
1,484
15.2
$
(205)
The increase in unallocated costs for six months ended June 30, 2023 as compared to June 30, 2022 was primarily driven by the NextGen charges. See Note 4 to our unaudited consolidated financial statements.
Other Income (Expense), Net
The following table sets forth total other income (expense), net for the six months ended June 30:
(in millions)
2023
2022
Increase/ Decrease
Foreign currency exchange gains (losses)
$
27
$
(49)
$
76
(Losses) gains on foreign exchange forward contracts not designated as hedging instruments
(24)
45
(69)
Foreign currency exchange gains (losses), net
3
(4)
7
Interest income
60
15
45
Interest expense
(19)
(5)
(14)
Other, net
2
—
2
Total other income (expense), net
$
46
$
6
$
40
The foreign currency exchange losses were attributed to the remeasurement of net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. The gains on foreign exchange forward contracts not designated as hedging instruments related to the realized and unrealized gains and losses on contracts entered into to offset our foreign currency exposures. The increase in interest income and interest expense was primarily attributable to higher interest rates in the current period.
The effective income tax rate decreased primarily due to 2023 discrete benefits resulting from a settlement related to U.S. state income taxes and the settlement of the IRS examination for tax years 2017 and 2018 as described in Note 8 to our unaudited consolidated financial statements.
Net Income
The decrease in net income was driven by lower income from operations, partially offset by higher interest income and a lower effective tax rate.
ê
$97M
¡ê0.9% of Revenues
Non-GAAP Financial Measures
See “Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 – Non-GAAP Financial Measures” above for additional information about our use of non-GAAP financial measures.
The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the six months ended June 30:
(Dollars in millions, except per share amounts)
2023
% of Revenues
2022
% of Revenues
GAAP income from operations and operating margin
$
1,279
13.2
$
1,484
15.2
NextGen charges (1)
117
1.2
—
—
Adjusted Income from Operations and Adjusted Operating Margin
(1)As part of the NextGen program, during the six months ended June 30, 2023, we incurred employee separation, facility exit and other costs. See Note 4 to our unaudited consolidated financial statements for additional information.
(2)Non-operating foreign currency exchange gains and losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, are reported in "Foreign currency exchange gains (losses), net" in our unaudited consolidated statements of operations.
(3)Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income:
(in millions)
Six Months Ended June 30,
2023
2022
Non-GAAP income tax benefit (expense) related to:
NextGen charges
31
—
Foreign currency exchange gains and losses
5
(20)
The effective tax rate related to non-operating foreign currency exchange gains and losses varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions. As such, the income tax effect of non-operating foreign currency exchange gains and losses shown in the above table may not appear proportionate to the net pre-tax foreign currency exchange gains and losses reported in our unaudited consolidated statements of operations.
Our cash generated from operations has historically been the primary source of liquidity to fund operations and investments to grow our business. As of June 30, 2023, we had cash, cash equivalents and short-term investments of $2,095 million and available capacity under our credit facilities of approximately $2,000 million.
The following table provides a summary of cash flows for the six months ended June 30:
(in millions)
2023
2022
Increase / Decrease
Net cash provided by (used in):
Operating activities
$
765
$
834
$
(69)
Investing activities
(300)
229
(529)
Financing activities
(704)
(1,050)
346
Operating activities
The decrease in cash provided by operating activities for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was primarily driven by an increase in income tax payments. In the second quarter of 2023, we made tax payments related to the mandatory capitalization of research and experimental expenditures for the 2022 tax year as well as the estimated tax payment for the six months ended June 30, 2023. Cash provided by operating activities for the six months ended June 30, 2023 benefited from improved collections of our trade accounts receivable.
We monitor turnover, aging and the collection of accounts receivable by client. Our DSO calculation includes receivables, net of allowance for doubtful accounts, and contract assets, reduced by the uncollected portion of deferred revenue. Our DSO was 75 days as of June 30, 2023, an increase of 1 day from 74 days as of December 31, 2022. Our DSO was 74 days as of June 30, 2022, an increase of 5 days from 69 days as of December 31, 2021.
Investing activities
Cash used in investing activities for the six months ended June 30, 2023 was driven by payments for business combinations and capital expenditures, partially offset by net maturities of investments. Cash provided by investing activities for the six months ended June 30, 2022 was primarily driven by net maturities of investments, partially offset by capital expenditures.
Financing activities
The decrease in cash used in financing activities for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was primarily driven by lower repurchases of common stock.
The Credit Agreement provides for a $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. As of June 30, 2023, we had no outstanding balance on the revolving credit facility. See Note 7 to our unaudited consolidated financial statements.
In March 2023, our India subsidiary renewed its working capital facility at 15 billion Indian rupee ($183 million at the June 30, 2023 exchange rate). This facility requires us to repay any balances drawn down within 90 days from the date of disbursement. There is a 1.0% prepayment penalty applicable to payments made within 30 days after disbursement. This working capital facility contains affirmative and negative covenants and may be renewed annually. As of June 30, 2023, we have not borrowed funds under this facility or any of its predecessor facilities.
We review our capital allocation on an ongoing basis, considering our financial performance and liquidity position, investments required to execute our strategic plans and initiatives, acquisition opportunities, the economic outlook, regulatory changes and other relevant factors. As these factors may change over time, the actual amounts expended on stock repurchase activity, dividends, and acquisitions, if any, during any particular period cannot be predicted and may fluctuate from time to time.
Other Liquidity and Capital Resources Information
We seek to ensure that our worldwide cash is available in the locations in which it is needed. As part of ongoing liquidity assessments, we regularly monitor the mix of domestic and international cash flows and cash balances. We evaluate on an ongoing basis what portion of the non-U.S. cash, cash equivalents and short-term investments is needed locally to execute our strategic plans and what amount is available for repatriation back to the United States.
We expect operating cash flows, cash and short-term investment balances, together with the available capacity under our revolving credit facilities, to be sufficient to meet our operating requirements, including purchase commitments, making Tax Reform Act transition tax payments and servicing our debt for the next twelve months. The ability to expand and grow our business in accordance with current plans, make acquisitions, meet long-term capital requirements beyond a twelve-month period and execute our capital return plan will depend on many factors, including the rate, if any, at which cash flow increases, our ability and willingness to pay for acquisitions with capital stock and the availability of public and private debt, including the ability to extend the maturity or refinance our existing debt, and equity financing. We cannot be certain that additional financing, if required, will be available on terms and conditions acceptable to us, if at all.
Commitments and Contingencies
See Note 12 to our unaudited consolidated financial statements.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. On an ongoing basis, we evaluate our estimates. The most significant estimates relate to the recognition of revenue and profits, including the application of the cost-to-cost method of measuring progress to completion for certain fixed-price contracts, income taxes, business combinations and valuation of goodwill and other long-lived assets. We base our estimates on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual amounts may differ from the estimates used in the preparation of the accompanying unaudited consolidated financial statements. For a discussion of our critical accounting estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022. Our significant accounting policies are described in Note 1 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recently Adopted and New Accounting Pronouncements
There have been no changes in the information provided regarding recently adopted and new accounting pronouncements in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 15, 2023.
Our management, under the supervision and with the participation of our chief executive officer and our chief financial officer, evaluated the design and operating effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2023. Based on this evaluation, our chief executive officer and our chief financial officer concluded that, as of June 30, 2023, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Note 12 to our unaudited consolidated financial statements.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 15, 2023, except as follows:
Our NextGen program and the associated reductions in headcount and consolidation of office space could disrupt our business, may not result in anticipated savings, and could result in total costs and expenses that are greater than expected.
Guided by our strategic priorities, in the second quarter of 2023 we initiated the Nextgen program aimed at simplifying our operating model, optimizing corporate functions and consolidating and realigning office space to reflect the post-pandemic hybrid work environment. Our drive for simplification will include operating with fewer layers in an effort to enhance agility and enable faster decision making. In connection with the NextGen program, we currently expect to record total costs of approximately $350 million consisting of approximately $150 million of employee severance and other personnel costs and $200 million of costs related to the consolidation of office space. The NextGen program may result in the loss of institutional knowledge and expertise, as well as the reallocation of certain roles and responsibilities across the Company, all of which could adversely affect our operations. Such effects from our NextGen program could have a material adverse effect on our ability to execute on our business plan. There can be no assurance that we will be successful in implementing our NextGen program, which may be disruptive to our operations, or may cause difficulties in the retention of our remaining employees or reduced productivity among remaining employees. In addition, we may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from the NextGen program due to unforeseen difficulties, delays or unexpected costs. If the actual amount and timing of costs differ from our current expectations and estimates or we are unable to realize the expected operational efficiencies and cost savings from the NextGen program, our operating results and financial condition would be adversely affected. Furthermore, we may incur unanticipated charges or be required to make cash payments as a result of our NextGen program that were not previously contemplated, which could result in an adverse effect on our business or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Our stock repurchase program allows for the repurchase of up to $11.5 billion, excluding fees and expenses, of our Class A common stock through open market purchases, including under a 10b5-1 Plan or in private transactions, including through ASR agreements entered into with financial institutions, in accordance with applicable federal securities laws. The repurchase program does not have an expiration date and had a remaining authorized balance of $2,375 million as of June 30, 2023. The timing of repurchases and the exact number of shares to be purchased are determined by management, in its discretion, or pursuant to a 10b5-1 Plan, and will depend upon market conditions and other factors.
During the three months ended June 30, 2023, we repurchased $200 million of our Class A common stock under our stock repurchase program. The stock repurchase activity under our stock repurchase program during the three months ended June 30, 2023 was as follows:
Month
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in millions)
April 1, 2023 - April 30, 2023
—
$
—
—
$
2,575
May 1, 2023 - May 31, 2023
1,600,726
62.47
1,600,726
2,475
June 1, 2023 - June 30, 2023
1,581,790
63.22
1,581,790
2,375
Total
3,182,516
$
62.84
3,182,516
The aggregate purchase price and weighted average price per share does not include the excise tax on net stock repurchases incurred as part of the recently enacted Inflation Reduction Act. The excise tax was immaterial for the three months ended June 30, 2023.
During the three months ended June 30, 2023, we also purchased shares in connection with our stock-based compensation plans, whereby shares of our common stock were tendered by employees for payment of applicable statutory tax withholdings. For the three months ended June 30, 2023, such repurchases totaled 0.2 million shares at an aggregate cost of $14 million.
Item 5. Other Information
(c) Trading Plans
During the three months ended June 30, 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation-S-K).
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
