# COGNIZANT TECHNOLOGY SOLUTIONS CORP (CTSH) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from COGNIZANT TECHNOLOGY SOLUTIONS CORP's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1058290/000105829025000017/ctsh-20241231.htm Accession: 0001058290-25-000017 Filing date: 2025-02-12 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/CTSH/ All MD&A years: /company/CTSH/mda/ Previous year: /company/CTSH/mda/fy2023/ (FY 2023) Next year: /company/CTSH/mda/fy2025/ (FY 2025) Item 7.     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 today's fast-changing world, where AI is beginning to reshape organizations in every field. We provide industry expertise and close client collaboration, combining critical perspective with a flexible engagement style. 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 collaborative services include digital services and solutions, consulting, application development, systems integration, quality engineering and assurance, engineering research and development, application maintenance, infrastructure and security as well as business process services and automation. Digital, AI-enhanced services continue to be an important part of our portfolio, aligning with our clients' focus on becoming data-enabled, customer-centric and differentiated businesses. At the end of 2024, we completed our NextGen program, which was aimed at simplifying our operating model, optimizing corporate functions and consolidating and realigning office space to reflect the post-pandemic hybrid work environment. The savings generated by the program are funding continued investments in our people, revenue growth opportunities and the modernization of our office space. In 2024, we incurred $134 million of employee separation, facility exit and other costs related to the program, bringing the total costs incurred since inception to $363 million. See Note 4 to our consolidated financial statements. 2024 Financial Results1 Revenues Income from Operations Operating Margin Diluted EPS [[GREPCENT_TABLE]] [["GAAP","","Adjusted1"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["GAAP","","Adjusted1"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["GAAP","","Adjusted1"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Revenue up $383 million or 2.0% from 2023; an increase of 1.9% in constant currency1","","Income from Operations up $203 million or 7.5% from 2023 Adjusted Income from Operations1 up $108 million or 3.7% from 2023","","","","Operating margin up 80 basis points from 2023 Adjusted Operating Margin1 up 20 basis points from 2023","","","","Diluted EPS up $0.30 or 7.1% from 2023 Adjusted Diluted EPS1 up $0.20 or 4.4% from 2023"]] [[/GREPCENT_TABLE]] During the year ended December 31, 2024, revenues increased by $383 million as compared to the year ended December 31, 2023, representing an increase of 2.0%, or 1.9% on a constant currency basis1. Our recently completed acquisitions contributed 200 basis points to revenue growth. Additionally, revenues were positively impacted by growth in our Health Sciences segment, partially offset by weakness primarily in our Products and Resources (excluding the impact of our recently completed acquisitions) and Financial Services segments. 1 Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measurements 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. [[GREPCENT_TABLE]] [["Cognizant","28","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 Our operating margin and Adjusted Operating Margin2 increased to 14.7% and 15.3%, respectively, for the year ended December 31, 2024, from 13.9% and 15.1%, respectively, for the year ended December 31, 2023. Our 2024 GAAP and Adjusted Operating Margins were positively impacted by net savings generated from our NextGen program and the beneficial impact of foreign currency exchange rate movements, while being negatively impacted by increased compensation costs, primarily as a result of a merit increase cycle completed during the third quarter of 2024, and the dilutive impact of recently completed acquisitions, primarily driven by transaction and integration related expenses and amortization of acquired intangibles. In addition, our GAAP operating margins for 2024 and 2023, were negatively impacted by the NextGen charges, as discussed in Note 4 to our 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. We closely monitor attrition trends focusing on the metric that we believe is most relevant to our business. For the year ended December 31, 2024 our Voluntary Attrition - Tech Services was 15.9% as compared to 13.8% for the year ended December 31, 2023. We finished 2024 with approximately 336,800 employees as compared to 347,700 employees at the end of 2023. Business Outlook See "Overview" within Part I, Item 1. Business for information on our strategic approach. We continue to expect the focus of our clients to be on their transformation into AI-ready, technology-driven, data-enabled, customer-centric and differentiated businesses. To support this transformation and drive greater business resiliency, we expect clients will continue to demand services and solutions that can enhance productivity and deliver cost savings. 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 and geopolitical factors, including the uncertainty related to the global economy, which has affected and may continue to affect their demand for our services. We increasingly use AI-based technologies, including GenAI, in our client offerings and our own internal operations. AI technologies and services are part of a highly competitive and rapidly evolving market. We plan to make significant investments in our AI capabilities to meet the needs of our clients and harness AI's value in a flexible, secure, scalable and responsible way. As AI-based technologies or other forms of automation evolve, we expect that demand for some services that we currently perform for our clients may be reduced and our ability to obtain favorable pricing or other terms for our services may be diminished. Potential tax law and other regulatory changes, including possible U.S. corporate income tax reform and the Code on Social Security, 2020 in India, among other items, may impact our future results. We expect that the Code on Social Security, 2020, if enacted as currently written, could result in a material one-time increase to our post-employment liability for past service and would also modestly increase our costs for employment and post-employment benefits prospectively. In addition, in March 2024, India and Mauritius signed a Protocol to amend the India-Mauritius Income Tax Treaty. We are currently evaluating the potential impact of the amendment, which, depending on its final terms when entered into force, could increase our effective income tax rate, as CTS India is a subsidiary of our wholly-owned Mauritius entity. For additional information, see Part I, Item 1A. Risk Factors. During the third quarter of 2024, we completed the acquisition of Belcan. See Note 3 to our consolidated financial statements. This acquisition is expected to have a modest near-term dilutive impact to our 2025 operating margin, primarily due to integration-related expenses and amortization of acquired intangibles. 2 Adjusted Operating Margin is not a measurement 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. [[GREPCENT_TABLE]] [["Cognizant","29","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 Results of Operations For a discussion of our results of operations for the year ended December 31, 2022, including a year-to-year comparison between 2023 and 2022, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report Form 10-K for the year ended December 31, 2023. The Year Ended December 31, 2024 Compared to The Year Ended December 31, 2023 The following table sets forth certain financial data for the years ended December 31: [[GREPCENT_TABLE]] [["","","","% of","","","","% of","","","","Increase / Decrease"],["(Dollars in millions, except per share data)","2024","","Revenues","","2023","","Revenues","","","","$","","","","","%"],["Revenues","$","19,736","","","100.0","","$","19,353","","","100.0","","","","$","383","","","","","","2.0"],["Cost of revenues(a)","12,958","","","65.7","","12,664","","","65.4","","","","294","","","","","","2.3"],["Selling, general and administrative expenses(a)","3,223","","","16.3","","3,252","","","16.8","","","","(29)","","","","","","(0.9)"],["Restructuring charges","134","","","0.7","","229","","","1.2","","","","(95)","","","","","","(41.5)"],["Depreciation and amortization expense","529","","","2.7","","519","","","2.7","","","","10","","","","","","1.9"],["Income from operations and operating margin","2,892","","","14.7","","2,689","","","13.9","","","","203","","","","","","7.5"],["Other income (expense), net","46","","","","","98","","","","","","","(52)","","","","","","(53.1)"],["Income before provision for income taxes","2,938","","","14.9","","2,787","","","14.4","","","","151","","","","","","5.4"],["Provision for income taxes","(713)","","","","","(668)","","","","","","","(45)","","","","","","6.7"],["Income (loss) from equity method investments","15","","","","","7","","","","","","","8","","","","","","114.3"],["Net income","$","2,240","","","11.3","","$","2,126","","","11.0","","","","$","114","","","","","","5.4"],["Diluted EPS","$","4.51","","","","","$","4.21","","","","","","","$","0.30","","","","","","7.1"],["Other Financial Information 3"],["Adjusted Income From Operations and Adjusted Operating Margin","$","3,026","","","15.3","","$","2,918","","","15.1","","","","$","108","","","","","","3.7"],["Adjusted Diluted EPS","$","4.75","","","","","$","4.55","","","","","","","$","0.20","","","","","","4.4"]] [[/GREPCENT_TABLE]] (a)    Exclusive of depreciation and amortization expense3 3 Adjusted Income from Operations, Adjusted Operating Margin and Adjusted Diluted EPS 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. [[GREPCENT_TABLE]] [["Cognizant","30","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 Revenues - Reportable Business Segments and Geographic Markets Revenues of $19,736 million across our business segments and geographies were as follows for the year ended December 31, 2024: [[GREPCENT_TABLE]] [["2024 as compared to 2023","","","","","Increase / (Decrease)"],["(Dollars in millions)","","$","","%","","CC %4"],["Health Sciences","","","","","$","258","","","4.5","","","4.5"],["Financial Services","","","","","(56)","","","(1.0)","","","(1.1)"],["Products and Resources","","","","","154","","","3.3","","","3.2"],["CMT","","","","","27","","","0.8","","","0.5"],["Total revenues","","","","","$","383","","","2.0","","","1.9"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["2024 as compared to 2023","","","","","Increase / (Decrease)"],["(Dollars in millions)","","$","","%","","CC %4"],["North America","","","","","$","435","","","3.0","","","3.1"],["United Kingdom","","","","","(58)","","","(3.1)","","","(5.1)"],["Continental Europe","","","","","23","","","1.2","","","0.9"],["Europe - Total","","","","","(35)","","","(0.9)","","","(2.1)"],["Rest of World","","","","","(17)","","","(1.3)","","","\u2014"],["Total revenues","","","","","$","383","","","2.0","","","1.9"]] [[/GREPCENT_TABLE]] Change in revenues was driven by the following factors: •North America revenues, particularly in the Health Sciences segment, were positively impacted by the ramp up of several recently won large deals; •Recently completed acquisitions contributed 200 basis points of growth to the overall change in revenues, including approximately 600 basis points of growth to our Products and Resources segment (primarily in North America) and approximately 150 basis points of growth to our Communications, Media and Technology segment (primarily in North America); •The resale of third-party products, primarily in North America, in connection with our integrated offerings strategy, contributed 70 basis points of growth to the overall change in revenue; •Reduced demand for discretionary work negatively impacted revenues across all segments. Clients in our Financial Services, Products and Resources, and Communications, Media and Technology segments were particularly affected; •Revenue decline in our United Kingdom region was primarily driven by weakness in the Communications, Media and Technology and Financial Services segments; and •Revenue decline in our Rest of World region was primarily driven by weakness in the Products and Resources and Financial Services segments. 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. [[GREPCENT_TABLE]] [["Cognizant","31","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 Cost of Revenues (Exclusive of Depreciation and Amortization Expense) [[GREPCENT_TABLE]] [["\u00e9","$294M"],["\u00e9","0.3% as a % of revenues"],["\u00a1 % of Revenues"]] [[/GREPCENT_TABLE]] 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 costs of third-party products and services relating to revenues. The increase, as a percentage of revenues, was due to higher compensation costs, primarily as a result of a merit increase cycle, and the resale of third-party products in connection with our integrated offerings strategy, partially offset by the beneficial impact of foreign currency exchange rate movements and operational efficiencies. 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 driven by the net savings generated from our NextGen program, partially offset by the impact of recently completed acquisitions, primarily as a result of transaction and integration related expenses. [[GREPCENT_TABLE]] [["\u00ea","$29M"],["\u00ea","0.5% as a % of revenues"],["\u00a1 % of Revenues"]] [[/GREPCENT_TABLE]] Restructuring Charges Restructuring charges consist of costs related to the NextGen program. Restructuring charges were $134 million or 0.7%, as a percentage of revenues for the year ended December 31, 2024, as compared to $229 million or 1.2%, as a percentage of revenue, for the year ended December 31, 2023. For further detail on our restructuring charges see Note 4 to our consolidated financial statements. Depreciation and Amortization Expense Depreciation and amortization expense increased by 1.9%, and was flat as a percentage of revenues, in 2024 as compared to 2023. The increase in amortization expense driven by intangible assets related to our recently completed acquisitions was partially offset by the decline of depreciation expense, which was driven by actions taken under our NextGen program. Operating Margin and Adjusted Operating Margin5 - Overall The increase in our 2024 GAAP operating margin and Adjusted Operating Margin5 was primarily driven by net savings generated from our NextGen program and the beneficial impact of foreign currency exchange rate movements, partially offset by increased compensation costs, primarily as a result of a merit increase cycle, and the dilutive impact of recently completed acquisitions, primarily as a result of transaction and integration related expenses and amortization of acquired intangibles. In addition, our 2024 and 2023 GAAP operating margins were negatively impacted by the NextGen charges, as discussed in Note 4 to our consolidated financial statements, which were excluded from our Adjusted Operating Margin5. 5 Adjusted Income From Operations and Adjusted Operating Margin are not measurements 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. [[GREPCENT_TABLE]] [["Cognizant","32","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 A predominant portion of our costs in India are denominated in the Indian rupee, representing approximately 24% of our global operating costs during the year ended December 31, 2024. 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. Including the impact of the hedges, the depreciation of the Indian rupee positively impacted our operating margin for the year ended December 31, 2024 by 44 basis points as compared to the year ended December 31, 2023. 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 approximately 25 basis points in 2024. 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 approximately 18 basis points (excluding the impact of our cash flow hedges). In 2024, the settlement of our cash flow hedges positively impacted our operating margin by approximately 6 basis points, compared to a negative impact of 13 basis points in 2023. Segment Operating Profit Segment operating profit and operating margin percentage were as follows: [[GREPCENT_TABLE]] [["","","Segment operating profit","","%","Segment operating margin"]] [[/GREPCENT_TABLE]] In 2024, segment operating margins across all our segments were negatively impacted by increased compensation costs, partially offset by savings generated from our NextGen program and the beneficial impact of foreign currency exchange rate movements. Segment operating profit in the Health Sciences and Communications, Media and Technology segments was negatively impacted by resales of third-party products in connection with our integrated offerings strategy and higher costs typical to the initial phases of several recently won large deals. Segment operating profit in the Products and Resources segment was negatively impacted by the dilutive impact of the Belcan acquisition. Segment operating profit in the Financial Services segment was positively impacted by reduced resales of third-party products in connection with our integrated offerings strategy. Total segment operating profit was as follows for the year ended December 31: [[GREPCENT_TABLE]] [["(Dollars in millions)","2024","","% of Revenues","","2023","","% of Revenues","","Increase / (Decrease)"],["Total segment operating profit","$","4,156","","","21.1","","","$","4,117","","","21.3","","","$","39"],["Less: unallocated costs","1,264","","","6.4","","","1,428","","","7.4","","","(164)"],["Income from operations","$","2,892","","","14.7","","","$","2,689","","","13.9","","","$","203"]] [[/GREPCENT_TABLE]] The decrease in unallocated costs for 2024 as compared to 2023 was primarily driven by lower corporate expenses as well as lower NextGen charges of $134 million in 2024 as compared to $229 million in 2023 (see Note 4 to our consolidated financial statements). [[GREPCENT_TABLE]] [["Cognizant","33","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 Other Income (Expense), Net Total other income (expense), net consists primarily of foreign currency exchange gains and losses, interest income and interest expense. The following table sets forth total other income (expense), net for the years ended December 31: [[GREPCENT_TABLE]] [["(in millions)","2024","","2023","","","","Increase / Decrease"],["Foreign currency exchange gains (losses)","$","(29)","","","$","42","","","","","$","(71)"],["Gains (losses) on foreign exchange forward contracts not designated as hedging instruments","10","","","(40)","","","","","50"],["Foreign currency exchange gains (losses), net","(19)","","","2","","","","","(21)"],["Interest income","119","","","126","","","","","(7)"],["Interest expense","(54)","","","(41)","","","","","(13)"],["Other, net","\u2014","","","11","","","","","(11)"],["Total other income (expense), net","$","46","","","$","98","","","","","$","(52)"]] [[/GREPCENT_TABLE]] 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. As of December 31, 2024, the notional value of our undesignated hedges was $489 million. Interest income for the year ended December 31, 2024 decreased by $7 million as compared to 2023. While our invested balances decreased during the year ended December 31, 2024, primarily due to the required payment related to the ITD dispute in January 2024 (see Note 11 to our consolidated financial statements) and the Belcan acquisition in August 2024, we benefited from higher interest rates compared to the year ended December 31, 2023. Interest expense for the year ended December 31, 2024 increased by $13 million as compared to 2023 primarily due to the drawdown on our revolving credit facility in connection with the Belcan acquisition. Provision for Income Taxes [[GREPCENT_TABLE]] [["\u00e9","$45M"],["\u00a1 Effective Income Tax Rate \u00e9 0.3%"]] [[/GREPCENT_TABLE]] See Note 11 to our consolidated financial statements for additional information. In December 2021, the OECD adopted model rules for a global framework to impose a 15% global minimum tax referred to as Pillar Two with a targeted effective date of January 1, 2024. The OECD has continued and is continuing to issue additional guidance on the operation of the model rules. While the United States has not enacted Pillar Two, certain countries in which we operate have adopted their own version of the Pillar Two model rules. Although Management continues to monitor additional guidance from the OECD and countries’ implementation of Pillar Two, based on current guidance, our net income, cash flows, or financial condition has not and will not in the future be materially impacted by Pillar Two. Net Income The increase in net income was driven by the increase in income from operations. [[GREPCENT_TABLE]] [["\u00e9","$114M"],["\u00e9","0.3% as a % of revenues"],["\u00a1 % of Revenues"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Cognizant","34","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 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 exclude unusual items, such as NextGen charges. Our non-GAAP financial measure Adjusted Diluted EPS excludes unusual items, such as NextGen charges, and 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 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. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment. 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, as applicable, for the years ended December 31: [[GREPCENT_TABLE]] [["(Dollars in millions, except per share data)","2024","","% of Revenues","","2023","","% of Revenues"],["GAAP income from operations and operating margin","$","2,892","","","14.7","%","","$","2,689","","","13.9","%"],["NextGen charges (1)","134","","","0.6","","","229","","","1.2"],["Adjusted Income From Operations and Adjusted Operating Margin","$","3,026","","","15.3","%","","$","2,918","","","15.1","%"],["GAAP diluted EPS","$","4.51","","","","","$","4.21"],["Effect of NextGen charges, pre-tax","0.27","","","","","0.45"],["Effect of non-operating foreign currency exchange losses (gains), pre-tax (2)","0.04","","","","","\u2014"],["Tax effect of above adjustments (3)","(0.07)","","","","","(0.11)"],["Adjusted Diluted EPS","$","4.75","","","","","$","4.55"],["Net cash provided by operating activities","$","2,124","","","","","$","2,330"],["Purchases of property and equipment","(297)","","","","","(317)"],["Free cash flow","$","1,827","","","","","$","2,013"]] [[/GREPCENT_TABLE]] (1)    Consists of employee separation, facility exit and other costs incurred in connection with the NextGen program. See Note 4 to our consolidated financial statements for additional information. [[GREPCENT_TABLE]] [["Cognizant","35","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 (2)    Non-operating foreign currency exchange gains and losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, are reported in "Foreign currency exchange gains (losses), net" in our consolidated statements of operations. (3)    Presented below are the tax impacts of our non-GAAP adjustments to pre-tax income for the years ended December 31: [[GREPCENT_TABLE]] [["(in millions)","2024","","2023"],["Non-GAAP income tax benefit (expense) related to:"],["NextGen charges","$","34","","","$","59"],["Foreign currency exchange gains and losses","(4)","","","(6)"]] [[/GREPCENT_TABLE]] 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 consolidated statements of operations. Liquidity and Capital Resources Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. As of December 31, 2024, we had cash, cash equivalents and short-term investments of $2,243 million. Additionally, as of December 31, 2024, we had available capacity under our credit facilities of approximately $1.55 billion. The following table provides a summary of our cash flows for the years ended December 31: [[GREPCENT_TABLE]] [["(in millions)","","2024","","2023","","","","Increase / Decrease"],["Net cash provided by (used in):"],["Operating activities","","$","2,124","","","$","2,330","","","","","$","(206)"],["Investing activities","","(1,646)","","","(331)","","","","","(1,315)"],["Financing activities","","(915)","","","(1,609)","","","","","694"],["Other Cash Flow Information6"],["Free cash flow","","1,827","","","2,013","","","","","(186)"]] [[/GREPCENT_TABLE]] Operating activities6 The decrease in cash provided by operating activities in 2024 compared to 2023 was primarily driven by the $360 million payment made in relation to our dispute with the ITD in January 2024 (see Note 11 to our consolidated financial statements). 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 78 days as of December 31, 2024, 77 days as of December 31, 2023 and 74 days as of December 31, 2022. Investing activities The increase in cash used in investing activities in 2024 compared to 2023 was primarily driven by higher payments for business combinations as well as lower net maturities of investments in 2024. Financing activities The decrease in cash used in financing activities in 2024 compared to 2023 was primarily driven by lower repurchases of common stock and net borrowings under the revolving credit facility to finance the Belcan acquisition. We have a Credit Agreement providing for a $650 million Term Loan and a $1,850 million unsecured revolving credit facility, which are each due to mature in October 2027. As of December 31, 2024, we had $300 million outstanding on the revolving credit facility, consisting of a Term Benchmark loan with a maturity of October 2027 and an Interest Period (as defined in the Credit Agreement) of one month. We are required under the Credit Agreement to make scheduled quarterly 6 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information. [[GREPCENT_TABLE]] [["Cognizant","36","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 principal payments on the Term Loan. We believe that we currently meet all conditions set forth in the Credit Agreement to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the revolving credit facility as of December 31, 2024 and through the date of this filing. See Note 10 to our consolidated financial statements. Capital Allocation Framework [[GREPCENT_TABLE]] [["","Acquisitions"],["","Share repurchases"],["","Dividend payments"]] [[/GREPCENT_TABLE]] Our capital allocation framework anticipates the deployment of approximately 50% of our free cash flow7 for acquisitions and 50% for share repurchases and dividend payments. 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 cash is available in the locations in which it is needed. As part of our ongoing liquidity assessments, we regularly monitor the mix of our 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, tax payments, including the Tax Reform Act transition tax payment, and servicing our debt for the next twelve months. Our remaining Tax Reform Act transition tax payment of $157 million is due in the second quarter of 2025. In 2024, our Tax Reform Act transition tax payment was $123 million. Additionally, we have purchase commitments of approximately $1.1 billion that will be paid over the next four years, of which approximately $440 million will be paid during the next twelve months. In addition, see Note 7 to our consolidated financial statements for a description of our operating lease obligations. 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 of 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. Critical Accounting Estimates Management’s discussion and analysis of our financial condition and results of operations is based on our accompanying consolidated financial statements that have been prepared in accordance with GAAP. We base our estimates on historical experience, current trends and on various other assumptions that are believed to be relevant at the time our consolidated financial statements are prepared. We evaluate our estimates on a continuous basis. However, the actual amounts may differ from the estimates used in the preparation of our consolidated financial statements. We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our consolidated financial statements as they require the most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Changes to these estimates could have a material effect on our results of operations and financial condition. Our significant accounting policies are described in Note 1 to our consolidated financial statements. Revenue Recognition. Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost-to-cost method, 7 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information. [[GREPCENT_TABLE]] [["Cognizant","37","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to-date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, quality engineering and assurance and business process services are recognized using the cost-to-cost method, if the right to invoice is not representative of the value being delivered. The cost-to-cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information. Such estimates and changes in estimates involve the use of judgment. The cumulative impact of any change in estimates is reflected in the financial reporting period in which the change in estimate becomes known. Net changes in estimates of such future costs were immaterial to the consolidated results of operations for the periods presented. Income Taxes. Determining the consolidated provision for income taxes, deferred income tax assets (and related valuation allowance, if any) and liabilities requires significant judgment. We are required to calculate and provide for income taxes in each of the jurisdictions where we operate. Changes in the geographic mix of income before taxes or estimated level of annual pre-tax income can affect our overall effective income tax rate. In addition, transactions between our affiliated entities are arranged in accordance with applicable transfer pricing laws, regulations and relevant guidelines. As a result, and due to the interpretive nature of certain aspects of these laws and guidelines, we have pending applications for APAs before the taxing authorities in some of our most significant jurisdictions. It could take years for the relevant taxing authorities to negotiate and conclude these applications. The consolidated provision for income taxes may change period to period based on changes in facts and circumstances, such as settlements of income tax audits, the expiration of the applicable statute of limitations or finalization of our applications for APAs. Our provision for income taxes also includes the impact of reserves established for uncertain income tax positions, as well as the related interest, which may require us to apply judgment to complex issues and may require an extended period of time to resolve. We apply a “more likely than not” threshold when assessing the need for a reserve for an uncertain tax position, which involves significant judgment. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final outcome of these matters will not differ from our recorded amounts. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of the applicable statute of limitations. Additionally, we have tax positions that we believe are more likely than not to be realized and for which we have therefore not established a reserve. To the extent that the final outcome of these matters differs from the amounts recorded, such differences may materially impact, positively or negatively, the provision for income taxes in the period in which such determination is made. Business Combinations, Goodwill and Intangible Assets. Goodwill and intangible assets, including indefinite-lived intangible assets, arise from the accounting for business combinations. We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired, liabilities assumed, including any contingent consideration, and any noncontrolling interest in the acquiree to properly allocate purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price utilizes estimates and assumptions in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets, including the timing and amount of forecasted revenues and cash flows, anticipated growth rates, client attrition rates and the discount rate reflecting the risk inherent in future cash flows. At each acquisition date, we allocate goodwill and intangible assets to our reporting units based on how we expect each reporting unit to benefit from the respective business combination. Our seven industry-based operating segments are our reporting units. We exercise judgment to allocate goodwill to the reporting units expected to benefit from each business combination. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, regulatory environment, established business plans, operating performance indicators or competition. Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit. We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. Under the income approach, we estimate projected future cash flows, the timing of such cash flows and long-term growth rates and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on a market participant weighted-average cost of capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. [[GREPCENT_TABLE]] [["Cognizant","38","December 31, 2024 Form 10-K"]] [[/GREPCENT_TABLE]] Table of Contents                                                 Based on our most recent evaluation of goodwill performed during the fourth quarter of 2024, we concluded that the goodwill in each of our reporting units was not at risk of impairment. As of December 31, 2024, our goodwill balance was $6,953 million. We review our finite-lived assets, including our finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The carrying amount may not be recoverable when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset groups. The impairment loss is determined as the amount by which the carrying amount of the asset group exceeds its fair value. Assessing the fair value of asset groups involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows and discount rates reflecting the risk inherent in future cash flows. Recently Adopted and New Accounting Pronouncements See Note 1 to our consolidated financial statements for additional information.