COGNIZANT TECHNOLOGY SOLUTIONS CORP (CTSH)

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

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.

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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.

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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:

(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.

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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:

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.

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Cost of Revenues (Exclusive of Depreciation and Amortization Expense)

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.

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.

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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:

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:

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).

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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:

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

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.

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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:

(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.

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(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:

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:

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.

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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

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.

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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.

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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.

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 a fast-changing world. 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, 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 2023 we incurred $115 million of employee separation costs and $114 million of facility exit and other costs totaling $229 million. See Note 4 to our audited consolidated financial statements. We currently expect to incur total costs of approximately $300 million with approximately $70 million of such costs anticipated 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.

2023 Financial Results1

Revenues

Income from Operations

Operating Margin

Diluted EPS

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.

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During the year ended December 31, 2023, revenues decreased by $75 million as compared to the year ended December 31, 2022, representing a decrease of 0.4%, or a decrease of 0.3% on a constant currency basis2. Revenue decline was driven by our Financial Services segment, which was negatively impacted by weakness in the banking sector, partially offset by growth in our Communications, Media and Technology, Products and Resources and Health Sciences segments. Our recently completed acquisitions contributed 110 basis points to revenue growth, primarily benefiting our Products and Resources and Communications, Media and Technology segments.

Our operating margin and Adjusted Operating Margin2 was 13.9% and 15.1%, respectively, for the year ended December 31, 2023. This compares to operating margin and Adjusted Operating Margin of 15.3% for the year ended December 31, 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, savings generated from our NextGen program and improvement in profitability of a large contract with a Health Sciences client in 2023. In addition, as discussed in Note 4 to our audited consolidated financial statements, our 2023 GAAP operating margin was negatively impacted by the NextGen charges, 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. 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 year ended December 31, 2023 our Voluntary Attrition - Tech Services was 13.8% as compared to 25.6% for the year ended December 31, 2022. We finished 2023 with approximately 347,700 employees as compared to 355,300 employees at the end of 2022.

Business Outlook

See "Overview" within Part I, Item 1. Business for information on our six strategic priorities.

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 and geopolitical factors, including the increasing uncertainty related to the global economy, which has affected and may continue to affect their demand for our services.

We are focused on expanding our partner ecosystem across a broad range of technology companies, including hyperscalers, cloud providers, enterprise software companies, best-in-class digital software enterprises and emerging start-ups. We believe this partner ecosystem will enable us to enhance our innovative, integrated offerings, by combining third-party products with our service solutions, to deliver enterprise-wide digital transformation.

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 its value in a flexible, secure, scalable and responsible way. As AI-based technologies evolve, we expect that some services that we currently perform for our clients will be replaced by AI or forms of automation. This may lead to reduced demand for certain services or harm our ability to obtain favorable pricing or other terms for our services.

In connection with the NextGen program, in 2023 we incurred $229 million in employee separation, facility exit and other costs. We currently expect to incur total costs of approximately $300 million in connection with the NextGen program, with approximately $70 million of such costs anticipated in 2024. 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. For additional information, see Part I, Item 1A. Risk Factors.

2 Adjusted Operating Margin 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.

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Results of Operations

For a discussion of our results of operations for the year ended December 31, 2021, including a year-to-year comparison between 2022 and 2021, 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, 2022.

The Year Ended December 31, 2023 Compared to The Year Ended December 31, 2022

The following table sets forth certain financial data for the years ended December 31:

(a)    Exclusive of depreciation and amortization expense

N/A    Not applicable3

Revenues

During the year ended December 31, 2023, revenues declined by $75 million as compared to the twelve months ended December 31, 2022, representing a decline of 0.4%, or a decline of 0.3% on a constant currency basis.3 Our recently completed acquisitions contributed 110 basis points of growth to the change in revenues.

3 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.

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Revenues - Reportable Business Segments and Geographic Markets

Revenues of $19,353 million across our business segments and geographies were as follows for the year ended December 31, 2023:

Change in revenues was driven by the following factors:

•Reduced demand for discretionary work negatively impacted revenues across all segments, and 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;

•Recently completed acquisitions which contributed 110 basis points of growth to the overall change in revenues, including 230 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 Continental Europe and the United Kingdom);

•North America revenues in the Communications, Media and Technology segment included growing demand among the largest clients in this segment, including for services related to digital content;

•The resale of third-party products in North America in connection with our integrated offerings strategy, primarily in the Financial Services and Products and Resources segments, contributed 70 basis points of growth to the overall change in revenue;

•North America revenues in the Communications, Media and Technology and Products and Resources segments were positively impacted by the ramp up of several recently won large deals;

•Revenue growth in the United Kingdom was driven by expansion of work public sector clients included in our Communications, Media and Technology and Financial Services segments;

•Revenues in the Continental Europe region were driven by increased demand from pharmaceutical clients within the Health Sciences segment and automotive clients within the Products and Resources segment; and

•Revenue decline in our Rest of World region was primarily driven 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.

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Cost of Revenues (Exclusive of Depreciation and Amortization Expense)

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 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 and improvement in profitability of a large contract with a Health Sciences client in 2023.

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 savings generated from our NextGen program and the 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.

Restructuring Charges

Restructuring charges consist of costs related to the NextGen program. Restructuring charges were $229 million or 1.2%, as a percentage of revenues for the year ended December 31, 2023. For further detail on our restructuring charges see Note 4 to our audited consolidated financial statements.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased by 8.8%, and by 0.2% as a percentage of revenues, in 2023 as compared to 2022, primarily driven by a reduction in amortization expense due to certain intangible assets reaching the end of their useful lives and savings generated from our NextGen program.

Operating Margin and Adjusted Operating Margin5 - Overall

Our 2023 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, savings generated from our NextGen program and improvement in profitability of a large contract with a Health Sciences client in 2023. In addition, as discussed in Note 4 to our audited consolidated financial statements, our 2023 GAAP operating margin was negatively impacted by the NextGen charges, 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.

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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, 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 contributed 90 basis points to the improvement in our operating margin for the year ended December 31, 2023 as compared to December 31, 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 approximately 96 basis points in 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 approximately 19 basis points (excluding the impact of our cash flow hedges). In 2023, the settlement of our cash flow hedges negatively impacted our operating margin by approximately 13 basis points, compared to a negative impact of 7 basis points in 2022.

We finished the year ended December 31, 2023 with approximately 347,700 employees as compared to 355,300 employees for the year ended December 31, 2022. For the year ended December 31, 2023 our Voluntary Attrition - Tech Services was 13.8% as compared to 25.6% for the year ended December 31, 2022.

Segment Operating Profit

In 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 and 2021 results to conform to the new methodology. See Note 18 to our audited consolidated financial statements for the recast 2021 segment operating profits.

Segment operating profit and operating margin percentage were as follows:

In 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 benefit of the depreciation of the Indian rupee against the U.S. dollar and savings generated from our NextGen program. In addition, 2023 segment operating margin in Health Sciences benefited from the improvement in profitability of a large contract with a payer client, while segment operating profit in Communications, Media and Technology was negatively affected by higher costs typical to the initial phases of several recently won large deals in this segment.

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Total segment operating profit was as follows for the year ended December 31:

The increase in unallocated costs for 2023 as compared to 2022 was primarily driven by the NextGen charges in 2023, see Note 4 to our audited consolidated financial statements, partially offset by lower corporate expenses.

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:

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, 2023, the notional value of our undesignated hedges was $1,317 million. The increase in interest income and interest expense was each primarily attributable to higher interest rates in the current period.

Provision for Income Taxes

The effective income tax rate decreased primarily driven by the geographical mix of earnings in 2023 as compared to 2022. 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, we believe that our net income, cash flows, or financial condition will not be materially impacted by Pillar Two.

Net Income

The decrease in net income was primarily driven by lower income from operations, partially offset by higher interest income and lower provision for income taxes in 2023.

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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 the effect of recognition in the third quarter of 2022 of an income tax benefit related to a specific uncertain tax position that was previously unrecognized in our prior-year consolidated financial statements, 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 audited 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 do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and 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.

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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:

(1)    As part of the NextGen program, during the year ended December 31, 2023, we incurred employee separation, facility exit and other costs. See Note 4 to our audited 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 consolidated statements of operations.

(3)    Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income for the years ended December 31:

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.

(4)    As previously reported in our 2022 Annual Report on Form 10-K, during the three months ended September 30, 2022, we recognized an income tax benefit of $36 million related to a specific uncertain tax position that was previously unrecognized in our prior-year consolidated financial statements. The recognition of the benefit in the third quarter of 2022 was based on management’s reassessment regarding whether this unrecognized tax benefit met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefit.

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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, 2023, we had cash, cash equivalents and short-term investments of $2,635 million. Additionally, as of December 31, 2023, we had available capacity under our credit facilities of approximately $2.0 billion.

The following table provides a summary of our cash flows for the years ended December 31:

Operating activities6

The decrease in cash provided by operating activities in 2023 compared to 2022 was primarily driven by an increase in income tax payments. In 2023, we made tax payments related to the mandatory capitalization of research and experimental expenditures for the 2022 tax year of approximately $300 million as well as the estimated tax payments for 2023 of approximately $230 million. Cash provided by operating activities for 2023 benefited from improved collections of our trade accounts receivable as compared to 2022.

We monitor turnover, aging and the collection of trade accounts receivable by client. Our DSO calculation includes trade accounts receivable, net of allowance for credit losses, and contract assets, reduced by the uncollected portion of our deferred revenue. DSO was 77 days as of December 31, 2023, 74 days as of December 31, 2022 and 69 days as of December 31, 2021.

Investing activities

The increase in cash used in investing activities in 2023 compared to 2022 was primarily driven by lower net maturities of investments in 2023 as compared to 2022 and higher payments for business combinations in 2023.

Financing activities

The decrease in cash used in financing activities in 2023 compared to 2022 was primarily driven by lower repurchases of common stock.

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. We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan beginning in December 2023. See Note 10 to our consolidated financial statements. 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, 2023 and through the date of this filing. As of December 31, 2023, we had no outstanding balance on our revolving credit facility.

In March 2023, our India subsidiary renewed its working capital facility at 15 billion Indian rupee ($180 million at the December 31, 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 December 31, 2023, we have not borrowed funds under this facility or any of its predecessor facilities.

6 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.

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Capital Allocation Framework

Our capital allocation framework anticipates the deployment of approximately 50% of our free cash flow7 for acquisitions, 25% for share repurchases and 25% for 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 worldwide 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 Tax Reform Act transition tax payments, and servicing our debt for the next twelve months. Our remaining Tax Reform Act transition tax payments are $123 million and $157 million in the years 2024 and 2025, respectively. In 2023, our Tax Reform Act transition tax payment was $94 million. In addition, we also have purchase commitments of approximately $615 million that will be paid over the next four years, of which approximately $180 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.

In connection with our ongoing dispute with the ITD, on January 8, 2024, the SCI ruled that, in order to proceed with our appeal, we must deposit 30 billion Indian rupees ($355 million at the December 31, 2023 exchange rate), representing the time deposits of CTS India under lien, on the condition that, if CTS India prevails at the High Court, the amount deposited will be returned to CTS India, along with interest accrued, within 4 weeks of the judgment. The SCI also requested the High Court to consider and dispose of the appeal as expeditiously as possible, preferably within 6 weeks of the January 8, 2024 ruling. We made the required deposit in January 2024. See Note 11 to our consolidated financial statements.

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.

7 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.

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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, 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 revision 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. 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. To the extent that the final outcome of these matters differs from the amounts recorded, such differences will impact 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.

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Based on our most recent evaluation of goodwill performed during the fourth quarter of 2023, we concluded that the goodwill in each of our reporting units was not at risk of impairment. As of December 31, 2023, our goodwill balance was $6,085 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.

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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 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.

2022 Financial Results

Revenues

Income from Operations

Operating Margin

Diluted EPS

During the year ended December 31, 2022, revenues increased by $921 million as compared to the year ended December 31, 2021, representing growth of 5.0%, or 7.5% on a constant currency basis1. Our recently completed acquisitions contributed 100 basis points to revenue growth while the previously disclosed sale of the Samlink subsidiary, which was completed on February 1, 2022, negatively impacted revenue growth by 60 basis points.

Revenue growth was strongest in our Communications, Media and Technology and Products and Resources segments. Revenues in our Financial Services segment reflect the negative impact of the previously disclosed sale of the Samlink subsidiary, which was completed on February 1, 2022. For further details, see the "Revenues - Reportable Business Segments" section within the Results of Operations.

Revenue growth was driven by our clients' continued adoption and integration of digital technologies as well as pricing improvements but was negatively impacted by challenges attracting and retaining personnel and slowing demand for our services through the second half of 2022. For the year ended December 31, 2022, our attrition, including both voluntary and involuntary, was 31.7% as compared to 30.8% for the year ended December 31, 2021. For the three months ended December 31, 2022, our annualized attrition rate, including both voluntary and involuntary, was 25.3% as compared to 34.6% for the three months ended December 31, 2021. Attrition and hiring challenges have also resulted in increased cost of delivery.

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.

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Our operating margin and Adjusted Operating Margin2 were each 15.3% for the year ended December 31, 2022. Our 2022 operating margin was positively impacted by economies of scale that allowed us to leverage our cost structure over a larger organization, delivery efficiencies, pricing improvements and the depreciation of the Indian rupee against the U.S. dollar, partially offset by increased compensation costs for our delivery personnel (including employees and subcontractors) as well as a 30 basis point negative impact due to the impairment of certain capitalized costs related to a large volume-based contract with a Health Sciences client. Our 2021 GAAP operating margin was negatively impacted by the Class Action Settlement Loss, which was excluded from our Adjusted Operating Margin2 in 2021.

Business Outlook

See "Overview" within Part I, Item 1. Business for information on our four strategic priorities.

We expect clients to 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.

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 particular those with experience in key digital areas, in balance with client demand. Competition for skilled employees in the current labor market is intense and in 2021 and 2022, we experienced significantly elevated voluntary attrition. We saw improvement in our annualized attrition rate for the three months ended December 31, 2022 and we expect our annualized attrition rate for the first quarter of 2023 to be lower than our full year 2022 rate. Attrition can be difficult to predict as it is impacted by both macroeconomic and internal factors. Challenges attracting and retaining personnel have negatively impacted and may continue to negatively impact cost of delivery and our ability to satisfy client demand. Further, our ongoing and anticipated future efforts with respect to recruitment, talent management and employee engagement may not be successful and may continue to result in increased compensation costs. While we strive to adjust pricing to reduce the impact of compensation increases on our operating margin, we may not be successful in fully recovering these increases, which could adversely affect our profitability.

The invasion of Ukraine by Russia and the sanctions and other measures being imposed in response to this conflict have increased the level of economic and political uncertainty worldwide. We do not have employees, facilities or significant operations in either Russia or Ukraine and revenues generated from clients in both countries were immaterial in both 2021 and 2022. However, the continuation of the hostilities or the expansion of the current conflict’s scope into surrounding geographic areas could impact us or our clients, vendors or subcontractors, which could in turn impact our operations and financial performance. We continue to monitor the situation closely to ensure business continuity plans are in place for neighboring countries where we have a presence.

Our future results may be affected by potential tax law changes and other potential 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. For additional information, see Part I, Item 1A. Risk Factors.

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 reconciliation to the most directly comparable GAAP financial measures.

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Results of Operations

For a discussion of our results of operations for the year ended December 31, 2020, including a year-to-year comparison between 2021 and 2020, 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, 2021.

The Year Ended December 31, 2022 Compared to The Year Ended December 31, 2021

The following table sets forth certain financial data for the years ended December 31:

(a)    Exclusive of depreciation and amortization expense

*    Not meaningful

Revenues - Overall

During 2022, revenues increased by $921 million as compared to 2021, representing growth of 5.0%, or 7.5% on a constant currency basis3. Our recently completed acquisitions contributed 100 basis points to revenue growth while the previously disclosed sale of the Samlink subsidiary, which was completed on February 1, 2022, negatively impacted revenue growth by 60 basis points. Revenue growth was driven by our clients' continued adoption and integration of digital technologies as well as pricing improvements but was negatively impacted by challenges attracting and retaining personnel and slowing demand for our services through the second half of 2022. Revenues from clients added during 2022 were $172 million.

3 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, as applicable.

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Revenues - Reportable Business Segments

The following charts set forth revenues and change in revenues by reportable business segment and geography for the year ended December 31, 2022 as compared to the year ended December 31, 2021:

Financial Services - revenues increased 0.3%, or 2.8% on a constant currency basis4

Revenue growth reflected the growing demand for digital services among U.S. regional banks, public sector clients in the United Kingdom and insurance clients. The previously disclosed sale of the Samlink subsidiary, which was completed on February 1, 2022, negatively impacted revenue growth in this segment by 170 basis points, or $104 million. Revenues from clients added since December 31, 2021 were $26 million.4

Health Sciences - revenues increased 5.5%, or 6.8% on a constant currency basis4

Effective in the second quarter of 2022, we combined the healthcare operating segment with the life sciences operating segment and renamed our Healthcare reportable business segment to Health Sciences. See Note 18 to our consolidated financial statements for additional information.

Revenue growth was driven by increased demand for digital services among healthcare and pharmaceutical clients. Revenues from clients added since December 31, 2021 were $23 million.

4 Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.

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Products and Resources - revenues increased 6.8%, or 10.2% on a constant currency basis5

Revenue growth in this segment was primarily driven by demand for our digital services among automotive, logistics, utilities, consumer goods and travel and hospitality clients. Revenue growth in this segment included approximately 200 basis points related to recently completed acquisitions. Revenues from clients added since December 31, 2021 were $54 million.5

Communications, Media and Technology - revenues increased 11.1%, or 14.6% on a constant currency basis5

In 2022, we combined the communications and media operating segment with the technology operating segment. See Note 18 to our consolidated financial statements for additional information.

Revenues in this segment reflected growing demand from our technology clients for services related to digital content, primarily driven by the largest clients in this segment, as well as demand for personalized user experiences and data modernization. Revenues from clients added since December 31, 2021 were $69 million.

Revenues - Geographic Markets

Revenues of $19,428 million by geographic market were as follows for the year ended December 31, 2022:

North America continues to be our largest market, representing 74.3% of total revenues for the year ended December 31, 2022. Outside of our North America region, revenues were negatively impacted by foreign currency exchange rate movements. Constant currency revenue growth in the United Kingdom was strong among Communications, Media and Technology clients, Products and Resources clients and Financial Services clients, including certain public sector clients. Constant currency revenue growth in the Continental Europe region was driven by growth in the German market, which benefited from an acquisition that closed in the first half of 2021 and strong demand from our pharmaceutical clients, partially offset by a negative 540 basis point, or $104 million, impact from the previously disclosed sale of the Samlink subsidiary, which was completed on February 1, 2022. Constant currency revenue growth in the Rest of World region was primarily driven by the Australian market, which benefited from an acquisition that closed in the first half of 2021.

5 Constant currency revenue growth is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.

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Cost of Revenues (Exclusive of Depreciation and Amortization Expense)

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 (including employees and subcontractors) as well as a 30 basis point negative impact due to the impairment of certain capitalized costs related to a large volume-based contract with a Health Sciences client, partially offset by delivery efficiencies and the depreciation of the Indian rupee against the U.S. dollar. Challenges attracting and retaining highly qualified personnel have resulted in higher compensation costs.

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 economies of scale that allowed us to leverage our cost structure over a larger organization, the beneficial impact of foreign currency exchange rate movements and the optimization of non-strategic SG&A expenses.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased by 0.2%, as a percentage of revenue in 2022 as compared to 2021 primarily due to scale, as the expense remained relatively flat while revenues increased.

Operating Margin and Adjusted Operating Margin6 - Overall

Our 2022 operating margin was positively impacted by economies of scale that allowed us to leverage our cost structure over a larger organization, delivery efficiencies and the depreciation of the Indian rupee against the U.S. dollar, partially offset by increased compensation costs for our delivery personnel (including employees and subcontractors) as well as a 30 basis point negative impact due to the impairment of certain capitalized costs related to a large volume-based contract with a Health Sciences client. Our 2021 GAAP operating margin was negatively impacted by the Class Action Settlement Loss, which was excluded from our Adjusted Operating Margin6 in 2021.

6 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.

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A predominant portion of our costs in India are denominated in the Indian rupee, representing approximately 23.5% of our global operating costs during the year ended December 31, 2022. 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 contributed 73 basis points to the improvement in our operating margin for the year ended December 31, 2022 as compared to December 31, 2021.

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 115 basis points in 2022, while in 2021 the appreciation of the Indian rupee against the U.S. dollar negatively impacted our operating margin by approximately 5 basis points. 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 2022, the settlement of our cash flow hedges negatively impacted our operating margin by approximately 7 basis points, compared to a positive impact of 35 basis points in 2021.

We finished the year ended December 31, 2022 with approximately 355,300 employees as compared to 330,600 employees for the year ended December 31, 2021. Annualized attrition, including both voluntary and involuntary, was approximately 25.3% for the three months ended December 31, 2022. Attrition, including both voluntary and involuntary, was approximately 31.7% for the year ended December 31, 2022.

* Annualized attrition

Segment Operating Profit

In 2022, 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 charge to the segments the costs that they directly manage and control. Specifically, segment operating profit now includes costs related to non-delivery personnel that support consulting services, which were previously included in "unallocated costs." We have reported 2022 segment operating profits using the new allocation methodology and have recast the 2021 results to conform to the new methodology. Segment operating profit and operating margin percentage were as follows:

In 2022, segment operating margins benefited from delivery efficiencies and the depreciation of the Indian rupee against the U.S. dollar offset by increased compensation costs for delivery personnel (including employees and subcontractors). The 2022 Health Sciences segment operating margin was negatively affected by the impairment of certain capitalized costs related to a large volume-based contract with a Health Sciences client, investments to support revenue growth and elevated pricing pressure.

Total segment operating profit was as follows for the year ended December 31:

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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:

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, 2022, the notional value of our undesignated hedges was $1,433 million. The increase in interest income and interest expense was each primarily attributable to higher interest rates in the current period.

Provision for Income Taxes

The effective income tax rate in 2022 decreased as compared to the 2021 period primarily due to higher discrete tax benefits in 2022, such as the recognition in the third quarter of 2022 of an income tax benefit of $36 million related to a specific uncertain tax position that was previously unrecognized in our prior-year consolidated financial statements and the impact of depreciation of the Indian rupee against the U.S. dollar on our undistributed foreign earnings, partially offset by changes in the geographic mix of taxable income. See Note 11 to our consolidated financial statements for additional information.

Net Income

The increase in net income was primarily driven by higher income from operations.

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 the Class Action Litigation Settlement in 2021. Our non-GAAP financial measure Adjusted Diluted EPS excludes unusual items, such as the Class Action Litigation Settlement in 2021 and the effect of recognition in the third quarter of 2022 of an income tax benefit related to a specific uncertain tax position that was previously unrecognized in our prior-year consolidated financial statements, net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. 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

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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 out 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 do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and 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:

(1)    During 2021, we recorded a Class Action Settlement Loss in "Selling, general and administrative expenses" in our consolidated financial statements. For further information, see "Note 15 - Commitments and Contingencies" in the notes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

(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 each of our non-GAAP adjustments to pre-tax income for the years ended December 31:

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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.

(4)    During the three months ended September 30, 2022, we recognized an income tax benefit of $36 million related to a specific uncertain tax position that was previously unrecognized in our prior-year consolidated financial statements. The recognition of the benefit in the third quarter of 2022 was based on management’s reassessment regarding whether this unrecognized tax benefit met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefit.

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, 2022, we had cash, cash equivalents and short-term investments of $2,501 million. Additionally, as of December 31, 2022, we had available capacity under our credit facilities of approximately $2,000 million.

The following table provides a summary of our cash flows for the years ended December 31:

Operating activities7

The increase in cash provided by operating activities in 2022 compared to 2021 was primarily driven by higher income from operations.

We monitor turnover, aging and the collection of trade accounts receivable by client. Our DSO calculation includes trade accounts receivable, net of allowance for credit losses, and contract assets, reduced by the uncollected portion of our deferred revenue. DSO was 74 days as of December 31, 2022 and 69 days as of December 31, 2021.

Investing activities

The decrease in cash used in investing activities in 2022 compared to 2021 was primarily driven by net maturities of investments in 2022 as compared to net purchases of investments in 2021 as well as lower payments for business combinations in 2022.

Financing activities

The increase in cash used in financing activities in 2022 compared to 2021 was primarily driven by higher repurchases of common stock.

In October 2022, we completed a debt refinancing and entered into the New Credit Agreement with a commercial bank syndicate providing for a $650 million New Term Loan and a $1,850 million unsecured revolving credit facility, which are each due to mature in October 2027. The Credit Agreement was terminated upon the closing of the New Credit Agreement and the proceeds from the New Term Loan were used primarily to repay our outstanding Term Loan balance. We are required under the New Credit Agreement to make scheduled quarterly principal payments on the New Term Loan beginning in December 2023. See Note 10 to our consolidated financial statements. We believe that we currently meet all conditions set forth in the New 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, 2022 and through the date of this filing. As of December 31, 2022, we had no outstanding balance on our revolving credit facility.

7 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.

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In March 2022, our India subsidiary renewed its one-year 13 billion Indian rupee ($157 million at the December 31, 2022 exchange rate) working capital facility, which 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 of disbursement. This working capital facility contains affirmative and negative covenants and is renewable annually. As of December 31, 2022, there was no balance outstanding under the working capital facility.

Capital Allocation Framework

Our capital allocation framework anticipates the deployment of approximately 50% of our free cash flow8 for acquisitions, 25% for share repurchases and 25% for 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 worldwide 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 Tax Reform Act transition tax payments, and servicing our debt for the next twelve months. Our Tax Reform Act transition tax payments are due in annual installments of $94 million, $126 million and $157 million for the years 2023, 2024 and 2025, respectively. In 2022, our Tax Reform Act transition tax payment was $50 million. We also have purchase commitments of approximately $350 million that will be paid over the next three years, of which approximately $150 million will be paid during the next twelve months. See Note 7 to our consolidated financial statements for a description of our operating lease obligations.

Provisions enacted in the Tax Reform Act in December 2017 related to the capitalization of research and experimental expenditures became effective on January 1, 2022. These provisions require us to capitalize research and experimental expenditures and amortize them for tax purposes over five or fifteen years, depending on where the research is conducted. Previously these expenses could be deducted in the year incurred. The implementation of these provisions has increased our income taxes payable in the United States for the 2022 tax year by approximately $300 million. The incremental tax amount related to the 2022 mandatory capitalization of research and experimental expenditures had not been paid as of December 31, 2022, and will be paid on or before April 15, 2023. We estimate an additional similar amount of cash taxes to be paid in 2023 related to the capitalization of 2023 research and experimental expenditures. The capitalized expenses are recorded as a deferred tax asset and do not significantly impact our effective income tax rate.

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.

8 Free cash flow is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” for more information.

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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, 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 revision 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. 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. To the extent that the final outcome of these matters differs from the amounts recorded, such differences will impact 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

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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.

Based on our most recent evaluation of goodwill performed during the fourth quarter of 2022, we concluded that the goodwill in each of our reporting units was not at risk of impairment. As of December 31, 2022, our goodwill balance was $5,710 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.

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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 business for the digital era. Our services include digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services. Digital services have become an increasingly important part of our portfolio, aligning with our clients' focus on becoming data-enabled, customer-centric and differentiated businesses. We are continuing to invest in digital services with a focus on four key areas: IoT, digital engineering, data and cloud. 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. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in a fast-changing world.

2021 Financial Results

Revenue

Income from Operations

Operating Margin

Diluted EPS

GAAP
Adjusted

GAAP
Adjusted

GAAP
Adjusted

During the year ended December 31, 2021, revenues increased by $1,855 million as compared to the year ended December 31, 2020, representing growth of 11.1%, or 10.0% on a constant currency basis1. Our recently completed acquisitions contributed 320 basis points to our revenue growth. Revenue growth also reflected our clients' continued adoption and integration of digital technologies and was aided by the negative impact on 2020 revenues of the COVID-19 pandemic. Revenue growth in the Healthcare segment was driven by increased demand for our services from our pharmaceutical clients while continued adoption and integration of digital technologies across our manufacturing, logistics, energy and utilities clients drove revenue growth in the Products and Resources segment. Revenues in the Communications, Media and Technology segment benefited from our technology clients' growing demand for services related to digital content. Our 2020 revenue was negatively affected by the Samlink Impact, which contributed approximately 70 basis points to our 2021 revenue growth. We continue to experience pricing pressure on our non-digital services as our clients, particularly those in the Financial Services segment, optimize the cost of supporting their legacy systems and operations.

Our operating margin and Adjusted Operating Margin1 increased to 15.3% and 15.4%, respectively, for the year ended December 31, 2021 from 12.7% and 14.4%, respectively, for the year ended December 31, 2020. Our 2021 GAAP and Adjusted Operating Margins benefited from savings generated by the implementation of the delivery cost optimization initiatives of our 2020 Fit for Growth Plan and a decrease in travel and entertainment costs. These benefits were partially offset by investments intended to drive and support organic revenue growth, including additions to our sales organization and initiatives to reposition our brand, as well as the negative impact on margin of our recently completed acquisitions, increased subcontractor and compensation costs as a result of significantly elevated attrition and costs related to the modernization of our

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.

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core IT systems. Our 2020 operating margins were adversely impacted by the decline in revenues brought on by the COVID-19 pandemic, the Samlink Impact and the April 2020 ransomware attack. Our 2020 GAAP operating margin was also negatively impacted by costs related to our restructuring program that concluded at the end of 2020 and COVID-19 Charges.

During the fourth quarter of 2021, we reached a settlement agreement with the final customer involved in our previously disclosed proposed exit from a large customer engagement of our Samlink subsidiary and additionally entered into an agreement to sell this subsidiary. We reached settlement agreements with the other two customers to this engagement in the second quarter of 2021. The financial terms of the final settlement agreements with the three customers did not materially differ from our original 2020 offer and, accordingly, the impact to our 2021 consolidated statement of operations was immaterial. In 2020, in connection with our settlement offer, we recorded a reduction of revenues of $118 million and additional expenses of $33 million, or, jointly, the Samlink Impact. This negatively impacted both our 2020 GAAP and Adjusted Diluted EPS2 by $0.27. The sale of our Samlink subsidiary closed on February 1, 2022. In 2021, our Samlink subsidiary had $113 million in revenues.

In the third quarter of 2021, the parties to the consolidated putative securities class action suit filed a settlement agreement that resolved the consolidated putative securities class action against us and certain of our former officers. As a result, we recorded a $20 million Class Action Settlement Loss in "Selling, general and administrative expenses" in our consolidated financial statements. The loss is excluded from Adjusted Operating Margin2 and Adjusted Diluted EPS2. For further information see Note 15 to our consolidated financial statements.

Business Outlook

As we seek to increase our commercial momentum and accelerate growth, our four strategic priorities are:

•Accelerating digital - growing our digital business organically and inorganically;

•Globalizing Cognizant - accelerating the growth of our business in key international markets and diversifying our leadership, capabilities and delivery footprint;

•Repositioning our brand - improving our global brand recognition and becoming better known as a global digital partner to the entire C-suite; and

•Increasing our relevance to our clients - leading with thought leadership and capabilities to address clients' business needs.

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. The COVID-19 pandemic accelerated our clients' need to modernize their business, which has led to increased demand for digital capabilities. In 2021, we completed seven acquisitions intended to expand our talent, experience and capabilities in key digital areas or in particular geographies or industries.

As our clients seek to optimize the cost of supporting their legacy systems and operations, our non-digital services have been and may continue to be subject to pricing pressure. In addition, our clients will likely 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, which could affect their demand for our services.

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 particular those with experience in key digital areas, in balance with client demand. Competition for skilled employees in the current labor market is intense, and we experienced significantly elevated voluntary attrition during 2021. For the three months ended December 31, 2021, our annualized attrition rate, including both voluntary and involuntary, was 34.6% as compared to 19.0% for the three months ended December 31, 2020. For the year ended December 31, 2021, our attrition rate, including both voluntary and involuntary, was 30.8% as compared to 20.6% for the year ended December 31, 2020. Challenges attracting and retaining highly qualified personnel have negatively impacted our ability to satisfy client demand and achieve our full revenue potential. We expect this impact to continue in 2022. Further, our ongoing and anticipated future efforts with respect to recruitment, talent management and employee engagement may not be successful and may result in increased delivery costs during 2022. Our most significant costs are the salaries and related benefits for our employees. In certain regions, competition for employees with the advanced technical skills necessary to perform our services has caused wages to increase at a rate greater than the general rate of inflation. While we strive to adjust pricing to reduce the

2 Adjusted Operating Margin and Adjusted Diluted EPS 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.

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impact of compensation increases on our operating margin, we may not be successful in fully recovering these increases, which could adversely affect our profitability and operating margin.

Our future results may be affected by potential tax law changes and other potential 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. For additional information, see Part I, Item 1A. Risk Factors.

Environmental, Social and Corporate Governance

We believe environmental and social considerations are increasingly important to our clients and the talent we seek to attract and retain. As a company committed to improving everyday life, ESG is an important part of our business and that of our clients. Cognizant’s vision is to become the preeminent technology services provider to the leaders of the world’s Global 2000 companies. Our ESG program is designed to support that vision and aligns with our clients’ increasing focus on ESG. In 2021, we took the following steps to advance our ESG agenda:

•In February 2021, we announced an initiative to advance economic mobility, educational opportunity, diversity, equity, and inclusion, and health and well‑being in communities around the world through new philanthropic funding and in-kind contributions;

•In April 2021, as the second wave of the COVID-19 pandemic gripped India, we launched Operation C3. This initiative facilitated vaccination for our Indian employees and their dependents, and set up vaccination drives across the country to help senior citizens, physically challenged dependents, and mothers with infants. Operation C3 also provided critical medical equipment to hospitals, helped to boost oxygen supplies and more;

•In June 2021, we issued our first ESG report with assured greenhouse gas emissions data;

•In October 2021, we announced our commitment to achieve net zero emissions by 2030. This pledge calls for reducing emissions by 50% from the Company's global operations and supply chain by 2030, and by 90% by 2040; and

•In October 2021, we launched “All Belong,” an initiative led by our executive committee and global D&I team designed to strengthen employee engagement, showcase our affinity groups, and recognize employees who exemplify inclusion.

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