We are a leading provider of IT, consulting and business process services, dedicated to helping the world's leading companies build stronger businesses. Our clients engage us to help them build more efficient operations, provide solutions to critical business and technology problems, and to help them drive technology-based innovation and growth. Our core competencies include: Business, Process,
Operations and IT Consulting, Application Development and Systems Integration, EIM, Application Testing, Application Maintenance, IT IS, and BPS. We tailor our services to specific industries and utilize an integrated global delivery model. This seamless global sourcing model combines client service teams based on-site at the client locations with delivery teams located at dedicated near-shore and offshore global delivery centers. In 2013, our revenue increased to $8,843.2 millioncompared to $7,346.5 millionin 2012. Net income increased to $1,228.6 millionor $4.03per diluted share, compared to net income of $1,051.3 millionor $3.44per diluted share. On a non-GAAP basis our 2013 diluted earnings per share increased to $4.381compared to $3.741during 2012.
The key drivers of our revenue growth in 2013 were as follows:
• Strong performance across all of our business segments, particularly our
Manufacturing/Retail/Logistics and Financial Services business segments,
which reported revenue growth of 24.7% and 22.5%, respectively, as compared to 2012;
• Continued penetration of the European and Rest of World (primarily the
Asia Pacific) markets where we experienced revenue growth of 32.1% and 28.3%, respectively, as compared to 2012;
• Sustained strength in the North American market where revenues grew 17.5%,
as compared to 2012; • Increased customer spending on discretionary projects;
• Expansion of our service offerings, including Consulting, IT IS, and BPS
services, which enabled us to cross-sell new services to our customers and
meet the rapidly growing demand for complex large-scale outsourcing
solutions; • Increased penetration at existing customers, including strategic clients;
• Continued expansion of the market for global delivery of IT services and
We saw a continued demand from our customers for a broad range of services, including IT strategy and business consulting, application development and systems integration, EIM, application testing, application maintenance, IT IS, and BPS. In addition, we are seeing an increased customer interest in our social, mobile, analytics and cloud-based services. We finished the year with approximately 1,197 active clients, compared to approximately 821 active clients as of
December 31, 2012, and increased the number of strategic clients by 29 during the year, bringing the total number of our strategic clients to 243. We define a strategic client as one offering the potential to generate at least $5 millionto $50 millionor more in annual revenues at maturity. Our revenue growth is also attributed to increasing market acceptance of, and strong demand for, offshore IT software and services and BPS. NASSCOM ( India's National Association of Software and Service Companies) reports indicate that export revenues from India'sIT software and services and BPS sectors are expected to grow approximately 12% to 14% for NASSCOM's fiscal year ending March 31, 2014. For the fiscal year ended March 31, 2013, the industry recorded export revenue growth of 10.2%, which was at the lower end of NASSCOM's growth projection.
1 Non-GAAP diluted earnings per share and non-GAAP operating margin are not
measurements of financial performance prepared in accordance with GAAP. See
"Non-GAAP Financial Measures" for more information and a reconciliation to
the most directly comparable GAAP financial measures. 46
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In 2013, our operating margin increased to approximately 19.0% compared to 18.5% in 2012. Our non-GAAP operating margin in 2013 was approximately 20.6%1 compared to 20.2%1 in 2012. The increase in our GAAP and non-GAAP operating margins was due to revenue growth outpacing headcount growth and the impact of the depreciation of the Indian rupee against the U.S. dollar, net of losses on our cash flow hedges, partially offset by increases in compensation and benefit costs, including incentive-based compensation. Historically, we have invested our profitability above the 19% to 20% non-GAAP operating margin level back into our business, which we believe is a significant contributing factor to our strong revenue growth. This investment is primarily focused in the areas of hiring client partners and relationship personnel with specific industry experience or domain expertise, training our technical staff in a broader range of service offerings, strengthening our business analytics capabilities, strengthening and expanding our portfolio of services, continuing to expand our geographic presence for both sales and delivery as well as recognizing and rewarding exceptional performance by our employees. In addition, this investment includes maintaining a level of resources, trained in a broad range of service offerings, to be well positioned to respond to our customer requests to take on additional projects. We expect to continue to invest amounts in excess of our targeted operating margin levels back into the business. We finished the year with approximately 171,400 employees, which is an increase of approximately 14,700 over the prior year. The increase in the number of our technical personnel and the related infrastructure costs to meet the demand for our services is the primary driver of the increase in our operating expenses in 2013. Annualized turnover, including both voluntary and involuntary, was approximately 14.5% for the three months ended
December 31, 2013. The majority of our turnover occurs in India. As a result, annualized attrition rates on-site at clients are below our global attrition rate. In addition, attrition is weighted towards the more junior members of our staff. We have experienced increases in compensation and benefit costs, including incentive-based compensation costs, in Indiawhich may continue in the future; however, historically, this has not had a material impact on our results of operations as we have been able to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, the mix of our professional staff as well as utilization levels, and achieving other operating efficiencies. At December 31, 2013, we had cash, cash equivalents and short-term investments of $3,747.5 millionand working capital of $4,373.4 million. Accordingly, we do not anticipate any near-term liquidity issues.
During 2014, barring any unforeseen events, we expect the following factors to affect our business and our operating results:
• Continued focus by customers on directing IT spending towards cost containment projects, such as application maintenance, IT IS and BPS;
• Demand from our customers to help them achieve their dual mandate of
simultaneously achieving cost savings while investing in innovation;
• Secular changes driven by evolving technologies and regulatory changes;
• Volatility in foreign currency rates; and • Continued uncertainty in the world economy.
In response to this macroeconomic environment, we plan to:
• Continue to invest in our talent base and new service offerings;
• Partner with our existing customers to garner an increased portion of our
customers' overall IT spend by providing innovative solutions; • Continue our focus on growing our business in
Europe, the Middle East, the Asia Pacificand Latin Americaregions, where we believe there are opportunities to gain market share; • Continue to increase our strategic customer base across all of our business segments; 47
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• Opportunistically look for acquisitions that may improve our overall
service delivery capabilities, expand our geographic presence and/or
enable us to enter new areas of technology;
• Continue to focus on operating discipline in order to appropriately manage
our cost structure; and • Continue to locate most of our new development center facilities in tax
Our four reportable business segments are:
• Financial Services, which includes customers providing banking/transaction
processing, capital markets and insurance services;
• Healthcare, which includes healthcare providers and payers as well as life
sciences customers; • Manufacturing/Retail/Logistics, which includes consumer goods
manufacturers, retailers, travel and other hospitality customers, as well
as customers providing logistics services; and • Other, which is an aggregation of industry operating segments each of
which, individually, represents less than 10.0% of consolidated revenues
and segment operating profit. The Other segment includes information,
media and entertainment services, communications, and high technology
Our chief operating decision maker evaluates Cognizant's performance and allocates resources based on segment revenues and operating profit. Segment operating profit is defined as income from operations before unallocated costs. Generally, operating expenses for each operating segment have similar characteristics and are subject to the same factors, pressures and challenges. However, the economic environment and its effects on industries served by our operating groups may affect revenue and operating expenses to differing degrees. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as a per seat charge for use of the development and delivery centers. Certain selling, general and administrative expenses, excess or shortfall of incentive compensation for delivery personnel as compared to target, stock-based compensation expense, a portion of depreciation and amortization and the impact of the settlements of our cash flow hedges are not allocated to individual segments in internal management reports used by the chief operating decision maker. Accordingly, such expenses are excluded from segment operating profit. We had approximately 1,197 active clients as of
December 31, 2013. Accordingly, we provide a significant volume of services to many customers in each of our business segments. Therefore, a loss of a significant customer or a few significant customers in a particular segment could materially reduce revenues for that segment. However, no individual customer accounted for sales in excess of 10% of our consolidated revenues during 2013, 2012 or 2011. In addition, the services we provide to our larger customers are often critical to the operations of such customers and we believe that a termination of our services would require an extended transition period with gradually declining revenues. 48
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Results of Operations for the Three Years Ended
The following table sets forth certain financial data for the three years ended
December 31, 2013: (Dollars in thousands) % of % of % of Increase (Decrease) 2013 Revenues 2012 Revenues 2011 Revenues 2013 2012 Revenues $ 8,843,189100.0 $ 7,346,472100.0 $ 6,121,156100.0 $ 1,496,717 $ 1,225,316Cost of revenues(1) 5,265,469 59.5 4,278,241 58.2 3,538,622 57.8 987,228 739,619 Selling, general and administrative(1) 1,727,609 19.5 1,557,646 21.2 1,328,665 21.7 169,963 228,981 Depreciation and amortization 172,201 1.9 149,089 2.0 117,401 1.9 23,112 31,688 Income from operations 1,677,910 19.0 1,361,496 18.5 1,136,468 18.6 316,414 225,028 Other income (expense), net 10,007 26,100 32,681 (16,093 ) (6,581 ) Provision for income taxes 459,339 336,333 285,531 123,006 50,802 Net income $ 1,228,57813.9 $ 1,051,26314.3 $ 883,61814.4 $ 177,315 $ 167,645Diluted earnings per share $ 4.03 $ 3.44 $ 2.85 $ 0.59 $ 0.59Other Financial Information(2) Non-GAAP income from operations and non-GAAP operating margin $ 1,820,71220.6 $ 1,484,72220.2 $ 1,240,12120.3 $ 335,990 $ 244,601Non-GAAP diluted earnings per share $ 4.38 $ 3.74 $ 3.10 $ 0.64 $ 0.64
(1) Exclusive of depreciation and amortization expense.
(2) Non-GAAP income from operations, non-GAAP operating margin and non-GAAP
diluted earnings per share are not measurements of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information and a reconciliation to the most directly comparable GAAP
Revenue-Overall. Revenue increased by 20.4% to
$8,843.2 millionduring 2013 as compared to an increase of 20.0% to $7,346.5 millionin 2012. In both years, the increase was primarily attributed to greater acceptance of our global delivery model among an increasing number of industries, continued interest in using our global delivery model as a means to reduce overall IT and operations costs, increased customer spending on discretionary projects, and continued penetration in all our geographic markets. Revenues from new customers contributed $243.4 millionand $136.5 million, representing 16.3% and 11.1% of the year-over-year revenue growth for 2013 and 2012, respectively. Our acquisitions of the C1 Groupcompanies and Equinox Consultingcontributed to new customer revenue growth in 2013. In 2013, our consulting and technology services revenues increased by approximately 18.3% and represented approximately 50.2% of total 2013 revenues, while our outsourcing services revenue increased by approximately 22.6% and constituted approximately 49.8% of total revenues. In 2012, consulting and technology services revenue increased by 20.4% and represented 49
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approximately 51.1% of total 2012 revenues, while our outsourcing services increased by approximately 19.6% and constituted approximately 48.9% of total 2012 revenues.
We had approximately 1,197 active clients as of
December 31, 2013as compared to approximately 821 and 785 active clients as of December 31, 2012and 2011, respectively. Revenues from our top five customers as a percentage of total revenues were 13.2%, 14.0% and 16.3% in 2013, 2012 and 2011, respectively. Revenues from our top ten customers as a percentage of total revenues were 22.6%, 25.0% and 27.7% in 2013, 2012 and 2011, respectively. As we continue to add new customers and increase our penetration at existing customers, we expect the percentage of revenues from our top five and top ten customers to decline over time. Revenue-Reportable Segments. Revenues by reportable business segment were as follows: (Dollars in thousands) Increase 2013 2012 2013 2012 2011 $ % $ % Financial services $ 3,717,573 $ 3,035,447 $ 2,518,422 $ 682,12622.5 $ 517,02520.5 Healthcare 2,264,826 1,934,898 1,622,157 329,928 17.1 312,741 19.3 Manufacturing/Retail/Logistics 1,868,305 1,498,668 1,197,472 369,637 24.7 301,196 25.2 Other 992,485 877,459 783,105 115,026 13.1 94,354 12.0 Total revenue $ 8,843,189 $ 7,346,472 $ 6,121,156 $ 1,496,71720.4 $ 1,225,31620.0 Revenue from our Financial Services segment grew 22.5% or $682.1 millionin 2013, as compared to 2012. This strength was driven by revenue growth of $494.1 millionfrom our banking customers who benefited from the improving economy. In this segment, revenue from customers added during 2013 was approximately $75.3 millionand represented 11.0% of the year-over-year revenue increase in this segment. During the year, key areas of focus for our Financial Services customers included cost optimization, regulatory and compliance driven initiatives, risk management, and the adoption and integration of SMAC solutions to align with shifts in consumer preferences. Revenue from our Financial Services segment grew 20.5% or $517.0 millionin 2012, as compared to 2011. During 2012, our banking and insurance customers each almost equally contributed to the year-over-year revenue increase. In 2012, revenue from customers added during that year was approximately $35.5 millionand represented 6.9% of the year-over-year revenue increase in this segment. Revenue from our Healthcare segment grew 17.1% or $329.9 millionin 2013, as compared to 2012. Our healthcare and life sciences customers contributed approximately $241.5 millionand $88.4 million, respectively, to the year-over-year revenue increase. Revenue from customers added during 2013 was approximately $30.4 millionand represented 9.2% of the year-over-year revenue increase in this segment. Growth within the segment was driven by work related to Affordable Care Act initiatives, including extended support for member enrollment and the implementation of direct to consumer programs through mobile platforms. Revenue from our Healthcare segment grew 19.3% or $312.7 millionin 2012, as compared to 2011. In 2012, growth was driven primarily by our healthcare customers, which contributed $222.4 millionto year-over-year revenue growth. Revenue from customers added during 2012 was approximately $19.8 millionand represented 6.3% of the year-over-year revenue increase in this segment. IT spending by some of our life sciences customers has been and may continue to be adversely impacted by the patent cliff affecting some of our pharmaceutical customers. Revenue from our Manufacturing/Retail/Logistics segment grew 24.7% or $369.6 millionin 2013, as compared to 2012. During 2013, growth was stronger among our manufacturing and logistics customers, where revenue increased by approximately $200.0 millionas compared to approximately $169.6 millionfor our retail and hospitality customers. Revenue from customers added during 2013 was approximately $79.9 millionand represented 21.6% of the year-over-year revenue increase in this segment. Demand within this segment was 50
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driven by multichannel commerce implementation and integration efforts, supply chain consulting and implementation initiatives, and increased adoption of SMAC solutions. Revenue from our Manufacturing/Retail/Logistics segment grew 25.2% or
$301.2 millionin 2012, as compared to 2011. In 2012, growth within this segment was stronger among our retail and hospitality customers, where revenue increased by approximately $219.0 million, while revenue for our manufacturing and logistics customers increased by approximately $82.2 million. In 2012, revenue from customers added during that year was approximately $57.8 millionand represented 19.2% of the year-over-year revenue increase in this segment. Revenue from our Other segment grew 13.1% or $115.0 millionin 2013, as compared to 2012. In 2013, growth within Other was particularly strong among our high technology customers, where revenue increased by approximately $54.0 milliondue to an increase in discretionary spending. Revenue from customers added during 2013 was approximately $57.9 millionand represented 50.3% of the year-over-year revenue increase in this segment. Revenue from our Other segment grew 12.0% or $94.4 millionin 2012, as compared to 2011. In 2012, each of our operating segments within Other, including information, media and entertainment services, communications and high technology, grew slower than the company average. In 2012, revenue from customers added during that year was approximately $23.4 millionand represented 24.8% of the year-over-year revenue increase in this segment. Revenue-Geographic Locations. Revenues by geographic location were as follows: (Dollars in thousands) Increase 2013 2012 2013 2012 2011 $ % $ % North America $ 6,860,067 $ 5,836,258 $ 4,802,958 $ 1,023,80917.5 $ 1,033,30021.5 United Kingdom 942,579 764,936 698,853 177,643 23.2 66,083 9.5 Rest of Europe 636,626 430,554 398,622 206,072 47.9 31,932 8.0 Europe-Total 1,579,205 1,195,490 1,097,475 383,715 32.1 98,015 8.9 Rest of World 403,917 314,724 220,723 89,193 28.3 94,001 42.6 Total Revenue $ 8,843,189 $ 7,346,472 $ 6,121,156 $ 1,496,71720.4 $ 1,225,31620.0 North Americacontinues to be our largest market representing approximately 77.6% of total revenue in 2013 and accounted for $1,023.8 millionof the $1,496.7 millionrevenue increase in 2013. Revenue from Europegrew 32.1% in 2013. Excluding approximately $93.5 millionof revenue from our 2013 acquisitions of the C1 Groupcompanies and Equinox Consulting, revenue from Europegrew 24.3%. The strong revenue growth in Europewas driven by Europe'seconomic recovery and the increasing acceptance of our global delivery model. Conversely, in 2012, revenue in Europegrew 8.9% year-over-year and was negatively impacted by the economic downturn in Europeduring 2012. We believe the European market is under-penetrated and represents a significant future growth opportunity for us. The acquisitions of the C1 Groupcompanies and Equinox Consultingsignificantly strengthen our local presence in Germanyand France. Revenue growth from Rest of World customers in 2013 was primarily driven by the Middle East, Singapore and Indiamarkets and, in 2012, the revenue growth for Rest of World was driven primarily by the Singapore market. We believe that Europe, the Middle East, the Asia Pacificand Latin Americaregions will continue to be areas of significant investment for us as we see these regions as growth opportunities for the long term. Cost of Revenues (Exclusive of Depreciation and Amortization Expense). Our cost of revenues consists primarily of salaries, incentive-based compensation, stock-based compensation expense, payroll taxes, employee benefits, immigration and project-related travel for technical personnel, subcontracting and sales commissions related to revenues. Our cost of revenues increased by 23.1% or $987.2 millionduring 2013 as compared to an increase of approximately 20.9% or $739.6 millionduring 2012. In both 2013 and 2012, the increase was due 51
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primarily to an increase in compensation and benefits costs, including incentive-based compensation. In 2013, compensation and benefit costs, including incentive-based compensation, increased by approximately
$870.2 millionas a result of the increase in the number of our technical personnel and higher accrual of individual bonus payouts. In 2012, the increase in compensation and benefit costs, including incentive based compensation, was approximately $660.3 millionand was due primarily to the increase in the number of our technical personnel, partially offset by the favorable impact of the depreciation of the Indian rupee versus the U.S. dollar, net of the impact of our cash flow hedge losses. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, payroll taxes, employee benefits, immigration, travel, promotion, communications, management, finance, administrative and occupancy costs. Selling, general and administrative expenses, including depreciation and amortization, increased by 11.3%, or $193.1 millionduring 2013 as compared to an increase of approximately 18.0% or $260.7 millionduring 2012. Selling, general and administrative expenses, including depreciation and amortization, decreased as a percentage of revenue to 21.5% in 2013 as compared to 23.2% in 2012 and 23.6% in 2011. In both 2013 and 2012, the decrease as a percentage of revenue was due primarily to economies of scale that allowed us to leverage our cost structure over a larger organization and the favorable impact of the depreciation of the Indian rupee versus the U.S. dollar, net of losses on our cash flow hedges. Income from Operations and Operating Margin-Overall. Income from operations increased 23.2%, or approximately $316.4 millionin 2013 as compared to an increase of 19.8% or approximately $225.0 millionduring 2012. Our operating margin increased to 19.0% of revenues in 2013 from 18.5% of revenues in 2012, due to revenue growth outpacing headcount growth and the impact of the depreciation of the Indian rupee against the U.S. dollar, net of losses on our cash flow hedges, partially offset by increases in compensation and benefit costs, including incentive-based compensation costs. In 2012, operating margin decreased slightly to 18.5% of revenues in 2012 from 18.6% of revenues in 2011, due to continued investments to grow our business partially offset by the favorable impact of the depreciation of the Indian rupee against the U.S. dollar, net of losses on our cash flow hedges, and economies of scale that allowed us to leverage our cost structure over a larger organization. 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 209 basis points or 2.09 percentage points in 2013 and 355 basis points or 3.55 percentage points in 2012. 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 22 basis points or 0.22 percentage points.
For the years ended
We entered into foreign exchange forward 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. During the years ended December 31, 2013and 2012, the settlement of certain cash flow hedges negatively impacted our operating margin by approximately 184 basis points or 1.84 percentage points and 131 basis points or 1.31 percentage points, respectively. During 2011, the settlement of certain cash flow hedges favorably impacted our operating margin by approximately 31 basis points or 0.31 percentage points.
2 Non-GAAP operating margin is not a measurement of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information and a reconciliation to the most directly comparable GAAP financial measure. 52
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Segment Operating Profit. Segment operating profits were as follows:
(Dollars in thousands) Increase 2013 2012 2013 2012 2011 $ % $ % Financial Services
$ 1,212,099 $ 998,339 $ 872,267 $ 213,76021.4 $ 126,07214.5 Healthcare 829,916 724,454
625,052 105,462 14.6 99,402 15.9 Manufacturing/Retail/Logistics 630,250 527,970 440,416 102,280 19.4 87,554 19.9 Other
254,145 30,305 10.5 33,907 13.3
Total segment operating profit 2,990,622 2,538,815 2,191,880 451,807 17.8 346,935 15.8 Less: unallocated costs(1) 1,312,712 1,177,319 1,055,412 135,393 11.5 121,907 11.6 Income from operations
$ 1,677,910 $ 1,361,496 $ 1,136,468 $ 316,41423.2 $ 225,02819.8
for the years ended 2013, 2012 and 2011, respectively.
The increase in segment operating profit within all reportable segments during 2013 and 2012 was attributable primarily to increased revenues and the favorable impact of the depreciation of the Indian rupee versus the U.S. dollar, partially offset by an increase in compensation and benefit costs resulting primarily from additional headcount to support our revenue growth and continued investment in sales and marketing. Other Income (Expense), Net. Total other income (expense), net consists primarily of foreign currency exchange gains and (losses) and interest income. The following table sets forth, for the periods indicated, Total other income (expense), net: (Dollars in thousands) Increase (Decrease) 2013 2012 2011 2013 2012 Foreign currency exchange (losses)
$ (55,214 ) $ (11,745 ) $ (32,400 ) $ (43,469 ) $ 20,655Gains (losses) on foreign exchange forward contracts not designated as hedging instruments 14,084 (8,270 )
23,621 22,354 (31,891 )
Net foreign currency exchange (losses) (41,130 ) (20,015 ) (8,779 ) (21,115 ) (11,236 ) Interest income 48,896 44,514 39,249 4,382 5,265 Other, net 2,241 1,601 2,211 640 (610 )
Total other income (expense), net
The foreign currency exchange losses in all the years presented were primarily attributed to the remeasurement of the Indian rupee denominated net monetary assets on the books of our
Indiasubsidiaries to the U.S. dollar functional currency. The gains (losses) on foreign exchange forward contracts not designated as hedging instruments relate to the realized and unrealized gains on foreign exchange forward contracts entered into primarily to offset foreign currency exposure to Indian rupee denominated net monetary assets. As of December 31, 2013, the notional value of our undesignated hedges was $279.3 million. The increase in interest income in 2013 and 2012 was primarily attributed to the increase in average invested balances partially offset by the depreciation of the Indian rupee against the U.S. dollar. 53
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Provision for Income Taxes. The provision for income taxes was
$459.3 millionin 2013, $336.3 millionin 2012 and $285.5 millionin 2011. The effective income tax rate increased to 27.2% in 2013 from 24.2% in 2012 due primarily to a shift in the geographic mix of our current year earnings towards countries with higher statutory rates, an increase in the Indiastatutory rate effective April 1, 2013, and a scheduled reduction of certain income tax holiday benefits in Indiain 2013. The effective income tax rate decreased slightly to 24.2% in 2012 from 24.4% in 2011, due primarily to favorable discrete items in 2012 partially offset by the scheduled reduction of certain income tax holiday benefits in Indiain 2012. Net Income. Net income increased to approximately $1,228.6 millionin 2013 from approximately $1,051.3 millionin 2012 and approximately $883.6 millionin 2011. Net income as a percentage of revenues decreased to 13.9% in 2013 from 14.3% in 2012 and 14.4% in 2011. In 2013, the decrease in net income as a percentage of revenues was a result of the increase in the provision for income taxes and an increase in net foreign currency exchange losses, partially offset by the increase in the operating margin.
Non-GAAP Financial Measures
Portions of our disclosure, including the following table, include non-GAAP income from operations, non-GAAP operating margin, and non-GAAP diluted earnings per share. 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 measures used by other companies. In addition, these non-GAAP measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of Cognizant's non-GAAP financial measures to the corresponding GAAP measures should be carefully evaluated. Historically, we sought to manage the company to a targeted operating margin, excluding stock-based compensation expense, of 19% to 20% of revenues. Beginning with 2013, we continue to seek to manage the company to the same targeted operating margin, but we now also exclude acquisition-related charges, in addition to excluding stock-based compensation expense, in setting our internal operating targets. We believe providing investors with an operating view consistent with how we manage the company provides enhanced transparency into the operating results of the company. For our internal management reporting and budgeting purposes, we use non-GAAP financial information that does not include stock-based compensation expense and acquisition-related charges for financial and operational decision making, to evaluate period-to-period comparisons and for making comparisons of our operating results to those of our competitors. Therefore, it is our belief that the use of non-GAAP financial measures excluding these costs provides a meaningful measure for investors to evaluate our financial performance. Accordingly, we believe that the presentation of non-GAAP income from operations, non-GAAP operating margin and non-GAAP diluted earnings per share, when read in conjunction with our reported GAAP results, 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 measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and exclude costs that are recurring, namely stock-based compensation expense and certain acquisition-related charges. 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 this limitation by providing specific information regarding the GAAP amounts excluded from non-GAAP income from operations, non-GAAP operating margin and non-GAAP diluted earnings per share to allow investors to evaluate such non-GAAP financial measures with financial measures calculated in accordance with GAAP. 54
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The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the years ended
(Dollars in thousands, except per share amounts)
% of % of % of 2013 Revenues 2012 Revenues 2011 Revenues GAAP income from operations and operating margin
$ 1,677,91019.0 $ 1,361,49618.5 $ 1,136,46818.6 Add: Stock-based compensation expense 118,800 1.3 107,355 1.5 90,232 1.5 Add: Acquisition-related charges(1) 24,002 0.3 15,871 0.2 13,421 0.2 Non-GAAP income from operations and non-GAAP operating margin $ 1,820,71220.6 $ 1,484,72220.2 $ 1,240,12120.3 GAAP diluted earnings per share $ 4.03 $ 3.44 $ 2.85Add: non-GAAP adjustments per diluted share 0.35 0.30 0.25 Non-GAAP diluted earnings per share $ 4.38 $ 3.74 $ 3.10
(1) Acquisition-related charges include, when applicable, amortization of
purchased intangible assets included in the depreciation and amortization
expense line on our consolidated statements of operations, external deal
costs, acquisition-related retention bonuses, integration costs, changes in
the fair value of contingent consideration liabilities, charges for
impairment of acquired intangible assets and other acquisition-related costs.
Liquidity and Capital Resources
December 31, 2013, we had cash, cash equivalents and short-term investments of $3,747.5 million. We have used, and plan to use, such cash for expansion of existing operations, including our offshore development and delivery centers, continued development of new service lines, acquisitions of related businesses, formation of joint ventures, stock repurchases and general corporate purposes, including working capital. As of December 31, 2013, we had no third party debt and had working capital of approximately $4,373.4 million. Accordingly, we do not anticipate any near-term liquidity issues.
The following table provides a summary of the major cash flows and liquidity trends for the three years ended
(Dollars in thousands) Increase / Decrease 2013 2012 2011 2013 2012 Net cash from operating activities
$ 1,423,776 $ 1,172,583 $ 875,152 $ 251,193 $ 297,431Net cash (used) in investing activities (730,763 ) (570,046 ) (850,281 ) (160,717 ) 280,235 Net cash (used) in financing activities (30,867 ) (342,988 ) (255,455 ) 312,121 (87,533 ) Cash, cash equivalents and short-term investments 3,747,473 2,863,758 2,432,264 883,715 431,494 Working capital 4,373,374 3,436,964 2,875,801 936,410 561,163 Operating activities. The increase in operating cash flow for both 2013 and 2012 was primarily attributed to the increase in net income and more efficient deployment of working capital. Trade accounts receivable increased to approximately $1,648.8 millionat December 31, 2013as compared to approximately $1,345.7 millionat December 31, 2012and approximately $1,179.0 millionat December 31, 2011. Unbilled 55
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accounts receivable increased to approximately
$226.5 millionat December 31, 2013from approximately $183.1 millionat December 31, 2012and $139.6at December 31, 2011. The increase in trade accounts receivable and unbilled receivables during 2013 was primarily due to increased revenues. We monitor turnover, aging and the collection of accounts receivable through the use of management reports that are prepared on a customer basis and evaluated by our finance staff. At December 31, 2013, our days sales outstanding, including unbilled receivables, was approximately 73 days as compared to 72 days as of December 31, 2012and 73 days as of December 31, 2011. Investing activities. The increase in net cash used in investing activities during 2013 is primarily related to higher net investment purchases and payments for acquisitions during 2013 as compared to the 2012 period, partially offset by lower spending for capital expenditures during the year. The 2012 decrease in net cash used in investing activities, when compared to 2011, is related to a decrease in net purchases of investments and lower payments for acquisitions, partially offset by higher spending for capital expenditures. Financing activities. The decrease in net cash used in financing activities during 2013 compared to 2012 primarily related to lower levels of repurchases of our common stock under our stock repurchase program in 2013. The increase in net cash used in financing activities during 2012 when compared to 2011 primarily related to higher levels of repurchases of our common stock under our stock repurchase program. As of December 31, 2013, $2,510.9 millionof our cash, cash equivalents and short-term investments was held outside the United States. We utilize certain strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. Most of the amounts held outside of the United Statescould be repatriated to the United Statesbut, under current law, would be subject to income taxes in the United States, less applicable foreign tax credits. Other than amounts for which we have already accrued U.S. taxes, we intend to indefinitely reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate these amounts to fund our cash needs in the United States. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, we will accrue the applicable amount of taxes associated with such earnings at that time. Due to the various methods by which such earnings could be repatriated in the future, it is not currently practicable to determine the amount of applicable taxes that would result from such repatriation. Our ability to expand and grow our business in accordance with current plans, to make acquisitions and form joint ventures and to meet our long-term capital requirements beyond a twelve month period will depend on many factors, including the rate, if any, at which our cash flow increases, our ability and willingness to accomplish acquisitions and joint ventures with capital stock, our continued intent not to repatriate foreign earnings, and the availability of public and private debt and equity financing. We cannot be certain that additional financing, if required, will be available on terms favorable to us, if at all. We expect our operating cash flow and cash and cash equivalents to be sufficient to meet our operating requirements for the next twelve months.
Commitments and Contingencies
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December 31, 2013, we had the following obligations and commitments to make future payments under contractual obligations and commercial commitments: Payments due by period Less than More than Total 1 year 1-3 years 3-5 years 5 years (in thousands) Operating leases $ 673,337 $ 135,745 $ 216,168 $ 133,990 $ 187,434Fixed capital commitments(1) 63,260 63,260 - - - Other purchase commitments(2) 81,561 48,345 33,216 - - Total $ 818,158 $ 247,350 $ 249,384 $ 133,990 $ 187,434
(1) Relates to our
(2) Other purchase commitments include, among other things, communications and
information technology obligations, as well as other obligations in the ordinary course of business that we cannot cancel or where we would be required to pay a termination fee in the event of cancellation. As of
December 31, 2013, we had $96.6 millionof unrecognized tax benefits. This represents the tax benefits associated with certain tax positions on our domestic and international tax returns that have not been recognized on our financial statements due to uncertainty regarding their resolution. The resolution of these income tax positions with the relevant taxing authorities is at various stages and therefore we are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters. We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the outcome of such claims and legal actions, if decided adversely, is not expected to have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, many of our engagements involve projects that are critical to the operations of our customers' business and provide benefits that are difficult to quantify. Any failure in a customer's systems or our failure to meet our contractual obligations to our clients, including any breach involving a customer's confidential information or sensitive data, or our obligations under applicable laws or regulations could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Although we attempt to contractually limit our liability for damages arising from negligent acts, errors, mistakes, or omissions in rendering our services, there can be no assurance that the limitations of liability set forth in our contracts will be enforceable in all instances or will otherwise protect us from liability for damages. Although we have general liability insurance coverage, including coverage for errors or omissions, there can be no assurance that such coverage will cover all types of claims, continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Foreign Currency Risk
Overall, we believe that we have limited revenue risk resulting from movement in foreign currency exchange rates as approximately 77.6% of our revenues during 2013 were generated from customers located in
North America. However, a portion of our costs in India, representing approximately 27.3% of our global operating costs during 2013, are denominated in the Indian rupee and are subject to foreign exchange rate fluctuations. These foreign currency exchange rate fluctuations have an impact on our results of operations. In addition, a portion of our balance sheet is exposed to foreign currency exchange rate fluctuations, which may result in non-operating foreign currency exchange gains or losses upon remeasurement. In 2013, we reported foreign currency exchange losses, exclusive of hedging gains or losses, of approximately $55.2 million, which 57
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were primarily attributed to the remeasurement of the Indian rupee denominated net monetary assets on the books of our
Indiasubsidiaries to the U.S. dollar functional currency. On an ongoing basis, we manage a portion of this risk by limiting our net monetary asset exposure to certain currencies in our foreign subsidiaries, primarily the Indian rupee. We entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of certain Indian rupee denominated payments in India. Cognizant Indiaconverts U.S. dollar receipts from intercompany billings to Indian rupees to fund local expenses. These hedges to buy Indian rupees and sell U.S. dollars are intended to partially offset the impact of movement of exchange rates on future operating costs. We reported losses of $163.0 millionin 2013 and $96.1 millionin 2012, on contracts that settled during these periods. As of December 31, 2013, we have outstanding contracts with a notional value of $2,340.0 millionand weighted average forward rate of 57.2 rupeesto the U.S. dollar. These contracts are scheduled to mature as follows: outstanding contracts with a notional value of $1,200.0 millionand a weighted average forward rate of 54.1 rupeesto the U.S. dollar scheduled to mature in 2014; outstanding contracts with a notional value of $900.0 millionand a weighted average forward rate of 58.6 rupeesto the U.S. dollar scheduled to mature in 2015; and outstanding contracts with a notional value of $240.0 millionand a weighted average forward rate of 67.2 rupeesto the U.S. dollar scheduled to mature in 2016. Our foreign subsidiaries are exposed to foreign exchange rate risk for transactions denominated in currencies other than the functional currency of the respective subsidiary. We also use foreign exchange forward contracts to hedge balance sheet exposure to certain monetary assets and liabilities denominated in currencies other than the functional currency of the subsidiary. These contracts are not designated as hedges and are intended to offset the foreign currency exchange gains or losses upon remeasurement of these net monetary assets. We entered into a series of foreign exchange forward contracts scheduled to mature in 2014 which are used to hedge our foreign currency denominated net monetary assets. At December 31, 2013, the notional value of the outstanding contracts was $279.3 millionand the related fair value was an asset of $9.9 million. During 2013, inclusive of gains of $14.1 millionon our undesignated balance sheet hedges, we reported net foreign currency exchange losses of approximately $41.1 million.
Off-Balance Sheet Arrangements
Other than our foreign exchange forward contracts, there were no off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons in 2013, 2012 and 2011 that have, or are reasonably likely to have, a current or future effect on the company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Effects of Inflation Our most significant costs are the salaries and related benefits for our programming staff and other professionals. In certain regions, competition for professionals with advanced technical skills necessary to perform our services has caused wages to increase at a rate greater than the general rate of inflation. As with other service providers in our industry, we must adequately anticipate wage increases, particularly on our fixed-price contracts. Historically, we have experienced increases in compensation and benefit costs, including incentive-based compensation, in
India; however, this has not had a material impact on our results of operations as we have been able to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, mix of professional staff and utilization levels and achieving other operating efficiencies. There can be no assurance that we will be able to offset such cost increases in the future.
Critical Accounting Estimates and Risks
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 accounting 58
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principles generally accepted in
the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. On an on-going basis, we evaluate our estimates. The most significant estimates relate to the recognition of revenue and profits based on the percentage of completion method of accounting for certain fixed-bid contracts, the allowance for doubtful accounts, income taxes, valuation of goodwill and other long-lived assets, valuation of investments and derivative financial instruments, assumptions used in valuing stock-based compensation arrangements, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual amounts may differ from the estimates used in the preparation of the accompanying consolidated financial statements. Our significant accounting policies are described in Note 1 to the accompanying consolidated financial statements. We believe the following critical accounting policies require a higher level of management judgments and estimates than others in preparing the consolidated financial statements: Revenue Recognition. Revenues related to our highly complex information technology application development contracts, which are predominantly fixed-price contracts, are recognized as the services are performed using the percentage of completion method of accounting. Under this method, total contract revenue during the term of an agreement is recognized on the basis of the percentage that each contract's total labor cost to date bears to the total expected labor cost (cost to cost method). This method is followed where reasonably dependable estimates of revenues and costs can be made. Management reviews total expected labor costs on an ongoing basis. Revisions to our estimates may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified. If our estimates indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated costs of the contract exceed the estimated total revenues that will be generated by the contract and are included in cost of revenues in our consolidated statement of operations. Changes in estimates related to our revenue contracts and contract losses were immaterial for the periods presented. Stock-Based Compensation. Utilizing the fair value recognition provisions prescribed by the authoritative guidance, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term over which the stock awards will be outstanding before they are exercised, the expected volatility of our stock and the number of stock-based awards that are expected to be forfeited. In addition, for performance stock units, we are required to estimate the most probable outcome of the performance conditions in order to determine the amount of stock compensation costs to be recorded over the vesting period. If actual results differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted. Income Taxes. Determining the consolidated provision for income tax expense, 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. The consolidated provision for income taxes may also change period to period based on non-recurring events, such as the settlement of income tax audits and changes in tax laws, regulations, or accounting principles. Our provision for income taxes also includes the impact of reserves established for uncertain income tax positions, as well as the related interest, which can involve 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 59
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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. 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. Significant judgment is also required in determining any valuation allowance recorded against deferred income tax assets. In assessing the need for a valuation allowance, we consider all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event we change our determination as to the amount of deferred income tax assets that can be realized, we will adjust the valuation allowance with a corresponding impact recorded to income tax expense in the period in which such determination is made. Our Indian subsidiaries, collectively referred to as Cognizant India, are primarily export-oriented companies and are eligible for certain income tax holiday benefits granted by the Indian government for export activities conducted within SEZs for periods of up to 15 years. We have constructed and expect to continue to locate most of our newer development facilities in SEZs. All Indian profits, including those generated within SEZs, are subject to the MAT, at the current rate of approximately 20.0%. Any MAT paid is creditable against future corporate income tax within a 10-year expiration period, subject to limitations. Currently, we anticipate utilizing our existing MAT balances against our future corporate income tax obligations in
India. However, our ability to do so could be impacted by possible changes to the Indian tax laws as well as the future financial results of Cognizant India. Derivative Financial Instruments. Derivative financial instruments are accounted for in accordance with the authoritative guidance which requires that each derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value as of the reporting date. Our derivative financial instruments consist of foreign exchange forward contracts. We estimate the fair value of each foreign exchange forward contract by using a present value of expected cash flows model. This model utilizes various assumptions, including, but not limited to timing and amounts of cash flows, discount rates, and credit risk factors. The use of different assumptions could have a positive or negative effect on our results of operations and financial condition. Investments. Our investment portfolio is comprised primarily of time deposits, mutual funds invested in fixed income securities and U.S. dollar denominated corporate bonds, municipal bonds, certificates of deposit, commercial paper, debt issuances by the U.S. government, U.S. government agencies, foreign governments and supranational entities and asset-backed securities. The asset-backed securities included Government National Mortgage Association(GNMA) mortgage backed securities and securities backed by auto loans, credit card receivables, and other receivables. The years of issuance of our asset-backed securities fall in the 2004 to 2013 range. We utilize various inputs to determine the fair value of our investment portfolio. To the extent they exist, unadjusted quoted market prices for identical assets in active markets (Level 1) or quoted prices on similar assets (Level 2) are utilized to determine the fair value of each investment in our portfolio. In the absence of quoted prices or liquid markets, valuation techniques would be used to determine fair value of any investments that require inputs that are both significant to the fair value measurement and unobservable (Level 3). Valuation techniques are based on various assumptions, including, but not limited to timing and amounts of cash flows, discount rates, rate of return, and adjustments for nonperformance and liquidity. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on our results of operations and financial condition. See Note 10 to our consolidated financial statements for additional information related to our security valuation methodologies.
We periodically evaluate if unrealized losses, as determined based on the security valuation methodologies discussed above, on individual securities classified as available-for-sale in the investment portfolio are considered to be other-than-temporary. The analysis of other-than-temporary impairment requires the use of
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various assumptions, including, but not limited to, the length of time an investment's book value is greater than fair value, the severity of the investment's decline, any credit deterioration of the investment, whether management intends to sell the security and whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is generally recorded to income and a new cost basis in the investment is established. Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is determined by evaluating the relative credit-worthiness of each customer, historical collections experience and other information, including the aging of the receivables. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Goodwill. We evaluate goodwill for impairment at least annually, or as circumstances warrant. When determining the fair value of our reporting units, we utilize various assumptions, including projections of future cash flows. Any adverse changes in key assumptions about our businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge. Based upon our most recent evaluation of goodwill, there are no significant risks of impairment for any of our reporting units. As of
December 31, 2013, our goodwill balance was $444.2 million. Long-Lived Assets and Intangibles. We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we will recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset. The measurement for such an impairment loss is then based on the fair value of the asset. If such assets were determined to be impaired, it could have a material adverse effect on our business, results of operations and financial condition. Risks. The majority of our development and delivery centers, including a majority of our employees, are located in India. As a result, we may be subject to certain risks associated with international operations, including risks associated with foreign currency exchange rate fluctuations and risks associated with the application and imposition of protective legislation and regulations relating to import and export or otherwise resulting from foreign policy or the variability of foreign economic or political conditions. Additional risks associated with international operations include difficulties in enforcing intellectual property rights, limitations on immigration programs, the burdens of complying with a wide variety of foreign laws, potential geo-political and other risks associated with terrorist activities and local and cross border conflicts, and potentially adverse tax consequences, tariffs, quotas and other barriers. We are also subject to risks associated with our overall compliance with Section 404 of the Sarbanes-Oxley Act of 2002. The inability of our management to ensure the adequacy and effectiveness of our internal control over financial reporting for future year ends could result in adverse consequences to us, including, but not limited to, a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our stock to decline. See PartI, Item 1A. "Risk Factors."
Recently Adopted Accounting Pronouncements
February 2013, the Financial Accounting Standards Board, or FASB, issued additional guidance related to accumulated other comprehensive income, requiring the presentation of significant amounts reclassified out of accumulated other comprehensive income to the respective line items in the statement of operations. For those amounts required by U.S. GAAP to be reclassified to earnings in their entirety in the same reporting period, this presentation is required either on the statement of operations or in a single footnote. For items that are not required to be reclassified in their entirety to earnings, the presentation requirement can be met by cross-referencing disclosures elsewhere in the footnotes. We adopted this standard on January 1, 2013and included the required disclosures in Note 7 to our consolidated financial statements. The adoption of this standard affects financial statement presentation only and has no effect on our financial condition or consolidated results of operations. 61
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December 2011, the FASB issued guidance requiring enhanced disclosures related to the nature of an entity's rights to offset and any related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed and the related net exposure. In January 2013, the FASB issued an additional update clarifying the scope of this guidance. We adopted this standard on January 1, 2013and included the required disclosures in Note 11 to our consolidated financial statements. The adoption of this standard affects financial statement disclosures only and has no effect on our financial condition or consolidated results of operations.
New Accounting Pronouncement
July 2013, the FASB issued new guidance which requires the netting of any unrecognized tax benefits against all available same-jurisdiction deferred tax carryforward assets that would apply if the uncertain tax positions were settled. This standard will be effective for periods beginning on or after January 1, 2014. The adoption of this standard affects financial statement presentation only and will have no effect on our financial condition or consolidated results of operations.
Forward Looking Statements
The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "could," "would," "plan," "intend," "estimate," "predict," "potential," "continue," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in various filings made by us with the
Securities and Exchange Commission, or press releases or oral statements made by or with the approval of one of our authorized executive officers. These forward-looking statements, such as statements regarding anticipated future revenues or operating margins, contract percentage completions, earnings, capital expenditures, liquidity, plans, objectives, and other statements regarding matters that are not historical facts, are based on our current expectations, estimates and projections, management's beliefs, and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including, but not limited to, continuing worsening economic conditions in the United Statesand Europe; the loss of customers; the rate of growth in the use of technology in business and the type and level of technology spending by our clients; the risk of reputational harm to us; increased competition from other service providers; the risk that we may not be able to keep pace with the rapidly evolving technological environment; competition for hiring highly-skilled professionals or the loss of key personnel; the risk that we may not be able to control our costs or maintain favorable pricing and utilization rates; the risk that we might not be able to maintain effective internal controls; the risk that we may not be able to enforce non-competition agreements with our executives; the risk of liability resulting from security breaches; our inability to successfully acquire or integrate target companies; changes in domestic and international regulations and legislation, including immigration and anti-outsourcing legislation; the effect of fluctuations in the Indian rupee and other currency exchange rates; the effect of our use of derivative instruments; the risk of war, terrorist activities, pandemics and natural disasters; the possibility that me may choose to repatriate foreign earnings or that those earnings may become subject to tax on a U.S. basis; the possibility that we may lose certain tax benefits provided to companies in our industry by India; the risk that we may not be able to enforce or protect our intellectual property rights, or that we may infringe upon the intellectual property rights of others; the possibility that we could lose our ability to utilize the intellectual property rights of others; and the factors set 62
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forth in Part I, in the section entitled "Item 1A. Risk Factors" in this report. You are advised to consult any further disclosures we make on related subjects in the reports we file with the
Securities and Exchange Commission, including this report in the sections titled "Part I, Item 1. Business," "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.