Cognizant(CTSH) - 2024 Q3 - Quarterly Report

GLOSSARY This section defines key terms and abbreviations used throughout the financial report FORWARD LOOKING STATEMENTS This section outlines inherent uncertainties and risks associated with future projections and business expectations PART I. FINANCIAL INFORMATION This part presents the company's unaudited consolidated financial statements and related notes for the reported periods Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including the statements of financial position, operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, revenue disaggregation, business combinations, restructuring, investments, debt, income taxes, derivatives, fair value measurements, and accumulated other comprehensive income Consolidated Statements of Financial Position (Unaudited) This section provides a snapshot of the company's assets, liabilities, and equity at specific reporting dates Balance Sheet Highlights (September 30, 2024 vs. December 31, 2023) | Metric | Sep 30, 2024 (Millions $) | Dec 31, 2023 (Millions $) | | :----------------------------- | :------------------------ | :------------------------ | | Total Assets | 20,164 | 18,483 | | Total Liabilities | 5,712 | 5,256 | | Total Stockholders' Equity | 14,452 | 13,227 | | Cash and cash equivalents | 2,013 | 2,621 | | Goodwill | 7,132 | 6,085 | | Intangible assets, net | 1,681 | 1,149 | | Long-term debt | 1,183 | 606 | Consolidated Statements of Operations (Unaudited) This section details the company's revenues, expenses, and net income for the reported periods Key Financial Performance (Three Months Ended September 30) | Metric | Sep 30, 2024 (Millions $) | Sep 30, 2023 (Millions $) | Change (Millions $) | Change (%) | | :----------------------------- | :------------------------ | :------------------------ | :------------------ | :--------- | | Revenues | 5,044 | 4,897 | 147 | 3.0% | | Income from operations | 738 | 686 | 52 | 7.6% | | Net income | 582 | 525 | 57 | 10.9% | | Diluted earnings per share | 1.17 | 1.04 | 0.13 | 12.5% | | Restructuring charges | 33 | 72 | (39) | (54.2%) | Key Financial Performance (Nine Months Ended September 30) | Metric | Sep 30, 2024 (Millions $) | Sep 30, 2023 (Millions $) | Change (Millions $) | Change (%) | | :----------------------------- | :------------------------ | :------------------------ | :------------------ | :--------- | | Revenues | 14,654 | 14,595 | 59 | 0.4% | | Income from operations | 2,141 | 1,965 | 176 | 9.0% | | Net income | 1,694 | 1,568 | 126 | 8.0% | | Diluted earnings per share | 3.41 | 3.09 | 0.32 | 10.4% | | Restructuring charges | 85 | 189 | (104) | (55.0%) | Consolidated Statements of Comprehensive Income (Unaudited) This section reports the company's net income and other comprehensive income components for the reported periods Comprehensive Income (Three Months Ended September 30) | Metric | Sep 30, 2024 (Millions $) | Sep 30, 2023 (Millions $) | | :------------------------------------- | :------------------------ | :------------------------ | | Net income | 582 | 525 | | Foreign currency translation adjustments | 206 | (129) | | Other comprehensive income (loss) | 192 | (144) | | Comprehensive income | 774 | 381 | Comprehensive Income (Nine Months Ended September 30) | Metric | Sep 30, 2024 (Millions $) | Sep 30, 2023 (Millions $) | | :------------------------------------- | :------------------------ | :------------------------ | | Net income | 1,694 | 1,568 | | Foreign currency translation adjustments | 132 | (35) | | Other comprehensive income (loss) | 136 | 14 | | Comprehensive income | 1,830 | 1,582 | Consolidated Statements of Stockholders' Equity (Unaudited) This section outlines changes in stockholders' equity resulting from net income, dividends, and stock transactions Stockholders' Equity Changes (December 31, 2023 to September 30, 2024) | Metric | Dec 31, 2023 (Millions $) | Sep 30, 2024 (Millions $) | | :------------------------------------- | :------------------------ | :------------------------ | | Total Stockholders' Equity | 13,227 | 14,452 | | Retained Earnings | 13,301 | 14,347 | | Accumulated Other Comprehensive Income (Loss) | (94) | 42 | - Key Activities Impacting Equity (Nine Months Ended September 30, 2024): * Net income: $1,694 million * Repurchases of common stock: $(451) million * Dividends declared: $(450) million * Common stock issued, acquisition related: $113 million[16] Consolidated Statements of Cash Flows (Unaudited) This section summarizes cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Type | Sep 30, 2024 (Millions $) | Sep 30, 2023 (Millions $) | | :----------------------------- | :------------------------ | :------------------------ | | Net cash provided by operating activities | 1,204 | 1,593 | | Net cash (used in) investing activities | (1,567) | (499) | | Net cash (used in) financing activities | (313) | (1,154) | | (Decrease) in cash, cash equivalents | (704) | (90) | | Cash and cash equivalents, end of period | 2,013 | 2,204 | - Key Drivers of Cash Flow Changes (Nine Months Ended September 30, 2024): * Operating activities: Decrease primarily due to a $360 million payment related to the ITD dispute in January 2024[19][20][156] * Investing activities: Increase in cash used primarily due to higher payments for business combinations ($1,615 million in 2024 vs. $409 million in 2023)[19][20][158] * Financing activities: Decrease in cash used primarily due to $600 million in borrowings under the revolving credit facility and lower repurchases of common stock ($451 million in 2024 vs. $751 million in 2023)[19][20][159] Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations of accounting policies and specific financial statement items Note 1 — Interim Consolidated Financial Statements This note describes the basis of presentation for interim financial statements and new accounting pronouncements - New Accounting Pronouncements: * Segment Reporting (Topic 280): Effective for annual periods starting in 2024 and interim periods starting in 2025. Adoption not expected to have a significant impact on disclosures[22] * Income Taxes (Topic 740): Effective for annual periods starting in 2025. Company is currently evaluating the impact on its disclosures[22] Note 2 — Revenues and Trade Accounts Receivable This note details revenue recognition policies, disaggregated revenues by segment, and the allowance for credit losses Disaggregated Revenues (Three Months Ended September 30, 2024) | Segment | Revenues (Millions $) | | :----------------------------- | :-------------------- | | Financial Services (FS) | 1,486 | | Health Sciences (HS) | 1,514 | | Products & Resources (P&R) | 1,228 | | Communications, Media and Technology (CMT) | 816 | | Total | 5,044 | Disaggregated Revenues (Nine Months Ended September 30, 2024) | Segment | Revenues (Millions $) | | :----------------------------- | :-------------------- | | Financial Services (FS) | 4,318 | | Health Sciences (HS) | 4,391 | | Products & Resources (P&R) | 3,487 | | Communications, Media and Technology (CMT) | 2,458 | | Total | 14,654 | - Remaining Performance Obligations (as of September 30, 2024): * Aggregate amount: $4,700 million[34] * Expected recognition within 2 years: Approximately 55%[34] * Expected recognition within 5 years: Approximately 85%[34] Allowance for Credit Losses (Nine Months Ended September 30) | Metric | 2024 (Millions $) | 2023 (Millions $) | | :----------------------------- | :---------------- | :---------------- | | Beginning balance | 32 | 43 | | Credit loss expense | 7 | 11 | | Write-offs | (9) | (18) | | Ending balance | 30 | 36 | Note 3 — Business Combinations This note discusses recent acquisitions and their preliminary purchase price allocations, including goodwill and intangible assets - Acquisitions in Nine Months Ended September 30, 2024: * Thirdera: Acquired 100% ownership on January 22, 2024, specializing in ServiceNow platform solutions[36] * Belcan: Acquired 100% ownership on August 26, 2024, a global supplier of Engineering Research & Development services[37] - Belcan Acquisition Details: * Cash paid (net of cash acquired): $1,195 million[37] * Class A common stock issued: 1,470,589 shares, valued at $113 million[37] Preliminary Purchase Price Allocation (Thirdera and Belcan) | Asset/Liability | Total (Millions $) | | :----------------------------- | :----------------- | | Non-deductible goodwill | 846 | | Tax-deductible goodwill | 166 | | Customer relationship assets | 612 | | Total Purchase Price | 1,791 | - Goodwill from Belcan acquisition allocated to Products and Resources segment[39] Note 4 — Restructuring Charges This note outlines costs and progress related to the NextGen restructuring program, including employee separation and facility exit costs - NextGen Program Overview: * Initiated in Q2 2023 to simplify operating model, optimize corporate functions, and realign office space[40][99] * Expected completion by end of 2024[40][99] Restructuring Charges (Three Months Ended September 30) | Cost Type | 2024 (Millions $) | 2023 (Millions $) | | :----------------------------- | :---------------- | :---------------- | | Employee separation costs | 29 | 15 | | Facility exit costs | 4 | 55 | | Third party and other costs | — | 2 | | Total restructuring charges | 33 | 72 | Restructuring Charges (Nine Months Ended September 30) | Cost Type | 2024 (Millions $) | 2023 (Millions $) | | :----------------------------- | :---------------- | :---------------- | | Employee separation costs | 55 | 93 | | Facility exit costs | 29 | 92 | | Third party and other costs | 1 | 4 | | Total restructuring charges | 85 | 189 | - Expected total costs for NextGen Program: Approximately $335 million. Costs incurred as of September 30, 2024: $314 million[42][100][106] Note 5 — Investments This note reports balances and changes in short-term and long-term investments, including equity method investments Investment Balances (September 30, 2024 vs. December 31, 2023) | Investment Type | Sep 30, 2024 (Millions $) | Dec 31, 2023 (Millions $) | | :----------------------------- | :------------------------ | :------------------------ | | Total short-term investments | 12 | 14 | | Total long-term investments | 90 | 435 | - Long-term Investment Change Driver: Restricted time deposits decreased from $355 million to $0, primarily due to the required payment related to the ITD dispute in January 2024[43][55][148] - Equity method investment in technology sector: $84 million (Sep 30, 2024) vs. $74 million (Dec 31, 2023)[46] Note 6 — Accrued Expenses and Other Current Liabilities This note presents a breakdown of accrued expenses and other current liabilities Accrued Expenses and Other Current Liabilities (September 30, 2024 vs. December 31, 2023) | Category | Sep 30, 2024 (Millions $) | Dec 31, 2023 (Millions $) | | :----------------------------- | :------------------------ | :------------------------ | | Compensation and benefits | 1,439 | 1,511 | | Income taxes | 141 | 27 | | Professional fees | 167 | 146 | | Total | 2,504 | 2,425 | Note 7 — Debt This note details the company's credit facilities and long-term debt obligations, including compliance with covenants - Credit Agreement Details: * Term Loan: $650 million[47] * Unsecured revolving credit facility: $1,850 million[47] * Maturity: October 2027 for both[47] - Borrowing in Q3 2024: $600 million borrowed under revolving credit facility to partially fund Belcan acquisition[47][159] Long-term Debt Balances (September 30, 2024 vs. December 31, 2023) | Debt Type | Sep 30, 2024 (Millions $) | Dec 31, 2023 (Millions $) | | :----------------------------- | :------------------------ | :------------------------ | | Notes outstanding under revolving credit facility | 600 | — | | Term Loan (net of current maturities and unamortized deferred financing costs) | 583 | 606 | | Long-term debt, net of current maturities | 1,183 | 606 | - Compliance: Company was in compliance with all debt covenants as of September 30, 2024[48] Note 8 — Income Taxes This note explains effective tax rates, deferred taxes, and significant tax disputes, including the ITD dispute Effective Income Tax Rates (Three Months Ended September 30) | Period | Effective Income Tax Rate | | :----------------------------- | :------------------------ | | Sep 30, 2024 | 22.7% | | Sep 30, 2023 | 26.8% | Effective Income Tax Rates (Nine Months Ended September 30) | Period | Effective Income Tax Rate | | :----------------------------- | :------------------------ | | Sep 30, 2024 | 23.4% | | Sep 30, 2023 | 23.2% | - Tax Rate Benefit (Q3 2024): Benefited from a $40 million deferred tax asset related to foreign tax credits[51] - ITD Dispute (2016 Share Repurchase): * Disputed amount: 33 billion Indian rupees ($394 million at Sep 30, 2024 exchange rate)[54] * Deposit made in January 2024: 30 billion Indian rupees ($355 million at Dec 31, 2023 exchange rate) to proceed with appeal at High Court[55] * Deposit with ITD as of Sep 30, 2024: $412 million (presented in "Other noncurrent assets")[56] * Company believes all applicable taxes have been paid and has not recorded any reserves[57] Note 9 — Derivative Financial Instruments This note describes the company's use of derivative instruments for hedging and their fair value measurements Derivative Financial Instruments (Fair Values as of September 30, 2024) | Designation | Assets (Millions $) | Liabilities (Millions $) | | :----------------------------- | :------------------------ | :------------------------- | | Cash flow hedging instruments | 22 | 3 | | Not designated as hedging instruments | 3 | 2 | | Total | 25 | 5 | Notional Value of Outstanding Contracts (as of September 30, 2024) | Maturity Year | Notional Value (Millions $) | | :----------------------------- | :-------------------------- | | 2024 | 603 | | 2025 | 1,725 | | 2026 | 595 | | Total | 2,923 | - Expected reclassification of net gains from cash flow hedges into earnings within 12 months: $14 million (net of tax)[60] - Realized gains on foreign exchange forward contracts not designated as hedging instruments: $14 million for Q3 2024, $42 million for YTD 2024[66] Note 10 — Fair Value Measurements This note explains the fair value hierarchy and the measurement of financial assets and liabilities - Fair Value Hierarchy: * Level 1: Quoted prices in active markets for identical assets/liabilities[68] * Level 2: Quoted prices for similar assets/liabilities or observable market data[68] * Level 3: Unobservable inputs derived from valuation techniques[68] Financial Assets and Liabilities Measured at Fair Value (September 30, 2024) | Item | Level 1 (Millions $) | Level 2 (Millions $) | Level 3 (Millions $) | Total (Millions $) | | :----------------------------- | :------------------- | :------------------- | :------------------- | :----------------- | | Cash equivalents: Money market funds | 364 | — | — | 364 | | Cash equivalents: Time deposits | — | 443 | — | 443 | | Short-term investments: Equity investment security | 11 | — | — | 11 | | Other current assets: Foreign exchange forward contracts | — | 23 | — | 23 | | Accrued expenses and other current liabilities: Foreign exchange forward contracts | — | (3) | — | (3) | Contingent Consideration Liabilities (Nine Months Ended September 30) | Metric | 2024 (Millions $) | 2023 (Millions $) | | :----------------------------- | :---------------- | :---------------- | | Beginning balance | 30 | 22 | | Payments | (30) | (9) | | Ending balance | — | 28 | Note 11 — Accumulated Other Comprehensive Income (Loss) This note details changes in the components of accumulated other comprehensive income (loss) Accumulated Other Comprehensive Income (Loss) (Three Months Ended September 30, 2024) | Component | Beginning Balance (Millions $) | Net Change (Millions $) | Ending Balance (Millions $) | | :------------------------------------- | :----------------------------- | :---------------------- | :-------------------------- | | Foreign currency translation adjustments | (178) | 206 | 28 | | Unrealized gains on cash flow hedges | 28 | (14) | 14 | | Total Accumulated OCI (Loss) | (150) | 192 | 42 | Accumulated Other Comprehensive Income (Loss) (Nine Months Ended September 30, 2024) | Component | Beginning Balance (Millions $) | Net Change (Millions $) | Ending Balance (Millions $) | | :------------------------------------- | :----------------------------- | :---------------------- | :-------------------------- | | Foreign currency translation adjustments | (104) | 132 | 28 | | Unrealized gains on cash flow hedges | 10 | 4 | 14 | | Total Accumulated OCI (Loss) | (94) | 136 | 42 | Note 12 — Commitments and Contingencies This note discusses ongoing legal proceedings, including litigation, tax disputes, and class action lawsuits - Syntel Litigation: Jury verdict in favor of Cognizant for $855 million (reduced to $570 million post-trial), affirmed on liability but vacated on damages by Second Circuit. USDC-SDNY granted new trial on compensatory damages[77] - India Defined Contribution Obligation: SCI ruling altered historical understanding, increasing contributions. Company accrued $117 million in Q1 2019 for prior periods. Uncertainty remains regarding retroactive application and ultimate liability[77] - Shareholder Derivative Actions: Multiple complaints filed, some dismissed, one ongoing. Limited discovery ordered on wrongful refusal of litigation demand[78][79][80][81][82] - Race/National Origin Discrimination Class Action: Jury returned a verdict in favor of plaintiffs on October 4, 2024, for the "bench terminations class." Case proceeds to second phase for individualized liability and damages, with a rebuttable presumption of discrimination. Company believes class certification was improper and will vigorously defend[86][87][88][89] Note 13 — Segment Information This note provides financial data broken down by the company's operating segments, including revenues and operating profits - Reportable Business Segments: * Financial Services (banking and insurance)[92] * Health Sciences[92] * Products and Resources (retail, consumer goods, manufacturing, logistics, energy, utilities, travel, hospitality)[92] * Communications, Media and Technology[92] - Segment operating profit is defined as income from operations before unallocated costs. Unallocated costs include corporate expenses, NextGen program expenses, a portion of depreciation and amortization, and the impact of cash flow hedge settlements[93][94] Segment Operating Profits (Three Months Ended September 30) | Segment | 2024 (Millions $) | 2023 (Millions $) | | :----------------------------- | :---------------- | :---------------- | | Financial Services | 344 | 283 | | Health Sciences | 331 | 330 | | Products and Resources | 258 | 256 | | Communications, Media and Technology | 158 | 167 | | Total segment operating profit | 1,091 | 1,036 | | Less: unallocated costs | 353 | 350 | | Income from operations | 738 | 686 | Segment Operating Profits (Nine Months Ended September 30) | Segment | 2024 (Millions $) | 2023 (Millions $) | | :----------------------------- | :---------------- | :---------------- | | Financial Services | 905 | 862 | | Health Sciences | 975 | 1,009 | | Products and Resources | 717 | 719 | | Communications, Media and Technology | 437 | 464 | | Total segment operating profit | 3,034 | 3,054 | | Less: unallocated costs | 893 | 1,089 | | Income from operations | 2,141 | 1,965 | Note 14 — Subsequent Events This note reports significant events that occurred after the reporting period but before the financial statements were issued - Dividend: On October 29, 2024, the Board of Directors approved a $0.30 per share dividend, payable November 27, 2024, to shareholders of record on November 19, 2024[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, detailing revenue drivers, operating expenses, profitability, and liquidity. It highlights the impact of the NextGen program, recent acquisitions, and ongoing legal and tax matters Executive Summary This section provides a high-level overview of the company's business, recent financial performance, and strategic outlook - Company Overview: Leading professional services company, engineering modern businesses, delivering strategic outcomes, and helping clients modernize technology, reimagine processes, and transform experiences[98] - NextGen Program: * Initiated in Q2 2023 to simplify operating model, optimize corporate functions, and consolidate office space[99] * Q3 2024 costs: $33 million (employee separation, facility exit, other)[100] * Total costs incurred since inception: $314 million[100][106] * Expected total costs: Approximately $335 million by end of 2024[100][106] Q3 2024 Financial Highlights | Metric | Value | YoY Change | | :----------------------------- | :-------------------- | :-------------------- | | Revenue | $5,044 million | Up 3.0% (2.7% CC) | | Income from Operations | $738 million | Up 7.6% | | Operating Margin (GAAP) | 14.6% | Up 60 bps | | Diluted EPS (GAAP) | $1.17 | Up 12.5% | | Adjusted Operating Margin | 15.3% | Down 20 bps | | Adjusted Diluted EPS | $1.25 | Up 7.8% | - Acquisitions Impact: Recently completed acquisitions contributed approximately 200 basis points to Q3 2024 revenue growth[101] Voluntary Attrition - Tech Services (Trailing Twelve Months) | Period | Attrition Rate | | :----------------------------- | :------------- | | September 30, 2024 | 14.6% | | September 30, 2023 | 16.2% | - Employee Count (Q3 2024): Approximately 340,100 employees, inclusive of Belcan[103] - Business Outlook: Clients' long-term focus on digital transformation into AI-ready, software-driven, data-enabled, customer-centric businesses. Company plans significant investments in AI capabilities[104][105] - Potential Future Impacts: Possible U.S. corporate income tax reform, India's Code on Social Security 2020, and amendment to India-Mauritius Income Tax Treaty could impact future results and effective tax rate[106] Results of Operations This section analyzes the company's financial performance for the reported periods, detailing revenue, expenses, and profitability drivers Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 This section compares the company's financial results for the third quarter of 2024 against the same period in the prior year - Revenue Growth (Q3 2024 vs. Q3 2023): * Total Revenues: $5,044 million, up 3.0% (2.7% in constant currency)[109][110] * Acquisitions contributed ~200 bps to revenue growth[109] * Health Sciences: Up 7.8% (7.6% CC)[112] * Products and Resources: Up 5.0% (4.6% CC), with acquisitions contributing ~750 bps[112] * Financial Services: Up 0.7% (0.5% CC)[112] * CMT: Down 3.7% (4.1% CC)[112] * North America: Up 3.8% (3.8% CC)[112] * Europe (Total): Down 0.3% (1.9% CC)[112] - Cost of Revenues: Increased by $102 million (3.2%) to $3,311 million, primarily due to increased compensation costs from merit increases, partially offset by foreign currency movements[109][114] - SG&A Expenses: Increased by $32 million (4.0%) to $833 million, driven by acquisition-related expenses and compensation costs, partially offset by NextGen savings[109][115] - Restructuring Charges: Decreased to $33 million (0.7% of revenue) from $72 million (1.5% of revenue) in Q3 2023[109][117] - Operating Margin (GAAP): Increased to 14.6% from 14.0%. Adjusted Operating Margin: Decreased to 15.3% from 15.5%[108][109] - Operating Margin Drivers: Positively impacted by NextGen net savings and foreign currency exchange rate movements (Indian rupee depreciation positively impacted by 45 bps net of hedges), negatively impacted by increased compensation costs and dilutive impact of acquisitions[103][120][122] - Other Income (Expense), Net: Decreased to $10 million from $27 million, primarily due to lower gains on undesignated foreign exchange forward contracts and lower interest income[109][126] - Provision for Income Taxes: Decreased to $(170) million from $(191) million, with effective tax rate decreasing to 22.7% from 26.8%, benefiting from a $40 million deferred tax asset[109][127] - Net Income: Increased by $57 million (10.9%) to $582 million[109][128] Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 This section compares the company's financial results for the first nine months of 2024 against the same period in the prior year - Revenue Growth (YTD 2024 vs. YTD 2023): * Total Revenues: $14,654 million, up 0.4% (0.3% in constant currency)[135][136] * Acquisitions contributed ~100 bps to revenue growth[135] * Third-party product resales contributed ~100 bps to revenue growth[137] * Financial Services: Down 2.2% (2.3% CC)[137] * Health Sciences: Up 2.6% (2.6% CC)[137] * Products and Resources: Up 0.6% (0.5% CC), with acquisitions contributing ~300 bps[137] * CMT: Up 0.8% (0.6% CC), with acquisitions contributing ~150 bps[137] * North America: Up 1.3% (1.4% CC)[137] * Europe (Total): Down 1.9% (3.2% CC)[137] - Cost of Revenues: Increased by $78 million (0.8%) to $9,661 million, due to higher compensation costs and impact of third-party product resales, partially offset by foreign currency movements[135][139] - SG&A Expenses: Decreased by $87 million (3.5%) to $2,379 million, primarily due to NextGen net savings, partially offset by acquisition-related expenses[135][140] - Restructuring Charges: Decreased to $85 million (0.6% of revenue) from $189 million (1.3% of revenue) in YTD 2023[135][142] - Operating Margin (GAAP): Increased to 14.6% from 13.5%. Adjusted Operating Margin: Increased to 15.2% from 14.8%[135][152] - Operating Margin Drivers: Positively impacted by NextGen net savings and foreign currency exchange rate movements (Indian rupee depreciation positively impacted by 43 bps net of hedges), partially offset by increased compensation costs and impact of third-party product resales[144][145] - Other Income (Expense), Net: Decreased to $57 million from $73 million, primarily due to foreign currency exchange losses and lower interest income[135][148] - Provision for Income Taxes: Increased to $(514) million from $(473) million, with effective tax rate increasing to 23.4% from 23.2%. Both periods benefited from discrete items related to U.S. state income taxes, with 2024 also benefiting from a $40 million deferred tax asset[135][149] - Net Income: Increased by $126 million (8.0%) to $1,694 million[135][151] Non-GAAP Financial Measures This section reconciles GAAP financial measures to non-GAAP adjustments for clearer insights into the company's underlying performance - Non-GAAP Measures Defined: * Adjusted Operating Margin and Adjusted Income from Operations: Exclude unusual items like NextGen charges[130] * Adjusted Diluted EPS: Excludes unusual items (NextGen charges), net non-operating foreign currency exchange gains/losses, and their tax impacts[130] * Constant Currency Revenue Growth: Revenues restated at comparative period's foreign currency exchange rates[130] Reconciliation (Three Months Ended September 30) | Metric | GAAP 2024 | Non-GAAP Adjustments | Adjusted 2024 | GAAP 2023 | Non-GAAP Adjustments | Adjusted 2023 | | :----------------------------- | :---------- | :------------------- | :------------ | :---------- | :------------------- | :------------ | | Income from Operations (Millions $) | 738 | 33 (NextGen) | 771 | 686 | 72 (NextGen) | 758 | | Operating Margin (%) | 14.6% | 0.7% | 15.3% | 14.0% | 1.5% | 15.5% | | Diluted EPS | 1.17 | 0.07 (NextGen) + 0.02 (FX) - 0.01 (Tax) | 1.25 | 1.04 | 0.14 (NextGen) + 0 (FX) - 0.02 (Tax) | 1.16 | Reconciliation (Nine Months Ended September 30) | Metric | GAAP 2024 | Non-GAAP Adjustments | Adjusted 2024 | GAAP 2023 | Non-GAAP Adjustments | Adjusted 2023 | | :----------------------------- | :---------- | :------------------- | :------------ | :---------- | :------------------- | :------------ | | Income from Operations (Millions $) | 2,141 | 85 (NextGen) | 2,226 | 1,965 | 189 (NextGen) | 2,154 | | Operating Margin (%) | 14.6% | 0.6% | 15.2% | 13.5% | 1.3% | 14.8% | | Diluted EPS | 3.41 | 0.17 (NextGen) + 0 (FX) - 0.03 (Tax) | 3.55 | 3.09 | 0.37 (NextGen) - 0.01 (FX) - 0.08 (Tax) | 3.37 | Liquidity and Capital Resources This section assesses the company's ability to generate and manage cash flows, fund operations, and meet financial obligations Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Type | 2024 (Millions $) | 2023 (Millions $) | | :----------------------------- | :---------------- | :---------------- | | Net cash provided by operating activities | 1,204 | 1,593 | | Net cash (used in) investing activities | (1,567) | (499) | | Net cash (used in) financing activities | (313) | (1,154) | - Operating Activities Decrease: Primarily driven by a $360 million payment related to the ITD dispute in January 2024[156] - Days Sales Outstanding (DSO): 81 days as of September 30, 2024 (up 4 days from Dec 31, 2023)[157] - Investing Activities Increase: Primarily driven by higher payments for business combinations[158] - Financing Activities Decrease: Primarily driven by $600 million borrowing under revolving credit facility for Belcan acquisition and lower common stock repurchases[159] - Revolving Credit Facility: $1,850 million facility, $600 million outstanding, approximately $1.3 billion available capacity[154][160] - Capital Allocation: Reviewed on an ongoing basis, considering financial performance, liquidity, investments, acquisitions, economic outlook, and regulatory changes[162] - Future Liquidity: Expects operating cash flows, cash balances, and credit facilities to be sufficient for operating requirements and debt servicing for the next twelve months[164] Critical Accounting Estimates This section highlights key accounting judgments and assumptions that have a significant impact on the financial statements - Key Areas of Estimates: Revenue recognition (cost-to-cost method for fixed-price contracts), income taxes, business combinations, and valuation of goodwill and other long-lived assets[165] Recently Adopted and New Accounting Pronouncements This section summarizes the impact of new accounting standards on the company's financial statements - Refer to Note 1 for details on recently adopted and new accounting pronouncements[166] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure, primarily from changes in interest rates, was not materially impacted by the $600 million borrowing under its revolving credit facility during Q3 2024. No other material changes to market risk disclosures were reported compared to the prior annual report - Market Risk Impact: $600 million borrowing under revolving credit facility in Q3 2024 did not materially impact exposure to market risk from interest rate changes[167] - No other material changes in quantitative and qualitative disclosures about market risk from the 2023 Annual Report on Form 10-K[167] Item 4. Controls and Procedures As of September 30, 2024, management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective. No material changes in internal control over financial reporting occurred during the fiscal quarter - Disclosure Controls and Procedures: Evaluated as effective as of September 30, 2024[168] - Internal Control over Financial Reporting: No material changes occurred during the fiscal quarter ended September 30, 2024[169] PART II. OTHER INFORMATION This part provides additional disclosures not covered in the financial statements, including legal proceedings, risk factors, and equity security sales Item 1. Legal Proceedings This section refers to Note 12 for details on legal proceedings, which include a trade secret misappropriation case against Syntel, an ongoing dispute with the Indian Income Tax Department, and several shareholder derivative actions. A class action jury trial regarding alleged race and national origin discrimination resulted in a verdict for plaintiffs, moving to a second phase for individualized damages - Refer to Note 12 for details on legal proceedings[169] Item 1A. Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 - No material changes in risk factors from the Annual Report on Form 10-K for the year ended December 31, 2023[170] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased $228 million of Class A common stock during Q3 2024 under its $11.5 billion stock repurchase program, which had a remaining balance of $1,377 million as of September 30, 2024. Additionally, $15 million of shares were repurchased for statutory tax withholdings related to stock-based compensation plans - Stock Repurchase Program: * Total authorized: Up to $11.5 billion[171] * Remaining balance as of September 30, 2024: $1,377 million[171] * Repurchases during Q3 2024: $228 million (3,095,693 shares at average price of $73.49)[172] - Repurchases for Tax Withholdings: $15 million (0.2 million shares) during Q3 2024[173] Item 5. Other Information This section details Rule 10b5-1 trading arrangements adopted by certain executive officers during Q3 2024, including John Kim and Jatin Dalal, for the sale of common stock - Rule 10b5-1 Trading Arrangements (Q3 2024): * John Kim (EVP, Chief Legal Officer, CAO, Corporate Secretary): Adopted plan on September 3, 2024, to sell up to 20,000 shares by December 4, 2025[174] * Jatin Dalal (Chief Financial Officer): Adopted plan on September 6, 2024, to sell up to 5,000 shares by December 22, 2024[174] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including merger agreements, amended certificates of incorporation and bylaws, certifications under Sarbanes-Oxley Act, and Inline XBRL documents - Lists various exhibits, including merger agreements, corporate governance documents, and certifications[175] SIGNATURES This section confirms the official submission and certification of the report by authorized officers - Signed by Ravi Kumar S (CEO) and Jatin Dalal (CFO) on October 30, 2024[176]