10-Q 1 ctsh2018331-10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2018
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                      to                     
Commission File Number 0-24429
 
 
 
cognizantcoverlogo.jpg
 COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
 
13-3728359
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
Glenpointe Centre West
500 Frank W. Burr Blvd.
Teaneck, New Jersey
 
07666
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (201) 801-0233
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒   No:  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No:  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
☐  (Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of April 30, 2018:
Class
 
Number of Shares
Class A Common Stock, par value $.01 per share
 
585,898,903

 
 
 


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
 
 
 
Page
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 



PART I. FINANCIAL INFORMATION
 
Item 1.     Consolidated Financial Statements (Unaudited).
 
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in millions, except par values)
 
March 31,  
 2018

December 31, 
 2017
Assets



Current assets:



Cash and cash equivalents
$
1,440


$
1,925

Short-term investments
3,390


3,131

Trade accounts receivable, net of allowances of $66 and $65, respectively
3,145


2,865

Unbilled accounts receivable


357

Restricted cash
159

 

Other current assets
856


833

Total current assets
8,990


9,111

Property and equipment, net
1,333


1,324

Goodwill
2,713


2,704

Intangible assets, net
955


981

Deferred income tax assets, net
394


418

Long-term investments
83

 
235

Other noncurrent assets
577


448

Total assets
$
15,045


$
15,221

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable
$
293


$
210

Deferred revenue
360


383

Short-term debt
100


175

Accrued expenses and other current liabilities
1,716


2,071

Total current liabilities
2,469


2,839

Deferred revenue, noncurrent
70


104

Deferred income tax liabilities, net
113


146

Long-term debt
673


698

Long-term income taxes payable
533

 
584

Other noncurrent liabilities
199


181

Total liabilities
4,057


4,552

Commitments and contingencies (See Note 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.10 par value, 15.0 shares authorized, none issued

 

Class A common stock, $0.01 par value, 1,000 shares authorized, 586 and 588 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
6

 
6

Additional paid-in capital
63

 
49

Retained earnings
10,856

 
10,544

Accumulated other comprehensive income (loss)
63

 
70

Total stockholders’ equity
10,988


10,669

Total liabilities and stockholders’ equity
$
15,045


$
15,221

The accompanying notes are an integral part of the unaudited consolidated financial statements.

1


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
 
 
Three Months Ended 
 March 31,
 
2018
 
2017
Revenues
$
3,912


$
3,546

Operating expenses:



Cost of revenues (exclusive of depreciation and amortization expense shown separately below)
2,401


2,194

Selling, general and administrative expenses
711


686

Depreciation and amortization expense
107


96

Income from operations
693


570

Other income (expense), net:



Interest income
41


32

Interest expense
(6
)

(6
)
Foreign currency exchange gains (losses), net
(31
)

52

Other, net


1

Total other income (expense), net
4


79

Income before provision for income taxes
697


649

Provision for income taxes
(177
)

(92
)
Income from equity method investments

 

Net income
$
520


$
557

Basic earnings per share
$
0.89


$
0.92

Diluted earnings per share
$
0.88


$
0.92

Weighted average number of common shares outstanding - Basic
587


605

Dilutive effect of shares issuable under stock-based compensation plans
2

 
2

Weighted average number of common shares outstanding - Diluted
589


607

Dividends declared per common share
$
0.20

 
$

The accompanying notes are an integral part of the unaudited consolidated financial statements.

2


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
 
 
Three Months Ended 
 March 31,
 
2018
 
2017
Net income
$
520

 
$
557

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
37

 
17

Change in unrealized gains and losses on cash flow hedges, net of taxes
(36
)
 
79

Change in unrealized gains and losses on available-for-sale securities, net of taxes
(7
)
 
1

Other comprehensive income (loss)
(6
)
 
97

Comprehensive income
$
514

 
$
654

The accompanying notes are an integral part of the unaudited consolidated financial statements.

3


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in millions)
 
 
 
Class A Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 Total
 
Shares    
 
Amount
 
Balance, December 31, 2017
 
588

 
$
6

 
$
49

 
$
10,544

 
$
70

 
$
10,669

Cumulative effect of changes in accounting principle(1)
 

 

 

 
122

 
(1
)
 
121

Net income
 

 

 

 
520

 

 
520

Other comprehensive income (loss)
 

 

 

 

 
(6
)
 
(6
)
Common stock issued, stock-based compensation plans
 
2

 

 
60

 

 

 
60

Stock-based compensation expense
 

 

 
59

 

 

 
59

Repurchases of common stock
 
(4
)
 

 
(105
)
 
(211
)
 

 
(316
)
Dividends
 

 

 

 
(119
)
 

 
(119
)
Balance, March 31, 2018
 
586

 
$
6

 
$
63

 
$
10,856

 
$
63

 
$
10,988

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 Total
 
Shares    
 
Amount
 
Balance, December 31, 2016
 
608

 
$
6

 
$
358

 
$
10,478

 
$
(114
)
 
$
10,728

Net income
 

 

 

 
557

 

 
557

Other comprehensive income (loss)
 

 

 

 

 
97

 
97

Common stock issued, stock-based compensation plans
 
3

 

 
61

 

 

 
61

Stock-based compensation expense
 

 

 
54

 

 

 
54

Repurchases of common stock
 
(22
)
 

 
(414
)
 
(1,100
)
 

 
(1,514
)
Balance, March 31, 2017
 
589

 
$
6

 
$
59

 
$
9,935

 
$
(17
)
 
$
9,983

            
(1)
Reflects the adoption of accounting standards as described in Note 1.            


The accompanying notes are an integral part of the unaudited consolidated financial statements.


4


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)

 
For the Three Months Ended 
 March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
520

 
$
557

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
117

 
104

Provision for doubtful accounts
2

 
9

Deferred income taxes
2

 
9

Stock-based compensation expense
59

 
54

Other
23

 
(55
)
Changes in assets and liabilities:
 
 
 
Trade accounts receivable
(273
)
 
(86
)
Other current assets
352

 
20

Other noncurrent assets
(105
)
 
(31
)
Accounts payable
86

 
13

Deferred revenues, current and noncurrent
(2
)
 
67

Other current and noncurrent liabilities
(393
)
 
(384
)
Net cash provided by operating activities
388

 
277

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(96
)
 
(66
)
Purchases of available-for-sale investment securities
(300
)
 
(1,176
)
Proceeds from maturity or sale of available-for-sale investment securities
193

 
1,488

Purchases of held-to-maturity investment securities
(222
)
 
(349
)
Proceeds from maturity of held-to-maturity investment securities
171

 
15

Purchases of other investments
(31
)
 
(59
)
Proceeds from maturity or sale of other investments
59

 
244

Payments for business combinations, net of cash acquired
(1
)
 
(6
)
Net cash (used in) provided by investing activities
(227
)
 
91

Cash flows from financing activities:
 
 
 
Issuance of common stock under stock-based compensation plans
60

 
61

Repurchases of common stock
(316
)
 
(1,514
)
Repayment of term loan borrowings and capital lease obligations
(39
)
 
(21
)
Net change in notes outstanding under the revolving credit facility
(75
)
 
350

Dividends paid
(118
)
 

Net cash (used in) financing activities
(488
)
 
(1,124
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
1

 
30

(Decrease) in cash, cash equivalents and restricted cash
(326
)
 
(726
)
Cash and cash equivalents, beginning of year
1,925

 
2,034

Cash, cash equivalents and restricted cash, end of period
$
1,599

 
$
1,308

The accompanying notes are an integral part of the unaudited consolidated financial statements.

5


COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Interim Consolidated Financial Statements

The terms “Cognizant,” “we,” “our,” “us” and “the Company” refer to Cognizant Technology Solutions Corporation and its subsidiaries unless the context indicates otherwise. We have prepared the accompanying unaudited consolidated financial statements included herein in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and Regulation S-X under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The accompanying unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2017. In our opinion, all adjustments considered necessary for a fair statement of the accompanying unaudited consolidated financial statements have been included and all adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire year.

Recently Adopted Accounting Pronouncements
Date Issued and Topic
Date Adopted and Method
Description
Impact
May 2014

Revenue
January 1, 2018

Modified Retrospective
The new standard, as amended, sets forth a single comprehensive model for recognizing and reporting revenues. The standard also requires additional financial statement disclosures that enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. The standard allows for two methods of adoption: the full retrospective adoption, which requires the standard to be applied to each prior period presented, or the modified retrospective adoption, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption.
See Note 3 for the impact of adoption of this standard.
November 2016

Statement of Cash Flows
January 1, 2018

Retrospective

This update requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. It also requires a reconciliation of such totals to the amounts on the statement of financial position and disclosure as to the nature of the restrictions.

As of March 31, 2018, we had a restricted cash balance of $159 million. There were no restricted cash balances in prior periods. Accordingly, the adoption of this update resulted in an increase to the ending cash, cash equivalents and restricted cash balance presented on our unaudited consolidated statement of cash flows for the three months ended March 31, 2018.
February 2018

Income Statement - Reporting Comprehensive Income
January 1, 2018

In the period of adoption
This update provides an option for entities to reclassify stranded tax effects caused by the newly-enacted Tax Cuts and Jobs Act, or Tax Reform Act, from accumulated other comprehensive income to retained earnings.
We have early adopted this update as of January 1, 2018. The adoption resulted in a decrease of $1 million in accumulated other comprehensive income and a corresponding increase of $1 million to opening retained earnings.



6


New Accounting Pronouncements
Date Issued and Topic
Effective Date
Description
Impact
February 2016

Leases
January 1, 2019
The new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. The methods of adoption are in the process of being finalized by the Financial Accounting Standards Board.
We expect the requirement to recognize a right-of-use asset and a lease liability for operating leases to have a material impact on the presentation of our consolidated statements of financial position.
March 2017

Nonrefundable Fees and Other Costs
January 1, 2019
This update shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount. Upon adoption, entities will be required to use a modified retrospective transition with the cumulative effect adjustment recognized to retained earnings as of the beginning of the period of adoption.
We are currently evaluating the effect the amendments will have on our consolidated financial statements and related disclosures.
Note 2 — Internal Investigation and Related Matters

We are conducting an internal investigation focused on whether certain payments relating to Company-owned facilities in India were made improperly and in possible violation of the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable laws. The investigation is also examining various other payments made in small amounts in India that may not have complied with Company policy or applicable law. In September 2016, we voluntarily notified the U.S. Department of Justice, or DOJ, and Securities and Exchange Commission, or SEC, and are cooperating fully with both agencies. The investigation is being conducted under the oversight of the Audit Committee, with the assistance of outside counsel. To date, the investigation has identified a total of approximately $6 million in payments made between 2009 and 2016 that may have been improper. During the year ended December 31, 2016, we recorded out-of-period corrections related to $4 million of such payments that had been previously capitalized that should have been expensed. These out-of-period corrections and the other $2 million in potentially improper payments were not material to any previously issued financial statements. There were no adjustments recorded during 2018 and 2017 related to the amounts under investigation.
Note 3 — Revenues

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers,” or the New Revenue Standard, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the New Revenue Standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. For contracts that were modified before the effective date, the Company aggregated the effect of all contract modifications prior to identifying performance obligations and allocating transaction price in accordance with the practical expedient ASC 606-10-65-1-(f)-4. Upon adoption of the New Revenue Standard on January 1, 2018, we recorded a net increase to opening retained earnings of approximately $121 million, after a tax impact of $37 million. The impact of adoption primarily relates to (1) changes in the method used to measure progress on our fixed-price application maintenance, consulting and business process services contracts, (2) the longer period of amortization for costs to fulfill a contract, (3) the timing of revenue recognition and allocation of purchase price on our software license contracts, (4) the reclassification of balances representing receivables, as defined by the New Revenue Standard, from Unbilled accounts receivable to Trade accounts receivable, net, (5) the reclassification of balances representing contract assets, as defined by the New Revenue Standard, from Unbilled accounts receivable to Other current assets, as well as (6) the income tax impact of the above items, as applicable.


7


The following tables compare the financial statement line items materially affected by the adoption of the New Revenue Standard as of and for the three months ended March 31, 2018, to the pro-forma amounts had the previous guidance been in effect, or Pro-forma Amounts:
 
 
March 31, 2018
 
 
As Reported
 
Pro-forma Amounts
 
Impacts of the New Revenue Standard
 
 
(in millions)
Assets:
 
 
 
 
 
 
Trade accounts receivable, net(1), (2)
 
$
3,145

 
$
3,015

 
$
130

Unbilled accounts receivable(1), (3)
 

 
412

 
(412
)
Other current assets(2), (3)
 
856

 
549

 
307

Total current assets
 
 
 
 
 
25

Other noncurrent assets(4)
 
577

 
533

 
44

Total assets
 
 
 
 
 
$
69

Liabilities:
 
 
 
 
 
 
Deferred revenue(2)
 
$
360

 
$
471

 
$
(111
)
Total current liabilities
 
 
 
 
 
(111
)
Deferred revenue, noncurrent(2)
 
70

 
79

 
(9
)
Deferred income tax liabilities, net(5)
 
113

 
70

 
43

Total liabilities
 
 
 
 
 
(77
)
Stockholders’ equity:
 
 
 
 
 
 
Retained earnings
 
10,856

 
10,712

 
144

Accumulated other comprehensive income (loss)(6)
 
63

 
61

 
2

Total stockholders’ equity
 
 
 
 
 
146

Total liabilities and stockholders’ equity
 
 
 
 
 
$
69

 
 
Three Months Ended March 31, 2018
 
 
As Reported
 
Pro-forma Amounts
 
Impacts of the New Revenue Standard
 
 
(in millions)
Revenues(2)
 
$
3,912

 
$
3,891

 
$
21

Cost of revenues (4)
 
2,401

 
2,409

 
(8
)
Selling, general and administrative expenses
 
711

 
711

 

Depreciation and amortization expense
 
107

 
107

 

Income from operations
 
693

 
664

 
29

Other income (expense), net
 
4

 
4

 

Income before provision for income taxes(5)
 
697

 
668

 
29

Provision for income taxes
 
(177
)
 
(171
)
 
(6
)
Net income
 
$
520

 
$
497

 
$
23

Basic earnings per share
 
$
0.89

 
$
0.85

 
$
0.04

Diluted earnings per share
 
$
0.88

 
$
0.84

 
$
0.04

            
(1)
Reflects the reclassification of balances representing receivables, as defined by the New Revenue Standard, from Unbilled accounts receivable to Trade accounts receivable, net.
(2)
Reflects the impact of changes in the method used to measure progress on our fixed-price application maintenance, consulting and business process services contracts and the timing of revenue recognition and allocation of purchase price on our software license contracts.
(3)
Reflects the reclassification of balances representing contract assets, as defined by the New Revenue Standard, from Unbilled accounts receivable to Other current assets.
(4)
Reflects the impact of a longer period of amortization for costs to fulfill a contract.
(5)
Reflects the income tax impact of the above items.
(6)
Reflects the impact of foreign currency translation related to the above impacts.


8


Revenue Recognition

We recognize revenues as we transfer control of deliverables (products, solutions and services) to our customers in an amount reflecting the consideration to which we expect to be entitled. To recognize revenues, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenues when a performance obligation is satisfied. We account for a contract when it has approval and commitment from all parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience.

We may enter into arrangements that consist of multiple performance obligations. Such arrangements may include any combination of our deliverables. To the extent a contract includes multiple promised deliverables, we apply judgment to determine whether promised deliverables are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised deliverables are accounted for as a combined performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price. Standalone selling price is the price at which we would sell a promised good or service separately to the customer.  When not directly observable, we typically estimate standalone selling price by using the expected cost plus a margin approach. We typically establish a standalone selling price range for our deliverables, which is reassessed on a periodic basis or when facts and circumstances change.

For performance obligations where control is transferred over time, revenues are recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the deliverables to be provided. Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered, in accordance with the practical expedient in ASC 606-10-55-18. If our invoicing is not consistent with value delivered, revenues are recognized as the service is performed based on the cost to cost method described above. The cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information; such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately. Revenues related to fixed-price hosting and infrastructure services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered, in accordance with the practical expedient in ASC 606-10-55-18. If our invoicing is not consistent with value delivered, revenues are recognized on a straight-line basis unless revenues are earned and obligations are fulfilled in a different pattern. The revenue recognition method applied to the types of contracts described above provides the most faithful depiction of performance towards satisfaction of our performance obligations; for example, the cost to cost method is used when the value of services provided to the customer is best represented by the costs expended to deliver those services.

Revenues related to our non-hosted software license arrangements that do not require significant modification or customization of the underlying software are recognized when the software is delivered as control is transferred at a point in time. For software license arrangements that require significant functionality enhancements or modification of the software, revenues for the software license and related services are recognized as the services are performed in accordance with the methods described above. In software hosting arrangements, the rights provided to the customer, such as ownership of a license, contract termination provisions and the feasibility of the client to operate the software, are considered in determining whether the arrangement includes a license or a service. Sales and usage-based fees promised in exchange for licenses of intellectual property are not recognized as revenue until the uncertainty related to the variable amounts is resolved. Revenues related to software maintenance and support are generally recognized on a straight-line basis over the contract period.

Revenues related to our time-and-materials, transaction-based or volume-based contracts are recognized over the period the services are provided in a manner that corresponds with the value transferred to the customer to-date relative to the remaining services to be provided.

Revenues also include the reimbursement of out-of-pocket expenses. Our warranties generally provide a customer with assurance that the related deliverable will function as the parties intended because it complies with agreed-upon specifications and is therefore not considered an additional performance obligation in the contract.

9



From time to time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Determining whether we control the good or service before it is transferred to the customer may require judgment.

Our contracts may be modified to add, remove or change existing performance obligations. The accounting for modifications to our contracts involves assessing whether the services added to an existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are not distinct are accounted for on a cumulative catch up basis, while those that are distinct are accounted for prospectively, either as a separate contract if the additional services are priced at the standalone selling price, or as a termination of the existing contract and creation of a new contract if not priced at the standalone selling price. Services added to our application development and systems integration service contracts are typically not distinct, while services added to our other contracts, including application maintenance, testing and business process services contracts, are typically distinct.

Incentive revenues, volume discounts, or any other form of variable consideration is estimated using either the sum of probability weighted amounts in a range of possible consideration amounts (expected value), or the single most likely amount in a range of possible consideration amounts (most likely amount), depending on which method better predicts the amount of consideration to which we may be entitled. We include in the transaction price variable consideration only to the extent it is probable that a significant reversal of revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price may involve judgment and are based largely on an assessment of our anticipated performance and all information that is reasonably available to us.

We assess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set up or transition fees paid upfront by our customers to represent a financing component, as such fees are required to encourage customer commitment to the project and protect us from early termination of the contract.

Costs to Fulfill

Recurring operating costs for contracts with customers are recognized as incurred. Certain eligible, nonrecurring costs incurred in the initial phases of our application maintenance, business process outsourcing and infrastructure services contracts (i.e. set-up or transition costs) are capitalized when such costs (1) relate directly to the contract, (2) generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future, and (3) are expected to be recovered. These costs are expensed ratably over the estimated life of the customer relationship, including expected renewals. In determining the estimated life of the customer relationship, we evaluate the average contract term, on a portfolio basis by nature of the services to be provided, as well as the rate of technological and industry change. Capitalized amounts are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows are not sufficient to recover the carrying amount of the capitalized costs to fulfill.

The following table presents information related to the capitalized costs to fulfill, such as set-up or transition activities, for the three months ended March 31, 2018. Costs to obtain contracts are immaterial for the periods disclosed and were expensed as incurred.
 
 
Costs to Fulfill
 
 
(in millions)
Balance - January 1, 2018
 
$
303

Amortization expense
 
(14
)
Costs capitalized
 
39

Other
 
2

Balance - March 31, 2018
 
$
330

Costs to fulfill are recorded in "Other noncurrent assets" in our consolidated statements of financial position.

10


Trade Accounts Receivable and Contract Balances

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). For example, we recognize a receivable for revenues related to our time and materials and transaction or volume-based contracts. We present such receivables in Trade accounts receivable, net in our consolidated statements of financial position at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.

A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are presented in Other current assets in our consolidated statements of financial position and primarily relate to unbilled amounts on fixed-price contracts utilizing the cost to cost method of revenue recognition. The table below shows significant movements in contract assets:
 
 
Contract Assets
 
 
(in millions)
Balance - January 1, 2018
 
$
306

Revenues recognized during the period but not billed
 
225

Amounts reclassified to accounts receivable
 
(225
)
Other
 
1

Balance - March 31, 2018
 
$
307


Our contract liabilities, or deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize the revenues. The noncurrent portion of deferred revenue is included in other noncurrent liabilities in our consolidated statements of financial position.

The table below shows significant movements in the deferred revenue balances (current and noncurrent) for the period disclosed:
 
 
Deferred Revenue
 
 
(in millions)
Balance - January 1, 2018
 
$
431

Amounts billed but not recognized as revenues
 
99

Revenues recognized related to the opening balance of deferred revenue
 
(100
)
Balance - March 31, 2018
 
$
430

Our contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period.
Revenues recognized during the three months ended March 31, 2018 for performance obligations satisfied or partially satisfied in previous periods were immaterial.
Remaining Performance Obligations

ASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2018. This disclosure is not required for:
(1)
contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty,
(2)
contracts for which we recognize revenues based on the right to invoice for services performed,
(3)
variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met, or
(4)
variable consideration in the form of a sales-based or usage based royalty promised in exchange for a license of intellectual property.

11


Many of our performance obligations meet one or more of these exemptions. As of March 31, 2018, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $1,752 million, of which approximately 70% is expected to be recognized as revenues within 2 years, and the remainder thereafter.
Disaggregation of Revenues

The table below presents disaggregated revenues from contracts with customers by customer location, service line and contract-type for each of our business segments. We believe this disaggregation best depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by industry, market and other economic factors.

 
 
Three Months Ended
 
 
March 31, 2018
 
 
Financial Services
 
Healthcare
 
Products and Resources
 
Communications, Media and Technology
 
Total
 
 
(in millions)
Revenues
 
 
 
 
 
 
 
 
 
 
Geography:
 
 
 
 
 
 
 
 
 
 
North America
 
$
1,044

 
$
1,023

 
$
572

 
$
336

 
$
2,975

United Kingdom
 
116

 
23

 
87

 
84

 
310

Rest of Europe
 
162

 
61

 
109

 
42

 
374

Europe - Total
 
278

 
84

 
196

 
126

 
684

Rest of World
 
139

 
14

 
53

 
47

 
253

Total
 
$
1,461

 
$
1,121

 
$
821

 
$
509

 
$
3,912

 
 
 
 
 
 
 
 
 
 

Service line:
 
 
 
 
 
 
 
 
 

Consulting and technology services
 
$
871

 
$
638

 
$
481

 
$
278

 
$
2,268

Outsourcing services
 
590

 
483

 
340

 
231

 
1,644

Total
 
$
1,461

 
$
1,121

 
$
821

 
$
509

 
$
3,912

 
 
 
 
 
 
 
 
 
 

Type of contract:
 
 
 
 
 
 
 
 
 

Time and materials
 
$
935

 
$
448

 
$
369

 
$
306

 
$
2,058

Fixed-price
 
471

 
511

 
361

 
179

 
1,522

Transaction or volume-based
 
55


162

 
91

 
24

 
332

Total
 
$
1,461

 
$
1,121

 
$
821

 
$
509

 
$
3,912


12


Note 4 — Investments
Our investments were as follows:
 
March 31, 2018
 
December 31, 2017
 
(in millions)
Short-term investments:
 
 
 
Equity investment securities
$
25

 
$
25

Available-for-sale investment securities
2,069

 
1,972

Held-to-maturity investment securities
943

 
745

Time deposits(1)
353

 
389

Total short-term investments
$
3,390

 
$
3,131

Long-term investments:
 
 
 
Equity and cost method investments
$
77

 
$
74

Held-to-maturity investment securities
6

 
161

Total long-term investments
$
83

 
$
235

            
(1)
Includes $348 million in restricted time deposits as of March 31, 2018. See Note 14.

Equity Investment Securities

Our equity investment securities consist of a U.S. dollar denominated investment in a fixed income mutual fund. Unrealized losses for the three months ended March 31, 2018 and 2017 were immaterial. The value of the fixed income mutual fund invested in fixed income securities is based on the net asset value, or NAV, of the fund, with appropriate consideration of the liquidity and any restrictions on disposition of our investment in the fund. There were no realized gains or losses on equity securities during the three months ended March 31, 2018 and 2017.

Available-for-Sale Investment Securities

Our available-for-sale investment securities consist of U.S. dollar denominated investments primarily in U.S. Treasury notes, U.S. government agency debt securities, municipal debt securities, non-U.S. government debt securities, U.S. and international corporate bonds, certificates of deposit, commercial paper, debt securities issued by supranational institutions, and asset-backed securities, including securities backed by auto loans, credit card receivables, and other receivables. Our investment guidelines are to purchase securities which are investment grade at the time of acquisition. We monitor the credit ratings of the securities in our portfolio on an ongoing basis.

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at March 31, 2018 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
U.S. Treasury and agency debt securities
$
643

 
$

 
$
(9
)
 
$
634

Corporate and other debt securities
448

 

 
(6
)
 
442

Certificates of deposit and commercial paper
563

 

 

 
563

Asset-backed securities
305

 

 
(3
)
 
302

Municipal debt securities
129

 

 
(1
)
 
128

Total available-for-sale investment securities
$
2,088

 
$

 
$
(19
)
 
$
2,069


13


The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at December 31, 2017 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
U.S. Treasury and agency debt securities
$
667

 
$

 
$
(6
)
 
$
661

Corporate and other debt securities
439

 

 
(2
)
 
437

Certificates of deposit and commercial paper
450

 

 

 
450

Asset-backed securities
297

 

 
(2
)
 
295

Municipal debt securities
130

 

 
(1
)
 
129

Total available-for-sale investment securities
$
1,983

 
$

 
$
(11
)
 
$
1,972


The fair value and related unrealized losses of available-for-sale investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of March 31, 2018:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in millions)
U.S. Treasury and agency debt securities
$
517

 
$
(7
)
 
$
94

 
$
(2
)
 
$
611

 
$
(9
)
Corporate and other debt securities
331

 
(5
)
 
111

 
(1
)
 
442

 
(6
)
Certificates of deposit and commercial paper
399

 

 

 

 
399

 

Asset-backed securities
214

 
(2
)
 
85

 
(1
)
 
299

 
(3
)
Municipal debt securities
107

 
(1
)
 
16

 

 
123

 
(1
)
Total
$
1,568

 
$
(15
)
 
$
306

 
$
(4
)
 
$
1,874

 
$
(19
)

The fair value and related unrealized losses of available-for-sale investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of December 31, 2017:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in millions)
U.S. Treasury and agency debt securities
$
519

 
$
(4
)
 
$
124

 
$
(2
)
 
$
643

 
$
(6
)
Corporate and other debt securities
297

 
(1
)
 
126

 
(1
)
 
423

 
(2
)
Certificates of deposit and commercial paper
49

 

 

 

 
49

 

Asset-backed securities
193

 
(1
)
 
94

 
(1
)
 
287

 
(2
)
Municipal debt securities
107

 
(1
)
 
18

 

 
125

 
(1
)
Total
$
1,165

 
$
(7
)
 
$
362

 
$
(4
)
 
$
1,527

 
$
(11
)

The unrealized losses for the above securities as of March 31, 2018 and December 31, 2017 were primarily attributable to changes in interest rates. At each reporting date, we perform an evaluation of impaired available-for-sale securities to determine if the unrealized losses are other-than-temporary. We do not consider any of the investments to be other-than-temporarily impaired as of March 31, 2018. The gross unrealized gains and losses in the above tables were recorded, net of tax, in "Accumulated other comprehensive income (loss)" in our consolidated statements of financial position.

14


The contractual maturities of our fixed income available-for-sale investment securities as of March 31, 2018 are set forth in the following table:
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
729

 
$
728

Due after one year up to two years
500

 
494

Due after two years up to three years
495

 
487

Due after three years
59

 
58

Asset-backed securities
305

 
302

Total available-for-sale investment securities
$
2,088

 
$
2,069


Asset-backed securities were excluded from the maturity categories because the actual maturities may differ from the contractual maturities since the underlying receivables may be prepaid without penalties. Further, actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.

Proceeds from sales of available-for-sale investment securities and the gross gains and losses that have been included in earnings as a result of those sales were as follows:
 
Three Months Ended 
 March 31,
 
2018
 
2017
 
(in millions)
Proceeds from sales of available-for-sale investment securities
$
125

 
$
1,248

 
 
 
 
Gross gains
$

 
$
1

Gross losses
(1
)
 
(1
)
Net realized (losses) on sales of available-for-sale investment securities
$
(1
)
 
$


Held-to-Maturity Investment Securities

Our held-to-maturity investment securities consist of Indian rupee denominated investments primarily in commercial paper, corporate bonds and government debt securities. Our investment guidelines are to purchase securities that are investment grade at the time of acquisition. We monitor the credit ratings of the securities in our portfolio on an ongoing basis.

The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at March 31, 2018 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
Short-term investments:
 
 
 
 
 
 
 
Corporate and other debt securities
$
481

 
$

 
$
(1
)
 
$
480

Commercial paper
462

 

 
(1
)
 
461

Total short-term held-to-maturity investments
943

 

 
(2
)
 
941

Long-term investments:
 
 
 
 
 
 
 
Corporate and other debt securities
6

 

 

 
6

Total held-to-maturity investment securities
$
949

 
$

 
$
(2
)
 
$
947



15


The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at December 31, 2017 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
Short-term investments:
 
 
 
 
 
 
 
Corporate and other debt securities
$
346

 
$

 
$
(1
)
 
$
345

Commercial paper
399

 

 
(2
)
 
397

Total short-term held-to-maturity investments
745

 

 
(3
)
 
742

Long-term investments:
 
 
 
 
 
 
 
Corporate and other debt securities
161

 

 
(1
)
 
160

Total held-to-maturity investment securities
$
906

 
$

 
$
(4
)
 
$
902


The fair value and related unrealized losses of held-to-maturity investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of March 31, 2018:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in millions)
Corporate and other debt securities
$
327

 
$
(1
)
 
$
32

 
$

 
$
359

 
$
(1
)
Commercial paper
322

 
(1
)
 

 

 
322

 
(1
)
Total
$
649

 
$
(2
)
 
$
32

 
$

 
$
681

 
$
(2
)

The fair value and related unrealized losses of held-to-maturity investment securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer were as follows as of December 31, 2017:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in millions)
Corporate and other debt securities
$
473

 
$
(2
)
 
$

 
$

 
$
473

 
$
(2
)
Commercial paper
394

 
(2
)
 

 

 
394

 
(2
)
Total
$
867

 
$
(4
)
 
$

 
$

 
$
867

 
$
(4
)

At each reporting date, the Company performs an evaluation of held-to-maturity securities to determine if the unrealized losses are other-than-temporary. We do not consider any of the investments to be other-than-temporarily impaired as of March 31, 2018.
The contractual maturities of our fixed income held-to-maturity investment securities as of March 31, 2018 are set forth in the following table:
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
943

 
$
941

Due after two years
6

 
6

Total held-to-maturity investment securities
$
949

 
$
947


During the three months ended March 31, 2018 and the year ended December 31, 2017, there were no transfers of investments between our available-for-sale and held-to-maturity investment portfolios.

16


Note 5 — Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:
 
March 31, 2018
 
December 31, 2017
 
(in millions)
Compensation and benefits
$
848

 
$
1,272

Income taxes
74

 
48

Professional fees
103

 
100

Travel and entertainment
38

 
32

Customer volume and other incentives
318

 
289

Derivative financial instruments
2

 
5

Other
333

 
325

Total accrued expenses and other current liabilities
$
1,716

 
$
2,071

Note 6 — Debt

In 2014, we entered into a credit agreement with a commercial bank syndicate, or, as amended, the Credit Agreement, providing for a $1,000 million unsecured term loan and a $750 million unsecured revolving credit facility. The term loan and the revolving credit facility both mature in November 2019. All notes drawn to date under the revolving credit facility have been less than 90 days in duration. We are required under the Credit Agreement to make scheduled quarterly principal payments on the term loan. We were in compliance with all debt covenants and representations as of March 31, 2018.

Short-term Debt

The following summarizes our short-term debt balances as of:
 
 
March 31, 2018
 
December 31, 2017
 
 
(in millions)
Notes outstanding under revolving credit facility
 
$

 
$
75

Term loan - current maturities
 
100

 
100

Total short-term debt
 
$
100

 
$
175

Long-term Debt

The following summarizes our long-term debt balances as of:
 
 
March 31, 2018
 
December 31, 2017
 
 
(in millions)
Term loan, due November 2019
 
$
775

 
$
800

Less:
 
 
 
 
Current maturities
 
(100
)
 
(100
)
Deferred financing costs
 
(2
)
 
(2
)
Long-term debt, net of current maturities
 
$
673

 
$
698


17


Note 7 — Income Taxes
On December 22, 2017, the United States enacted the Tax Reform Act, which significantly revised the U.S. corporate income tax law for tax years beginning after December 31, 2017 by (among other provisions):
reducing the U.S. federal statutory corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017;
implementing a modified territorial tax system that includes a one-time transition tax on all accumulated undistributed earnings of foreign subsidiaries;
providing for a full deduction on future dividends received from foreign affiliates; and
imposing a U.S. income tax on global intangible low-taxed income, or GILTI.
During the fourth quarter of 2017, in accordance with the SEC Staff Accounting Bulletin No. 118 - Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we recorded a one-time provisional net income tax expense of $617 million, which was comprised of: (i) the one-time transition tax expense on accumulated undistributed earnings of foreign subsidiaries of $635 million, (ii) foreign and U.S. state income tax expense that will be applicable upon repatriation of the accumulated undistributed earnings of our foreign subsidiaries, other than our Indian subsidiaries, of $53 million, partially offset by (iii) an income tax benefit of $71 million resulting from the revaluation of U.S. net deferred income tax liabilities to the new lower U.S. income tax rate. The transition tax on undistributed earnings is payable over eight years. The one-time incremental income tax expense is provisional as it reflects certain assumptions based upon our interpretation of the Tax Reform Act and may change, possibly materially, as we receive additional clarification and guidance and as the interpretation of the Tax Reform Act evolves over time. During the first quarter of 2018, we have not recorded any adjustments to the one-time provisional net income tax expense. We anticipate completing the accounting for the Tax Reform Act within the measurement period.
Our Indian subsidiaries, collectively referred to as Cognizant India, are primarily export-oriented and are eligible for certain income tax holiday benefits granted by the government of India for export activities conducted within Special Economic Zones, or SEZs, for periods of up to 15 years. Our Indian profits ineligible for SEZ benefits are subject to corporate income tax at the rate of 34.9%. In addition, all Indian profits, including those generated within SEZs, are subject to the Minimum Alternative Tax, or MAT, at the rate of 21.5%. Any MAT paid is creditable against future Indian corporate income tax, subject to limitations.
Our effective income tax rates were as follows:
 
Three Months Ended 
 March 31,
 
2018
 
2017
Effective income tax rate
25.4
%
 
14.2
%
The effective tax rate for the three months ended March 31, 2017 was affected by the recognition of income tax benefits previously unrecognized in our consolidated financial statements related to several uncertain tax positions totaling $72 million. The recognition of these benefits in the first quarter of 2017 was based on management’s reassessment regarding whether certain unrecognized tax benefits met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefits. Our March 31, 2018 effective tax rate benefitted from the new lower U.S. federal statutory corporate income tax rate, partially offset by the estimated incremental income tax expense related to the current interpretation of the GILTI provision of the Tax Reform Act. The estimate of our annual effective income tax rate reflects the current interpretation of the Tax Reform Act and may change as we receive additional clarification and guidance and as the interpretation of the Tax Reform Act evolves over time.
We are involved in an ongoing dispute with the Indian Income Tax Department, or ITD, in connection with which we received a notice in March 2018 asserting that the ITD is owed additional taxes on our previously disclosed 2016 India Cash Remittance, the transaction undertaken by our principal operating subsidiary in India, or CTS India, to repurchase shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion. As a result of that transaction, undertaken pursuant to a plan approved by the Madras High Court in Chennai, India, we previously paid $135 million in Indian income taxes, which we believe are all the applicable taxes owed for this transaction under Indian law. The ITD is asserting that we owe an additional $507 million related to the 2016 India Cash Remittance. In addition to the dispute on the 2016 India Cash Remittance, we are involved in another ongoing dispute with the ITD relating to a 2013 transaction undertaken by CTS India to repurchase shares from its shareholders valued at $523 million (the two disputes collectively referred to as the ITD Dispute), for which we also believe we have paid all the applicable taxes owed. Accordingly, we have not recorded any reserves for these matters as of March 31, 2018. The ITD Dispute is ongoing, and no final decision has been reached.

18


In March 2018, the ITD placed an attachment on certain of our India bank accounts, relating to the 2016 India Cash Remittance. In April 2018, the Madras High Court granted our application for a stay of the actions of the ITD and lifted the ITD’s attachment of our bank accounts. As part of the interim stay order, we have deposited $76 million, representing 15% of the disputed tax amount related to the 2016 India Cash Remittance, to be kept in a segregated account by the ITD. In addition, the court has placed a lien on certain time deposits of CTS India in the amount of $431 million, which is the remainder of the disputed tax amount related to the 2016 India Cash Remittance. See Note 14 for a description of our restricted assets as of March 31, 2018 relating to this matter.
Note 8 — Derivative Financial Instruments

In the normal course of business, we use foreign exchange forward contracts to manage foreign currency exchange rate risk. The estimated fair value of the foreign exchange forward contracts considers the following items: discount rate, timing and amount of cash flow and counterparty credit risk. Derivatives may give rise to credit risks from the possible non-performance by counterparties. Credit risk is generally limited to the fair value of those contracts that are favorable to us. We have limited our credit risk by entering into derivative transactions only with highly-rated financial institutions, limiting the amount of credit exposure with any one financial institution and conducting an ongoing evaluation of the creditworthiness of the financial institutions with which we do business. In addition, all the assets and liabilities related to our foreign exchange forward contracts set forth in the below table are subject to International Swaps and Derivatives Association, or ISDA, master netting arrangements or other similar agreements with each individual counterparty. These master netting arrangements generally provide for net settlement of all outstanding contracts with the counterparty in the case of an event of default or a termination event. We have presented all the assets and liabilities related to our foreign exchange forward contracts on a gross basis, with no offsets, in our accompanying unaudited consolidated statements of financial position. There is no financial collateral (including cash collateral) posted or received by us related to our foreign exchange forward contracts.

The following table provides information on the location and fair values of derivative financial instruments included in our unaudited consolidated statements of financial position as of:
 
 
 
 
March 31, 2018
 
December 31, 2017
Designation of Derivatives
 
Location on Statements of
Financial Position
 
Assets
 
Liabilities
 
Assets  
 
Liabilities
 
 
 
 
(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments
 
Other current assets
 
$
97

 
$

 
$
134

 
$

 
 
Other noncurrent assets
 
9

 

 
20

 

 
 
Other noncurrent liabilities
 

 
1

 

 

 
 
Total
 
106

 
1

 
154

 

Foreign exchange forward contracts – Not designated as hedging instruments
 
Other current assets
 
1

 

 

 

 
 
Accrued expenses and other current liabilities
 

 
2

 

 
5

 
 
Total
 
1

 
2

 

 
5

Total
 
 
 
$
107

 
$
3

 
$
154

 
$
5


Cash Flow Hedges

We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of Indian rupee denominated payments in India. These contracts are intended to partially offset the impact of movement of exchange rates on future operating costs and are scheduled to mature each month during 2018, 2019 and the first quarter of 2020. Under these contracts, we purchase Indian rupees and sell U.S. dollars. The changes in fair value of these contracts are initially reported in the caption “Accumulated other comprehensive income (loss)” in our consolidated statements of financial position and are subsequently reclassified to earnings in the same period the forecasted Indian rupee denominated payments are recorded in earnings. As of March 31, 2018, we estimate that $72 million, net of tax, of net gains related to derivatives designated as cash flow hedges recorded in accumulated other comprehensive income (loss) is expected to be reclassified into earnings within the next 12 months.


19


The notional value of our outstanding contracts by year of maturity and the net unrealized gains included in accumulated other comprehensive income (loss) for such contracts were as follows as of:
 
March 31, 2018
 
December 31, 2017
 
(in millions)
2018
$
983

 
$
1,185

2019
885

 
720

2020
135

 

Total notional value of contracts outstanding
$
2,003

 
$
1,905

Net unrealized gains included in accumulated other comprehensive income (loss), net of taxes
$
79

 
$
115


Upon settlement or maturity of the cash flow hedge contracts, we record the gains or losses, based on our designation at the commencement of the contract, with the related hedged Indian rupee denominated expense reported within cost of revenues and selling, general and administrative expenses. Hedge ineffectiveness was immaterial for all periods presented.

The following table provides information on the location and amounts of pre-tax gains on our cash flow hedges for the three months ended March 31:
 
Change in
Derivative Gains/Losses Recognized
in Accumulated Other
Comprehensive Income (Loss)
(effective portion)
 
Location of Net Derivative Gains Reclassified
from Accumulated Other
Comprehensive Income (Loss)
into Income
(effective portion)
 
Net Gains Reclassified
from Accumulated Other
Comprehensive Income (Loss)
into Income
(effective portion)
 
2018
 
2017
 
 
 
2018
 
2017
 
(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments
$
(14
)
 
$
124

 
Cost of revenues
 
$
30

 
$
17

 
 
 
 
 
Selling, general and administrative expenses
 
5

 
3

 
 
 
 
 
Total
 
$
35

 
$
20


The activity related to the change in net unrealized gains on our cash flow hedges included in accumulated other comprehensive income (loss) is presented in Note 10.

Other Derivatives

We use foreign exchange forward contracts, which have not been designated as hedges, to hedge balance sheet exposure to certain monetary assets and liabilities denominated in currencies, primarily the Indian rupee and British pound, other than the functional currency of our foreign subsidiaries. We entered into a series of foreign exchange forward contracts that are scheduled to mature in 2018. Realized gains or losses and changes in the estimated fair value of these derivative financial instruments are recorded in the caption "Foreign currency exchange gains (losses), net" in our consolidated statements of operations.

Additional information related to our outstanding foreign exchange forward contracts not designated as hedging instruments is as follows:
 
March 31, 2018
 
December 31, 2017
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
(in millions)
Contracts outstanding
$
301

 
$
(1
)
 
$
255

 
$
(5
)


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The following table provides information on the location and amounts of realized and unrealized pre-tax gains and losses on our other derivative financial instruments for the three months ended March 31:
 
Location of Net Gains (Losses) on
Derivative Instruments
 
Amount of Net Gains (Losses) on Derivative Instruments
 
 
 
2018
 
2017
 
 
 
(in millions)
Foreign exchange forward contracts – Not designated as hedging instruments
Foreign currency exchange gains (losses), net
 
$
2

 
$
(10
)

The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.
Note 9 — Fair Value Measurements
We measure our cash equivalents, investments and foreign exchange forward contracts at fair value. The authoritative guidance defines fair value as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

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The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of March 31, 2018:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
335

 
$

 
$

 
$
335

Commercial paper

 
248

 

 
248

Total cash equivalents
335

 
248

 

 
583

Short-term investments:
 
 
 
 
 
 
 
Time deposits(1)

 
353

 

 
353

Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Treasury and agency debt securities
566

 
68

 

 
634

Corporate and other debt securities

 
442

 

 
442

Certificates of deposit and commercial paper

 
563

 

 
563

Asset-backed securities

 
302

 

 
302

Municipal debt securities

 
128

 

 
128

Total available-for-sale investment securities
566

 
1,503

 

 
2,069

Held-to-maturity investment securities:
 
 
 
 
 
 
 
Commercial paper

 
461

 

 
461

Corporate and other debt securities

 
480

 

 
480

Total short-term held-to-maturity investment securities

 
941

 

 
941

Total short-term investments(2)
566

 
2,797

 

 
3,363

Long-term investments:
 
 
 
 
 
 
 
Held-to-maturity investment securities:
 
 
 
 
 
 
 
Corporate and other debt securities

 
6

 

 
6

Total long-term held-to-maturity investment securities

 
6

 

 
6

Total long-term investments(3)

 
6

 

 
6

Derivative financial instruments - foreign exchange forward contracts:
 
 
 
 
 
 
 
Other current assets

 
98

 

 
98

Accrued expenses and other current liabilities

 
(2
)
 

 
(2
)
Other noncurrent assets

 
9

 

 
9

Other noncurrent liabilities

 
(1
)
 

 
(1
)
Total
$
901

 
$
3,155

 
$

 
$
4,056

            
(1)
Includes $348 million in restricted time deposits. See Note 14.
(2)
Excludes an equity security invested in a mutual fund valued at $25 million based on the NAV of the fund.
(3)
Excludes equity and cost method investments of $77 million, which are accounted for using the equity method of accounting and at cost, respectively.


22


The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
334

 
$

 
$

 
$
334

Bank deposits

 
80

 

 
80

Commercial paper

 
386