Document
Table of Contents

 
 
 

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 September 30, 2017
☐
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
 
 
 
 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 October 25, 2017:
Class
 
Number of Shares
Class A Common Stock, par value $.01 per share
 
589,645,636

 
 
 
Table of Contents

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.
 
 

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.    Condensed Consolidated Financial Statements (Unaudited).
 
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in millions, except par values)
 
 
September 30,  
 2017

December 31, 
 2016
Assets



Current assets:



Cash and cash equivalents
$
1,577


$
2,034

Short-term investments
3,136


3,135

Trade accounts receivable, net of allowances of $62 and $48, respectively
2,889


2,556

Unbilled accounts receivable
403


349

Other current assets
552


526

Total current assets
8,557


8,600

Property and equipment, net
1,304


1,311

Goodwill
2,608


2,554

Intangible assets, net
957


951

Deferred income tax assets, net
464


425

Long-term investments
262

 
62

Other noncurrent assets
428


359

Total assets
$
14,580


$
14,262

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable
$
186


$
175

Deferred revenue
333


306

Short-term debt
100


81

Accrued expenses and other current liabilities
1,981


1,856

Total current liabilities
2,600


2,418

Deferred revenue, noncurrent
114


151

Deferred income tax liabilities, net
5


6

Long-term debt
723


797

Other noncurrent liabilities
159


162

Total liabilities
3,601


3,534

Commitments and contingencies (See Note 12)

 

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, 590 and 608 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
6

 
6

Additional paid-in capital
208

 
358

Retained earnings
10,721

 
10,478

Accumulated other comprehensive income (loss)
44

 
(114
)
Total stockholders’ equity
10,979


10,728

Total liabilities and stockholders’ equity
$
14,580


$
14,262

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
3,766


$
3,453


$
10,982


$
10,025

Operating expenses:







Cost of revenues (exclusive of depreciation and amortization expense shown separately below)
2,337


2,077


6,792


6,030

Selling, general and administrative expenses
674


701


2,069


2,001

Depreciation and amortization expense
107


92


297


266

Income from operations
648


583


1,824


1,728

Other income (expense), net:







Interest income
34


27


97


86

Interest expense
(6
)

(5
)

(18
)

(15
)
Foreign currency exchange gains (losses), net
(16
)

7


41


(4
)
Other, net
(2
)

1


(2
)

2

Total other income (expense), net
10


30


118


69

Income before provision for income taxes
658


613


1,942


1,797

Provision for income taxes
(164
)

(170
)

(421
)

(661
)
Income from equity method investment
1

 
1

 
1

 
1

Net income
$
495


$
444


$
1,522


$
1,137

Basic earnings per share
$
0.84


$
0.73


$
2.56


$
1.88

Diluted earnings per share
$
0.84


$
0.73


$
2.55


$
1.87

Weighted average number of common shares outstanding - Basic
590


606


594


607

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

 
3

 
2

 
3

Weighted average number of common shares outstanding - Diluted
592


609


596


610

Dividends declared per common share
$
0.15

 
$
—

 
$
0.30

 
$
—

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

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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
495

 
$
444

 
$
1,522

 
$
1,137

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
33

 
1

 
100

 
(8
)
Change in unrealized gains and losses on cash flow hedges, net of taxes
(22
)
 
41

 
56

 
53

Change in unrealized gains and losses on available-for-sale securities, net of taxes
—

 
(2
)
 
2

 
6

Other comprehensive income (loss)
11

 
40

 
158

 
51

Comprehensive income
$
506

 
$
484

 
$
1,680

 
$
1,188

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

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

 
For the Nine Months Ended 
 September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
1,522

 
$
1,137

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
321

 
278

Provision for doubtful accounts
12

 
9

Deferred income taxes
(46
)
 
(44
)
Stock-based compensation expense
161

 
165

Other
(49
)
 
10

Changes in assets and liabilities:
 
 
 
Trade accounts receivable
(284
)
 
(261
)
Other current assets
21

 
(84
)
Other noncurrent assets
(65
)
 
(51
)
Accounts payable
(5
)
 
12

Deferred revenues, current and noncurrent
(21
)
 
(57
)
Other current and noncurrent liabilities
4

 
(73
)
Net cash provided by operating activities
1,571

 
1,041

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(204
)
 
(213
)
Purchases of available-for-sale investment securities
(2,163
)
 
(3,423
)
Proceeds from maturity or sale of available-for-sale investment securities
2,352

 
3,052

Purchases of held-to-maturity investment securities
(1,015
)
 
(29
)
Proceeds from maturity of held-to-maturity investment securities
208

 
—

Purchases of other investments
(363
)
 
(764
)
Proceeds from maturity or sale of other investments
835

 
689

Payments for business combinations, net of cash acquired and equity method investment
(72
)
 
(185
)
Net cash (used in) investing activities
(422
)
 
(873
)
Cash flows from financing activities:
 
 
 
Issuance of common stock under stock-based compensation plans
146

 
135

Repurchases of common stock
(1,557
)
 
(492
)
Repayment of term loan borrowings and capital lease obligations
(62
)
 
(41
)
Net change in notes outstanding under the revolving credit facility
—

 
(350
)
Dividends paid
(179
)
 
—

Net cash (used in) financing activities
(1,652
)
 
(748
)
Effect of exchange rate changes on cash and cash equivalents
46

 
5

(Decrease) in cash and cash equivalents
(457
)
 
(575
)
Cash and cash equivalents, beginning of year
2,034

 
2,125

Cash and cash equivalents, end of period
$
1,577

 
$
1,550

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

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

Note 1 — Interim Condensed Consolidated Financial Statements

The terms “Cognizant,” “we,” “our,” “us” and “the Company” refer to Cognizant Technology Solutions Corporation unless the context indicates otherwise. We have prepared the accompanying unaudited condensed consolidated financial statements included herein in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The accompanying unaudited condensed 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, 2016. In our opinion, all adjustments considered necessary for a fair statement of the accompanying unaudited condensed 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.

In March 2016, the Financial Accounting Standards Board, or FASB, issued an update to the standard on derivatives and hedging, which clarifies the effect of derivative contract novations on existing hedge accounting relationships. As it relates to derivative instruments, novation refers to replacing one of the parties to a derivative instrument with a new party, which may occur for a variety of reasons such as: financial institution mergers, intercompany transactions, an entity exiting a particular derivatives business or relationship, or because of laws or regulatory requirements. The update clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedge accounting relationship provided that all other hedge accounting criteria continue to be met. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2017. We adopted this update beginning January 1, 2017. The adoption of this update did not have any effect on our financial condition or results of operations.

In March 2016, the FASB issued an update to the standard on stock compensation, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for excess tax benefits and deficiencies, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2017. We adopted this update prospectively beginning January 1, 2017. For the three and nine months ended September 30, 2017, we recognized net excess tax benefits on stock-based compensation awards in our income tax provision in the amount of $5 million and $16 million or approximately $0.01 and $0.03 per share, respectively. Additionally, the excess tax benefits and deficiencies have been presented in operating activities in the statement of cash flows in our consolidated financial statements and the prior period presentation has been adjusted to conform to the current period.

In January 2017, the FASB issued an update to the standard on business combinations, which clarifies the definition of a business. The update requires a business to include at least an input and a substantive process that together significantly contribute to the ability to create outputs. The update also states that the definition of a business is not met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2018 with early adoption permitted. We early adopted this update prospectively beginning January 1, 2017. The adoption of this update did not have a material effect on our financial condition or results of operations.

In January 2017, the FASB issued an update to the standard on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020 with early adoption permitted. We early adopted this update prospectively beginning January 1, 2017. The adoption of this update did not have any effect on our financial condition or results of operations.


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New Accounting Pronouncements.

In May 2014, the FASB issued a standard on revenue from contracts with customers. In 2016, the FASB issued five amendments to the new standard. 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 will enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. The standard is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2018. 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. We intend to adopt the standard using the modified retrospective method effective January 1, 2018. While we are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures, we believe the most significant impacts primarily relate to changes in the method used to measure progress on our application maintenance and business process services fixed-price contracts, capitalization and amortization of costs to acquire and fulfill a contract, as well as the timing of revenue recognition on our software license contracts. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the standard will be dependent on each contract's specific terms. The final impact of adoption of the new standard will be based on active contracts as of December 31, 2017. Many of our contracts are short-term in nature and may be renewed, terminated or otherwise modified after September 30, 2017. Additionally, new contracts will be signed during the fourth quarter of 2017. Thus, we are unable to provide a quantification of the impact of adoption of the new standard at this time.

In January 2016, the FASB issued an update to the standard on financial instruments. The update significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements.  The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. Upon adoption, entities will be required to make a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value will apply prospectively to all equity investments that exist as of the date of adoption.  We do not expect the adoption of this update to have a material effect on our financial condition or results of operations.

In February 2016, the FASB issued a standard on lease accounting. 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. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2019. Upon adoption, entities will be required to use a modified retrospective transition which provides for certain practical expedients. Entities are required to apply the new standard at the beginning of the earliest comparative period presented. Early adoption of this new standard is permitted. We expect to adopt the standard beginning January 1, 2019. We are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures. 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.

In August 2016, the FASB issued an update to the standard on the statement of cash flows, which clarifies the presentation and classification of certain cash receipts and cash payments. The update addresses specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. Upon adoption, entities will be required to use a retrospective transition approach. The adoption of this guidance may affect financial statement presentation but will have no effect on our financial position or results of operations.

In March 2017, the FASB issued an update to shorten 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. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2019 with early adoption permitted. 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.

In May 2017, the FASB issued an update to amend the scope of modification accounting for share-based payment arrangements. The amendment requires that an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification are the same immediately before and after the modification. The

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update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. Upon adoption, entities will be required to apply this guidance prospectively to an award modified on or after the adoption date. We do not expect the adoption of this update to have a material effect on our financial condition or results of operations.

In August 2017, the FASB issued an update to the standard on derivatives and hedging. The update expands and refines hedge accounting for both financial and nonfinancial hedging strategies to better align hedge accounting with companies’ risk management strategies. The update also amends the presentation and disclosure requirements and changes how companies assess effectiveness of their hedges. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2019 with early adoption permitted. Adoption methods will differ by type of hedge. We are currently evaluating the effect the update 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. 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 2010 and 2015 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. Of the $4 million out-of-period correction, $3 million was recorded in the third quarter of 2016 and $1 million was recorded in the fourth quarter of 2016. These out-of-period corrections and the other $2 million in potentially improper payments were not material to any previously issued financial statements. The investigation is also examining various other payments made in small amounts in India and elsewhere that may not have complied with Company policy or applicable law. There were no adjustments recorded during the nine months ended September 30, 2017.

Note 3 — Business Combinations

Business Combinations

In 2017, we completed three business combinations for total initial consideration of approximately $72 million (net of cash acquired). One of these transactions was an acquisition of an intelligent products and solutions company specializing in digital strategy, product design and engineering, the internet of things, and enterprise mobility that expands our digital transformation portfolio and capabilities. The second transaction was an acquisition of a healthcare management consulting firm that strengthens our consulting service offerings within the healthcare consulting market. The third transaction was an acquisition of a leading national provider of business process services to the government healthcare market that further strengthens our business process-as-a-service solutions for government and public health programs.

These acquisitions were included in our unaudited condensed consolidated financial statements as of the date on which the businesses were acquired and were not material to our operations, financial position or cash flows. Accordingly, pro forma results have not been presented. We have preliminarily allocated the purchase price related to these transactions to tangible and intangible assets and liabilities, including non-deductible goodwill, based on their estimated fair values. We will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the date of acquisition. Specifically-identified intangible assets and goodwill acquired were as follows:
 
Fair Value
 
Weighted Average Useful Life
 
(in millions)
 
 
Non-deductible goodwill
$
28

 
 
Customer relationship intangible assets
91

 
10.0 years
Other intangible assets
2

 
2.7 years

The primary items that generated the aforementioned goodwill are the value of the acquired assembled workforces and synergies between the acquired companies and us, neither of which qualify as an amortizable intangible asset.


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Supplemental Schedule of Noncash Investing Activities
In conjunction with the 2017 acquisitions, liabilities were assumed as follows:
 
Nine Months Ended 
 September 30,
 
(in millions)
Fair value of assets acquired
$
165

Purchase price paid in cash (net of cash acquired)
(72
)
Liabilities assumed
$
93


Note 4 — Realignment Charges
In 2017, we began a realignment of our business to accelerate the shift to digital services and solutions while improving the overall efficiency of our operations. As part of this realignment, for the three and nine months ended September 30, 2017, we incurred $19 million and $69 million, respectively, in pre-tax realignment charges, reported in "Selling, general and administrative expenses" in our consolidated statements of operations. The realignment charges are comprised of severance costs, including those related to a voluntary separation program, or VSP, announced in May 2017, lease termination costs and advisory fees related to non-routine shareholder matters and to the development of our realignment and return of capital programs.
Realignment charges for the three and nine months ended September 30, 2017 were as follows:
 
 
Three Months
 
Nine Months
 
 
(in millions)
Employee separations
 
$
14

 
$
53

Advisory fees
 
5

 
15

Lease termination costs
 
—

 
1

Total realignment costs
 
$
19

 
$
69

There were no realignment charges incurred in 2016.

Note 5 — Investments

Our investments were as follows:
 
September 30, 2017
 
December 31, 2016
 
(in millions)
Short-term investments:
 
 
 
Trading investment securities
$
25

 
$
25

Available-for-sale investment securities
2,075

 
2,264

Held-to-maturity investment securities
677

 
40

Time deposits
359

 
806

Total short-term investments
$
3,136

 
$
3,135


Long-term investments:
 
 
 
Equity and cost method investments
$
72

 
$
62

Held-to-maturity investment securities
190

 
—

Total long-term investments
$
262

 
$
62


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Trading Investment Securities

Our trading investment securities consist of a U.S. dollar denominated investment in a fixed income mutual fund. Unrealized losses for the three and nine months ended September 30, 2017 and 2016 were immaterial. There were no realized gains or losses on trading securities during the three and nine months ended September 30, 2017. 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.

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 September 30, 2017 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
U.S. Treasury and agency debt securities
$
658

 
$
—

 
$
(2
)
 
$
656

Corporate and other debt securities
452

 
—

 
(1
)
 
451

Certificates of deposit and commercial paper
546

 
1

 
—

 
547

Asset-backed securities
289

 
—

 
(1
)
 
288

Municipal debt securities
133

 
—

 
—

 
133

Total available-for-sale investment securities
$
2,078

 
$
1

 
$
(4
)
 
$
2,075

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale investment securities at December 31, 2016 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
U.S. Treasury and agency debt securities
$
605

 
$
—

 
$
(3
)
 
$
602

Corporate and other debt securities
407

 
—

 
(2
)
 
405

Certificates of deposit and commercial paper
910

 
1

 
—

 
911

Asset-backed securities
232

 
—

 
(1
)
 
231

Municipal debt securities
116

 
—

 
(1
)
 
115

Total available-for-sale investment securities
$
2,270

 
$
1

 
$
(7
)
 
$
2,264


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 September 30, 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
$
546

 
$
(1
)
 
$
44

 
$
(1
)
 
$
590

 
$
(2
)
Corporate and other debt securities
253

 
(1
)
 
37

 
—

 
290

 
(1
)
Certificates of deposit and commercial paper
25

 
—

 
—

 
—

 
25

 
—

Asset-backed securities
226

 
(1
)
 
10

 
—

 
236

 
(1
)
Municipal debt securities
60

 
—

 
7

 
—

 
67

 
—

Total
$
1,110

 
$
(3
)
 
$
98

 
$
(1
)
 
$
1,208

 
$
(4
)

9
Table of Contents

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, 2016:
 
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
$
526

 
$
(3
)
 
$
—

 
$
—

 
$
526

 
$
(3
)
Corporate and other debt securities
342

 
(2
)
 
1

 
—

 
343

 
(2
)
Certificates of deposit and commercial paper
185

 
—

 
—

 
—

 
185

 
—

Asset-backed securities
206

 
(1
)
 
1

 
—

 
207

 
(1
)
Municipal debt securities
88

 
(1
)
 
1

 
—

 
89

 
(1
)
Total
$
1,347

 
$
(7
)
 
$
3

 
$
—

 
$
1,350

 
$
(7
)

The unrealized losses for the above securities as of September 30, 2017 and December 31, 2016 were primarily attributable to changes in interest rates. At each reporting date, the Company performs 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 September 30, 2017. 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.
The contractual maturities of our fixed income available-for-sale investment securities as of September 30, 2017 are set forth in the following table:
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
692

 
$
692

Due after one year up to two years
539

 
538

Due after two years up to three years
461

 
460

Due after three years
97

 
97

Asset-backed securities
289

 
288

Total available-for-sale investment securities
$
2,078

 
$
2,075


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Proceeds from sales of available-for-sale investment securities
$
375

 
$
465

 
$
2,020

 
$
2,843

 
 
 
 
 
 
 
 
Gross gains
$
—

 
$
1

 
$
1

 
$
5

Gross losses
(1
)
 
(4
)
 
(2
)
 
(4
)
Net realized (losses) gains on sales of available-for-sale investment securities
$
(1
)
 
$
(3
)
 
$
(1
)
 
$
1


10
Table of Contents


Held-to-Maturity Investment Securities

Our held-to-maturity investment securities consist of Indian rupee denominated investments primarily in commercial paper, international 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. We classify these securities with maturities beyond 90 days but less than one year at the reporting date as short-term investments and beyond one year as long-term investments.

The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at September 30, 2017 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
Short-term investments:
 
 
 
 
 
 
 
Corporate and other debt securities
$
281

 
$
—

 
$
—

 
$
281

Commercial paper
396

 
—

 
—

 
396

Total short-term held-to-maturity investments
677

 
—

 
—

 
677

Long-term investments:
 
 
 
 
 
 
 
Corporate and other debt securities
190

 
—

 
(1
)
 
189

Total held-to-maturity investment securities
$
867

 
$
—

 
$
(1
)
 
$
866


The amortized cost, gross unrealized gains and losses and fair value of held-to-maturity investment securities at December 31, 2016 were as follows:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
Short-term investments:
 
 
 
 
 
 
 
Certificates of deposit and commercial paper
$
40

 
$
—

 
$
—

 
$
40


There were no long-term held-to-maturity investment securities at December 31, 2016.

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 September 30, 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
$
363

 
$
(1
)
 
$
—

 
$
—

 
$
363

 
$
(1
)
Commercial paper
268

 
—

 
—

 
—

 
268

 
—

Total
$
631

 
$
(1
)
 
$
—

 
$
—

 
$
631

 
$
(1
)

As of December 31, 2016, held-to-maturity investment securities in an unrealized loss position were immaterial. 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 September 30, 2017.

11
Table of Contents

The contractual maturities of our fixed income held-to-maturity investment securities as of September 30, 2017 are set forth in the following table:
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
677

 
$
677

Due after one year up to two years
184

 
183

Due after two years
6

 
6

Total held-to-maturity investment securities
$
867

 
$
866


During the nine months ended September 30, 2017 and the year ended December 31, 2016, there were no transfers of investments between our trading, available-for-sale and held-to-maturity investment portfolios.

Note 6 — Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:
 
September 30, 2017
 
December 31, 2016
 
(in millions)
Compensation and benefits
$
1,262

 
$
1,134

Income taxes
23

 
10

Professional fees
99

 
99

Travel and entertainment
43

 
36

Customer volume and other incentives
277

 
258

Derivative financial instruments
2

 
4

Other
275

 
315

Total accrued expenses and other current liabilities
$
1,981

 
$
1,856


Note 7 — 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. There were no notes outstanding under the revolving credit facility as of September 30, 2017 or December 31, 2016. 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 September 30, 2017.

Short-term Debt

The following summarizes our short-term debt balances as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
(in millions)
Term loan - current maturities
 
$
100

 
$
81

Total short-term debt
 
$
100

 
$
81


12
Table of Contents


Long-term Debt

The following summarizes our long-term debt balances as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
(in millions)
Term loan, due 2019
 
$
825

 
$
881

Less:
 
 
 
 
Current maturities
 
(100
)
 
(81
)
Deferred financing costs
 
(2
)
 
(3
)
Long-term debt, net of current maturities
 
$
723

 
$
797


Note 8 — Income Taxes

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 34.6%. In addition, all Indian profits, including those generated within SEZs, are subject to the Minimum Alternative Tax, or MAT, at the rate of 21.3%. 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Effective income tax rate
24.9
%
 
27.6
%
 
21.7
%
 
36.7
%
In the first quarter of 2017, we recognized 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.
In May 2016, our principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion ("India Cash Remittance"). This transaction was undertaken pursuant to a plan approved by the High Court of Madras and simplified the shareholding structure of our principal operating subsidiary in India. Pursuant to the transaction, our principal Indian operating subsidiary repurchased approximately $1.2 billion of the total $2.8 billion of shares from its U.S. shareholders, resulting in tax expense in the United States and India, while the remaining $1.6 billion was repurchased from its shareholder outside the United States. Net of taxes, the transaction resulted in a remittance of cash to the United States in the amount of $1.0 billion. As a result of this transaction, we incurred an incremental 2016 income tax expense of $238 million, including a discrete item recognized in the second quarter of 2016 of $143 million relating to the distribution of historic undistributed accumulated foreign earnings. Total incremental tax expense of $24 million and $214 million were recognized in the three and nine months ended September 30, 2016. This transaction is primarily responsible for the decrease in our effective income tax rate in 2017 compared to 2016.
The decrease in our effective income tax rate for the nine months ended 2017 as compared to the same period in 2016 is primarily due to the India Cash Remittance and the recognition of previously unrecognized income tax benefits, as described above. For the 2017 periods, the principal reasons for the difference between our effective income tax rates and the U.S. federal statutory rate are the effect of the Indian tax holiday, earnings taxed in countries that have lower rates than the United States, and, for the nine months ended September 30, 2017, the recognition in the first quarter of 2017 of previously unrecognized income tax benefits. For the three months ended September 30, 2016, the principal reasons for the difference between our effective income tax rates and the U.S. federal statutory rate are the effect of the Indian tax holiday and earnings taxed in countries that have lower rates than the United States, partially offset by the effect of the India Cash Remittance transaction. For the nine months ended September 30, 2016, the principal reasons for the difference between our effective income tax rates and the U.S. federal statutory rate are the effect of the India Cash Remittance transaction, partially offset by the effect of the Indian tax holiday and earnings taxed in countries that have lower rates than the United States.


13
Table of Contents

Note 9 — 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:
 
 
 
 
September 30, 2017
 
December 31, 2016
Designation of Derivatives
 
Location on Statement of
Financial Position
 
Assets
 
Liabilities
 
Assets  
 
Liabilities
 
 
 
 
(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments
 
Other current assets
 
$
106

 
$
—

 
$
34

 
$
—

 
 
Other noncurrent assets
 
24

 
—

 
17

 
—

 
 
Accrued expenses and other current liabilities
 
—

 
1

 
—

 
—

 
 
Other noncurrent liabilities
 
—

 
2

 
—

 
—

 
 
Total
 
130

 
3

 
51

 
—

Foreign exchange forward contracts – Not designated as hedging instruments
 
Other current assets
 
3

 
—

 
—

 
—

 
 
Accrued expenses and other current liabilities
 
—

 
1

 
—

 
4

 
 
Total
 
3

 
1

 
—

 
4

Total
 
 
 
$
133

 
$
4

 
$
51

 
$
4


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 2017, 2018 and 2019. 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 September 30, 2017, we estimate that $78 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.


14
Table of Contents

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:
 
September 30, 2017
 
December 31, 2016
 
(in millions)
2017
$
360

 
$
1,320

2018
1,140

 
1,020

2019
525

 
—

Total notional value of contracts outstanding
$
2,025

 
$
2,340

Net unrealized gains included in accumulated other comprehensive income (loss), net of taxes
$
95

 
$
39


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 (losses) on our cash flow hedges for the three months ended September 30:
 
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)
 
2017
 
2016
 
 
 
2017
 
2016
 
(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments
$
6

 
$
63

 
Cost of revenues
 
$
29

 
$
7

 
 
 
 
 
Selling, general and administrative expenses
 
5

 
2

 
 
 
 
 
Total
 
$
34

 
$
9

The following table provides information on the location and amounts of pre-tax gains (losses) on our cash flow hedges for the nine months ended September 30:
 
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)
 
2017
 
2016
 
 
 
2017
 
2016
 
(in millions)
Foreign exchange forward contracts – Designated as cash flow hedging instruments
$
165

 
$
78

 
Cost of revenues
 
$
75

 
$
8

 
 
 
 
 
Selling, general and administrative expenses
 
14

 
2

 
 
 
 
 
Total
 
$
89

 
$
10


The activity related to the change in net unrealized gains (losses) on our cash flow hedges included in accumulated other comprehensive income (loss) is presented in Note 11.

15
Table of Contents


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, other than the functional currency of our foreign subsidiaries. These foreign exchange forward contracts are scheduled to mature in 2017 and 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:
 
September 30, 2017
 
December 31, 2016
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
(in millions)
Contracts outstanding
$
273

 
$
2

 
$
213

 
$
(4
)

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 and nine months ended September 30:
 
Location of Net (Losses) on
Derivative Instruments
 
Amount of Net (Losses) on Derivative Instruments
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
(in millions)
Foreign exchange forward contracts – Not designated as hedging instruments
Foreign currency exchange gains (losses), net
 
$
(3
)
 
$
(6
)
 
$
(16
)
 
$
(6
)

The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.

Note 10 — 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.

16
Table of Contents

The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of September 30, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
317

 
$
—

 
$
—

 
$
317

Bank deposits
—

 
80

 
—

 
80

Commercial paper
—

 
10

 
—

 
10

Total cash equivalents
317

 
90

 
—

 
407

Short-term investments:
 
 
 
 
 
 
 
Time deposits
—

 
359

 
—

 
359

Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Treasury and agency debt securities
574

 
82

 
—

 
656

Corporate and other debt securities
—

 
451

 
—

 
451

Certificates of deposit and commercial paper
—

 
547

 
—

 
547

Asset-backed securities
—

 
288

 
—

 
288

Municipal debt securities
—

 
133

 
—

 
133

Total available-for-sale investment securities
574

 
1,501

 
—

 
2,075

Held-to-maturity investment securities:
 
 
 
 
 
 
 
Commercial paper
—

 
396

 
—

 
396

Corporate and other debt securities
—

 
281

 
—

 
281

Total short-term held-to-maturity investment securities
—

 
677

 
—

 
677

Total short-term investments(1)
574

 
2,537

 
—

 
3,111

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

 
189

 
—

 
189

Total long-term held-to-maturity investment securities
—

 
189

 
—

 
189

Total long-term investments(2)
—

 
189

 
—

 
189

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

 
109

 
—

 
109

Accrued expenses and other current liabilities
—

 
(2
)
 
—

 
(2
)
Other noncurrent assets
—

 
24

 
—

 
24

Other noncurrent liabilities
—

 
(2
)
 
—

 
(2
)
Total
$
891

 
$
2,945

 
$
—

 
$
3,836

________________
(1)
Excludes trading securities invested in a mutual fund valued at $25 million based on the NAV of the fund at September 30, 2017.
(2)
Excludes equity and cost method investments of $72 million at September 30, 2017, which are accounted for using the equity method of accounting and at cost, respectively.


17
Table of Contents

The following table summarizes our financial assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
624

 
$
—

 
$
—

 
$
624

Commercial paper
—

 
131

 
—

 
131

Total cash equivalents
624

 
131

 
—

 
755

Short-term investments:
 
 
 
 
 
 
 
Time deposits
—

 
806

 
—

 
806

Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Treasury and agency debt securities
558

 
44

 
—

 
602

Corporate and other debt securities
—

 
405

 
—

 
405

Certificates of deposit and commercial paper
—

 
911

 
—

 
911

Asset-backed securities
—

 
231

 
—

 
231

Municipal debt securities
—

 
115

 
—

 
115

Total available-for-sale investment securities
558

 
1,706

 
—

 
2,264

Held-to-maturity investment securities:
 
 
 
 
 
 
 
Certificates of deposit and commercial paper
—

 
40

 
—

 
40

Total held-to-maturity investment securities
—

 
40

 
—

 
40

Total short-term investments(1)
558

 
2,552

 
—

 
3,110

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

 
34

 
—

 
34

Accrued expenses and other current liabilities
—

 
(4
)
 
—

 
(4
)
Other noncurrent assets
—

 
17

 
—

 
17

Total
$
1,182

 
$
2,730

 
$
—

 
$
3,912

________________
(1)
Excludes trading securities invested in a mutual fund valued at $25 million based on the NAV of the fund at December 31, 2016.

We measure the fair value of money market funds and U.S. Treasury securities based on quoted prices in active markets for identical assets and therefore classify these assets as Level 1. The fair value of commercial paper, certificates of deposit, U.S. government agency securities, municipal debt securities, debt securities issued by supranational institutions, U.S. and international corporate bonds and foreign government debt securities is measured based on relevant trade data, dealer quotes, or model-driven valuations using significant inputs derived from or corroborated by observable market data, such as yield curves and credit spreads. We measure the fair value of our asset-backed securities using model-driven valuations based on significant inputs derived from or corroborated by observable market data such as dealer quotes, available trade information, spread data, current market assumptions on prepayment speeds and defaults and historical data on deal collateral performance. The carrying value of deposits approximated fair value as of September 30, 2017 and December 31, 2016.

We estimate the fair value of each foreign exchange forward contract by using a present value of expected cash flows model. This model calculates the difference between the current market forward price and the contracted forward price for each foreign exchange contract and applies the difference in the rates to each outstanding contract. The market forward rates include a discount and credit risk factor. The amounts are aggregated by type of contract and maturity.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, there were no transfers among Level 1, Level 2, or Level 3 financial assets and liabilities.


18
Table of Contents

Note 11 — Stockholder's Equity
Stock Repurchase Program
Under the Board of Directors' authorized stock repurchase program, the Company is authorized to repurchase its Class A common stock through open market purchases, including under a trading plan adopted pursuant to Rule 10b5-1 of the Exchange Act, or in private transactions, in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares to be purchased are determined by the Company’s management, in its discretion, or pursuant to a Rule 10b5-1 trading plan, and will depend upon market conditions and other factors.
In March 2017, we entered into accelerated share repurchase agreements, referred to collectively as the ASR, with certain financial institutions under our stock repurchase program. Under the terms of the ASR and in exchange for up-front payments of $1,500 million, the financial institutions initially delivered 21.5 million shares. In August 2017, upon the final settlement of the ASR, we received an additional 2.2 million shares based on the final volume-weighted average price of the Company's Class A common stock during the purchase period less the negotiated discount.

Under the ASR, the shares received were constructively retired and returned to the status of authorized and unissued shares in the periods they were delivered, and the up-front payments were accounted for as a reduction to stockholders’ equity in our consolidated statement of financial position in the period the payments were made. The ASR was accounted for as a $400 million reduction in common stock and additional paid-in capital and a $1,100 million reduction in retained earnings in our consolidated statements of financial position. We reflected the ASR as a repurchase of common stock in the period shares were delivered for purposes of calculating earnings per share and as forward contracts indexed to our common stock. The forward contracts met all of the applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.
As of September 30, 2017, the remaining available balance under our stock repurchase program was $2,000 million.

Stock repurchases were made in connection with our stock-based compensation plans, whereby Company shares were tendered by employees for payment of applicable statutory tax withholdings. We also repurchased a limited number of shares from employees at the repurchase date market price. Combined, for the nine months ended September 30, 2017, such repurchases totaled 0.9 million shares at an aggregate cost of $57 million.

Dividends

The Company declared and paid cash dividends per share during the periods presented as follows:
 
 
Dividends per Share
 
Amount Paid
 
 
 
 
(in millions)
Three months ended June 30, 2017
 
$
0.15

 
$
89

Three months ended September 30, 2017
 
0.15

 
90

Nine months ended September 30, 2017
 
 
 
$
179


On November 1, 2017, our Board of Directors approved the Company's declaration of a $0.15 per share dividend with a record date of November 20, 2017 and a payment date of November 30, 2017.

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Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component were as follows for the three and nine months ended September 30, 2017:
 
Three Months
 
Nine Months
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
(in millions)
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(82
)
 
$
—

 
$
(82
)
 
$
(149
)
 
$
—

 
$
(149
)
Change in foreign currency translation adjustments
33

 
—

 
33

 
100

 
—

 
100

Ending balance
$
(49
)
 
$
—

 
$
(49
)
 
$
(49
)
 
$
—

 
$
(49
)
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(3
)
 
$
1

 
$
(2
)
 
$
(6
)
 
$
2

 
$
(4
)
Net unrealized (losses) gains arising during the period
(1
)
 
—

 
(1
)
 
2

 
(1
)
 
1

Reclassification of net losses to Other, net
1

 
—

 
1

 
1

 
—

 
1

Net change
—

 
—

 
—

 
3

 
(1
)
 
2

Ending balance
$
(3
)
 
$
1

 
$
(2
)
 
$
(3
)
 
$
1

 
$
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
155

 
$
(38
)
 
$
117

 
$
51

 
$
(12
)
 
$
39

Unrealized gains arising during the period
6

 
(2
)
 
4

 
165

 
(41
)
 
124

Reclassifications of net (gains) to:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
(29
)
 
7

 
(22
)
 
(75
)
 
18

 
(57
)
Selling, general and administrative expenses
(5
)
 
1

 
(4
)
 
(14
)
 
3

 
(11
)
Net change
(28
)
 
6

 
(22
)
 
76

 
(20
)
 
56

Ending balance
$
127

 
$
(32
)
 
$
95

 
$
127

 
$
(32
)
 
$
95

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
70

 
$
(37
)
 
$
33

 
$
(104
)
 
$
(10
)
 
$
(114
)
Other comprehensive income (loss)
5

 
6

 
11

 
179

 
(21
)
 
158

Ending balance
$
75

 
$
(31
)
 
$
44

 
$
75

 
$
(31
)
 
$
44





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Table of Contents

Changes in accumulated other comprehensive income (loss) by component were as follows for the three and nine months ended September 30, 2016:
 
Three Months
 
Nine Months
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
Before Tax
Amount
 
Tax
Effect
 
Net of Tax
Amount
 
(in millions)
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
(99
)
 
$
—

 
$
(99
)
 
$
(90
)
 
$
—

 
$
(90
)
Change in foreign currency translation adjustments
1

 
—

 
1

 
(8
)
 
—

 
(8
)
Ending balance
$
(98
)
 
$
—

 
$
(98
)
 
$
(98
)
 
$
—

 
$
(98
)
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5

 
$
(2
)
 
$
3

 
$
(7
)
 
$
2

 
$
(5
)
Net unrealized (losses) gains arising during the period
(3
)
 
1

 
(2
)
 
10

 
(3
)
 
7

Reclassification of net (gains) to Other, net
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Net change
(3
)
 
1

 
(2
)
 
9

 
(3
)
 
6

Ending balance
$
2

 
$
(1
)
 
$
1