Cognizant Technology Solutions Corporation

02/12/2026 | Press release | Distributed by Public on 02/12/2026 07:32

Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Cognizant is one of the world's leading professional services companies, engineering modern businesses and delivering strategic outcomes for our clients. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in today's fast-changing world, where AI is reshaping organizations in every field. As an AI builder, we provide deep expertise at the intersection of industry and technology, combining our perspective with extensive knowledge of our clients' organizations to build industry-specific platforms and incorporate context into systems, AI models and custom solutions. We tailor our services and solutions to specific industries with an integrated global delivery model that employs client service and delivery teams based at client locations and dedicated global and regional delivery centers. Our services include consulting, application development, systems integration, quality engineering and assurance, engineering research and development, application maintenance, infrastructure and security as well as business process services and automation.
2025 Financial Results1
Revenues
Income from Operations
Operating Margin
Diluted EPS
GAAP
Adjusted1
GAAP
Adjusted1
GAAP
Adjusted1
Revenue up $1,372 million or 7.0% from 2024; an increase of 6.4% in constant currency1
Income from Operations up $497 million or 17.2% from 2024
Adjusted Income from Operations1up $301 million or 9.9% from 2024
Operating margin up 140 basis points from 2024
Adjusted Operating Margin1up 50 basis points from 2024
Diluted EPS up $0.05 or 1.1% from 2024
Adjusted Diluted EPS1up $0.53 or 11.2% from 2024
During the year ended December 31, 2025, revenues increased by $1,372 million as compared to the year ended December 31, 2024, representing an increase of 7.0%, or 6.4% on a constant currency basis1. Our acquisition of Belcan contributed 260 basis points to revenue growth. Additionally, revenues were positively impacted by growth in our Health Sciences and Financial Services segments, partially offset by weakness in our Products and Resources (excluding the acquisition of Belcan) and Communications Media and Technology segments.
Our operating margin and Adjusted Operating Margin1increased to 16.1% and 15.8%, respectively, for the year ended December 31, 2025, from 14.7% and 15.3%, respectively, for the year ended December 31, 2024. Our 2025 GAAP and Adjusted Operating Margins were positively impacted by net savings generated from our NextGen program, operational efficiencies and the beneficial impact of foreign currency exchange rate movements, partially offset by increased compensation costs and the dilutive impact of the acquisition of Belcan. In addition, our GAAP operating margin for 2025 was positively impacted by 30 basis points, or $62 million, from the gain on sale of property and equipment, and our GAAP operating margin for 2024 was negatively impacted by NextGen charges, both of which were excluded from our Adjusted Operating Margin1.
1Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures.
Cognizant December 31, 2025 Form 10-K
As a global professional services company, we compete on the basis of the knowledge, experience, insights, skills and talent of our employees and the value they can provide to our clients. We closely monitor attrition trends focusing on the metric that we believe is most relevant to our business. For the year ended December 31, 2025 our Voluntary Attrition - Tech Services was 13.9% as compared to 15.9% for the year ended December 31, 2024. We finished 2025 with approximately 351,600 employees as compared to 336,800 employees at the end of 2024.
In July 2025, the OBBBA was enacted in the United States, which, among other provisions, repealed the requirement to capitalize U.S. R&E costs. As a result, we do not believe it is more likely than not that we will realize our deferred tax asset of $390 million related to R&E costs capitalized outside the United States. These amounts would have otherwise been available to offset certain future U.S. taxes on our non-U.S. earnings, which, as a result of this repeal, we no longer project to be applicable to us. Therefore, in the third quarter of 2025, we recorded a one-time, non-cash income tax expense of $390 million. This impacted our full year 2025 GAAP diluted EPS by $0.80, which is added back for the calculation of Adjusted EPS. Other than this impact, we do not expect the OBBBA to significantly impact our effective income tax rate. Additionally, as a result of this repeal, our cash taxes during 2025 were reduced by approximately $200 million as compared to our initial cash tax projections prior to the repeal. These assessments are based upon our current interpretation of the OBBBA, which may change as a result of future clarifications or guidance.
The Government of India implemented labor law reforms effective November 21, 2025, including the Code on Social Security, 2020. As a result, during the fourth quarter of 2025, we recorded a one-time increase to our defined benefit liability for past service of $147 million, in "Other noncurrent liabilities" in our consolidated statement of financial position with a corresponding increase in "Accumulated other comprehensive income (loss)". Additionally, we anticipate a modest increase in our defined benefit costs prospectively. Certain aspects of the Labor Code rely on the issuance of rules and regulations. Additionally, the Government of India is in the process of clarifying certain aspects of the Labor Code. The issuance of rules and regulations as well as the outcome of these clarifications could impact our compensation and benefit expenses in India.
Business Outlook
See "Overview" within Part I, Item 1. Businessfor information on our strategic approach.
We continue to expect our clients' focus to be on their transformation into AI-ready, technology-driven, data-enabled, customer-centric and differentiated businesses. To support this transformation and drive greater business resiliency, clients have demanded and may increasingly demand services and solutions that deliver productivity and cost savings. We believe clients will continue to contend with industry-specific changes driven by evolving digital technologies, uncertainty in the regulatory environment, industry consolidation and convergence as well as international trade policies, including tariffs, and other macroeconomic and geopolitical factors. This includes the uncertainty related to the global economy, which has affected and may continue to affect their demand for our services and discretionary work.
We increasingly use AI-based technologies, including GenAI, in our client offerings and our own internal operations. AI technologies and services are part of a highly competitive and rapidly evolving market. We plan to continue to make significant investments in our AI capabilities to meet the needs of our clients and harness AI's value in a flexible, secure, scalable and responsible way. As AI-based technologies or other forms of automation evolve, demand for some services that we currently perform for our clients may be reduced and our ability to obtain favorable pricing or other terms for some of our services may be diminished.
Potential tax law and other regulatory and administrative changes, including judicial decisions thereon, may impact our future results. In addition, in March 2024, India and Mauritius signed a Protocol to amend the India-Mauritius Income Tax Treaty. We continue to evaluate the potential impact of the amendment, which, depending on its final terms when entered into force, could increase our effective income tax rate, as CTS India is a subsidiary of our wholly-owned Mauritius entity. For additional information, see Part I, Item 1A. Risk Factors.
Cognizant December 31, 2025 Form 10-K
Results of Operations
For a discussion of our results of operations for the year ended December 31, 2023, including a year-to-year comparison between 2024 and 2023, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report Form 10-K for the year ended December 31, 2024.
The Year Ended December 31, 2025 Compared to The Year Ended December 31, 2024
The following table sets forth certain financial data for the years ended December 31:
% of % of Increase / Decrease
(Dollars in millions, except per share data) 2025 Revenues 2024 Revenues $ %
Revenues $ 21,108 100.0 $ 19,736 100.0 $ 1,372 7.0
Operating expenses:
Cost of revenues(a)
13,991 66.3 12,958 65.7 1,033 8.0
Selling, general and administrative expenses(a)
3,240 15.3 3,223 16.3 17 0.5
Restructuring charges - - 134 0.7 (134) (100.0)
Depreciation and amortization expense 550 2.6 529 2.7 21 4.0
(Gain) on sale of property and equipment
(62) (0.3) - - (62) N/A
Income from operations and operating margin
3,389 16.1 2,892 14.7 497 17.2
Other income (expense), net
90 46 44 95.7
Income before provision for income taxes
3,479 16.5 2,938 14.9 541 18.4
Provision for income taxes
(1,258) (713) (545) 76.4
Income (loss) from equity method investments 9 15 (6) (40.0)
Net income $ 2,230 10.6 $ 2,240 11.3 $ (10) (0.4)
Diluted EPS
$ 4.56 $ 4.51 $ 0.05 1.1
Other Financial Information 2
Adjusted Income From Operations and Adjusted Operating Margin
$ 3,327 15.8 $ 3,026 15.3 $ 301 9.9
Adjusted Diluted EPS
$ 5.28 $ 4.75 $ 0.53 11.2
(a) Exclusive of depreciation and amortization expense
N/A Not Applicable
N/A Not Applicable2
2Adjusted Income from Operations, Adjusted Operating Margin and Adjusted Diluted EPS are not measures of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
Cognizant December 31, 2025 Form 10-K
Revenues - Reportable Business Segments and Geographic Markets
Revenues of $21,108 million across our business segments and geographies were as follows for the year ended December 31, 2025:
2025 as compared to 2024
Increase
(Dollars in millions) $ %
CC %3
Health Sciences $ 415 7.0 6.4
Financial Services 420 7.3 6.8
Products and Resources 503 10.5 9.7
CMT 34 1.0 0.7
Total revenues $ 1,372 7.0 6.4
2025 as compared to 2024
Increase
(Dollars in millions) $ %
CC %3
North America $ 1,082 7.4 7.4
United Kingdom 95 5.2 2.1
Continental Europe 158 8.2 3.6
Europe - Total 253 6.7 2.9
Rest of World 37 2.9 4.7
Total revenues $ 1,372 7.0 6.4
Change in revenues was driven by the following factors:
•Revenue growth across all geographies was primarily driven by our Financial Services and Health Sciences segments, which were positively impacted by the ramp up of several recently won large deals;
•Our acquisition of Belcan contributed 260 basis points of growth to the overall revenue growth, including approximately 960 basis points of growth to our Products and Resources segment, primarily in North America and to a lesser extent the United Kingdom;
•Our Communications Media and Technology segment has seen weakness amongst communications and media customers, offset by growth in technology customers.
3Constant currency revenue growth is not a measure of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information.
Cognizant December 31, 2025 Form 10-K
Cost of Revenues (Exclusive of Depreciation and Amortization Expense)
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$1,033M
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0.6% as a % of revenues
¡ % of Revenues
Our cost of revenues consists primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, project-related immigration and travel for technical personnel, subcontracting and costs of third-party products and services relating to revenues. The increase, as a percentage of revenues, was driven by increased compensation costs, the dilutive impact of the acquisition of Belcan and resales of third-party products in connection with our integrated offerings strategy, partially offset by operational efficiencies and the beneficial impact of foreign currency exchange rate movements.
SG&A Expenses (Exclusive of Depreciation and Amortization Expense)
SG&A expenses consist primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, immigration, travel, marketing, communications, management, finance, administrative and occupancy costs. The decrease, as a percentage of revenues, was primarily driven by net savings generated from our NextGen program.
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$17M
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1.0% as a % of revenues
¡ % of Revenues
Gain on Sale of Property and Equipment
During the year ended December 31, 2025, we realized a gain of $62 million on the sale of an office complex in India. For further detail see Note 5to our consolidated financial statements.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by 4.0%, and remained relatively flat as a percentage of revenues, in 2025 as compared to 2024. The increase in amortization expense, driven by intangible assets related to our acquisition of Belcan, was partially offset by the decline of depreciation expense, which was driven by actions taken under our NextGen program.
Operating Margin and Adjusted Operating Margin4- Overall
The increase in our 2025 GAAP operating margin and Adjusted Operating Margin4was primarily driven by net savings generated from our NextGen program, operational efficiencies and the beneficial impact of foreign currency exchange rate movements, partially offset by increased compensation costs and the dilutive impact of the acquisition of Belcan. In addition, our GAAP operating margin for 2025 was positively impacted by 30 basis points, or $62 million, from the gain on sale of property and equipment, and our GAAP operating margin for 2024 was negatively impacted by NextGen charges, both of which were excluded from our Adjusted Operating Margin.4
4Adjusted Income From Operations and Adjusted Operating Margin are not measures of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable.
Cognizant December 31, 2025 Form 10-K
A predominant portion of our costs in India are denominated in the Indian rupee, representing approximately 23% of our global operating costs during the year ended December 31, 2025. These costs are subject to foreign currency exchange rate fluctuations, which have an impact on our results of operations. We enter into foreign exchange derivative contracts to hedge certain Indian rupee denominated payments in India. These hedges are intended to mitigate the volatility of the changes in the exchange rate between the U.S. dollar and the Indian rupee. Including the impact of the hedges, the depreciation of the Indian rupee positively impacted our operating margin for the year ended December 31, 2025 by 50 basis points as compared to the year ended December 31, 2024.
Excluding the impact of applicable designated cash flow hedges, the depreciation of the Indian rupee against the U.S. dollar positively impacted our operating margin by approximately 70 basis points in 2025. Each additional 1.0% change in exchange rate between the Indian rupee and the U.S. dollar will have the effect of moving our operating margin by approximately 17 basis points (excluding the impact of our cash flow hedges). In 2025, the settlement of our cash flow hedges negatively impacted our operating margin by approximately 15 basis points, compared to a positive impact of 5 basis points in 2024.
Segment Operating Profit
In the first quarter of 2025, we made certain changes to the internal measurement of segment operating profit for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to reflect a more complete cost of delivery. Specifically, segment operating profit now includes an allocation of corporate costs, which were previously included in "unallocated costs." We have reported 2025 segment operating profits using the new allocation methodology and have recast the 2024 results to conform to the new methodology. While we have recast the 2024 results to conform to the new methodology, it is impracticable for us to recast our 2023 segment operating results as the detailed information required for the allocation of such costs to the segments is not reasonably available.
Segment operating profit and operating margin percentage were as follows:
Segment operating profit % Segment operating margin
In 2025, segment operating margins across all our segments were positively impacted by net savings generated from our NextGen program, operational efficiencies and the beneficial impact of foreign currency exchange rate movements, partially offset by increased compensation costs. In 2025, segment operating profit in the Products and Resources segment was negatively impacted by the dilutive impact of the Belcan acquisition and by resales of third-party products in connection with our integrated offerings strategy.
Total segment operating profit was as follows for the year ended December 31:
(Dollars in millions)
2025
% of Revenues
2024
% of Revenues
Increase / (Decrease)
Total segment operating profit $ 3,485 16.5 $ 3,152 16.0 $ 333
Less: unallocated costs 96 0.4 260 1.3 (164)
Income from operations $ 3,389 16.1 $ 2,892 14.7 $ 497
The decrease in unallocated costs for 2025 as compared to 2024 was primarily driven by the 2025 gain on sale of property and equipment and the absence of NextGen charges, partially offset by higher amortization of intangible assets and certain corporate costs.
Cognizant December 31, 2025 Form 10-K
Other Income (Expense), Net
Total other income (expense), net consists primarily of foreign currency exchange gains and losses, interest income and interest expense. The following table sets forth total other income (expense), net for the years ended December 31:
(in millions) 2025 2024 Increase / Decrease
Foreign currency exchange gains (losses)
$ 15 $ (29) $ 44
Gains on foreign exchange forward contracts not designated as hedging instruments
3 10 (7)
Foreign currency exchange gains (losses), net 18 (19) 37
Interest income 105 119 (14)
Interest expense (37) (54) 17
Other, net 4 - 4
Total other income (expense), net $ 90 $ 46 $ 44
The foreign currency exchange gains and losses were attributed to the remeasurement of net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. The gains on foreign exchange forward contracts not designated as hedging instruments related to the realized and unrealized gains and losses on contracts entered into to offset our foreign currency exposures. As of December 31, 2025, the notional value of our undesignated hedges was $748 million. Interest income declined in 2025 as compared to 2024, driven by a mix of lower invested balances and lower yields. Higher interest expense during 2024 was driven by the borrowing of $600 million under our revolving credit facility to partially fund the acquisition of Belcan during the third quarter of 2024. The borrowing was subsequently repaid in the fourth quarter of 2024 and first quarter of 2025.
Provision for Income Taxes
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$545M
¡ Effective Income Tax Rate é 11.9%
The effective income tax rate for 2025 was negatively impacted by the one-time, non-cash income tax expense of $390 million related to the enactment of the OBBBA. See Note 10to our consolidated financial statements for additional information.
Net Income
The decrease in net income was primarily driven by the one-time, non-cash income tax expense of $390 million related to the enactment of the OBBBA, partially offset by an increase in income from operations, including the $62 million gain on sale of property and equipment.
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$10M
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0.7% as a % of revenues
¡ % of Revenues
Non-GAAP Financial Measures
Portions of our disclosure include non-GAAP financial measures. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of non-GAAP financial measures to the corresponding GAAP measures set forth below should be carefully evaluated.
Our non-GAAP financial measures Adjusted Operating Margin and Adjusted Income from Operations exclude unusual items, such as the gain on sale of property and equipment in 2025 and NextGen charges in 2024. Our non-GAAP financial measure Adjusted Diluted EPS excludes unusual items, such as the one-time income tax expense related to the enactment of the OBBBA, the gain on sale of property and equipment and NextGen charges, and net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. For further detail on the NextGen charges, see Note 4to our consolidated financial statements. The income tax impact of each item excluded from Adjusted Diluted EPS is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Constant currency
Cognizant December 31, 2025 Form 10-K
revenue growth is defined as revenues for a given period restated at the comparative period's foreign currency exchange rates measured against the comparative period's reported revenues. Free cash flow is defined as cash flows from operating activities plus proceeds from sale of property and equipment, net of purchases of property and equipment.
We believe providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for executive officers and for making comparisons of our operating results to those of our competitors. We believe that the presentation of these non-GAAP financial measures, which exclude certain costs, read in conjunction with our reported GAAP results and reconciliations to the most comparable GAAP measure, as applicable, can provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations.
A limitation of using non-GAAP financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures may exclude costs that are recurring such as net non-operating foreign currency exchange gains or losses. In addition, other companies may calculate non-GAAP financial measures differently than us, thereby limiting the usefulness of these non-GAAP financial measures as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP financial measures to allow investors to evaluate such non-GAAP financial measures.
The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure, as applicable, for the years ended December 31:
(Dollars in millions, except per share data) 2025 % of
Revenues 		2024 % of
Revenues
GAAP income from operations and operating margin
$ 3,389 16.1 % $ 2,892 14.7 %
(Gain) on sale of property and equipment(1)
(62) (0.3) - -
NextGen charges (2)
- - 134 0.6
Adjusted Income From Operations and Adjusted Operating Margin
$ 3,327 15.8 % $ 3,026 15.3 %
GAAP diluted EPS $ 4.56 $ 4.51
Effect of above adjustments, pre-tax
(0.13) 0.27
Effect of non-operating foreign currency exchange (gains) losses, pre-tax (3)
(0.04) 0.04
Tax effect of above adjustments (4)
0.09 (0.07)
One-time income tax expense related to the enactment of the OBBBA (5)
0.80 -
Adjusted Diluted EPS $ 5.28 $ 4.75
Net cash provided by operating activities $ 2,883 $ 2,124
Purchases of property and equipment (288) (297)
Proceeds from sale of property and equipment
70 -
Free cash flow $ 2,665 $ 1,827
(1) During 2025, we realized a gain of $62 million on the sale of an office complex in India. See Note 5to our consolidated financial statements for additional information.
(2) Consists of employee separation, facility exit and other costs incurred in connection with the NextGen program. See Note 4to our consolidated financial statements for additional information.
(3) Non-operating foreign currency exchange gains and losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, are reported in "Foreign currency exchange gains (losses), net" in our consolidated statements of operations.
Cognizant December 31, 2025 Form 10-K
(4) Presented below are the tax impacts of our non-GAAP adjustments to pre-tax income for the years ended December 31:
(in millions) 2025 2024
Non-GAAP income tax benefit (expense) related to:
Gain on sale of property and equipment
$ (9) $ -
NextGen charges
- 34
Foreign currency exchange gains and losses (33) (4)
The effective tax rate related to non-operating foreign currency exchange gains and losses varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions. As such, the income tax effect of non-operating foreign currency exchange gains and losses shown in the above table may not appear proportionate to the net pre-tax foreign currency exchange gains and losses reported in our consolidated statements of operations.
(5) In the third quarter of 2025, we recorded a one-time, non-cash income tax expense of $390 million related to the enactment of the OBBBA. See Note 10to our consolidated financial statements for additional information.
Liquidity and Capital Resources
Cash generated from operations has historically been our primary source of liquidity to fund operations and investments to grow our business. As of December 31, 2025, we had cash, cash equivalents and short-term investments of $1,914 million and restricted cash of $733 million (see Note 18to our consolidated financial statements). Additionally, as of December 31, 2025, we had available capacity under our credit facilities of approximately $1.85 billion.
The following table provides a summary of our cash flows for the years ended December 31:
(in millions) 2025 2024 Increase / Decrease
Net cash provided by (used in):
Operating activities $ 2,883 $ 2,124 $ 759
Investing activities (230) (1,646) 1,416
Financing activities
(2,272) (915) (1,357)
Other Cash Flow Information5
Free cash flow 2,665 1,827 838
Operating activities5
The increase in cash provided by operating activities in 2025 compared to 2024 was primarily driven by the increase in net income, excluding the one-time, non-cash income tax expense of $390 million we recorded as a result of the enactment of the OBBBA, as well as the $360 million payment we made in January 2024 in relation to our dispute with the ITD (see Note 10to our consolidated financial statements), which reduced cash from operating activities in 2024.
We monitor turnover, aging and the collection of accounts receivable by client. Our DSO calculation includes receivables, net of allowance for doubtful accounts, and contract assets, reduced by the uncollected portion of deferred revenue. Our DSO was 81 days as of December 31, 2025, 78 days as of December 31, 2024 and 77 days as of December 31, 2023.
Investing activities
The decrease in cash used in investing activities in 2025 compared to 2024 was driven by payments for business acquisitions in 2024 and the proceeds from the sale of an office complex in India in 2025, partially offset by net maturities of investments in 2024.
Financing activities
The increase in cash used in financing activities in 2025 compared to 2024 was primarily driven by increased repurchases of common stock during 2025 and the borrowing under the revolving credit facility to finance the acquisition of Belcan in 2024.
5Free cash flow is not a measure of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information.
Cognizant December 31, 2025 Form 10-K
We have a Credit Agreement providing for a $650 million Term Loan and a $1,850 million unsecured revolving credit facility, which are each due to mature in October 2027. During the year ended December 31, 2025, we repaid the $300 million balance that was outstanding under the revolving credit facility, and had no outstanding balance as of December 31, 2025. We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan. We believe that we currently meet all conditions set forth in the Credit Agreement to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the revolving credit facility as of December 31, 2025 and through the date of this filing. See Note 9to our consolidated financial statements.
Capital Allocation Framework
Acquisitions
Share repurchases
Dividend payments
Our capital allocation framework anticipates the deployment of approximately 50% of our free cash flow6for acquisitions and 50% for share repurchases and dividend payments. We review our capital allocation on an ongoing basis, considering our financial performance and liquidity position, investments required to execute our strategic plans and initiatives, acquisition opportunities, the economic outlook, regulatory changes and other relevant factors. As these factors may change over time, the actual amounts expended on stock repurchase activity, dividends, and acquisitions, if any, during any particular period cannot be predicted and may fluctuate from time to time.
Other Liquidity and Capital Resources Information
We seek to ensure that our cash is available in the locations in which it is needed. As part of our ongoing liquidity assessments, we regularly monitor the mix of our domestic and international cash flows and cash balances. We evaluate on an ongoing basis what portion of the non-U.S. cash, cash equivalents and short-term investments is needed locally to execute our strategic plans and what amount is available for repatriation back to the United States.
We expect operating cash flows, cash and short-term investment balances, together with the available capacity under our revolving credit facilities, to be sufficient to meet our operating requirements, including purchase commitments, tax payments and servicing our debt for the next twelve months.Additionally, we have purchase commitments of approximately $2.3 billion that will be paid over the next five years, of which approximately $800 million will be paid during the next twelve months. In addition, see Note 6to our consolidated financial statements for a description of our operating lease obligations.
The ability to expand and grow our business in accordance with current plans, make acquisitions, meet long-term capital requirements beyond a twelve-month period and execute our capital return plan will depend on many factors, including the rate, if any, at which cash flow increases, our ability and willingness to pay for acquisitions with capital stock and the availability of public and private debt, including the ability to extend the maturity of or refinance our existing debt, and equity financing. We cannot be certain that additional financing, if required, will be available on terms and conditions acceptable to us, if at all.
Critical Accounting Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our accompanying consolidated financial statements that have been prepared in accordance with GAAP. We base our estimates on historical experience, current trends and on various other assumptions that are believed to be relevant at the time our consolidated financial statements are prepared. We evaluate our estimates on a continuous basis. However, the actual amounts may differ from the estimates used in the preparation of our consolidated financial statements.
We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our consolidated financial statements as they require the most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Changes to these estimates could have a material effect on our results of operations and financial condition. Our significant accounting policies are described in Note 1to our consolidated financial statements.
6Free cash flow is not a measure of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information.
Cognizant December 31, 2025 Form 10-K
Revenue Recognition. Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost-to-cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract's total labor cost to-date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, quality engineering and assurance and business process services are recognized using the cost-to-cost method, if the right to invoice is not representative of the value being delivered. The cost-to-cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information. Such estimates and changes in estimates involve the use of judgment. The cumulative impact of any change in estimates is reflected in the financial reporting period in which the change in estimate becomes known. Net changes in estimates of such future costs were immaterial to the consolidated results of operations for the periods presented.
Income Taxes.Determining the consolidated provision for income taxes, deferred income tax assets (and related valuation allowance, if any) and liabilities requires significant judgment. We are required to calculate and provide for income taxes in each of the jurisdictions where we operate. Changes in the geographic mix of income before taxes or estimated level of annual pre-tax income can affect our overall effective income tax rate. In addition, transactions between our affiliated entities are arranged in accordance with applicable transfer pricing laws, regulations and relevant guidelines. As a result, and due to the interpretive nature of certain aspects of these laws and guidelines, we have pending applications for APAs before the taxing authorities in some of our most significant jurisdictions. It could take years for the relevant taxing authorities to negotiate and conclude these applications. The consolidated provision for income taxes may change period to period based on changes in facts and circumstances, such as settlements of income tax audits, the expiration of the applicable statute of limitations or finalization of our applications for APAs.
Our provision for income taxes also includes the impact of reserves established for uncertain income tax positions, as well as the related interest, which may require us to apply judgment to complex issues and may require an extended period of time to resolve. We apply a "more likely than not" threshold when assessing the need for a reserve for an uncertain tax position, which involves significant judgment. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final outcome of these matters will not differ from our recorded amounts. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of the applicable statute of limitations. Additionally, we have tax positions that we believe are more likely than not to be realized and for which we have therefore not established a reserve. To the extent that the final outcome of these matters differs from the amounts recorded, such differences may materially impact, positively or negatively, the provision for income taxes in the period in which such determination is made.
Business Combinations, Goodwill and Intangible Assets. Goodwill and intangible assets, including indefinite-lived intangible assets, arise from the accounting for business combinations. We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired, liabilities assumed, including any contingent consideration, and any noncontrolling interest in the acquiree to properly allocate purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price utilizes estimates and assumptionsin determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets, including the timing and amount of forecasted revenues and cash flows, anticipated growth rates, client attrition rates and the discount rate reflecting the risk inherent in future cash flows.
At each acquisition date, we allocate goodwill and intangible assets to our reporting units based on how we expect each reporting unit to benefit from the respective business combination. A reporting unit is defined as an operating segment or one level below an operating segment. While we manage the business through our four industry-based operating segments, we have identified seven industry-based reporting units for purposes of goodwill allocation and impairment testing. We exercise judgment to allocate goodwill to the reporting units expected to benefit from each business combination. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Such events or circumstances may include significant changes in the business climate, the regulatory environment, business strategies, operating performance, or the competitive landscape. Evaluating goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit.
We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. Under the income approach, we estimate projected future cash flows, the timing of such cash flows and long-term growth rates and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on a market participant weighted-average cost of capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics
Cognizant December 31, 2025 Form 10-K
similar to the reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.
Based on our most recent evaluation of goodwill performed during the fourth quarter of 2025, we concluded that the goodwill in each of our reporting units was not at risk of impairment. As of December 31, 2025, our goodwill balance was $7,106 million.
We review our finite-lived assets, including our finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The carrying amount may not be recoverable when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset groups. The impairment loss is determined as the amount by which the carrying amount of the asset group exceeds its fair value. Assessing the fair value of asset groups involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows and discount rates reflecting the risk inherent in future cash flows.
Recently Adopted and New Accounting Pronouncements
See Note 1to our consolidated financial statements for additional information.
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