Genpact Limited — Q2 2021 Form 10-Q Summary
Business context and reporting period
Genpact is a global professional services company providing digitally led transformation, business process management, analytics, consulting, and information technology services. It had more than 104,000 employees serving clients in more than 30 countries. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenue | $988.1 million, up 9.8% | $1,934.2 million, up 6.1% |
| Gross profit | $355.1 million | $700.3 million |
| Gross margin | 35.9%, versus 34.0% | 36.2%, versus 34.3% |
| Income from operations | $136.9 million, up 51.5% | $264.8 million, up 31.7% |
| Operating margin | 13.9%, versus 10.0% | 13.7%, versus 11.0% |
| Net income | $102.7 million, up 65.2% | $194.0 million, up 31.2% |
| Net margin | 10.4%, versus 6.9% | 10.0%, versus 8.1% |
| Diluted EPS | $0.53, versus $0.32 | $1.01, versus $0.76 |
| Adjusted income from operations | $177.0 million; 17.9% margin | $339.7 million; 17.6% margin |
Global Client revenue increased 14.0% in the quarter and 10.2% year to date, while GE revenue declined 18.8% and 21.2%, respectively. Global Clients represented 90.4% of quarterly revenue and 90.3% of first-half revenue. Revenue growth was strongest in Consumer Goods, Retail, Life Sciences and Healthcare, while Banking, Capital Markets and Insurance revenue declined.
Net cash provided by operating activities was $237.8 million in the first half of 2021, compared with $173.1 million in the prior-year period. Investing cash outflow was $29.0 million, including $19.3 million of capital expenditures and $6.6 million for acquisition-related payments. Financing cash outflow was $130.5 million, after $350.0 million of senior-note proceeds, $250.0 million of short-term borrowing repayments, $147.2 million of share repurchases, and $40.2 million of dividends.
Cash and cash equivalents totaled $752.6 million at June 30, 2021, versus $680.4 million at December 31, 2020. Accounts receivable were $916.4 million. Approximately $741.9 million of cash was held by non-Bermuda foreign subsidiaries.
Total debt was approximately $2.055 billion at June 30, 2021, including $383.2 million classified as current and $1.289 billion of long-term debt. Debt included a $577.1 million term loan, $349.6 million of 2017 senior notes, $398.0 million of 2019 senior notes, and $347.1 million of 2021 senior notes. The 2017 notes mature in April 2022, the term loan matures in August 2023, the 2019 notes mature in December 2024, and the 2021 notes mature in April 2026. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Quarterly revenue increased $88.0 million, driven by Global Clients, transformation services, and growth in CGRLH, insurance, high technology, and manufacturing engagements.
- GE revenue declined because of contractual workforce reductions, lower discretionary spending, and GE divestitures; certain divested-business revenue was reclassified to Global Clients.
- Gross and operating margins expanded primarily because of stronger transformation-services utilization, higher analytics revenue, operating leverage, and the absence of prior-year restructuring and impairment charges.
- Quarterly SG&A increased 9.6%, reflecting higher staffing, marketing, wage inflation, and COVID-19-related medical costs; SG&A remained 20.7% of revenue.
- Amortization of acquired intangibles increased to $14.6 million in the quarter and $30.7 million year to date, mainly from the Enquero and SomethingDigital acquisitions.
- The company issued $350.0 million of 1.75% senior notes in March 2021 and repaid the $250.0 million funded revolving-credit balance outstanding at year-end.
- First-half share repurchases increased to $147.2 million from $45.0 million, with $489.8 million remaining under the authorized program. The quarterly dividend increased 10% to $0.1075 per share.
- Enquero and SomethingDigital expanded data analytics, cloud, digital commerce, Magento, and Shopify capabilities; the acquisitions also increased amortization and goodwill balances.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical revenue or earnings guidance outlook. Management stated that cash from operations, cash reserves, and debt capacity are expected to fund operations, growth, acquisitions, dividends, and additional repurchases, although COVID-19 could adversely affect cash flows.
Management reported that COVID-19 had no significant impact on revenue in the first half of 2021, while remote-work arrangements remained in place in most locations. The ultimate effects remain uncertain, particularly regarding pandemic duration, vaccination rates, government restrictions, client spending, employee costs, and macroeconomic conditions.
- Customer concentration remains relevant: GE represented 10% of first-half revenue and 15% of accounts receivable at June 30, 2021.
- Foreign exchange and interest-rate exposure are material. Interest-rate swaps covered $474 million of notional debt, and floating-rate borrowings were linked to LIBOR.
- Risks include client retention and pricing, employee attrition and wage inflation, competition, cybersecurity and data privacy, technology disruptions, international operations, acquisitions, tax-law changes, and the phaseout of LIBOR.
- The company faces disputed Indian GST and service-tax refunds of $18.7 million and stated that additional challenges may arise; no reserve was recorded because management assessed the risk of liability as remote.
- An Indian tax assessment seeking $110.3 million, excluding later interest and penalties, was cancelled by the Income Tax Appellate Tribunal, although Indian authorities may appeal. The company had $26.9 million of taxes paid under protest awaiting refund and recorded no reserve.
- The potential retrospective effect of an Indian judicial ruling on employee benefit contributions cannot currently be reliably estimated.
- Unrecognized tax benefits were $28.0 million at June 30, 2021 and, if recognized, would affect the effective tax rate.
- The company reported no legal proceedings likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether Global Client growth can offset continued GE revenue declines and concentration risk.
- The sustainability of margin expansion after excluding favorable comparisons with 2020 restructuring, impairment, and pandemic-related items.
- Liquidity and refinancing plans for the $349.6 million of 2017 senior notes due in April 2022 and the term loan maturity in August 2023.
- The effect of higher wage, medical, staffing, and acquired-intangible amortization costs on future margins.
- Progress and returns from the Enquero and SomethingDigital acquisitions.
- Exposure to Indian tax disputes, potential employee-benefit liabilities, foreign exchange, LIBOR transition, and client concentration.
- The company’s continuing ability to fund dividends and share repurchases while reducing or refinancing debt.
- Management’s future numerical guidance, which is not clearly provided in this filing.