Genpact Limited — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Genpact Limited is a global professional services company providing digitally enabled business process management, analytics, consulting, digital solutions, and information technology services. It had more than 97,500 employees serving clients in more than 30 countries. The filing covers the three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019. The financial statements are unaudited and prepared under U.S. GAAP.
Revenue growth included contributions from the November 2019 acquisition of Rightpoint Consulting, which expanded customer-experience capabilities. General Electric represented 13.2% of Q1 2020 revenue and 18% of accounts receivable at March 31, 2020.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $809.2 million | $923.2 million | 14.1% increase |
| Global Client revenue | $700.2 million | $801.5 million | 14.5% increase |
| GE revenue | $109.0 million | $121.7 million | 11.6% increase |
| Gross profit | $290.1 million | $318.4 million | 9.8% increase |
| Gross margin | 35.8% | 34.5% | 130 basis-point decrease |
| Income from operations | $90.1 million | $110.7 million | 22.9% increase |
| Operating margin | 11.1% | 12.0% | 90 basis-point increase |
| Net income attributable to shareholders | $60.8 million | $85.7 million | 40.9% increase |
| Net margin | 7.5% | 9.3% | 180 basis-point increase |
| Diluted EPS | $0.31 | $0.44 | Increase |
| Adjusted income from operations | $121.5 million | $135.7 million | 11.7% increase |
Revenue increased across all reportable segments: BCMI revenue rose 12.2% to $268.8 million, CGRLH rose 19.0% to $305.2 million, and HMS rose 12.3% to $354.2 million. Constant-currency revenue growth was 14.4%.
Net cash used in operating activities increased to $18.6 million from $5.4 million. Investing cash outflow was $23.9 million, primarily for capital expenditures, and financing cash outflow was $1.8 million. Cash and cash equivalents declined to $401.6 million from $467.1 million at December 31, 2019.
| Balance-sheet item | December 31, 2019 | March 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $467.1 million | $401.6 million |
| Short-term borrowings | $70.0 million | $165.0 million |
| Long-term debt, including current portion | $1.373 billion | $1.365 billion |
| Total shareholders’ equity | $1.689 billion | $1.573 billion |
The company paid an $18.5 million quarterly dividend, or $0.0975 per share, and repurchased 1.04 million shares for $45.0 million. Approximately $229 million remained available under the $1.25 billion repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based and benefited from large deals signed in 2019, increased transformation services, and the Rightpoint acquisition.
- Gross margin declined because of lower margins on large new deals using onshore resources, lower utilization caused by COVID-19 work-from-home restrictions, wage inflation, higher depreciation and amortization, and a non-recurring Indian retirement-fund charge.
- SG&A increased only 3.1% and declined to 21.4% of revenue from 23.7%, reflecting lower marketing and more efficient functional spending.
- Foreign exchange results improved from a $3.4 million loss to a $14.5 million gain, primarily from depreciation of the Indian rupee and Australian dollar against the U.S. dollar.
- Other income changed from $3.8 million of income to $2.9 million of expense, primarily because Indian export subsidies were no longer available and deferred-compensation plan assets declined in value.
- The company adopted ASC 326, Current Expected Credit Losses, on January 1, 2020. The adoption reduced opening retained earnings by $4.0 million net of tax.
- Accumulated other comprehensive loss increased by $129.9 million during the quarter, primarily from currency translation adjustments and cash-flow hedge losses.
- Short-term borrowings increased by $95.0 million during the quarter. After March 31, 2020, the company drew an additional $330 million under its revolving credit facility, representing the entire remaining availability.
Guidance, Outlook, Commentary, Risks, and Unusual Items
COVID-19 had a minimal effect on reported Q1 revenue and financial performance, but the company experienced operational disruption late in the quarter, including client ramp-downs, restrictions on remote work for certain BCMI clients, and lower utilization. Management expects COVID-19 to negatively affect future revenue, profitability, and cash flow.
The company withdrew its previously issued 2020 financial outlook because the duration and severity of the pandemic were uncertain. Management planned to reassess whether full-year guidance could be provided after the second quarter of 2020.
- Key COVID-19 risks include reduced client demand, delayed discretionary consulting work, contract terminations or performance delays, client credit deterioration, inability to deliver services remotely, cybersecurity and data-privacy threats, and prolonged economic weakness.
- The company is aligning its cost base with business volumes and reevaluating hiring, capital investment, real estate use, marketing, travel, and other discretionary spending.
- Debt totaled approximately $1.53 billion at March 31, 2020 when short-term borrowings are included, before the subsequent $330 million revolving-facility drawdown. Credit agreements require net debt to EBITDA below 3x and interest coverage above 3x; the company reported compliance at quarter-end.
- Long-term debt included a $619.0 million term loan, $348.9 million of 3.70% senior notes due 2022, and $397.3 million of 3.375% senior notes due 2024. Floating-rate exposure is partly hedged with interest-rate swaps having $495.1 million of notional value.
- The filing reports no material pending legal proceedings. A potential Indian statutory contribution obligation could require additional payments if a 2019 judicial interpretation is applied retrospectively, but the amount and timing cannot currently be estimated reliably.
- No goodwill or intangible-asset impairment was recorded after a COVID-19-related review during Q1 2020.
Investor Verification Checklist
- Verify the pace of post-quarter COVID-19 revenue, utilization, margin, and cash-flow recovery, particularly in the HMS and BCMI segments.
- Monitor liquidity after the subsequent $330 million revolving-credit drawdown, including covenant headroom and refinancing requirements.
- Assess whether GE concentration, including 13.2% of quarterly revenue and 18% of receivables, creates material customer or collection risk.
- Reconcile GAAP operating income with adjusted income from operations and evaluate the recurring nature of stock-based compensation and amortization adjustments.
- Track credit-loss allowances, receivable aging, and customer payment behavior following adoption of ASC 326 and the economic effects of COVID-19.
- Review the status of 2020 guidance, dividend policy, and share repurchases after the company withdrew its financial outlook.
- Evaluate exposure to foreign currency movements, LIBOR transition, interest-rate changes, cybersecurity, remote-work controls, and the unresolved Indian statutory-benefit matter.