Genpact Limited 2017 Form 10-K Summary
Business context and reporting period
Genpact is a Bermuda-incorporated global professional services company providing business process outsourcing, information technology, transformation, analytics, automation and digitally enabled operations. It had approximately 78,000 employees in more than 20 countries and served more than 700 clients as of December 31, 2017.
This filing is the audited Form 10-K for the fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter information; it is not a standalone quarterly filing.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total net revenue | $2,736.9 million | $2,570.8 million | 6.5% increase; 7% constant currency |
| Global Client revenue | $2,467.7 million | $2,212.9 million | 11.5% increase |
| GE revenue | $269.2 million | $357.9 million | 24.8% decrease |
| Gross profit | $1,053.2 million | $1,016.0 million | 3.7% increase |
| Gross margin | 38.5% | 39.5% | Down 1.0 percentage point |
| Income from operations | $328.6 million | $340.8 million | 3.6% decrease |
| Operating margin | 12.0% | 13.3% | Down 1.3 percentage points |
| Net income attributable to common shareholders | $263.1 million | $269.7 million | 2.4% decrease |
| Basic/diluted EPS | $1.36/$1.34 | $1.30/$1.28 | EPS increased due primarily to lower share count |
| Operating cash flow | $359.1 million | $345.8 million | 3.8% increase |
| Cash and equivalents | $504.5 million | $422.6 million | 19.4% increase |
BPO revenue increased 8.7% to $2.264 billion and represented 82.7% of total revenue. IT services revenue decreased 3.0% to $472.6 million. New bookings were approximately $2.80 billion, up 5% from approximately $2.65 billion in 2016.
Fourth-quarter 2017 revenue was $734.4 million, gross profit was $278.5 million, operating income was $72.0 million and net income attributable to common shareholders was $67.1 million.
Liquidity, debt and capital allocation
- Total debt was approximately $1.216 billion at December 31, 2017, including $698.2 million of term debt, $170.0 million of revolving borrowings and $347.8 million of 3.70% senior notes due April 2022.
- The term loan and revolving facility mature in June 2020 and bear interest primarily at LIBOR plus a 1.50% margin. The company reported compliance with its financial covenants.
- Operating cash flow of $359.1 million was more than offset by $362.0 million of investing cash outflows, principally acquisition payments.
- 2017 acquisitions required $284.8 million of cash, net of cash acquired. Share repurchases totaled $219.8 million and dividends paid totaled $46.7 million.
- The board increased the quarterly dividend from $0.06 to $0.075 per share in February 2018, implying a planned annual dividend of $0.30 per share.
- Approximately $499.5 million of cash was held by foreign subsidiaries. The company expects a $17.3 million deferred tax liability on repatriation of specified foreign earnings.
Material changes versus the prior comparable period
- Revenue growth was driven by Global Clients, acquisitions and BPO services, while GE revenue declined due largely to GE Capital divestitures. GE represented 9.8% of 2017 revenue versus 13.9% in 2016.
- Margins weakened as personnel expenses, wage inflation, acquisition costs, increased onshore staffing and stock-based compensation grew faster than revenue.
- Net interest expense increased to $31.7 million from $16.2 million, primarily because of the 2017 senior notes, higher LIBOR and greater revolving-facility utilization.
- Cash from operations improved modestly, but acquisition spending increased investing outflows by $236.2 million.
- Goodwill increased to $1.337 billion from $1.069 billion, and intangible assets increased to $131.6 million from $78.9 million, primarily from acquisitions.
- Genpact completed acquisitions including RAGE Frameworks, BrightClaim, TandemSeven and five additional individually immaterial transactions. Aggregate estimated consideration for 2017 acquisitions was approximately $305 million.
- The company sold a portion of its legacy European IT support business for no proceeds and recorded a $5.7 million loss.
Guidance, outlook, commentary and risks
The filing does not provide a clear formal 2018 revenue or earnings guidance range. Management emphasized continued investment in digital capabilities, analytics, domain expertise, people and the Genpact Cora automation and artificial-intelligence platform. Management attributed bookings growth to these investments and its focus on selected industries and service lines.
- Key concentration risks include GE, which remains a significant client despite declining to below 10% of revenue, and the concentration of more than 65% of revenue in North American clients and more than 10% in European clients.
- More than 40% of revenue came from financial services, including insurance.
- Employee attrition was approximately 26% in 2017. Wage inflation, hiring constraints and utilization pressure could reduce margins.
- Foreign exchange exposure is significant: approximately 74% of revenue was earned in U.S. dollars, while substantial expenses were incurred in Indian rupees and other currencies. The company uses foreign-exchange and interest-rate derivatives.
- A 1% interest-rate change, including the impact of swaps, was estimated to affect annual net interest expense by approximately $4.7 million. A ratings-related increase of up to 2% on the senior notes could increase annual interest expense by up to approximately $7.0 million.
- Indian tax assessments relating to 2009 and 2013 totaled approximately $168 million including interest; $25 million had been paid under protest. The company is appealing and does not believe the transactions are taxable under applicable law.
- The 2017 Tax Cuts and Jobs Act resulted in a provisional $3.2 million tax expense. The company had not recorded a liability for the estimated transition tax and expected to complete its analysis in the second half of 2018.
- Privacy, cybersecurity, regulatory, offshore-outsourcing, immigration, tax and geopolitical developments could adversely affect operations and client demand. GDPR requirements were scheduled to take effect in May 2018.
- Goodwill and intangible assets totaled approximately $1.469 billion. The company reported no goodwill impairment based on its 2017 qualitative assessment, but future impairment remains a risk.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2017, although acquired businesses representing $278.6 million of assets and $94.5 million of revenue were excluded from management's internal-control assessment.
Important facts for investors to verify
- Whether Global Client growth and bookings can offset continued declines in GE-related revenue.
- Whether gross and operating margins recover after the 2017 decline, particularly given wage inflation, attrition and acquisition-related costs.
- The timing and integration performance of the 2017 acquisitions and the sustainability of the resulting goodwill balances.
- Remaining availability under the revolving credit facility, debt-covenant headroom and sensitivity to LIBOR and credit-rating changes.
- The resolution and potential cash impact of the Indian tax assessments and the provisional U.S. tax legislation accounting.
- Accounts receivable growth and collection performance, including the increase in net receivables to $693.1 million and the $23.7 million doubtful-receivable reserve.
- Foreign-currency hedging effectiveness and exposure to Indian rupee appreciation and other currency movements.
- The final settlement and ongoing authorization of share repurchases, together with the board's discretion over future dividends.