Genpact Limited — Q1 2013 Form 10-Q Summary
Business context and reporting period
Genpact Limited is a global business process management and information technology services provider with approximately 60,200 employees, more than 700 clients, and operations in 18 countries. The unaudited filing covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012 and balance-sheet comparison to December 31, 2012.
Revenue was $503.8 million, including $117.0 million from GE and $386.8 million from Global Clients. Global Clients represented 76.8% of revenue, while GE represented 23.2%.
Financial performance and position
| Metric | Q1 2012 | Q1 2013 | Change |
|---|---|---|---|
| Net revenue | $435.5 million | $503.8 million | 15.7% |
| Gross profit | $170.0 million | $192.1 million | 13.0% |
| Gross margin | 39.0% | 38.1% | Down 0.9 percentage points |
| Income from operations | $60.4 million | $73.9 million | 22.4% |
| Operating margin | 13.9% | 14.7% | Up 0.8 percentage points |
| Net income | $40.3 million | $48.3 million | 19.9% |
| Net income attributable to shareholders | $38.5 million | $46.7 million | 21.3% |
| Diluted EPS | $0.17 | $0.20 | Increase |
| Cash flow from operations | $4.9 million | $31.5 million | Increase of $26.6 million |
Cost of revenue increased 17.4% to $311.7 million, exceeding revenue growth and reducing gross margin. SG&A increased 7.8% to $113.2 million, but declined to 22.5% of revenue from 24.1%. The effective tax rate decreased to 27.0% from 29.8%.
Cash and cash equivalents were $474.6 million at March 31, 2013, up from $459.2 million at December 31, 2012. Short-term deposits were $18.4 million. Total current assets were $1.172 billion versus current liabilities of $511.5 million.
Debt included $115.0 million of short-term borrowings, $5.0 million of current long-term debt, and $655.6 million of long-term debt excluding the current portion. Total debt excluding capital leases was approximately $775.6 million, resulting in cash and short-term deposits of approximately $493.0 million and net debt of approximately $282.6 million. The company was in compliance with its debt covenants.
Net cash used in investing activities was $61.7 million, including $46.1 million for acquisitions and $14.6 million for property, plant and equipment. Net cash provided by financing activities was $43.9 million, primarily from $35.0 million of borrowings and $16.1 million from stock-based compensation plans. Cash increased by $13.8 million during the quarter.
Material changes versus the prior comparable period
- Global Client revenue increased 21.0% to $386.8 million, while GE revenue increased only 1.0% to $117.0 million.
- Business process management revenue increased 15.5% to $383.9 million; information technology revenue increased 16.4%.
- Average headcount increased 10.1% to approximately 59,551, and annualized revenue per employee increased to approximately $34.5 thousand from $32.2 thousand.
- Operating margin improved despite lower gross margin, primarily because SG&A grew more slowly than revenue.
- Interest expense increased to $9.9 million from $3.6 million following the 2012 refinancing and higher borrowings; the weighted-average borrowing rate increased to 4.2% from 2.2%.
- Operating cash flow improved, partly because the prior-year period included unusual working-capital movements related to a client obligation.
- Genpact acquired the Jawood and Felix healthcare payer businesses for preliminary estimated consideration of $48.3 million and acquired the remaining 50% of NGEN for $0.2 million. These transactions added $35.9 million of preliminary goodwill for Jawood.
- The company sold Hello Communications for $1.0 million, with a $0.4 million loss and $1.0 million net cash outflow, and reserved $0.7 million for the expected disposal of Clearbizz B.V.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide clear quantitative revenue or earnings guidance. Management stated that operating cash flow, cash reserves, and unused credit capacity are expected to be sufficient to fund operations, growth, expansion, new delivery centers, and acquisitions.
Management attributed growth to existing Global Clients, acquisitions, increased headcount, and expansion in banking, financial services, insurance, consumer products, retail, hospitality, pharmaceutical, and healthcare. Cost pressures included wage inflation, new delivery-center costs, infrastructure spending, foreign-exchange volatility, and business travel.
Key risks include client retention and concentration, dependence on U.S. and European clients, continued reliance on GE, competition, pricing and utilization, employee recruitment and attrition, wage inflation, foreign-exchange movements, interest-rate and LIBOR exposure, acquisition integration, technology or security disruptions, economic weakness, visa restrictions, and changes to tax incentives or legislation.
GE represented 27% of receivables at March 31, 2013 and 23% of quarterly revenue. The company had $1.147 billion of contractual cash obligations, including $660.6 million of long-term debt, $167.8 million of operating leases, $22.6 million of contingent consideration, and $163.4 million of other long-term liabilities.
Tax matters remain material. Unrecognized tax benefits increased to $21.2 million, and the company disclosed uncertainty regarding Indian tax rules, potential indirect-transfer taxation, repatriation of foreign cash, and a pending Indian Supreme Court appeal concerning a historical GE share transfer. No material legal proceedings were identified by management.
Important facts for investors to verify
- Whether Global Client growth and reduced GE concentration continue without weakening pricing or utilization.
- The final purchase accounting, working-capital adjustments, tax positions, and integration performance for Jawood, Felix, NGEN, and prior acquisitions.
- Debt repayment requirements, interest-rate exposure, covenant headroom, and the refinancing or maturity risk concentrated in 2019.
- The sustainability of improved operating cash flow after adjusting for working-capital timing and acquisition-related spending.
- Exposure to foreign-exchange movements, particularly the Indian rupee, and the effectiveness and future earnings impact of hedging contracts.
- Potential consequences of Indian tax legislation, tax examinations, the pending Supreme Court matter, and the company’s ability to repatriate foreign cash tax-efficiently.
- The realizability of deferred tax assets, goodwill of $992.5 million, and other acquisition-related intangible assets.
- Whether the $0.7 million Clearbizz disposal reserve and other acquisition earn-out estimates require further adjustments.