Genpact Limited — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended September 30, 2010, compared with the corresponding 2009 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Genpact provides business-process management, information technology, analytics, finance and accounting, customer service, supply-chain, insurance and enterprise application services. It operated through approximately 40 locations in 13 countries and had approximately 43,300 employees at September 30, 2010. GE remained a related party and accounted for 38.1% of third-quarter revenue and 38.6% of nine-month revenue, although Global Clients represented the majority of revenue.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net revenue | $321.6 million | $284.4 million | $917.4 million | $823.1 million |
| Gross profit | $116.7 million | $117.4 million | $344.8 million | $326.6 million |
| Gross margin | 36.3% | 41.3% | 37.6% | 39.7% |
| Operating income | $42.4 million | $44.9 million | $118.0 million | $115.9 million |
| Operating margin | 13.2% | 15.8% | 12.9% | 14.1% |
| Net income attributable to Genpact shareholders | $40.1 million | $33.1 million | $96.2 million | $92.7 million |
| Diluted EPS | $0.18 | $0.15 | $0.43 | $0.42 |
| Cash flow from operations | Not separately provided | Not separately provided | $78.0 million | $123.5 million |
- Liquidity: Cash and cash equivalents were $360.9 million at September 30, 2010, compared with $288.7 million at December 31, 2009. Including short-term investments, liquidity was approximately $403.9 million.
- Debt: Long-term debt, including the current portion, declined to $37.4 million from $69.7 million at December 31, 2009. No short-term borrowings remained outstanding. Available short-term credit facilities totaled $145.0 million, with $11.5 million utilized through non-funded drawdowns.
- Cash flow: Nine-month operating cash flow declined by $45.5 million year over year, primarily due to higher accounts receivable, infrastructure deposits, acquisition-related working capital and lower current liabilities. Investing activities generated $7.7 million, while financing activities used $22.4 million.
- Capital expenditures and acquisitions: Capital expenditures were $47.7 million during the first nine months. Genpact paid $42.6 million for acquisitions, including Symphony Marketing Solutions and the Walgreens Danville delivery center.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 13.1%, while nine-month revenue increased 11.5%. Global Client revenue grew faster than GE revenue, increasing its share of total revenue to 61.9% in the quarter and 61.4% year to date.
- Business-process management revenue increased 14.9% in the quarter and 14.2% year to date. Information technology revenue increased 2.9% in the quarter but declined 2.7% year to date.
- Gross margin contracted materially because of increased hiring and infrastructure costs incurred ahead of delayed contract transitions, wage inflation, foreign-exchange effects and lower realization on Indian rupee-U.S. dollar hedges.
- Quarterly operating income decreased 5.5%, despite revenue growth. Year-to-date operating income increased 1.8%, but operating margin declined because costs grew faster than revenue.
- Quarterly net income attributable to Genpact shareholders increased 21.4%, aided by a $5.5 million foreign-exchange gain versus a $2.6 million loss in the prior-year quarter and lower income tax expense. Year-to-date net income attributable to shareholders increased 3.7%, while net margin declined to 10.5% from 11.3%.
- GE’s ownership declined to 9.1% following a March 2010 secondary offering of 38.64 million shares. The company received no proceeds from that offering and recorded approximately $0.6 million of related expenses.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash from operations, cash reserves and debt capacity were expected to be sufficient to fund operations, growth and expansion. The filing does not provide a specific revenue or earnings guidance range.
- Management identified delayed transitions for new contracts, employee hiring ahead of demand, wage inflation, pricing pressure and foreign-exchange volatility as factors affecting margins.
- Customer concentration remains significant: GE represented 38% to 39% of revenue and approximately 44% of net accounts receivable at September 30, 2010. The GE master services agreement was extended through 2016, with stated minimum annual volume commitments.
- Outstanding foreign-exchange forward contracts had aggregate notional principal amounts of approximately $2.37 billion at September 30, 2010. The filing reports a net derivative balance-sheet exposure liability of $59.2 million.
- Goodwill totaled $559.4 million. Annual impairment testing at September 30, 2010 indicated that each reporting unit’s estimated fair value exceeded carrying value by at least 79%; no impairment was recorded.
- Unrecognized tax benefits increased to $17.8 million, of which $17.6 million could affect the effective tax rate. The timing and amount of settlement were not reliably estimable.
- Total contractual cash obligations were $324.6 million, including $142.1 million of operating leases, $37.4 million of long-term debt, $125.4 million of other long-term liabilities and $7.2 million of capital commitments.
- The company reported no legal proceedings expected to have a material adverse effect and stated that disclosure controls were effective. The principal risks include GE dependence, client retention, competition, labor availability and attrition, wage increases, foreign-exchange movements, tax changes, economic conditions, technology disruptions, data or intellectual-property risks, and acquisition integration.
Investor Verification Checklist
- Verify whether margin pressure from delayed transitions, wage inflation and hedge realization improved in subsequent quarters.
- Assess the sustainability of revenue growth from Global Clients and the continuing reduction in GE concentration.
- Reconcile operating cash flow with earnings and monitor receivables, collection periods and related-party balances.
- Review foreign-exchange hedge notional amounts, accumulated other comprehensive income and potential earnings volatility.
- Track the $17.8 million of unrecognized tax benefits and the effect of expiring tax holidays and incentives.
- Evaluate acquisition performance and integration, particularly Symphony and the Walgreens Danville operation.
- Confirm debt repayments, facility availability and contractual obligations against expected cash generation.