Genpact Limited 2010 Form 10-K Summary
Business context and reporting period
Genpact Limited, a Bermuda-incorporated global business-process and technology-services provider, filed its Form 10-K for the fiscal year ended December 31, 2010. The company managed more than 3,000 processes for over 400 clients, operated 41 delivery centers in 13 countries, and employed approximately 43,900 people at year-end.
Services included finance and accounting, customer service and collections, banking and insurance operations, supply chain and procurement, analytics, enterprise applications, re-engineering, software automation, and IT infrastructure. The filing is an annual report; fourth-quarter results are presented separately as unaudited quarterly information.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total net revenues | $1,259.0 million | $1,120.1 million | Up 12.4% |
| Global Client revenue | $780.1 million | $668.7 million | Up 16.6% |
| GE revenue | $478.9 million | $451.3 million | Up 6.1% |
| Gross profit | $470.4 million | $447.4 million | Up 5.1% |
| Gross margin | 37.4% | 39.9% | Down 2.5 percentage points |
| Income from operations | $177.9 million | $162.2 million | Up 9.7% |
| Operating margin | 14.1% | 14.5% | Down 0.4 percentage points |
| Net income | $149.0 million | $135.0 million | Up 10.4% |
| Net income attributable to shareholders | $142.2 million | $127.3 million | Up 11.7% |
| Diluted EPS | $0.63 | $0.58 | Up 8.6% |
| Operating cash flow | $163.1 million | $158.2 million | Up 3.1% |
Business process management revenue increased 15.2% to $1,083.7 million, while information technology revenue declined to $175.3 million from $179.7 million. Global Clients represented 62.0% of revenue, compared with 59.7% in 2009; GE represented 38.0%, compared with 40.3%.
Cost of revenue increased 17.2% to $788.5 million, exceeding revenue growth because of higher headcount, wage inflation, acquisitions, infrastructure costs, delayed contract transitions, and foreign-exchange effects. SG&A increased 6.3% to $282.1 million, but declined to 22.4% of revenue from 23.7%.
Liquidity, debt and capital resources
- Cash and cash equivalents increased to $404.0 million from $288.7 million. Short-term investments were $77.0 million, primarily U.S. Treasury bills.
- Total long-term debt declined to $25.0 million from $69.7 million; the remaining debt was scheduled to mature in 2011. Short-term borrowings were zero at year-end.
- Available short-term credit facilities totaled approximately $194.3 million, of which $10.0 million was utilized through non-funded drawdowns.
- Net cash used in investing activities was $33.4 million, including $55.2 million of capital expenditures and $42.6 million for acquisitions, net of cash acquired.
- Net cash used in financing activities was $32.3 million, including $45.0 million of debt repayments and $7.1 million distributed to noncontrolling partners.
- Operating, investing and financing activity resulted in a $97.4 million increase in cash during 2010.
- Total contractual cash obligations were $269.1 million, including $136.2 million of operating leases, $25.0 million of long-term debt, and $93.9 million of other long-term liabilities. The filing excludes $20.0 million of uncertain tax positions from this total because timing and settlement amounts were not reliably estimable.
Material changes versus the prior comparable period
- Revenue growth accelerated, led by Global Clients and business process services. Global Client revenue increased $111.3 million, while GE revenue increased $27.6 million.
- Profitability weakened at the gross-profit level: gross margin fell to 37.4% from 39.9%, primarily because cost of revenue grew faster than revenue.
- Operating income and shareholder net income still increased because of revenue growth, lower acquired-intangible amortization, SG&A leverage, and a favorable foreign-exchange result.
- Income tax expense rose 34.3% to $34.2 million as Indian tax holidays expired or became less available. Management expects the expiration of remaining STPI benefits after March 31, 2011 to increase the tax rate materially over time.
- Cash generation improved only modestly because higher accounts receivable and other working-capital requirements offset much of the earnings growth.
- Genpact acquired Symphony Marketing Solutions for approximately $29.3 million and acquired a Walgreens delivery center for approximately $16.3 million. The Walgreens transaction included a ten-year master professional services agreement and the transfer of approximately 500 employees.
- GE’s master services agreement was extended through 2016. GE’s minimum annual commitment was $360 million through 2013, declining to $250 million in 2014, $150 million in 2015 and $90 million in 2016, subject to contractual adjustments.
- The company changed its annual goodwill impairment testing date from September 30 to December 31. No goodwill impairment was identified; reporting-unit fair values exceeded carrying values by at least 72% at year-end.
- Fourth-quarter 2010 revenue was $341.5 million, operating income was $59.9 million, and net income attributable to shareholders was $46.0 million, compared with $296.9 million, $46.3 million and $34.6 million, respectively, in fourth-quarter 2009.
Guidance, outlook, management commentary and risks
The filing does not provide a specific 2011 revenue or earnings guidance range. Management described the economic outlook as uncertain and identified possible demand declines, pricing pressure, foreign-exchange volatility, client financial weakness, and legislative changes as important risks.
- Client concentration remains material: GE accounted for 38% of 2010 revenue and approximately 43% of accounts receivable at year-end. GE’s minimum purchase commitments decline substantially in 2014–2016 and do not guarantee continued purchases above those levels.
- Indian tax-holiday expirations are expected to materially increase Indian and consolidated tax rates unless replacement incentives or other tax planning offset the effect.
- The business is exposed to wage inflation, employee attrition, recruiting constraints, and utilization risk. Attrition for employees employed at least one day was approximately 31% in 2010.
- Foreign-exchange exposure is significant because approximately 71% of revenue was denominated in U.S. dollars while a substantial portion of costs was incurred in Indian rupees. A 5% appreciation of the rupee against the U.S. dollar would have increased annual rupee-denominated expenses by approximately $24 million before hedging.
- The company uses foreign-exchange forwards, but hedging may not fully offset currency movements and is subject to liquidity and regulatory restrictions.
- Competition, long sales and implementation cycles, fixed-price contract risk, pricing pressure, service-level penalties, data-security breaches, regulatory compliance, visa restrictions, and delivery-center disruptions could affect results.
- Potential tax contingencies include $20.0 million of unrecognized tax benefits and an Indian tax matter concerning GE’s 2004 sale of predecessor-company shares. Genpact states that GE is obligated to indemnify it for any tax on that sale.
- No material legal proceedings were reported. Management and KPMG concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2010.
Most important facts for investors to verify
- Whether Global Client growth can continue to offset GE concentration and the scheduled reduction in GE minimum commitments.
- The effect of Indian tax-holiday expirations on the effective tax rate, earnings and cash flow.
- Whether gross-margin pressure from wage inflation, acquisitions, delayed transitions and foreign exchange reverses or persists.
- Accounts receivable collection trends, particularly the $131.3 million owed by GE and the increase in working-capital requirements.
- The maturity and refinancing status of the remaining $25.0 million of long-term debt due in 2011.
- Integration results and returns from the Symphony and Walgreens acquisitions, including the Walgreens ten-year services agreement.
- Foreign-exchange sensitivity, hedge effectiveness and the potential impact of Indian rupee appreciation.
- Unrecognized tax benefits, related-party balances, contractual obligations and the GE indemnification arrangements.
- Future share dilution from outstanding options, restricted share units and performance units; the company does not anticipate paying cash dividends in the foreseeable future.