Genpact Limited 2010 Q2 Form 10-Q Summary
Business context and reporting period
Genpact Limited is a Bermuda-based provider of business process management, information technology, analytics, finance and accounting, insurance, supply chain, procurement and related services. It operated through approximately 40 delivery locations in 13 countries and had approximately 42,500 employees as of June 30, 2010.
The filing covers the three and six months ended June 30, 2010, with comparisons to the corresponding 2009 periods. Financial statements are unaudited and presented under U.S. GAAP.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net revenue | $307.6 million | $272.9 million | $595.8 million | $538.7 million |
| Gross profit | $116.5 million | $107.0 million | $228.1 million | $209.2 million |
| Gross margin | 37.9% | 39.2% | 38.3% | 38.8% |
| Income from operations | $38.3 million | $37.8 million | $75.5 million | $71.0 million |
| Operating margin | 12.4% | 13.9% | 12.7% | 13.2% |
| Net income attributable to Genpact shareholders | $27.8 million | $29.7 million | $56.0 million | $59.6 million |
| Diluted EPS | $0.12 | $0.14 | $0.25 | $0.27 |
| Net cash from operating activities | Not separately provided for Q2 | Not separately provided for Q2 | $10.0 million | $67.8 million |
Q2 revenue increased 12.7%, while first-half revenue increased 10.6%. Revenue from Global Clients represented 61.7% of Q2 revenue and 61.2% of first-half revenue, compared with 59.5% and 58.7%, respectively, in the prior-year periods. GE represented 38.3% of Q2 revenue and 38.8% of first-half revenue.
As of June 30, 2010, cash and cash equivalents were $308.8 million, short-term investments were $43.0 million, and total current assets were $823.0 million. Total debt excluding capital leases was $49.8 million, all classified as current; capital lease obligations totaled approximately $5.2 million. The company reported $145.0 million of available short-term credit facilities, of which $15.7 million was utilized through non-funded drawdowns.
Total assets were $1.76 billion and total liabilities were $473.2 million as of June 30, 2010. Genpact shareholders’ equity was $1.28 billion.
Material changes versus the prior comparable period
- Revenue growth was led by Global Clients, including new business and the Symphony acquisition, and by the Walgreens delivery-center arrangement. Business process management revenue increased 16.4% in Q2, while information technology revenue declined 5.6%.
- Cost of revenue increased faster than revenue, rising to 62.1% of revenue from 60.8%. Personnel expenses increased 22.4% in Q2 and reflected hiring, acquisitions, wage inflation and foreign-exchange effects.
- SG&A increased 17.9% in Q2 and rose to 24.5% of revenue from 23.4%, partly due to higher personnel and business-development expenses.
- Operating income increased slightly in Q2 but operating margin declined 150 basis points. First-half operating margin declined 50 basis points.
- Q2 net income attributable to Genpact shareholders declined 6.2%, and first-half net income declined 6.1%. Diluted EPS declined to $0.12 in Q2 and $0.25 for the first half.
- Foreign-exchange expense was $4.9 million in Q2 2010 versus $2.2 million in Q2 2009, and $5.6 million for the first half versus a $0.6 million gain in the prior-year period.
- Operating cash flow fell to $10.0 million from $67.8 million, primarily due to higher accounts receivable, infrastructure deposits, acquisition-related working capital and lower accrued liabilities.
- The company repaid $20.0 million of long-term debt during the first half. Cash increased by $20.0 million from December 31, 2009, while short-term investments declined by $89.6 million.
Guidance, outlook, risks and unusual items
The filing does not provide a specific numerical revenue, earnings or margin forecast. Management stated that cash from operations, cash reserves and debt capacity were expected to be sufficient to finance operations, growth and expansion.
- On January 26, 2010, Genpact extended its GE master services agreement through 2016. The agreement includes a $360 million annual minimum volume commitment through 2011, with lower commitments thereafter.
- GE’s ownership declined to 9.1% following a March 2010 secondary offering. The offering involved 38.64 million shares sold by existing shareholders; Genpact received no proceeds and recorded approximately $0.6 million of related expenses.
- Genpact acquired Symphony Marketing Solutions for $29.3 million and acquired the Walgreens Danville delivery center for $16.3 million, together with a ten-year master professional services agreement.
- Goodwill was $553.2 million at June 30, 2010. The ICE reporting unit passed an interim impairment test, but its estimated fair value exceeded carrying value by only approximately 12%; continued adverse conditions in Europe could result in future impairment.
- Foreign-exchange exposure remains significant. Outstanding foreign-exchange derivative notional amounts were substantial, including $2.05 billion of U.S. dollar/Indian rupee contracts, although notional amounts do not represent the company’s direct credit or market exposure.
- GE concentration remains material despite diversification: GE accounted for 39% of first-half revenue and 44% of receivables at June 30, 2010.
- Other risks include client retention and pricing, employee hiring and attrition, wage inflation, offshore-services legislation, currency volatility, tax-policy changes, technology disruptions, competition, economic conditions and acquisition integration.
- Contractual cash obligations totaled approximately $404.4 million, including $49.8 million of long-term debt, $163.4 million of operating leases and $164.8 million of other long-term liabilities. Unrecognized tax positions of $17.4 million were excluded because timing and settlement amounts were not reliably estimable.
Important facts for investors to verify
- Assess whether revenue growth, particularly from Global Clients, can offset declining IT revenue and continued GE concentration.
- Monitor gross and operating margins for effects from wage inflation, hiring ahead of growth, pricing pressure and currency hedges.
- Reconcile the sharp decline in operating cash flow with accounts receivable growth and acquisition-related working capital.
- Review the terms and remaining maturities of the credit facility, debt obligations and available borrowing capacity.
- Evaluate the sensitivity of the ICE goodwill balance to European operating performance and the company’s discounted-cash-flow assumptions.
- Review the economic dependence on GE, the extended minimum-volume commitments and related-party balances and transactions.
- Consider the potential effect of the Hyderabad tax-holiday expiration, uncertain tax positions and future changes in tax policy.