Genpact Limited: FY2019 Form 10-K Summary
Business context and reporting period
Genpact Limited is a Bermuda-based global professional services company providing digitally enabled business process management, analytics, consulting, transformation, and information technology services. The filing covers the fiscal year ended December 31, 2019, including quarterly results for the three months ended December 31, 2019. Genpact had approximately 96,500 employees in more than 30 countries and reported 2019 net revenue of $3.521 billion.
Effective in the fourth quarter of 2019, Genpact realigned its reporting structure into three segments: Banking, Capital Markets and Insurance (BCMI); Consumer Goods, Retail, Life Sciences and Healthcare (CGRLH); and High Tech, Manufacturing and Services (HMS).
Financial performance and key metrics
| Metric | 2018 | 2019 | Change |
|---|---|---|---|
| Total net revenue | $3,000.8 million | $3,520.5 million | +17.3% |
| Gross profit | $1,079.0 million | $1,225.9 million | +13.6% |
| Gross margin | 36.0% | 34.8% | Down 120 bps |
| Income from operations | $348.2 million | $429.4 million | +23.3% |
| Operating margin | 11.6% | 12.2% | Up 60 bps |
| Net income attributable to shareholders | $282.0 million | $304.9 million | +8.1% |
| Diluted EPS | $1.45 | $1.56 | +7.6% |
| Adjusted income from operations | $473.3 million | $558.8 million | +18.1% |
| Cash flow from operating activities | $339.5 million | $427.9 million | +26.0% |
Approximately 84.5% of 2019 revenue came from business process outsourcing services and 15.5% from information technology services. Revenue from Global Clients increased 11.3% to $3.043 billion, while GE revenue increased 78.3% to $478.1 million, representing approximately 13.6% of total revenue. New bookings were approximately $3.9 billion, broadly consistent with 2018.
- Segment revenue: BCMI $1,078.8 million, down 0.1%; CGRLH $1,107.5 million, up 22.6%; and HMS $1,348.6 million, up 34.2%.
- Adjusted income from operations: BCMI $116.0 million, CGRLH $161.5 million, and HMS $238.1 million.
- Average headcount increased approximately 14.4% to 91,300; year-end headcount was approximately 96,500.
- Employee attrition was approximately 28%, unchanged from 2018.
- Effective tax rate increased to 23.7% from 22.3%.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents increased to $467.1 million from $368.4 million. Approximately $464.9 million was held by foreign subsidiaries.
- Net cash provided by operating activities was $427.9 million. Investing cash outflow was $357.1 million, including $252.3 million for acquisitions. Financing cash inflow was $39.6 million.
- Total debt, including current and long-term portions, was $1.373 billion at year-end, compared with $1.009 billion in 2018. Short-term borrowings declined to $70.0 million from $295.0 million.
- Genpact issued $400.0 million of 3.375% senior notes due December 2024, using proceeds in part to repay short-term borrowings. The company also had $348.8 million of 3.70% senior notes due April 2022 and $627.4 million outstanding under its term loan.
- The company had a $500.0 million revolving credit facility, of which $70.0 million was funded and approximately $72.1 million was utilized including non-funded commitments. The credit facility matures in August 2023.
- Genpact remained in compliance with applicable debt covenants during 2019.
- Operating lease liabilities totaled $359.8 million following adoption of ASC 842. Total contractual obligations were $2.232 billion, including debt, lease, purchase, capital, and earn-out obligations.
- Genpact paid $64.7 million in dividends and repurchased $30.0 million of common shares in 2019. Approximately $274.0 million remained available under the $1.25 billion repurchase authorization.
Material changes versus the prior comparable period
- Revenue growth accelerated, primarily from large deals signed in late 2018 and 2019, increased transformation services, and higher GE activity.
- Gross margin declined because of lower initial margins on large deals, higher stock-based compensation, and a $10.5 million accelerated charge related to a wealth management platform that Genpact no longer planned to leverage beyond its current scope.
- Operating margin improved despite the gross-margin decline, supported by revenue growth, operating leverage, SG&A efficiency, and a $31.4 million gain related to the transfer of land to a real estate developer.
- Other income declined to $5.8 million from $35.8 million, primarily because Indian export-subsidy income declined to $4.0 million from $36.1 million.
- Stock-based compensation increased to $83.9 million from $49.0 million.
- Goodwill increased to $1.574 billion from $1.394 billion, primarily reflecting 2019 acquisitions. The company recorded no goodwill impairment.
- Genpact adopted ASC 842, recognizing operating lease right-of-use assets and liabilities. The filing states that the adoption increased lease liabilities by approximately $329.0 million at January 1, 2019.
- Genpact acquired Rightpoint Consulting for approximately $270.7 million and riskCanvas for approximately $5.7 million. Rightpoint contributed to experience-led transformation capabilities and riskCanvas to financial crimes and risk services.
- Bain Capital-affiliated shareholders completed secondary offerings totaling approximately 47.9 million shares in 2019 and no longer owned Genpact equity after the November offering. Genpact received no proceeds from these offerings.
Guidance, outlook, commentary, risks, and unusual items
The filing states that 2020 company guidance was provided in an earnings release furnished on Form 8-K dated February 6, 2020, but the filing text supplied here does not provide the detailed guidance figures. Management stated that it could not yet predict the impact of COVID-19 on 2020 results.
- Key strategic priorities include digital transformation, analytics, domain expertise, intelligent operations, and experience-led transformation.
- Management expects wage inflation, employee attrition, foreign exchange movements, and utilization levels to remain important margin variables.
- Approximately 77% of fiscal 2019 revenue was denominated in U.S. dollars, while a substantial portion of expenses was incurred in Indian rupees. Management estimated that a 5% appreciation of the Indian rupee against the U.S. dollar would have increased 2019 expenses by approximately $45 million before hedging effects.
- Interest-rate exposure remains material because credit-facility borrowings are primarily LIBOR-based. A 1% change in interest rates, including swaps, was estimated to affect annual net interest expense by approximately $5 million.
- Important concentration risks include GE, which represented 13.6% of 2019 revenue and 17% of year-end receivables, and exposure to North American, European, and financial-services clients.
- Indian tax matters include demands totaling approximately $154 million for tax years 2009, 2013, and 2015; the company had paid $55 million under protest as of March 2, 2020 and had not recorded a reserve for the disputed exposure.
- An Indian court decision regarding provident-fund contributions could, if applied retrospectively, require substantial additional payments; the filing states that the amount cannot currently be reliably estimated.
- Other material risks include cybersecurity and data privacy, business interruption and pandemics, Brexit, regulatory restrictions on offshore outsourcing, tax-law changes, acquisitions and integration, client concentration, pricing pressure, wage inflation, currency volatility, and debt covenant or refinancing risk.
- The company reported effective disclosure controls and effective internal control over financial reporting. KPMG issued unqualified opinions, while excluding the acquired Rightpoint and riskCanvas businesses from management’s internal-control assessment.
Most important facts for an investor to verify
- Obtain the February 6, 2020 Form 8-K and verify the precise 2020 revenue, margin, cash flow, and bookings guidance.
- Assess whether GE revenue concentration and the unusually strong 2019 GE growth are sustainable, particularly as GE continues to divest businesses.
- Reconcile reported operating-margin improvement with the gross-margin decline, higher stock-based compensation, acquisition costs, and unusual land-transfer gains.
- Review debt maturities, LIBOR transition provisions, interest-rate swaps, covenant headroom, and the company’s ability to fund acquisitions, dividends, and repurchases.
- Evaluate the disputed Indian tax assessments, related payments under protest, unrecognized tax benefits, and the potential retrospective provident-fund obligation.
- Monitor COVID-19 effects on delivery centers, employee availability, client demand, travel, business continuity, and contract performance.
- Review Rightpoint’s integration, acquisition-related earn-outs, goodwill concentration, and future impairment sensitivity.
- Confirm the effect of ASC 842 on leverage, lease-adjusted obligations, and comparability with prior periods.