Genpact Limited 2016 Form 10-K Summary
Business context and reporting period
Genpact Limited is a Bermuda-incorporated provider of digitally powered business process management, analytics, consulting, information technology, and transformation services. The filing covers the fiscal year ended December 31, 2016; it is an annual report rather than a quarterly filing. Genpact operated with more than 75,000 employees in 25 countries and served more than 700 clients.
Revenue was increasingly diversified away from General Electric (GE). After the filing’s year-end reclassification of certain divested GE businesses, 2016 revenue was $2.213 billion from Global Clients and $357.9 million from GE.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenue | $2.571 billion | $2.461 billion | Up 4.5%; up 6% constant currency |
| Gross profit | $1.016 billion | $967.5 million | Up 5.0% |
| Gross margin | 39.5% | 39.3% | Up 20 basis points |
| Income from operations | $340.8 million | $334.2 million | Up 2.0% |
| Operating margin | 13.3% | 13.6% | Down 30 basis points |
| Net income attributable to common shareholders | $269.7 million | $239.8 million | Up 12.5% |
| Diluted EPS | $1.28 | $1.09 | Up 17.4% |
| Net cash from operating activities | $345.8 million | $327.4 million | Up 5.6% |
Fourth-quarter 2016 revenue was $681.7 million, operating income was $98.1 million, net income attributable to common shareholders was $77.1 million, and diluted EPS was $0.38.
- Global Client revenue increased 10.6% to $2.213 billion and represented 86.1% of total revenue.
- GE revenue declined 22.2% to $357.9 million, or 13.9% of total revenue, primarily because GE continued to divest GE Capital businesses.
- BPO revenue increased 7.8% to $2.083 billion, while IT services revenue declined 7.7% to $487.3 million.
- New bookings were approximately $2.65 billion, up 3% from 2015.
- Effective tax rate decreased to 18.7% from 20.5%, primarily due to discrete tax items, including reversal of uncertain tax positions and early adoption of ASU 2016-09.
- Average headcount increased 10.7% to approximately 74,600; employee attrition was approximately 26%.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $422.6 million at December 31, 2016, down from $450.9 million.
- Cash flow from operations of $345.8 million exceeded capital expenditures of $88.8 million.
- Cash used for investing activities was $125.8 million, including acquisitions and capital expenditures.
- Cash used for financing activities was $232.8 million, including $345.2 million of share repurchases.
- Credit-facility debt was approximately $897.3 million, consisting of $737.3 million of term debt and $160.0 million of funded revolving borrowings. The facilities mature in 2020 and bear variable interest generally based on LIBOR plus a margin of 1.50%.
- Total contractual obligations were $1.187 billion, including $791.7 million of long-term debt obligations, $161.8 million of short-term borrowings, and $136.5 million of operating lease obligations.
- The company was in compliance with its financial covenants at year-end. Its revolving credit facility had a total capacity of $350 million.
- Genpact repurchased 13.9 million shares in 2016 for $345.2 million. In February 2017, the board increased the repurchase authorization to $1.25 billion and announced a planned quarterly dividend of $0.06 per share.
Material changes, outlook, and unusual items
- Genpact entered into a new four-year GE master services agreement effective January 1, 2017. Unlike the prior agreement, it provides no minimum purchase commitment or exclusivity, and GE may terminate the agreement or statements of work with 30 days’ notice. Management expects GE revenue to remain volatile and potentially decline as divestitures continue.
- 2016 acquisitions included PNMSoft, Endeavour Software Technologies, and a 51% interest in Strategic Sourcing Excellence. These transactions expanded digital, mobility, workflow, sourcing, and procurement capabilities and generated additional goodwill and contingent earn-out obligations.
- The company sold its cloud-hosted rural banking technology platform in India for net proceeds of $17.2 million and recorded a $5.2 million gain.
- Genpact recorded an $11.2 million impairment charge for intangible assets, compared with $10.7 million in 2015. No goodwill impairment was recorded, although the IT services reporting unit required quantitative testing because of declining planned revenues.
- Management continued to invest in digital, consulting, analytics, domain expertise, and sales capabilities. The filing does not provide formal 2017 revenue or earnings guidance.
- Key risks include GE concentration and contract changes, client demand in North America and Europe, exposure to financial services, wage inflation and employee attrition, foreign exchange movements, variable-rate debt, cybersecurity and data privacy, tax disputes and expiring tax incentives, competition, complex fixed-price contracts, and execution of acquisitions and digital offerings.
- Indian tax authorities asserted potential tax claims totaling approximately $158 million, including interest, for tax years 2009 and 2013. Genpact had paid $20 million under protest and could be required to pay additional amounts pending resolution.
- Goodwill was $1.069 billion and intangible assets were $72.0 million at year-end, making impairment assumptions and future operating performance important valuation considerations.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls, while excluding the 2016 acquisitions from its internal-control assessment.
Most important facts for investors to verify
- Reconcile the filing’s different GE revenue percentages, including the 13.9% figure used in MD&A and the 16% figure presented in certain financial-statement disclosures, and understand the effect of the annual reclassification of divested GE businesses.
- Review the new GE master services agreement, including the absence of minimum purchase commitments, 30-day termination rights, transition assistance obligations, and the treatment of divested GE businesses.
- Assess whether Global Client growth can offset further GE declines, particularly given the concentration in North America, Europe, and financial services.
- Evaluate debt repayment capacity, variable LIBOR exposure, covenant headroom, and the effect of continued share repurchases and newly initiated dividends on liquidity.
- Monitor the Indian tax assessments, available indemnification from GE, tax-holiday expirations, and the company’s effective tax rate.
- Test the sustainability of margins in light of wage inflation, 26% attrition, lower IT-services utilization, higher SG&A investment, and foreign exchange sensitivity.
- Review the carrying value of goodwill and intangible assets, especially the IT services reporting unit and the $11.2 million 2016 intangible impairment charge.
- Confirm the expected accounting impact and transition approach for the revenue-recognition standard effective January 1, 2018; management expected no material revenue impact but was still assessing contract-cost timing effects.