Genpact Limited — Q3 2015 Form 10-Q Summary
Business context and reporting period
Genpact Limited is a Bermuda-based provider of business process outsourcing, information technology, analytics, consulting and technology-enabled services. The filing covers the unaudited quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Genpact reported more than 70,000 employees in 25 countries and approximately 103 client relationships generating more than $5 million of annual revenue.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Net revenues | $617.8 million | $588.1 million | 5.1% |
| Gross profit | $242.0 million | $233.6 million | 3.6% |
| Gross margin | 39.2% | 39.7% | Down 50 basis points |
| Income from operations | $87.3 million | $72.9 million | 19.9% |
| Operating margin | 14.1% | 12.4% | Up 170 basis points |
| Net income attributable to shareholders | $68.1 million | $46.7 million | 45.9% |
| Diluted EPS | $0.31 | $0.21 | Increase |
| Metric | Nine months 2015 | Nine months 2014 | Change |
|---|---|---|---|
| Net revenues | $1.815 billion | $1.678 billion | 8.1% |
| Gross profit | $714.9 million | $659.0 million | 8.5% |
| Gross margin | 39.4% | 39.3% | Up 10 basis points |
| Income from operations | $250.7 million | $223.2 million | 12.4% |
| Operating margin | 13.8% | 13.3% | Up 50 basis points |
| Net income attributable to shareholders | $175.4 million | $146.3 million | 19.9% |
| Diluted EPS | $0.80 | $0.65 | Increase |
Global Client revenue increased 6.9% in the quarter and 10.6% year to date, while GE revenue declined 2.3% and 1.3%, respectively. BPO revenue increased 8.2% in the quarter and 12.3% year to date; IT services revenue declined 5.0% and 4.8%, respectively. GE represented 18.5% of quarterly revenue and 18.9% of year-to-date revenue.
Nine-month operating cash flow was $253.6 million, compared with $178.8 million in 2014. Investing cash use was $78.4 million, including capital expenditures, acquisitions and a $13.5 million investment in an equity affiliate. Financing cash use was $152.8 million, including $159.0 million of share repurchases. Cash and cash equivalents were $467.5 million at September 30, 2015, compared with $461.8 million at December 31, 2014.
At September 30, 2015, total debt was approximately $807.7 million, consisting of $21.5 million of short-term borrowings, $39.1 million of current long-term debt and $747.1 million of long-term debt. The company refinanced its credit facilities in June 2015 with an $800 million term loan and a $350 million revolving facility. The term loan bears interest at LIBOR plus 1.50% based on the stated credit rating and matures June 30, 2020. Management stated that the company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue growth was led by Global Clients and BPO services, while GE and IT services declined.
- Quarterly gross margin contracted because of wage inflation, higher operating expenses, foreign-exchange effects and a non-recurring Indian statutory compliance cost. Year-to-date gross margin modestly improved because of operating efficiencies.
- SG&A declined 5.5% in the quarter and increased 5.8% year to date, with productivity savings, lower stock compensation and favorable foreign exchange partly offsetting wage and sales investment.
- Foreign exchange results improved from a $4.7 million loss to a $4.2 million gain in the quarter and from a $12.1 million loss to a $4.1 million gain year to date.
- The effective tax rate declined to 21.1% from 24.5% in the quarter and to 20.2% from 23.6% year to date, primarily due to jurisdictional mix and growth in lower-tax jurisdictions.
- Shares outstanding declined following the repurchase and retirement of 7.1 million shares for $159.0 million during the first nine months. An additional 999,416 shares were repurchased after quarter-end through November 6, 2015.
Outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative revenue or earnings guidance range. Management expected cash from operations, cash reserves and debt capacity to fund operations, growth, expansion and additional share repurchases.
- In 2015, Genpact acquired U.S. and U.K. wealth-management operations from Citibank and a finance-and-accounting delivery center in Slovakia. These acquisitions added approximately $21.2 million of cash consideration and related goodwill and intangible assets.
- Genpact recorded a $10.7 million non-recurring impairment charge for a software intangible asset after revising forecast cash flows. This was partly offset by a $7.3 million gain from changes in acquisition-related earn-out fair values.
- The June refinancing resulted in a $10.1 million loss from accelerated amortization of prior debt issuance costs.
- Key risks include client concentration and dependence on GE, foreign-exchange volatility, wage inflation and employee attrition, competition and pricing pressure, dependence on U.S. and European clients, tax-policy changes, interest-rate and LIBOR exposure, acquisition integration, technology disruptions or breaches, regulatory changes, visa restrictions and global economic conditions.
- GE accounted for 19% of year-to-date revenue and 18% of receivables at September 30, 2015. The filing also identifies approximately $1.15 billion of total contractual obligations, including debt, leases, purchase obligations, earn-outs and other liabilities.
- There were no legal proceedings reported that management believed were likely to have a material adverse effect. Disclosure controls were deemed effective, although controls related to 2015 acquisitions were excluded from management's assessment.
Important facts for investors to verify
- Whether Global Client growth and BPO expansion offset continued declines in GE-related and IT-services revenue.
- Whether quarterly gross-margin pressure from wages, operating costs and compliance charges persists.
- The effect of the new $800 million term loan, variable LIBOR-based interest rates, required amortization and covenant compliance on future cash flow.
- The remaining authorization and pace of share repurchases, including post-quarter-end activity.
- The sustainability of the lower effective tax rate and the status of $21.3 million of unrecognized tax benefits.
- The performance and integration of the 2015 acquisitions and the recoverability of goodwill and intangible assets.
- Foreign-exchange sensitivity, particularly to the Indian rupee, euro and Japanese yen, including the impact of outstanding hedges.