Genpact Limited 2011 Q2 Form 10-Q Summary
Business context and reporting period
Genpact Limited is a Bermuda-based provider of business process management, information technology, analytics, consulting, and technology services. It operated through approximately 45 delivery locations in 14 countries and had approximately 51,300 employees at June 30, 2011. The unaudited filing covers the three and six months ended June 30, 2011, with comparisons to the corresponding 2010 periods.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenues | $397.6 million | $307.6 million | $728.2 million | $595.8 million |
| Gross profit | $143.6 million | $116.5 million | $259.7 million | $228.1 million |
| Gross margin | 36.1% | 37.9% | 35.7% | 38.3% |
| Income from operations | $51.1 million | $38.3 million | $97.6 million | $75.5 million |
| Operating margin | 12.8% | 12.4% | 13.4% | 12.7% |
| Net income attributable to Genpact shareholders | $39.0 million | $27.8 million | $75.1 million | $56.0 million |
| Diluted EPS | $0.17 | $0.12 | $0.33 | $0.25 |
Six-month operating cash flow was $82.0 million, compared with $10.0 million in the prior-year period. Investing cash flow was negative $495.7 million, primarily reflecting $561.1 million of acquisition payments. Financing cash flow was $340.0 million, including $252.0 million of short-term borrowings and $120.0 million of term-loan proceeds, partly offset by debt repayments and financing costs.
Cash and cash equivalents were $336.4 million at June 30, 2011, down from $404.0 million at December 31, 2010. Short-term investments declined from $77.0 million to zero as Treasury bills were sold to help fund the Headstrong acquisition. Total debt excluding capital leases was approximately $369.3 million, comprising $252.0 million of short-term borrowings and $117.3 million of long-term debt. The company reported material compliance with its debt covenants.
Material changes versus the prior comparable period
- Q2 revenue increased 29.3% and first-half revenue increased 22.2%. Global Client revenue grew 44.9% in Q2 and 35.1% in the first half, while GE-related revenue grew 4.1% and 1.9%, respectively.
- Global Clients represented 69.2% of Q2 revenue, compared with 61.7% in Q2 2010. GE-related revenue declined to 30.8% of Q2 revenue from 38.3%.
- Headstrong, acquired May 3, 2011, contributed $45.2 million of revenue and $2.6 million of net income from acquisition through June 30. The acquisition generated approximately $390.0 million of preliminary goodwill and $91.0 million of identifiable intangible assets.
- Information technology revenue increased 101.0% in Q2 and 50.8% in the first half, primarily because of Headstrong. Business process management revenue increased 17.5% in Q2 and 17.4% in the first half.
- Gross margin declined because cost of revenue grew faster than revenue, reflecting higher personnel, infrastructure, onshore staffing, wage inflation, and acquisition-related costs. SG&A as a percentage of revenue improved to 21.8% in Q2 from 24.5%.
- Income tax expense increased to $14.4 million in Q2 and $27.5 million in the first half, primarily because the India STPI tax holiday fully expired for remaining exempt locations effective March 31, 2011 and Headstrong had higher applicable tax rates.
- Foreign exchange results improved from losses of $4.9 million in Q2 2010 and $5.6 million in the first half of 2010 to gains of $1.1 million and $2.7 million, respectively, in 2011.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management stated that operating cash flow, cash reserves, and debt capacity were expected to be sufficient to fund operations, growth, expansion, and working-capital needs.
- Key risks include client retention and new-business generation, competition, economic conditions, dependence on U.S. clients and GE, employee hiring and attrition, wage inflation, visa restrictions, pricing and utilization, foreign-exchange volatility, tax-law changes, technology disruptions or breaches, intellectual-property matters, and successful integration of acquisitions.
- GE remained a significant customer despite owning approximately 9.0% of Genpact's equity. GE represented 32% of first-half revenue and 36% of accounts receivable at June 30, 2011. The GE master services agreement includes minimum annual volume commitments through 2016.
- Headstrong acquisition accounting remained preliminary, including working-capital and seller-expense adjustments. The company incurred $5.6 million of acquisition-related costs and recorded a $1.5 million impairment of capital work in progress.
- Unrecognized tax benefits increased to $24.0 million at June 30, 2011, of which $23.9 million could affect the effective tax rate if recognized.
- Total contractual cash obligations were $594.2 million, including $252.0 million of short-term borrowings, $117.3 million of long-term debt, $159.8 million of operating leases, and $44.5 million of other long-term liabilities.
- Management concluded that disclosure controls were effective. The evaluation excluded Headstrong's disclosure controls because it was acquired during the quarter.
Important facts for investors to verify
- Whether Headstrong delivers the expected revenue growth, margins, synergies, and cash generation as integration progresses.
- The final purchase-price allocation, working-capital adjustment, seller-expense liability, goodwill, and intangible-asset values for Headstrong.
- The effect of the India tax-holiday expiration and Headstrong's tax profile on future effective tax rates.
- Debt repayment capacity, interest-rate exposure, covenant compliance, and refinancing or liquidity needs.
- Revenue concentration and receivable exposure to GE, including compliance with the GE minimum volume commitments.
- Sustainability of the improved operating cash flow and the decline in gross margin amid wage inflation, onshore staffing, and acquisition-related costs.
- Exposure to foreign-exchange movements and the effectiveness of the company's forward-contract hedging program.