Genpact Limited 10-Q Summary
Business context and reporting period
Genpact Limited is a global professional services company providing digitally enabled business process management, analytics, consulting, digital solutions and information technology services. It had more than 96,300 employees in over 30 countries. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, filed November 9, 2020.
Results were affected by the COVID-19 pandemic, including delayed client approvals for remote delivery, delayed or canceled projects, lower discretionary spending by certain clients and restructuring actions.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net revenue | $935.5 million | $888.8 million | $2,758.8 million | $2,579.8 million |
| Revenue growth | 5.3% | — | 6.9% | — |
| Gross profit | $329.7 million | $315.1 million | $954.3 million | $915.8 million |
| Gross margin | 35.2% | 35.5% | 34.6% | 35.5% |
| Income from operations | $124.6 million | $113.6 million | $325.7 million | $309.9 million |
| Operating margin | 13.3% | 12.8% | 11.8% | 12.0% |
| Net income | $85.4 million | $88.1 million | $233.3 million | $222.7 million |
| Net margin | 9.1% | 9.9% | 8.5% | 8.6% |
| Diluted EPS | $0.43 | $0.45 | $1.19 | $1.14 |
| Adjusted income from operations | $160.0 million | $142.3 million | $441.2 million | $399.9 million |
| Adjusted operating margin | 17.1% | 16.0% | 16.0% | 15.5% |
Global Client revenue increased 7.4% in Q3 and 8.0% for the nine-month period. GE revenue declined 8.0% in Q3 but increased 0.3% year to date. GE represented 11.9% of Q3 revenue and 12.7% of nine-month revenue; it accounted for 17% of accounts receivable at September 30, 2020.
- Cash flow: Operating cash flow was $425.2 million for the nine months, up from $341.3 million. Investing cash outflow was $55.9 million versus $86.0 million. Financing cash outflow was $1.6 million versus $154.2 million. Net cash increased $367.7 million.
- Liquidity: Cash and cash equivalents were $803.4 million at September 30, 2020, up from $467.1 million at December 31, 2019. Approximately $789.8 million was held by foreign subsidiaries.
- Debt: Short-term borrowings were $245.0 million, compared with $70.0 million at year-end. Long-term debt was $1.349 billion, including the term loan and 2017 and 2019 senior notes. Total contractual obligations were $2.399 billion.
- Capital returns: The company paid $55.8 million in dividends and repurchased 1.8 million shares for $73.6 million during the nine months. The quarterly dividend was increased to $0.0975 per share. Approximately $200.5 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Q3 revenue increased $46.7 million, primarily from Global Clients, including CGRLH, high-tech and insurance clients. CGRLH revenue rose 16.6%, while BCMI and HMS revenue were approximately flat.
- Nine-month revenue increased $179.0 million. CGRLH rose 15.9%, HMS rose 5.8% and BCMI rose 1.0%.
- Q3 operating income increased 9.7%, and operating margin expanded to 13.3%, despite pandemic-related charges. Nine-month operating income increased 5.1%, but margin declined to 11.8%.
- Q3 net income declined 3.0% because of higher interest expense, a higher effective tax rate and a shift from foreign-exchange gains to losses. Nine-month net income increased 4.8%.
- Gross margin declined in both periods, primarily because of lower utilization, COVID-19-related severance, and a non-recurring charge related to retirement fund assets in India.
- Adjusted operating income and margin improved, reflecting cost containment, improved transformation-resource utilization and operating leverage. Management excludes stock-based compensation, acquired-intangible amortization, restructuring and other items from this non-GAAP measure.
- The company adopted ASC 326, Current Expected Credit Losses, on January 1, 2020, reducing opening retained earnings by $4.0 million, net of tax.
- Rightpoint Consulting, acquired in November 2019 for total consideration of approximately $270.7 million, contributed to CGRLH and HMS growth and increased acquired-intangible amortization.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide a clear numerical revenue or earnings forecast. Management stated that the pandemic’s effects on demand, profitability and cash flow could continue, while noting that Q3 revenue growth was better than anticipated at the beginning of the quarter. The company expected cash from operations, cash reserves and debt capacity to support operations, growth, dividends and potential repurchases, but acknowledged that COVID-19 could adversely affect future cash flows.
- Restructuring: The company recorded $26.5 million of COVID-19-related restructuring charges in the second and third quarters, including $4.9 million in Q3. The charges included $15.4 million of severance and $11.2 million of non-cash lease and asset write-downs. Management stated that no further costs were expected under this restructuring plan.
- COVID-19 exposure: Risks include prolonged client spending reductions, service delays, contract cancellations, client credit deterioration, reduced utilization and continued work-from-home constraints, particularly for sensitive financial-services processes.
- Customer concentration: GE remained a significant customer, although its Q3 revenue declined because of productivity commitments and lower discretionary spending.
- Interest-rate and currency risk: Floating-rate debt is primarily based on LIBOR. Interest-rate swaps covered $495 million of notional debt at September 30, 2020. The company also had extensive foreign-exchange hedges and reported a $2.4 million Q3 foreign-exchange loss.
- Contingencies: The company disclosed uncertainty regarding possible retroactive Indian employee-benefit contributions and a $3.6 million Indian GST refund dispute for which no reserve was recorded because management considered the risk of loss remote.
- Subsequent events: The company acquired SomethingDigital.Com LLC on October 5, 2020, repurchased 1.105 million shares for $42.4 million through October 27, and declared a fourth-quarter dividend of $0.0975 per share.
Important facts for investors to verify
- Whether COVID-19-related demand reductions, project delays and work-from-home constraints persist beyond 2020.
- The sustainability of improved adjusted margins after excluding $26.5 million of restructuring costs and other non-GAAP adjustments.
- The ability to reduce the $245.0 million revolving-credit draw while continuing dividends, repurchases and investment.
- Debt maturities, including the $602.2 million term loan balance, $349.2 million 2017 senior notes due 2022 and $397.6 million 2019 senior notes due 2024.
- Revenue concentration and trends involving GE, which represented 12% of Q3 revenue and 13% of nine-month revenue.
- Potential liabilities related to Indian employee-benefit rules, tax matters and the GST refund dispute.
- Goodwill and intangible-asset impairment risk, particularly following the $10.6 million of nine-month 2020 asset write-downs.
- The terms and financial contribution of the SomethingDigital acquisition completed after quarter-end.