Genpact Limited — Form 10-Q Summary
Business context and reporting period
Genpact Limited is a global professional services company providing digitally enabled business process outsourcing and information technology services. It reported results for the three months ended March 31, 2018. The interim consolidated financial statements are unaudited and prepared under U.S. GAAP. The company had more than 78,000 employees in over 20 countries.
Key financial metrics
| Metric | Q1 2017 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $623.0 million | $688.9 million | 10.6% increase |
| Gross profit | $239.7 million | $244.6 million | 2.1% increase |
| Gross margin | 38.5% | 35.5% | Down 3.0 percentage points |
| Operating income | $79.1 million | $63.8 million | 19.4% decrease |
| Operating margin | 12.7% | 9.3% | Down 3.4 percentage points |
| Net income | $52.4 million | $63.9 million | 21.9% increase |
| Net income attributable to shareholders | $53.3 million | $64.7 million | 21.3% increase |
| Net margin attributable to shareholders | 8.6% | 9.4% | Up 0.8 percentage points |
| Diluted EPS | $0.26 | $0.33 | Increase |
| Cash flow from operations | $31.0 million | $(27.3) million | Decrease of $58.4 million |
Global Client revenue increased 13.9% to $630.9 million, while GE revenue declined 16.2% to $58.0 million. BPO revenue increased 12.3% to $574.1 million and IT services revenue increased 2.8% to $114.9 million. Constant-currency revenue growth was approximately 9%.
At March 31, 2018, cash and cash equivalents were $424.2 million, accounts receivable were $703.1 million, and total assets were $3.40 billion. Short-term borrowings were $275.0 million, current long-term debt was $39.2 million, and long-term debt excluding the current portion was $997.0 million. Total reported debt was approximately $1.31 billion, implying gross debt less cash of approximately $887 million before considering leases and other obligations.
Investing cash outflow was $27.7 million, including $18.7 million for property, plant and equipment, $4.4 million for internally generated intangible assets, and $4.7 million to purchase the remaining 49% interest in Strategic Sourcing Excellence. Financing cash outflow was $26.5 million, including $96.0 million of share repurchases, $14.4 million of dividends, and $10.0 million of long-term debt repayment. The quarterly dividend was increased 25% to $0.075 per share.
Material changes versus the prior comparable period
- Revenue growth was led by Global Clients and BPO services, partially offset by lower GE revenue.
- Gross margin declined because of wage inflation, unfavorable foreign exchange, higher onshore and operational staffing, acquisitions, stock-based compensation, and lower personnel utilization.
- Operating income declined despite higher revenue because cost of revenue, SG&A, and acquired-intangible amortization increased. Q1 2017 also benefited from a $4.4 million real-estate gain and a $3.1 million earn-out valuation gain that did not recur.
- Net income benefited from a $15.5 million Indian export subsidy recorded in other income and a favorable foreign-exchange result, compared with a foreign-exchange loss in Q1 2017.
- The company adopted ASC 606 using the modified retrospective method. The adoption increased opening retained earnings by $17.9 million and created contract cost assets; reported Q1 2018 revenue was unchanged and the reported cash-flow total was unchanged.
- Cash flow from operations turned negative, primarily because of higher accounts receivable, increased working-capital investment, timing of payables, and higher tax payments.
- Cash declined 15.9% from December 31, 2017, while short-term borrowings increased from $170.0 million to $275.0 million.
- The company purchased the remaining SSE interest, eliminating the redeemable non-controlling interest shown at year-end 2017.
Guidance, outlook, commentary, risks, and unusual items
The filing text does not provide a clear quantitative full-year revenue, margin, earnings, or cash-flow guidance. Management stated that cash from operations, cash reserves, and debt capacity are expected to be sufficient to fund operations, growth, dividends, and potential additional share repurchases.
Management identified growth in digital and transformation services, acquisitions, and Global Client demand as business drivers. Key risks include client retention and concentration, GE revenue dependence, competition, wage inflation and employee attrition, foreign-exchange movements, interest-rate and LIBOR exposure, debt covenant compliance, cybersecurity and data protection, technology disruption, acquisitions and integration, tax-law changes, loss of government incentives, and global economic conditions.
The company reported an effective tax rate of 15.7%, including $2.7 million of favorable discrete items. Accounting for the U.S. Tax Cuts and Jobs Act transition tax remained provisional, and no transition-tax liability had been recorded pending completion of the earnings-and-profits analysis. Unrecognized tax benefits were $25.8 million at March 31, 2018.
The company was in compliance with its revolving-credit and term-loan covenants. Its $350 million revolving facility expires in June 2020; the term loan matures in June 2020; and $350 million of 3.70% senior notes mature April 1, 2022. Interest-rate swaps covered $425.9 million of notional debt at quarter-end.
Contractual obligations totaled approximately $1.74 billion, including $1.14 billion of long-term debt obligations, $277.4 million of short-term borrowing obligations, $196.1 million of operating leases, and $48.3 million of purchase obligations. The company repurchased an additional 505,520 shares for $15.8 million between April 1 and May 10, 2018.
Most important facts for investors to verify
- Whether the sharp decline in gross and operating margins is temporary or reflects sustained wage, utilization, foreign-exchange, and acquisition-related pressure.
- The sustainability and collectability of the $703.1 million accounts-receivable balance and the causes of negative operating cash flow.
- The recurring nature of the $15.5 million Indian export subsidy and the effect of expiring or changing government incentives.
- Debt repayment capacity, refinancing needs, LIBOR and interest-rate sensitivity, and compliance with leverage and interest-coverage covenants.
- The provisional U.S. Tax Cuts and Jobs Act accounting and the potential impact of $25.8 million of unrecognized tax benefits.
- The effects of ASC 606 contract assets, contract liabilities, and capitalized contract costs on future revenue and expense timing.
- Progress in integrating 2017 acquisitions and the carrying value of approximately $1.34 billion of goodwill.
- Whether share repurchases and the higher dividend remain appropriate given declining cash and increased short-term borrowings.