Genpact Limited — FY2015 Form 10-K Summary
Business context and reporting period
Genpact is a global provider of digitally powered business process management, outsourcing, analytics, consulting, transformation, and information technology services. The filing covers the fiscal year ended December 31, 2015; quarterly data identifies fourth-quarter 2015 results but this is an annual Form 10-K, not a quarterly filing.
- Approximately 72,000 employees in 25 countries and 72 delivery centers in 17 countries.
- Over 700 clients; GE remained the largest client, while Global Clients represented 81.3% of revenue.
- Business mix continued shifting toward business process outsourcing, digital services, analytics, and transformation work.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenues | $2,461.0 million | $2,279.4 million | Up 8.0%; 10.2% constant currency |
| Gross profit | $967.5 million | $901.4 million | Up 7.3% |
| Gross margin | 39.3% | 39.5% | Down 0.2 percentage points |
| Income from operations | $334.2 million | $294.0 million | Up 13.7% |
| Operating margin | 13.6% | 12.9% | Up 0.7 percentage points |
| Net income attributable to shareholders | $239.8 million | $192.0 million | Up 24.9% |
| Diluted EPS | $1.09 | $0.85 | Up 28.2% |
| Operating cash flow | $327.4 million | $271.8 million | Up 20.5% |
| Cash and equivalents | $450.9 million | $461.8 million | Down 2.4% |
| Total debt, including current portion | $776.5 million | $653.6 million | Up $122.9 million |
- Global Client revenue increased 10.4% to $2,001.1 million; GE revenue declined 1.3% to $459.9 million.
- BPO revenue increased 11.3% to $1,933.1 million, while IT services revenue declined 2.7% to $527.9 million.
- Net income margin improved to 9.7% from 8.4%; effective tax rate declined to 20.5% from 23.0%.
- Accounts receivable increased to $590.1 million, and days sales outstanding increased to 82 days from 79 days.
- Net cash used in investing activities was $100.5 million, including acquisitions and an $18.4 million investment in the Markit Genpact KYC affiliate.
Material changes versus the prior comparable period
- Revenue growth was led by Global Client BPO work, particularly in banking and financial services, consumer products, life sciences, insurance, and high technology.
- GE represented 18.7% of 2015 revenue versus 20.4% in 2014, continuing the diversification trend. GE revenue is expected to decline as GE divests portions of GE Capital.
- Operating margin expanded despite a slight gross-margin decline, reflecting lower SG&A expense as a percentage of revenue, productivity savings, favorable foreign exchange, and lower stock-based compensation.
- Foreign exchange results improved from a $12.4 million loss in 2014 to a $5.3 million gain in 2015, primarily due to Indian rupee depreciation against the U.S. dollar.
- The company refinanced its credit facilities in June 2015 with an $800 million term loan and a $350 million revolving facility. The applicable rate at year-end was LIBOR plus 1.50%.
- Share repurchases totaled $226.9 million for 9.9 million shares in 2015. The board later approved an additional $250 million authorization, bringing the total authorization to $500 million.
- New bookings increased approximately 20% to $2.59 billion from $2.16 billion, although management cautions that bookings are not directly comparable to revenue and may convert over several years.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a clear quantitative FY2016 revenue or earnings outlook. Management states that operating cash flow, cash reserves, and debt capacity are expected to fund operations, growth, and expansion.
- The GE master services agreement expires in December 2016 and includes a $90 million minimum annual volume commitment for 2016, subject to adjustments or credits. Management expects GE revenue to continue declining.
- 2015 included a $10.7 million impairment charge for a software intangible asset and a $10.1 million loss related to accelerated amortization of debt issuance costs from refinancing.
- Key operating risks include client concentration and GE-related declines, dependence on North American and European demand, financial-services exposure, wage inflation, employee attrition, foreign exchange volatility, pricing and utilization, cybersecurity and data privacy, regulatory compliance, and execution of complex projects.
- India-related tax matters remain material. The company disclosed approximately $57 million of potential tax claims, including interest, relating to assessments of certain transactions; $28 million had been paid under protest, with appeals pending.
- Tax holidays and other incentives, particularly in India, support the effective tax rate but will expire over time. The filing states that the 2015 tax holiday benefit reduced basic EPS by approximately $0.18.
- Goodwill was $1,038.3 million and intangible assets were $98.6 million at year-end. Management concluded that no goodwill impairment was required, but future impairment remains a risk.
- Management and KPMG reported effective disclosure controls and internal control over financial reporting. The 2015 audit opinion was unqualified, although certain U.K. wealth-management acquisition operations were excluded from the internal-control assessment.
Most important facts for an investor to verify
- Whether Global Client growth and new bookings convert into sustained revenue and margin expansion.
- The pace and financial impact of GE Capital divestitures and the expiration or renewal terms of the GE agreement.
- Debt amortization, variable-rate exposure, covenant compliance, and refinancing needs through the June 2020 maturity.
- Accounts receivable aging, the increase in days sales outstanding, and cash conversion relative to reported earnings.
- The outcome and potential cash impact of Indian tax assessments and other uncertain tax positions.
- Whether wage inflation, 27% employee attrition, utilization, and foreign exchange movements pressure future margins.
- The sustainability of Indian tax incentives and the effect of their expiration on the effective tax rate.
- The basis for the $2.59 billion bookings measure, including contract duration, minimum commitments, cancellations, and conversion timing.
- Future share repurchases, their effect on leverage and diluted share count, and the absence of regular cash dividends.