Genpact Limited 2018 Form 10-K Summary
Business context and reporting period
Genpact is a global professional services company providing digitally enabled business process outsourcing, transformation, analytics, consulting, and information technology services. The filing covers the fiscal year ended December 31, 2018; it is an annual Form 10-K rather than a standalone quarterly filing. Genpact had approximately 87,000 employees in more than 25 countries and reported approximately $3.0 billion of revenue.
Revenue was generated primarily from global clients outside GE, with services concentrated in business process outsourcing. GE remained the largest individual client but represented a declining share of revenue.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total net revenue | $3,000.8 million | $2,736.9 million | +9.6% |
| Gross profit | $1,079.0 million | $1,055.5 million | +2.2% |
| Gross margin | 36.0% | 38.6% | Down 260 basis points |
| Income from operations | $348.2 million | $331.3 million | +5.1% |
| Operating margin | 11.6% | 12.1% | Down 50 basis points |
| Net income attributable to common shareholders | $282.0 million | $263.1 million | +7.2% |
| Net margin | 9.4% | 9.6% | Down 20 basis points |
| Diluted EPS | $1.45 | $1.34 | +8.2% |
| Cash flow from operations | $339.5 million | $359.1 million | Down 5.4% |
Global Client revenue increased 10.7% to $2,732.6 million and represented 91.1% of total revenue. GE revenue declined 0.4% to $268.2 million, or 8.9% of total revenue. BPO revenue rose 10.5% to $2,502.8 million, while IT services revenue increased 5.4% to $498.0 million.
Cash and cash equivalents were $368.4 million at year-end, down from $504.5 million. Net accounts receivable increased to $774.2 million. Total assets were $3.529 billion and shareholders’ equity was $1.404 billion.
Total debt, including current and long-term portions, was approximately $1.304 billion, comprising approximately $660.8 million under the term loan, $295.0 million drawn on the revolving facility, and $348.3 million of 3.70% senior notes due April 2022. The amended credit facility provides a $680 million term loan and a $500 million revolving facility, maturing in August 2023. Management reported compliance with applicable financial covenants.
Material changes versus the prior comparable period
- Revenue growth accelerated, led by Global Clients, transformation services, digital offerings, and acquisitions.
- Gross margin declined because personnel costs, wage inflation, onshore staffing, operating expenses, stock-based compensation, and unfavorable currency effects grew faster than revenue.
- Operating margin decreased despite higher operating income, as revenue growth was offset by lower gross margin.
- Net interest expense increased to $37.1 million from $31.7 million, reflecting higher LIBOR, greater revolving-facility utilization, and the senior notes issued in 2017.
- Effective tax rate increased to 22.3% from 18.5%, primarily due to internal restructuring, partially taxable Indian special economic zone units, and changes in the geographic mix of earnings.
- Operating cash flow decreased, while investing cash outflows declined because acquisition spending fell to $111.6 million from $284.8 million in 2017.
- Financing cash flow changed from a $47.2 million inflow in 2017 to a $135.2 million outflow in 2018, including $154.1 million of share repurchases and $57.1 million of dividends.
- Genpact acquired Barkawi for approximately $101.3 million and Commonwealth Informatics for approximately $17.6 million, adding supply-chain consulting, signal management, and pharmacovigilance capabilities.
- The company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $17.9 million and creating $160.2 million of contract cost assets at December 31, 2018. The filing states that cash flow from operations was not changed by the adoption.
Outlook, commentary, risks, and unusual items
Management highlighted strong demand for domain-led transformation, digitally enabled operations, analytics, automation, artificial intelligence, and other digital services. New bookings increased approximately 40% to $3.9 billion from $2.8 billion, although bookings are not directly comparable to revenue and may convert over several years.
Management expects cash from operations, cash reserves, and debt capacity to fund operations, growth, acquisitions, dividends, and potential share repurchases. The filing does not provide a specific 2019 revenue or earnings guidance range.
- Margin pressure remains a central issue, particularly from wage inflation, employee attrition, onshore delivery costs, utilization, pricing, and foreign exchange. Employee attrition was approximately 28% in 2018.
- GE contracts may generally be terminated on short notice, GE is not required to purchase minimum volumes, and further GE divestitures could reduce or make GE-related revenue more volatile.
- Revenue is concentrated geographically and by industry: more than 65% came from North American clients, more than 15% from European clients, and more than 35% from financial services clients.
- Brexit, restrictions on offshore outsourcing and employee visas, evolving privacy and data-security laws including GDPR, cybersecurity incidents, and regulatory noncompliance could adversely affect operations and client demand.
- Foreign exchange exposure is significant. Approximately 76% of 2018 revenue was denominated in U.S. dollars, while many costs were incurred in Indian rupees and other currencies.
- Tax risks include Indian tax assessments totaling approximately $158 million, including interest, related to 2009 and 2013 matters. Genpact had paid $23 million under protest and could be required to pay additional amounts pending resolution.
- Goodwill and intangible assets were substantial at $1.394 billion and $177.1 million, respectively. Management concluded that no goodwill impairment was required, but the filing recorded a $4.3 million write-down of certain software and technology-related assets.
- Government incentives contributed $36.1 million to other income in 2018, including an Indian export subsidy that was available through March 31, 2019 and may not be recurring at the same level.
- Genpact expects adoption of the new lease standard in 2019 to add approximately $320 million to $340 million of liabilities and approximately $300 million to $320 million of right-of-use assets.
- The company’s independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management excluded the acquired Barkawi and Commonwealth businesses from its internal-control assessment, representing $132.9 million of assets and $22.2 million of revenue.
Most important facts for investors to verify
- Whether revenue growth and the $3.9 billion bookings increase convert into sustainable revenue and margin expansion.
- Whether gross and operating margins recover from the 2018 declines as transformation services scale and cost initiatives mature.
- The ability to reduce or manage employee attrition, wage inflation, utilization, and onshore delivery costs.
- Debt repayment capacity, revolving-facility utilization, LIBOR or successor-rate exposure, covenant headroom, and the April 2022 senior-notes maturity.
- The outcome and potential cash impact of the Indian tax assessments and other uncertain tax positions.
- The durability of Indian tax holidays and government incentives, including the impact of their expiration on the effective tax rate.
- GE revenue trends and the company’s ability to retain work from GE businesses that are divested.
- Foreign exchange sensitivity, particularly Indian rupee appreciation against the U.S. dollar, and the effectiveness of hedging programs.
- Integration and performance of the 2018 acquisitions and the carrying value of goodwill and acquired intangible assets.
- The effect of ASC 606 and the 2019 lease-standard adoption on reported earnings, assets, liabilities, and comparability.