Genpact Limited — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; comparisons are to the corresponding 2015 periods unless otherwise noted. Genpact is a global provider of digitally powered business process management and services, with more than 75,000 employees in 25 countries.
Business Context and Key Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|
| Net revenue | $630.5 million, up 3.4% | $1,240.2 million, up 3.6% |
| Gross profit | $246.8 million, up 1.5% | $483.6 million, up 2.3% |
| Gross margin | 39.1%, versus 39.9% | 39.0%, versus 39.5% |
| Operating income | $79.9 million, down 10.5% | $155.6 million, down 4.8% |
| Operating margin | 12.7%, versus 14.7% | 12.5%, versus 13.7% |
| Net income attributable to Genpact shareholders | $65.2 million, up 4.0% | $123.8 million, up 15.3% |
| Diluted EPS | $0.31, versus $0.28 | $0.58, versus $0.48 |
| Operating cash flow | Not separately provided | $79.2 million, versus $114.6 million |
Revenue mix and operating drivers
- Global Client revenue increased 5.3% in the quarter and 5.7% for the first half, while GE revenue declined 4.8% and 5.1%, respectively, primarily due to GE Capital business dispositions.
- BPO revenue increased 5.6% in the quarter and 5.8% year to date. IT services revenue declined 4.5% and 4.4%, respectively, primarily in investment banking and healthcare.
- Global Clients represented 82.7% of quarterly revenue; GE represented 17.3%. On a reported basis, GE accounted for 17% of both quarterly and year-to-date revenue.
- Average quarterly headcount increased 7.8% to approximately 71,800. Management cited growth in targeted verticals, including banking and financial services, consumer products, life sciences, insurance and high technology.
Financial Position, Liquidity and Capital Allocation
| Balance sheet item | December 31, 2015 | June 30, 2016 |
|---|
| Cash and cash equivalents | $450.9 million | $407.3 million |
| Short-term borrowings | $21.5 million | $60.0 million |
| Current portion of long-term debt | $39.1 million | $39.2 million |
| Long-term debt, less current portion | $737.3 million | $717.7 million |
| Total shareholders’ equity | $1,304.4 million | $1,352.1 million |
- The term loan had $756.9 million outstanding at June 30, 2016, with quarterly principal payments of $10 million and the remaining balance due at maturity on June 30, 2020. The applicable interest rate was LIBOR plus 1.50%.
- The $350 million revolving credit facility had $60 million of funded borrowings outstanding and expires in June 2020. Genpact was in compliance with its financial covenants.
- Cash flow from operations declined 30.9% to $79.2 million, primarily because of upfront investments in large deals, higher tax payments, bonus payments and other working-capital movements.
- Investing cash outflow was $63.3 million, including $46.6 million of capital expenditures, $11.6 million for acquisitions and $5.3 million invested in an equity affiliate.
- Financing cash outflow was $51.9 million, including $86.4 million of share repurchases and $20.0 million of term-loan repayments, partly offset by revolving-credit borrowings.
- The company had $500 million of total share-repurchase authorization. It repurchased 3.3 million shares for $86.4 million during the first half and an additional 2.3 million shares for $59.8 million between July 1 and August 8, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue growth remained positive but was accompanied by margin pressure. Gross margin declined 80 basis points in the quarter and 50 basis points for the first half.
- SG&A increased 10.7% in the quarter and 9.2% year to date, reaching 26.2% of revenue in both periods, due to wage inflation, investments in digital and analytics capabilities, professional fees, travel and higher doubtful-receivable reserves.
- Operating income declined despite revenue growth because cost of revenue and SG&A grew faster than revenue.
- Net income and EPS benefited from substantially lower interest expense. The 2015 periods included a $10.1 million loss from accelerated debt-issuance-cost amortization and other refinancing-related effects.
- Other operating income included a $15.0 million first-half gain from changes in the fair value of acquisition earn-outs, partly offset by $5.8 million of intangible-asset impairment charges, including a $0.9 million charge in the second quarter.
- Cash declined 9.7% from year-end, while short-term borrowings increased by $38.5 million. Accumulated other comprehensive loss increased to $472.6 million, largely reflecting currency translation effects.
Acquisitions, Outlook, Risks and Unusual Items
- Genpact acquired Endeavour Software Technologies for preliminary consideration of $14.4 million, including up to $3.5 million of contingent earn-out consideration, to expand mobility and digital capabilities.
- Genpact acquired 51% of Strategic Sourcing Excellence for preliminary consideration of $14.5 million. Potential earn-outs total up to $20.0 million, and the sellers hold a future put right for the remaining 49% if Genpact does not exercise its call option.
- The company is seeking to sell its Indian rural-banking cloud platform. The related net assets were $2.0 million at June 30, 2016, and divestiture was expected within 12 months.
- On August 4, 2016, Genpact completed its acquisition of PNMSoft for preliminary consideration of $31 million, with potential earn-out consideration of up to $9 million.
- No specific quantitative revenue or earnings guidance is provided in the filing. Management stated that operating cash flow, cash reserves and debt capacity are expected to fund operations, growth, acquisitions and additional repurchases.
- Principal risks include client retention and concentration, continued GE business dispositions, wage inflation and employee attrition, foreign-exchange volatility, interest-rate and LIBOR exposure, cybersecurity and technology disruptions, acquisitions and integration, tax changes, competition, regulatory developments and global economic conditions.
- GE represented 16% of accounts receivable at June 30, 2016. The filing also identifies reliance on clients in the United States and Europe and selected industries.
- As of June 30, 2016, contractual obligations totaled approximately $1.16 billion, including $816.9 million of long-term debt obligations, $134.9 million of operating leases and $22.6 million of earn-out consideration.
- Management concluded that disclosure controls and procedures were effective. Internal-control evaluation excluded the 2016 acquisitions.
Important Facts for Investors to Verify
- Whether Global Client growth can offset continued GE revenue declines and whether the reported reclassification policy for GE-divested businesses affects comparability.
- Whether gross-margin and operating-margin pressure persists as wage, infrastructure and utilization costs rise.
- The sustainability and quality of cash generation, including working-capital investment and the decline in operating cash flow.
- Debt repayment capacity, exposure to LIBOR and the effect of interest-rate swaps covering $419.8 million of notional debt exposure.
- The timing and economics of the PNMSoft acquisition, the rural-banking platform divestiture and contingent earn-outs related to acquisitions.
- The remaining share-repurchase authorization and the effect of continued repurchases on cash balances, leverage and per-share results.
- The potential impact of unrecognized tax benefits of $23.4 million and other tax uncertainties.
