Genpact Limited 10-Q Summary
Business context and reporting period
Genpact Limited is a global provider of business process management, analytics, consulting, and technology services. It reported unaudited results for the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The company had approximately 58,600 employees, more than 600 clients, and operations in 18 countries.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Net revenue | $467.6 million | $397.6 million | $903.1 million | $728.2 million |
| Gross profit | $182.4 million | $143.6 million | $352.4 million | $259.7 million |
| Gross margin | 39.0% | 36.1% | 39.0% | 35.7% |
| Operating income | $63.2 million | $51.1 million | $123.6 million | $97.6 million |
| Operating margin | 13.5% | 12.8% | 13.7% | 13.4% |
| Net income attributable to shareholders | $61.1 million | $39.0 million | $99.6 million | $75.1 million |
| Diluted EPS | $0.27 | $0.17 | $0.44 | $0.33 |
Global Client revenue grew 24.2% in Q2 and 34.1% in the first half, while GE revenue grew 2.9% and 2.8%, respectively. Global Clients represented 73.0% of Q2 revenue and 73.2% of first-half revenue, compared with 69.2% and 67.7% in the prior-year periods. Information technology revenue increased to 24.0% of Q2 revenue from 21.9%; business process management represented 76.0%.
Net cash provided by operating activities was $132.1 million in the first half of 2012, compared with $82.0 million in the prior-year period. Investing cash outflow was $84.5 million, including $36.9 million for Accounting Plaza and $41.6 million for capital expenditures. Financing cash outflow was $17.5 million. Cash and cash equivalents increased to $436.3 million from $408.0 million at December 31, 2011.
At June 30, 2012, short-term borrowings were $251.0 million and long-term debt was $88.5 million, for total debt of approximately $339.5 million excluding capital leases. The company therefore had approximately $96.8 million of cash in excess of reported short- and long-term debt, before capital leases and other obligations. Short-term facilities of $260.0 million were nearly fully utilized, with $251.0 million of funded and $8.3 million of non-funded drawdowns.
Material changes versus the prior comparable period
- Q2 revenue increased 17.6%; first-half revenue increased 24.0%.
- Q2 net income attributable to shareholders increased 56.6%; first-half growth was 32.6%.
- Gross margin improved by 2.9 percentage points in Q2 and 3.3 points in the first half, primarily from operating leverage, acquisitions, foreign exchange effects, and lower cost of revenue as a percentage of sales.
- SG&A increased 31.7% in Q2 and 42.2% in the first half, causing SG&A as a percentage of revenue to rise to 24.4% and 24.3%, respectively. Increases included acquisitions, hiring, wage inflation, stock-based compensation, and consultancy and legal fees related to a proposed refinancing and anticipated shareholding change.
- Foreign exchange gains increased materially to $22.0 million in Q2 and $18.3 million in the first half, primarily from the depreciation of the Indian rupee and related hedging activity.
- Accounting Plaza was acquired in April 2012 for preliminary consideration of $38.6 million. The acquisition added approximately $25.4 million of preliminary goodwill. The proposed Atyati acquisition had not closed by June 30, 2012.
Guidance, outlook, risks, and unusual items
The filing does not provide a clear quantitative revenue or earnings forecast. Management expected operating cash flow, cash reserves, and debt capacity to fund operations and growth. The company planned to obtain approximately $925 million of new institutional financing, consisting of a $675 million term loan and a $250 million revolving facility, to refinance existing debt, fund a proposed special dividend, and support growth opportunities.
On August 1, 2012, after the reporting period, Genpact announced a proposed special cash dividend of $2.24 per share, or approximately $500 million, subject to satisfactory financing. It also announced the proposed sale of approximately 67.8 million shares to Bain affiliates for approximately $1.0 billion. The transaction was expected to close after the dividend payment.
Key risks include customer concentration and dependence on GE, client retention and pricing, employee hiring and attrition, wage inflation, foreign exchange volatility, acquisitions and integration, technology disruptions or security breaches, competition, international operating conditions, tax legislation, and the ability to obtain financing for the proposed dividend. GE represented approximately 27% of Q2 revenue and 27% of first-half revenue in 2012. The company also reported approximately $20.3 million of unrecognized tax benefits at June 30, 2012 and ongoing uncertainty regarding Indian tax legislation and related proceedings.
Other notable obligations included $819.7 million of total contractual cash obligations, $156.2 million of operating lease obligations, $15.9 million of contingent consideration at fair value, $11.4 million of capital commitments, and $11.8 million of bank guarantees. Management stated that no pending legal proceedings were expected to have a material adverse effect. Disclosure controls were evaluated as effective, with no material changes in internal controls.
Investor verification checklist
- Verify the planned $925 million refinancing, its final pricing and covenants, and whether it funded the proposed $500 million special dividend.
- Assess post-transaction leverage, liquidity, and debt repayment capacity after the dividend and any refinancing.
- Reconcile reported revenue growth with the contribution from Headstrong and Accounting Plaza and evaluate organic growth.
- Monitor GE concentration, minimum volume commitments, pricing reductions, and the transition toward Global Client revenue.
- Evaluate the sustainability of the $22.0 million Q2 foreign exchange gain and the company’s substantial foreign currency hedging exposures.
- Review the final purchase accounting for Accounting Plaza and the status and terms of the Atyati and Triumph transactions.
- Track Indian tax legislation, tax examinations, unrecognized tax benefits, and the pending Supreme Court matter.