Genpact Limited — Form 10-Q Summary
Business context and reporting period
Genpact Limited is a global business process management, analytics and technology-services provider with more than 60,000 employees, over 600 clients and 74 delivery centers across 20 countries. The filing covers the unaudited quarter and nine months ended September 30, 2012, compared with the same periods in 2011, and includes balance-sheet comparisons with December 31, 2011.
Global Clients represented 74.5% of third-quarter revenue and 73.6% of nine-month revenue. GE represented approximately 25.5% and 26.4%, respectively, despite continued growth in absolute GE revenue.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net revenues | $491.2 million | $429.6 million | $1,394.3 million | $1,157.7 million |
| Revenue growth | 14.3% | — | 20.4% | — |
| Gross profit | $193.9 million | $161.3 million | $546.3 million | $420.9 million |
| Gross margin | 39.5% | 37.5% | 39.2% | 36.4% |
| Income from operations | $70.0 million | $56.7 million | $193.6 million | $154.3 million |
| Operating margin | 14.2% | 13.2% | 13.9% | 13.3% |
| Net income attributable to shareholders | $25.2 million | $48.0 million | $124.8 million | $123.2 million |
| Diluted EPS | $0.11 | $0.21 | $0.55 | $0.54 |
| Net cash from operating activities | Not separately provided | Not separately provided | $209.5 million | $177.1 million |
Q3 net income attributable to shareholders declined 47.6% because of foreign-exchange losses, higher interest expense, accelerated amortization of prior debt issuance costs and recapitalization-related expenses. Nine-month net income attributable to shareholders increased 1.3%, but the margin declined to 9.0% from 10.6%.
Q3 SG&A increased 23.6% to $118.5 million, or 24.1% of revenue, from 22.3%. Nine-month SG&A increased 35.1% to $337.8 million, or 24.2% of revenue, from 21.6%. Acquired intangible amortization was $6.0 million in Q3 and $17.1 million for nine months.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $394.5 million at September 30, 2012, versus $408.0 million at December 31, 2011. Approximately $267.9 million was held by foreign subsidiaries and branches.
- Total assets increased to $2.599 billion from $2.403 billion, while total equity declined to $1.154 billion from $1.436 billion, principally after the $501.6 million special dividend.
- On August 30, 2012, Genpact replaced its $380.0 million credit facility with a $925.0 million facility consisting of a $675.0 million term loan and a $250.0 million revolving facility.
- At September 30, 2012, long-term debt, net of current portion, was $658.1 million; the term loan carrying amount was $663.1 million. The revolver had $80.0 million of funded borrowings and $8.5 million of non-funded usage.
- The term loan bears interest at LIBOR, subject to a 1% floor, plus a 3.25% margin. Substantially all principal is due at the end of the seven-year term, creating significant refinancing or repayment exposure.
- Management stated that the company was in compliance with financial covenants at September 30, 2012 and expected operating cash flow, cash reserves and unused credit capacity to fund operations and growth.
Material changes versus the prior comparable period
- Global Client revenue increased 19.4% in Q3 and 28.5% for nine months, materially exceeding GE revenue growth of 1.8% and 2.5%, respectively.
- Business process management revenue grew 17.0% in Q3; information technology revenue increased 6.6%. For nine months, information technology revenue increased 39.8%, substantially reflecting the Headstrong acquisition.
- Gross and operating margins improved because revenue growth exceeded cost-of-revenue growth, although SG&A expanded faster than revenue.
- Q3 foreign-exchange results shifted from a $9.7 million gain in 2011 to a $13.2 million loss in 2012. For nine months, the gain declined from $12.4 million to $5.1 million.
- The company completed or announced several acquisitions, including Accounting Plaza, Atyati Technologies and the Triumph companies. Preliminary goodwill recorded for these 2012 acquisitions totaled approximately $43.3 million.
- Goodwill increased to $966.6 million from $925.3 million, and net intangible assets increased to $118.8 million from $113.3 million.
- Cash flow from operations increased to $209.5 million, while capital expenditures increased to $60.1 million from $22.3 million. Investing cash use was $114.5 million versus $506.4 million, primarily because 2011 included the Headstrong acquisition.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear quantitative revenue or earnings forecast for 2012. Management expects cash from operations, cash reserves and available credit to support operations and expansion.
- The 2012 recapitalization included a $2.24-per-share special dividend paid September 24, 2012, new debt financing and the sale of sponsor-held shares. Expected recapitalization expenses were approximately $23.8 million, excluding certain credit-facility fees; $6.2 million was recorded in SG&A and $6.6 million was accrued in other expense by September 30.
- Management expected the remaining recapitalization costs to be recorded in the fourth quarter. General Atlantic and Oak Hill reimbursed $17.0 million at the October 25, 2012 closing, with the reimbursement expected to be recorded in fourth-quarter other income.
- The Bain Capital-led sponsor share purchase closed on October 25, 2012 after the reporting date. Investors should distinguish this subsequent event from the September 30 financial position.
- Management stated that no material legal proceeding was expected to adversely affect the business, financial condition or results of operations.
- Principal risks include customer concentration and dependence on GE, client retention and pricing, employee attrition and wage inflation, foreign-exchange volatility, higher leverage and LIBOR exposure, acquisition integration, tax-law changes, offshore-services regulation, competition, technology disruption and data-security breaches.
- GE accounted for 30% of receivables at September 30, 2012 and 26% of nine-month revenue. The company’s GE master service agreement includes minimum volume commitments through 2016, but also includes productivity guarantees, price reductions and revised termination provisions.
- Contractual cash obligations totaled approximately $1.141 billion, including $663.1 million of long-term debt, $175.4 million of operating leases, $21.9 million of contingent or deferred consideration and $167.8 million of other long-term liabilities.
Most important facts for investors to verify
- Reconcile the post-recapitalization debt schedule, covenant headroom and the large term-loan maturity due in 2019.
- Assess whether Global Client growth can continue to offset GE concentration and whether the GE master service agreement remains economically attractive after price reductions and productivity commitments.
- Separate underlying operating performance from the Q3 foreign-exchange loss, debt-cost acceleration and recapitalization expenses.
- Review acquisition integration, earn-out obligations and potential goodwill or intangible-asset impairment, particularly given goodwill of $966.6 million.
- Verify fourth-quarter accounting for the remaining recapitalization costs, the $17.0 million sponsor reimbursement and the October 25 share-purchase closing.
- Monitor working-capital conversion, accounts receivable growth, capital expenditures and the sustainability of the $209.5 million nine-month operating cash flow.