Genpact Limited: Q1 2015 Form 10-Q Summary
Business context and reporting period
Genpact designs, transforms and operates business processes, including business process outsourcing, information technology, analytics, finance and accounting, financial services, regulatory affairs and industrial asset optimization. The company employed more than 68,000 people in 25 countries and served hundreds of long-term clients. This report covers the unaudited three months ended March 31, 2015, compared primarily with the three months ended March 31, 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenues | $587.2 million | $528.2 million | Up 11.2% |
| Gross profit | $229.7 million | $203.9 million | Up 12.6% |
| Gross margin | 39.1% | 38.6% | Up 50 bps |
| Income from operations | $74.1 million | $77.2 million | Down 4.1% |
| Operating margin | 12.6% | 14.6% | Down 200 bps |
| Net income attributable to shareholders | $44.7 million | $50.6 million | Down 11.8% |
| Net margin attributable to shareholders | 7.6% | 9.6% | Down 200 bps |
| Diluted EPS | $0.20 | $0.21 | Down $0.01 |
| Cash flow from operating activities | $24.3 million | $14.2 million | Up 70.5% |
| Cash flow used in investing activities | $31.8 million | $14.4 million | Higher use |
| Cash flow used in financing activities | $15.8 million | $5.1 million | Higher use |
Global Client revenue increased 13.3% to $473.5 million and represented 80.7% of total revenue; GE revenue increased 3.1% to $113.6 million and represented 19.3%. BPO revenue rose 15.9% to $461.1 million, while IT services revenue declined 3.2% to $126.1 million. Adjusted for foreign exchange, revenue growth was 12.9%.
Average headcount increased 5.8% to approximately 66,000, while annualized revenue per employee increased to approximately $35,600 from $33,800. SG&A increased 21.4% to $148.7 million, or 25.3% of revenue, reflecting increased sales, marketing, business development and subject-matter-expert investments. Foreign exchange losses increased to $7.5 million from $3.6 million. The effective tax rate declined to 19.9% from 24.3%.
Financial position, debt and liquidity
- Cash and cash equivalents were $434.3 million at March 31, 2015, down from $461.8 million at December 31, 2014. Approximately $392.6 million was held by foreign subsidiaries.
- Long-term debt, net of issuance costs, was $652.5 million, including a term loan principally maturing in 2019. Current debt included $135.0 million of funded short-term borrowings and $4.3 million of current long-term debt.
- Total reported debt, excluding capital lease obligations, was approximately $787.5 million at March 31, 2015. The filing states that the company was in compliance with applicable financial covenants.
- Operating cash flow exceeded capital expenditures of $14.0 million, but investing cash outflows also included the $11.7 million wealth-management acquisition and a $6.7 million investment in an affiliate.
- The company had a $250.0 million revolving credit facility, of which $135.0 million was funded and $2.2 million was non-funded at March 31, 2015.
Material changes and unusual items
- On January 16, 2015, Genpact acquired certain U.S. wealth-management operations from Citibank for $11.7 million, recording $9.1 million of customer-related intangible assets and $3.4 million of goodwill.
- The company authorized a $250.0 million share-repurchase program and repurchased 590,713 shares for approximately $13.3 million during the quarter. It repurchased an additional approximately 1.1 million shares for $25.2 million between April 1 and May 8, 2015.
- Two short-term loans totaling $1.41 billion were obtained and fully repaid during the quarter in connection with internal reorganization transactions. Related debt issuance costs and interest expense contributed to higher other expense.
- Goodwill was $1.05 billion and intangible assets were $117.3 million at March 31, 2015. Amortization of acquired intangibles increased to $7.3 million from $6.0 million.
- Accumulated other comprehensive loss improved to $401.5 million from $412.5 million, primarily reflecting currency and cash-flow-hedge effects.
Outlook, risks and contingencies
The filing does not provide a clear quantitative revenue, earnings or margin guidance target. Management stated that cash from operations, cash reserves and debt capacity were expected to be sufficient to fund operations, growth, expansion and additional share repurchases.
- Key operating risks include client retention and concentration, competitive pricing, employee attrition and wage inflation, the ability to convert bookings into revenue, acquisition integration, technology or cybersecurity disruptions, and reliance on international operations.
- Foreign exchange exposure remains significant. Outstanding forward contracts had aggregate notional amounts of approximately $1.96 billion at March 31, 2015 and a net balance-sheet exposure liability of approximately $32.7 million.
- Genpact disclosed Indian tax assessments totaling approximately $62 million, including interest, relating to certain 2009 and 2010 transactions. The company had paid $17 million under protest and filed appeals; the ultimate outcome remains uncertain.
- Unrecognized tax benefits were $22.4 million at March 31, 2015, of which $20.9 million could affect the effective tax rate if recognized.
- Contractual obligations totaled approximately $1.18 billion, including $754.3 million of long-term debt obligations, $120.0 million of operating leases, $40.5 million of earn-out consideration and $20.4 million of purchase obligations.
- No legal proceedings were disclosed as likely to have a material adverse effect, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether continued BPO and Global Client growth can offset declining IT services revenue and rising SG&A investment.
- The sustainability of the 39.1% gross margin and whether operating-margin pressure from sales investments, wage inflation and foreign exchange persists.
- The company’s ability to generate stronger operating cash flow while funding acquisitions, affiliate investments, debt service and share repurchases.
- The outcome, timing and potential additional cash requirements associated with the approximately $62 million Indian tax assessments.
- Foreign exchange sensitivity, hedge effectiveness and the effect of LIBOR-based debt on interest expense.
- Integration and performance of the Citibank wealth-management acquisition and previously acquired regulatory-affairs and Japan delivery-center operations.