Genpact Limited 2014 Form 10-K Summary
Business context and reporting period
Genpact Limited filed its Form 10-K for the fiscal year ended December 31, 2014. The company provides business process outsourcing, information technology, analytics, consulting, re-engineering, finance and accounting, and industry-specific services through a global delivery network. Genpact operated as one reportable segment, employed approximately 67,900 people, and had 73 delivery centers in 18 countries at year-end.
Revenue remained diversified across more than 800 clients, although GE continued to be the largest customer. GE represented 20.4% of 2014 revenue, down from 22.6% in 2013, while Global Client revenue represented 79.6%.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenue | $2,279.4 million | $2,132.0 million | 6.9% increase |
| Global Client revenue | $1,813.4 million | $1,649.9 million | 9.9% increase |
| GE revenue | $466.1 million | $482.0 million | 3.3% decrease |
| BPO revenue | $1,736.7 million | $1,608.2 million | 8.0% increase |
| IT services revenue | $542.7 million | $523.8 million | 3.6% increase |
| Gross profit | $901.4 million | $812.4 million | 10.9% increase |
| Gross margin | 39.5% | 38.1% | Up 1.4 percentage points |
| Operating income | $294.0 million | $309.5 million | 5.0% decrease |
| Operating margin | 12.9% | 14.5% | Down 1.6 percentage points |
| Net income attributable to shareholders | $192.0 million | $229.7 million | 16.4% decrease |
| Diluted EPS | $0.85 | $0.97 | Decrease |
| Cash flow from operations | $271.8 million | $311.6 million | 12.8% decrease |
SG&A increased 20.8% to $585.6 million, primarily reflecting investment in sales, business development, subject-matter experts, wage inflation, and acquisition-related costs. Foreign exchange results shifted from a $20.8 million gain in 2013 to a $12.4 million loss in 2014. The effective tax rate was 23.0%, compared with 23.6% in 2013.
Year-end cash and cash equivalents were $461.8 million, including $454.0 million held by foreign subsidiaries. Net accounts receivable were $525.8 million, and days sales outstanding improved to 79 days from 81 days. Long-term debt, including the current portion, was $653.6 million, and short-term borrowings were $135.0 million. The company reported compliance with its credit-facility covenants.
Total assets were $2.743 billion and shareholders’ equity was $1.285 billion at December 31, 2014. Goodwill was $1.057 billion and acquired intangible assets were $114.5 million; management concluded that no goodwill impairment was required.
Fourth-quarter 2014 information
Fourth-quarter revenue was $601.5 million, compared with $558.5 million in the fourth quarter of 2013. Fourth-quarter gross profit was $242.3 million, operating income was $70.9 million, and net income attributable to Genpact shareholders was $45.8 million. Diluted fourth-quarter EPS was $0.21, compared with $0.21 in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue growth was driven by Global Client BPO activity, growth in selected verticals, higher IT services revenue, and the Pharmalink acquisition.
- Global Client revenue increased 9.9%, while GE revenue declined 3.3%. GE’s contractual minimum commitment declined to $250 million for 2014, $150 million for 2015, and $90 million for 2016.
- Gross margin improved because of operating efficiencies, personnel deployment, and foreign-exchange effects, partly offset by wage inflation.
- Operating and net margins declined because SG&A grew substantially faster than revenue and because of the foreign-exchange loss and equity-method investment loss.
- Cash from operations declined, while investing cash use increased to $192.8 million, largely because of $130.8 million spent on acquisitions and $62.6 million of capital expenditures.
- Financing cash use increased to $177.4 million, principally because of the $302.6 million repurchase and retirement of 17.3 million shares in April 2014. Year-end shares outstanding declined to 218.7 million from 231.3 million.
- Genpact acquired Pharmalink for preliminary consideration of $138.6 million and acquired a finance and accounting delivery center in Japan from Hitachi for preliminary consideration of $21.8 million. These acquisitions added approximately $127.0 million of goodwill.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear formal 2015 revenue, margin, earnings, or cash-flow guidance. Management stated that cash from operations, cash reserves, and debt capacity were expected to be sufficient to fund operations and planned growth.
Management emphasized continued expansion of Global Client relationships, targeted vertical expertise, digital and analytics capabilities, geographic diversification, and investment in sales and business development. New bookings were $2.156 billion in 2014, although the filing cautions that bookings are estimates, are not standardized, and may convert to revenue over different periods.
- GE concentration remains material despite declining as a percentage of revenue. GE’s minimum annual commitment declines through 2016, and GE may terminate statements of work, renegotiate pricing, or discontinue services after divestitures.
- The business is exposed to wage inflation, employee attrition, utilization, pricing pressure, long selling and implementation cycles, and competition for skilled personnel.
- Foreign-exchange exposure is significant: approximately 71.2% of revenue was denominated in U.S. dollars, while many costs were incurred in Indian rupees and other currencies. A 1% interest-rate change was estimated to affect 2015 net interest expense by approximately $8.1 million.
- Tax holidays and concessional tax rates may expire, increasing the effective tax rate. An Indian tax assessment generated a potential claim of approximately $43 million, including interest; Genpact had paid $15 million under protest and appealed.
- Genpact had $1.204 billion of total contractual cash obligations, including debt, leases, purchase obligations, earn-out consideration, and other long-term liabilities. Approximately $714.8 million was scheduled for payment in three to five years, principally reflecting debt maturities.
- The company reported no legal proceedings that management believed were likely to have a material adverse effect. KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, although internal controls of the 2014 acquisitions were excluded from management’s assessment.
- Subsequent to year-end, Genpact borrowed $672.5 million in January 2015 for internal reorganization transactions and repaid the loans three days later.
Most important facts for an investor to verify
- Whether Global Client growth and bookings convert into sustainable revenue and offset the planned decline in GE commitments.
- Whether elevated SG&A investment produces sufficient future growth to restore operating margins.
- The impact of wage inflation, attrition, utilization, and foreign-exchange movements on gross and operating margins.
- The refinancing and repayment profile of the approximately $653.6 million long-term term loan and $135.0 million revolving-facility draw.
- The ultimate resolution and cash impact of the Indian tax assessment and the expiration of foreign tax incentives.
- Integration performance, profitability, and goodwill impairment risk associated with Pharmalink and the Japan delivery-center acquisition.
- The concentration of cash in foreign subsidiaries and the tax cost or restrictions associated with repatriation.
- Whether the company’s reported control environment remains effective after fully integrating the 2014 acquisitions.