Genpact Limited 10-Q Summary
Business context and reporting period
Genpact Limited is a Bermuda-based global business process management and technology services company serving more than 700 clients through approximately 60,000 employees, 68 delivery centers and 18 countries. The filing covers the quarter and six months ended June 30, 2013, with comparative periods ended June 30, 2012. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $534.8 million, up 14.4% | $1,038.7 million, up 15.0% |
| Gross profit | $202.1 million, up 10.8% | $394.2 million, up 11.9% |
| Gross margin | 37.8%, versus 39.0% | 38.0%, versus 39.0% |
| Operating income | $78.0 million, up 23.5% | $151.9 million, up 22.9% |
| Operating margin | 14.6%, versus 13.5% | 14.6%, versus 13.7% |
| Net income attributable to Genpact shareholders | $63.9 million, up 4.6% | $110.6 million, up 11.0% |
| Diluted EPS | $0.27, versus $0.27 | $0.47, versus $0.44 |
| Operating cash flow | Not separately provided | $107.7 million, down from $132.1 million |
Global Client revenue increased 21.0% to $413.2 million in the second quarter and to $800.0 million for the first half. GE revenue declined 3.6% to $121.6 million in the second quarter and 1.4% to $238.7 million for the first half. IT services revenue increased 20.9% in the second quarter and 18.7% for the first half, while BPM revenue increased 12.4% and 13.9%, respectively.
At June 30, 2013, cash and cash equivalents were $519.1 million, including $0.8 million of restricted cash, compared with $459.2 million at December 31, 2012. Total current assets were $1.24 billion and total current liabilities were $562.0 million. Long-term debt, net of current portion, was $655.7 million, and short-term borrowings were $115.0 million. Total debt excluding capital leases was approximately $775.0 million.
Net cash used in investing activities was $72.5 million, including $25.6 million of capital expenditures and $46.1 million for acquisitions. Financing activities provided $41.6 million, primarily from debt refinancing, additional revolving borrowings and stock-plan proceeds. Cash increased by $76.8 million during the first half.
Material changes versus the prior comparable period
- Revenue growth was led by Global Clients and acquisitions, partially offset by lower GE revenue.
- Gross margin declined because cost of revenue grew faster than revenue, reflecting wage inflation, increased headcount, facility expansion and higher losses on Indian rupee-U.S. dollar hedges.
- Operating margin improved because SG&A grew more slowly than revenue and operating leverage offset the lower gross margin.
- Net margin declined to 12.2% from 13.4% in the quarter and to 10.9% from 11.4% for the first half. Higher interest expense and divestiture provisions offset operating improvement.
- Interest expense increased materially as a result of higher borrowings following the 2012 recapitalization and the June 2013 debt amendment.
- Operating cash flow declined year over year, although management stated that normalized operating cash flow increased after excluding a $45.0 million nonrecurring customer receipt in the 2012 period.
- Headcount and delivery capacity expanded, including new or expanded facilities in China, Poland, the United States and India.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear numerical revenue, earnings or cash-flow guidance range. Management expects cash from operations, cash reserves and debt capacity to fund operations, acquisitions and growth, but notes that interim results are not necessarily indicative of full-year results.
In June 2013, Genpact amended its credit facility. The term-loan margin declined from 3.25% to 2.75%, the revolving-facility margin declined to 2.50%, and the term-loan LIBOR floor declined from 1.0% to 0.75%. The term loan had a gross principal balance of $675.0 million and matures in August 2019, with most principal due at maturity. The company reported compliance with its financial covenants.
- Acquisitions included Jawood and Felix for preliminary consideration of $48.3 million, the purchase of the remaining NGEN interest for approximately $0.2 million, and previously completed acquisitions of Atyati and the Triumph Companies.
- Jawood generated preliminary goodwill of $35.9 million; purchase-price adjustments remained pending.
- The company completed the divestiture of Hello Communications and recorded planned-divestiture reserves of $1.3 million for Clearbizz and $2.3 million for Gantthead.
- A $2.4 million impairment provision was recorded for capital assets that were no longer strategic. Changes in acquisition earn-out fair values produced $2.3 million of operating income.
- Other comprehensive loss was $121.2 million for the first half, principally from currency translation and cash-flow hedge losses. Derivative liabilities had a fair value of $232.1 million at June 30, 2013.
- GE represented approximately 23% of quarterly and first-half revenue and 26% of accounts receivable at June 30, 2013, creating customer-concentration exposure.
- Key risks include foreign-exchange volatility, wage inflation, employee retention, competition, client concentration, technology or security disruptions, acquisition integration, changing tax laws and dependence on favorable Indian tax treatment.
- Unrecognized tax benefits were $21.4 million at June 30, 2013. The filing also discusses pending Indian tax matters and uncertainty regarding indirect-transfer and distribution-tax rules.
Most important facts to verify
- Whether Global Client growth can continue to offset flat or declining GE revenue.
- Whether gross-margin pressure from wage inflation, facility costs and currency hedges stabilizes.
- The sustainability and quality of operating cash flow after working-capital movements and nonrecurring items.
- Debt repayment capacity, interest-rate exposure and compliance with credit-facility covenants.
- Final purchase-price allocations and integration performance for Jawood, Atyati and other acquisitions.
- The ultimate cost and timing of the Clearbizz and Gantthead divestitures.
- Potential effects of Indian tax developments, unrecognized tax positions and cash-repatriation restrictions.
- The impact of foreign-exchange movements and the company’s large outstanding hedging portfolio on future earnings and accumulated other comprehensive income.