Genpact Limited 10-Q Summary
Business context and reporting period
Genpact Limited is a global business process and technology management company providing finance and accounting, customer service, insurance, supply chain, analytics, enterprise applications and IT infrastructure services. It operated through approximately 41 delivery locations in 13 countries and had approximately 45,500 employees as of March 31, 2011.
This unaudited Form 10-Q covers the three months ended March 31, 2011, with comparative results for the three months ended March 31, 2010. The company reported approximately 65.9% of first-quarter revenue from Global Clients and 34.1% from GE-related clients.
Financial performance and position
| Metric | Q1 2010 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $288.2 million | $330.6 million | 14.7% increase |
| Gross profit | $111.5 million | $116.1 million | 4.1% increase |
| Gross margin | 38.7% | 35.1% | Down 3.6 percentage points |
| Income from operations | $37.3 million | $46.5 million | 24.8% increase |
| Operating margin | 12.9% | 14.1% | Up 1.2 percentage points |
| Net income | $30.2 million | $37.9 million | 25.4% increase |
| Net income attributable to Genpact shareholders | $28.2 million | $36.1 million | 28.2% increase |
| Net margin attributable to shareholders | 9.8% | 10.9% | Up 1.1 percentage points |
| Basic and diluted EPS | $0.13 | $0.16 | Increase |
| Cash flow from operating activities | $(20.1) million | $21.1 million | Improved by $41.2 million |
Revenue from Global Clients increased 24.5% to approximately $217.8 million, while GE revenue declined 0.5% to approximately $112.8 million. Business process management revenue increased 17.3% to $288.1 million and represented 87.2% of total revenue. IT services revenue declined 0.2% and represented 12.8% of revenue.
Cost of revenue increased 21.4% to $214.5 million, primarily due to higher personnel, infrastructure and operational costs, wage inflation, acquisitions and increased onsite staffing. SG&A declined 7.5% to $67.4 million, reflecting lower support headcount, cost controls and lower share-based compensation. Income tax expense increased 81.8% to $13.1 million, principally because the India STPI tax holiday fully expired for remaining exempt locations effective March 31, 2011.
As of March 31, 2011, cash and cash equivalents were $351.8 million, compared with $404.0 million at December 31, 2010. Short-term investments increased to $129.5 million from $77.0 million. Total assets were $1.905 billion and shareholders’ equity was $1.544 billion. Long-term debt due within one year declined to $12.5 million from $25.0 million; total debt excluding capital leases was $12.5 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Global Clients, including consumer products, retail, business services, pharmaceutical, healthcare, banking, financial services and insurance customers.
- GE’s share of revenue declined from 39.3% to 34.1%, although GE remained a material customer and accounted for approximately 44% of receivables at March 31, 2011.
- Average headcount increased 11.9% to approximately 43,100, while revenue per employee increased to approximately $30.7 thousand from $29.9 thousand.
- Gross margin contracted because cost of revenue grew faster than revenue, but operating margin improved due largely to lower SG&A.
- Operating cash flow improved from a use of $20.1 million to generation of $21.1 million, supported by improved receivables management and higher accrued expenses and income taxes payable.
- Investing cash flow shifted to a use of $60.0 million, largely reflecting a net $52.5 million purchase of U.S. Treasury bills. Financing cash use increased to $13.9 million, including $12.5 million of scheduled debt repayment.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that cash from operations, cash reserves and debt capacity were expected to be sufficient to finance operations, growth and expansion.
On March 14, 2011, Genpact acquired Akritiv Technologies for $1.6 million in cash plus contingent consideration with an estimated fair value of $1.7 million. The acquisition generated $3.0 million of goodwill and included a contingent earn-out of up to $3.5 million based on future EBIT.
After the reporting period, Genpact agreed to acquire Headstrong for $550 million. The acquisition closed on May 3, 2011 and was funded with existing cash and new senior secured credit facilities totaling $380 million, consisting of a $120 million term loan and a $260 million revolving facility. The new facilities bear interest at LIBOR plus 1.65%, include a 0.70% revolving commitment fee and impose leverage, interest coverage and other covenants.
Key disclosed risks include dependence on GE and U.S. customers, client retention and new business wins, employee hiring and attrition, wage inflation, foreign-exchange fluctuations, tax-law changes, offshore-services restrictions, competition, technology or telecommunications disruptions, information security, regulatory changes and the successful integration of acquisitions.
Unrecognized tax benefits were approximately $20.0 million at March 31, 2011, including $19.8 million that could affect the effective tax rate if recognized. Contractual cash obligations totaled approximately $231.2 million, excluding $20.0 million of uncertain tax positions. Outstanding bank guarantees and letters of credit totaled $10.5 million.
Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting. The company reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Assess the effect of the Headstrong acquisition and the new $380 million credit facilities on leverage, interest expense, liquidity and covenant compliance.
- Evaluate whether the lower gross margin persists as headcount, wages, onsite staffing and infrastructure costs increase.
- Monitor GE concentration, including the GE master service agreement, minimum volume commitments and related-party receivables.
- Review the expiration of Indian tax incentives and its impact on the effective tax rate and future earnings.
- Reconcile reported operating cash flow with net income and monitor working-capital trends, particularly receivables and accrued liabilities.
- Evaluate foreign-exchange exposure and the potential volatility from the company’s substantial forward-contract portfolio.
- Review contingent consideration for Akritiv, acquisition integration risks and the company’s contractual obligations and tax contingencies.