Business Context and Reporting Period
Genpact Limited filed its Form 10-K for the fiscal year ended December 31, 2020. Genpact is a global professional services company providing digitally enabled intelligent operations, transformation, consulting, analytics, information technology, and business process services. It had approximately 96,500 employees in more than 30 countries and served more than 700 clients. Reportable segments were Banking, Capital Markets and Insurance; Consumer Goods, Retail, Life Sciences and Healthcare; and High Tech, Manufacturing and Services.
Financial Performance and Position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenues | $3,709.4 million | $3,520.5 million | 5.4% increase |
| Global Client revenue | $3,250.5 million | $3,042.5 million | 6.8% increase |
| GE revenue | $458.9 million | $478.1 million | 4.0% decrease |
| Gross profit | $1,291.2 million | $1,225.9 million | 5.3% increase |
| Gross margin | 34.8% | 34.8% | Flat |
| Income from operations | $438.7 million | $429.4 million | 2.2% increase |
| Operating margin | 11.8% | 12.2% | Down 0.4 percentage points |
| Net income attributable to Genpact shareholders | $308.3 million | $304.9 million | 1.1% increase |
| Net margin | 8.3% | 8.7% | Down 0.4 percentage points |
| Diluted EPS | $1.57 | $1.56 | Increase |
| Adjusted income from operations | $588.8 million | $558.8 million | 5.4% increase |
| Adjusted operating margin | 15.9% | 15.9% | Flat |
- Net cash provided by operating activities was $584.3 million, compared with $427.9 million in 2019.
- Cash used in investing activities was $266.4 million, including $186.6 million for acquisitions.
- Cash used in financing activities was $92.0 million, including $137.1 million of share repurchases and $74.2 million of dividends.
- Cash and cash equivalents increased to $680.4 million from $467.1 million. Approximately $666.1 million was held by foreign subsidiaries.
- Total debt, including short-term borrowings and current debt, was approximately $1.59 billion at year-end. Long-term debt was $1.34 billion and short-term borrowings were $250.0 million.
- Debt included a $593.9 million term loan, $349.3 million of 3.70% senior notes due April 2022, and $397.7 million of 3.375% senior notes due December 2024. The company was in compliance with its debt covenants.
- Accounts receivable, net, was $881.0 million. GE represented approximately 16% of receivables and 12% of 2020 revenue.
Material Changes Versus the Prior Comparable Period
- Global Client revenue growth more than offset a decline in GE revenue. Global Clients represented 87.6% of total revenue, up from 86.4%.
- Segment revenue increased 14.2% in CGRLH and 3.0% in HMS; BCMI revenue was essentially flat because delayed client approvals for remote delivery offset growth from new engagements.
- 2020 bookings declined to $3.1 billion from $3.9 billion, reflecting COVID-19-related delays and cancellations. Global Client bookings showed stronger momentum in the fourth quarter.
- SG&A expense declined 0.6%, and SG&A as a percentage of revenue improved to 21.3% from 22.6%, primarily due to cost controls and lower travel spending.
- Amortization of acquired intangible assets increased 32.9% to $43.3 million, primarily because of the Rightpoint acquisition.
- Interest expense increased as a result of the 2019 senior notes, despite lower average LIBOR-based rates.
- Employee attrition declined to 20% from 28%, primarily reflecting pandemic-related labor-market conditions. Average headcount increased to approximately 96,700 from 91,300.
- Genpact acquired Enquero for total consideration of $148.9 million and SomethingDigital.Com for $57.5 million, adding data and analytics, experience-led transformation, and digital commerce capabilities.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected revenue growth to improve as 2021 progressed but stated that pandemic-related effects on demand, profitability, and cash flow could continue. The filing does not provide clear numerical 2021 revenue or earnings guidance.
- COVID-19 reduced bookings, delayed client approvals, disrupted normal seasonality, and caused lower utilization in some intelligent-operations work. Most employees continued to work remotely.
- Genpact recorded $26.5 million of restructuring charges, including $15.4 million of employee severance and $11.2 million of non-cash charges related primarily to abandoned office premises and assets.
- Other operating expense included a $32.2 million impairment charge related primarily to leased premises and tangible and intangible assets. Total 2020 asset write-downs were $14.1 million for intangible assets and property, plant and equipment and $18.1 million for right-of-use and other assets.
- Tax matters remain material. Indian tax authorities had challenged or denied approximately $16.0 million of GST and service-tax refunds. Separately, tax demands totaling approximately $150 million, including interest through the assessment dates, remained subject to appeals; the company had received favorable appellate orders on demands totaling $135 million and was pursuing refunds of $55 million previously paid.
- The filing discusses potential retrospective Indian provident-fund and benefit-plan obligations, but states that the timing and amount cannot be reliably estimated.
- Principal operating risks include COVID-19 and macroeconomic weakness, client concentration and GE dependency, cybersecurity and data privacy incidents, employee attrition and wage inflation, foreign-exchange movements, competition, long sales cycles, fixed-price contract execution, tax changes, regulatory restrictions on offshore services, and the ability to integrate acquisitions.
- Goodwill was $1.70 billion and intangible assets were $236.7 million at year-end. Management concluded that reporting-unit fair values exceeded carrying values and recorded no goodwill impairment.
- The board increased the planned 2021 quarterly dividend to $0.1075 per share, or $0.43 annually, and increased the share-repurchase authorization from $1.25 billion to $1.75 billion in February 2021.
Investor Verification Priorities
- Verify the conversion of the $3.1 billion 2020 bookings level into 2021 revenue, particularly after the pandemic-related decline in bookings.
- Assess the sustainability of the 15.9% adjusted operating margin and reconcile it to GAAP operating margin, including restructuring, stock compensation, amortization, impairment, and acquisition-related adjustments.
- Review debt maturities, variable-rate exposure, LIBOR transition provisions, covenant headroom, and the ability to refinance or repay the 2022 notes and 2023 term-loan maturity.
- Monitor GE revenue trends, GE-divested businesses, and the concentration of revenue and receivables among the largest clients.
- Track the outcomes of Indian tax disputes, GST refund appeals, and potential employee-benefit obligations.
- Evaluate whether acquisitions of Enquero and SomethingDigital generate the expected revenue, margin, and integration benefits without additional impairment risk.
- Confirm the availability and geographic accessibility of cash, since most cash was held outside Bermuda, and consider restrictions or tax costs associated with repatriation.