Genpact Limited Form 10-K Summary
Business context and reporting period
Genpact Limited is a Bermuda-based global provider of business process management, analytics, and information technology services. The filing covers the fiscal year ended December 31, 2012, with comparative results for 2010 and 2011. The company served more than 700 clients through 73 delivery centers in 18 countries and had approximately 60,200 employees at year-end.
Genpact operates as one reportable segment. Its principal offerings were Business Process Management, including Smart Decision Services, and Information Technology Services. GE remained the largest client, although its revenue concentration continued to decline as Global Client revenue expanded.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total net revenue | $1,902.0 million | $1,600.4 million | 18.8% increase |
| Gross profit | $744.2 million | $595.5 million | 25.0% increase |
| Gross margin | 39.1% | 37.2% | 190 basis-point increase |
| Income from operations | $264.3 million | $216.2 million | 22.2% increase |
| Operating margin | 13.9% | 13.5% | 40 basis-point increase |
| Net income | $184.6 million | $191.1 million | 3.4% decrease |
| Net income attributable to Genpact shareholders | $178.2 million | $184.3 million | 3.3% decrease |
| Net margin attributable to Genpact shareholders | 9.4% | 11.5% | 210 basis-point decrease |
| Diluted earnings per share | $0.78 | $0.81 | Decrease |
| Cash flow from operating activities | $310.7 million | $266.6 million | 16.5% increase |
Revenue mix in 2012 included $1,154.8 million from Business Process Management excluding Smart Decision Services, $301.3 million from Smart Decision Services, and $445.8 million from Information Technology Services. Global Client revenue increased 25.8% to $1,405.3 million and represented 73.9% of total revenue. GE revenue increased 2.7% to $496.7 million but declined to 26.1% of total revenue from 30.2% in 2011.
Cost of revenue increased 15.2% to $1,157.8 million, while SG&A increased 27.6% to $456.6 million. SG&A included $6.2 million of expenses related to the special dividend and recapitalization. Income tax expense increased to $78.4 million from $70.7 million, and the effective tax rate increased to 30.6% from 27.7%.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $459.2 million at December 31, 2012, compared with $408.0 million at year-end 2011. An additional $18.3 million was held in short-term deposits with GE.
- Net cash from operating activities was $310.7 million. Investing cash outflow was $157.9 million, including $56.5 million for acquisitions and $83.3 million for property, plant, and equipment. Financing cash outflow was $105.5 million, primarily reflecting the $501.6 million special cash dividend.
- Genpact replaced its prior $380 million credit facility with a $925 million facility consisting of a $675 million term loan and a $250 million revolving facility. At year-end, $661.9 million of long-term debt and $80.0 million of funded revolving borrowings were outstanding; total credit-facility indebtedness was approximately $742 million.
- The term loan bears interest at LIBOR, subject to a 1% floor, plus a 3.25% margin, and matures on August 30, 2019. Approximately $631.7 million of the term loan was scheduled for repayment in 2019, creating significant maturity concentration.
- Management reported compliance with all financial covenants. A 1% change in interest rates was estimated to affect annual net interest expense by approximately $7.4 million.
- Total contractual cash obligations were $1.14 billion, including $661.9 million of long-term debt, $170.6 million of operating leases, and $181.2 million of other long-term liabilities.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Global Clients, expansion of Business Process Management and Information Technology Services, the full-year contribution from Headstrong, and the partial-year contribution from Accounting Plaza.
- Gross margin improved because cost of revenue grew more slowly than revenue, aided in part by foreign exchange effects and operating leverage. SG&A grew faster than revenue, reflecting acquisitions, sales and relationship-management investments, wage inflation, higher consulting costs, and recapitalization expenses.
- Operating margin improved modestly, but net income declined because the 2012 results included substantially higher interest expense, lower foreign exchange gains, higher taxes, and recapitalization-related costs.
- Global Client revenue increased from $1,116.7 million to $1,405.3 million, while GE concentration declined from 30.2% to 26.1% of revenue. GE nevertheless remained economically significant and had a contractual minimum purchase commitment.
- Headcount increased from approximately 55,400 to 60,200 and delivery centers increased from 57 to 73. Reported employee attrition was approximately 25% for employees employed at least one day.
- Goodwill increased from $925.3 million to $956.1 million. Quantitative impairment testing was performed for the China and Headstrong reporting units; no impairment was recorded, and each reporting unit’s estimated fair value exceeded carrying value by at least 24%.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a specific numerical revenue, earnings, or margin forecast for 2013. Management described the outlook as subject to economic uncertainty, cautious client spending, pricing pressure, foreign-exchange volatility, client financial condition, and legislative changes affecting offshore outsourcing.
- The GE master services agreement runs through 2016. Minimum annual commitments decline to $250 million in 2014, $150 million in 2015, and $90 million in 2016. The agreement is nonexclusive, and GE may terminate statements of work under specified circumstances.
- Genpact is exposed to foreign exchange risk because approximately 71% of 2012 revenue was denominated in U.S. dollars while substantial expenses were incurred in Indian rupees. A 5% appreciation of the rupee against the U.S. dollar was estimated to increase rupee-denominated expenses by approximately $33 million before hedging.
- Tax holidays and incentives in India and other jurisdictions are expiring or may change. The company reported a 30.6% effective tax rate in 2012 and identified potential exposure from tax audits, transfer pricing, Indian indirect-transfer rules, and uncertain tax positions.
- Unrecognized tax benefits were $21.0 million at year-end 2012, with approximately $3.4 million of accrued interest. The filing states that the Indian government’s appeal concerning the historical GE share transfer remained pending before the Supreme Court of India, although Genpact reported that GE is obligated to indemnify it for tax on that transfer.
- GE represented approximately 30% of accounts receivable at year-end 2012. Total net accounts receivable, including long-term receivables, was $471.1 million. No Global Client other than GE owed more than $14.4 million.
- The company completed acquisitions of Accounting Plaza, Triumph, and Atyati in 2012. It subsequently acquired Jawood for $51.0 million and Felix for $2.3 million on February 6, 2013.
- The company paid a one-time special dividend of $2.24 per share, or approximately $501.6 million, in September 2012. Management did not anticipate regular cash dividends in the foreseeable future.
- Other unusual items included $23.5 million of recapitalization expenses, $5.5 million of accelerated debt-issuance-cost amortization, $6.2 million of property and capital-work-in-progress impairment, and $3.2 million of net favorable acquisition earn-out remeasurement.
- The filing reports no legal proceedings expected to have a material adverse effect. KPMG issued an unqualified audit opinion on the financial statements and internal control over financial reporting. Internal-control testing excluded the 2012 acquisitions, which represented $88.3 million of assets and $39.8 million of revenue.
Most important facts for investors to verify
- Whether Global Client growth can continue to offset GE concentration and the scheduled reduction in GE minimum commitments.
- The company’s ability to refinance or repay the approximately $631.7 million term-loan balloon maturity scheduled for 2019.
- Exposure of margins and cash flow to Indian wage inflation, employee attrition, rupee appreciation, and interest-rate increases.
- The sustainability of the 2012 gross-margin improvement after excluding foreign exchange effects, acquisitions, and one-time recapitalization items.
- The future impact of expiring tax holidays, Indian tax legislation, audits, transfer-pricing matters, and unrecognized tax benefits.
- The carrying value and impairment sensitivity of approximately $956.1 million of goodwill and $112.4 million of intangible assets.
- Integration performance and final purchase-price adjustments for the 2012 acquisitions, together with the contribution from the Jawood and Felix acquisitions completed after year-end.