Genpact Limited 2013 Form 10-K Summary
Business context and reporting period
Genpact is a Bermuda-incorporated global provider of business process management, analytics, consulting, information technology, and related services. The filing covers the fiscal year ended December 31, 2013, with unaudited quarterly information for the fourth quarter ended December 31, 2013. The company had approximately 63,600 employees in 24 countries and operated 68 delivery centers in 18 countries.
Genpact served more than 700 clients, including over 100 Fortune Global 500 companies. Global Clients represented 77.4% of 2013 revenue, while GE represented 22.6%. GE remains subject to a master services agreement with minimum annual commitments through 2016, although those commitments decline from $250 million in 2014 to $90 million in 2016.
Financial performance and key metrics
| Metric | 2012 | 2013 | Change |
|---|---|---|---|
| Total net revenue | $1,902.0 million | $2,132.0 million | 12.1% increase |
| Global Client revenue | $1,405.3 million | $1,649.9 million | 17.4% increase |
| GE revenue | $496.7 million | $482.0 million | 2.9% decrease |
| Gross profit | $744.2 million | $812.4 million | 9.2% increase |
| Gross margin | 39.1% | 38.1% | Down 1.0 percentage point |
| Operating income | $264.3 million | $309.5 million | 17.1% increase |
| Operating margin | 13.9% | 14.5% | Up 0.6 percentage point |
| Net income | $184.6 million | $235.1 million | 27.3% increase |
| Net income attributable to Genpact shareholders | $178.2 million | $229.7 million | 28.9% increase |
| Diluted EPS | $0.78 | $0.97 | 24.4% increase |
| Operating cash flow | $310.7 million | $311.6 million | 0.3% increase |
| Cash and cash equivalents | $459.2 million | $571.3 million | 24.4% increase |
Business Process Management revenue increased 10.4% to $1,608.2 million, while Information Technology revenue increased 17.5% to $523.8 million. IT services represented 24.6% of total revenue, compared with 23.4% in 2012.
Cost of revenue increased 14.0% to $1,319.6 million, primarily due to wage inflation, acquisitions, higher headcount, subcontractor use, and expanded onshore operations. SG&A increased 6.2% to $484.8 million, but declined to 22.7% of revenue from 24.0% in 2012. The effective tax rate declined to 23.6% from 30.6%, primarily due to greater activity in low-tax or tax-exempt jurisdictions and the absence of certain 2012 recapitalization-related tax costs.
Fourth-quarter 2013 results
| Metric | Q4 2012 | Q4 2013 |
|---|---|---|
| Total net revenue | $507.7 million | $558.5 million |
| Gross profit | $197.9 million | $212.6 million |
| Operating income | $70.8 million | $71.6 million |
| Net income attributable to Genpact shareholders | $53.4 million | $48.8 million |
| Diluted EPS | $0.23 | $0.21 |
Fourth-quarter revenue and gross profit increased year over year, but operating income was broadly flat and net income attributable to shareholders declined. The filing notes that results are seasonal, with demand generally stronger in the second half of the year.
Liquidity, debt, and capital resources
- Cash and cash equivalents were $571.3 million at December 31, 2013, including $420.7 million held by foreign subsidiaries. The company expects to permanently reinvest or repatriate tax-free approximately $395.7 million of foreign cash and accrued taxes on the remaining $25.0 million.
- Net cash provided by operating activities was $311.6 million. Investing cash outflow was $78.4 million, including $49.2 million for acquisitions and $45.4 million of net property and equipment investment. Financing cash outflow was $65.3 million.
- Long-term debt, net of debt issuance costs, was $657.9 million, consisting primarily of a $675.0 million term loan. The term loan matures in August 2019, with approximately $636.3 million scheduled at maturity. The revolving facility had $250.0 million of capacity, with $4.4 million utilized on a non-funded basis at year-end.
- The June 2013 credit facility amendment reduced the term-loan margin to 2.75% and the revolving-facility margin to 2.50%; the term-loan LIBOR floor was reduced to 0.75%. The company reported compliance with applicable financial covenants.
- Total contractual cash obligations were $2.017 billion, including $789.2 million of long-term debt obligations, $151.3 million of operating leases, and $221.0 million of other long-term liabilities.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Global Clients, acquisitions, and higher BPM and IT demand. Global Client revenue increased $244.6 million, while GE revenue declined $14.6 million.
- Profitability improved at the operating and net income levels despite a decline in gross margin. Wage inflation and increased onshore delivery costs pressured gross margin.
- Genpact acquired Jawood Business Process Solutions and Felix for approximately $47.2 million, acquired the remaining interest in NGEN, and acquired certain Third Pillar assets for $2.5 million.
- The company divested Hello Communications, Clearbizz, and Gantthead.com. These transactions generated reported losses, including approximately $3.9 million in aggregate losses for the 2013 Clearbizz and Gantthead divestitures and a $0.4 million loss related to Hello Communications.
- Goodwill was approximately $953.8 million and other intangible assets were approximately $99.1 million at year-end. No goodwill impairment was recorded, although quantitative testing was required for the Headstrong and Americas reporting units.
- The company did not declare a regular dividend and stated that it did not anticipate paying cash dividends in the foreseeable future. The $501.6 million special dividend occurred in 2012.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical revenue, earnings, or margin guidance forecast for 2014. Management described the economic outlook as uncertain, citing sluggish GDP growth, cautious client spending, pricing pressure, foreign-exchange volatility, and client financial-condition risks.
Key risks include dependence on GE and clients concentrated in the United States and Europe; wage inflation and employee attrition; foreign-exchange exposure, particularly the Indian rupee; variable-rate debt and refinancing risk; offshore-outsourcing restrictions and immigration or visa limitations; tax-law changes and expiration of tax incentives; competitive pricing pressure; data-security breaches and service disruptions; execution and integration risks from acquisitions; and potential goodwill impairment.
Approximately 71.0% of 2013 revenue was denominated in U.S. dollars while a substantial portion of costs was incurred in Indian rupees. Excluding hedging, a 5% appreciation of the Indian rupee against the U.S. dollar would have increased 2013 rupee-denominated expenses by approximately $33 million. A 1% change in interest rates was estimated to affect 2014 net interest expense by approximately $6.8 million.
GE accounted for approximately 28% of accounts receivable at year-end. The company reported 25% employee attrition for employees employed at least one day during 2013. The company also disclosed an ongoing Indian tax matter related to GE's 2004 share transfer, although it believes it would not be liable and GE has agreed to indemnify it.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2013. KPMG issued unqualified opinions on the financial statements and internal controls, but the internal-control assessment excluded Jawood and Felix, which contributed $48.5 million of 2013 revenue and had $56.1 million of assets.
Most important facts for investors to verify
- Whether Global Client growth can offset the scheduled decline in GE minimum commitments and GE revenue.
- Whether wage inflation, onshore expansion, and subcontractor costs continue to pressure gross margin.
- The refinancing and repayment profile of the approximately $675 million term loan, including the large 2019 maturity and exposure to LIBOR.
- The collectability of receivables, particularly the $141.5 million owed by GE and the increased doubtful-receivable reserve.
- The sustainability of the 23.6% effective tax rate as tax holidays and other incentives expire.
- Progress integrating Jawood, Felix, and other acquisitions and the performance of the Headstrong and Americas reporting units.
- Foreign-exchange hedge effectiveness and the sensitivity of expenses to Indian rupee appreciation.
- Potential consequences of the pending Indian tax appeal, other tax examinations, and unrecognized tax benefits of approximately $20.9 million that could affect the effective tax rate.
- The company’s dividend policy, debt covenant restrictions, and future capital-allocation priorities.