Genpact Limited: Q3 2013 Form 10-Q Summary
Business context and reporting period
Genpact Limited is a global business-process management, information technology, analytics and operations-services provider. It reported unaudited U.S. GAAP results for the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company had more than 60,000 employees in 24 countries and served hundreds of long-term clients, including more than 100 Fortune Global 500 companies.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net revenues | $534.9 million | $491.2 million | $1,573.5 million | $1,394.3 million |
| Gross profit | $205.6 million | $193.9 million | $599.8 million | $546.3 million |
| Gross margin | 38.4% | 39.5% | 38.1% | 39.2% |
| Operating income | $86.0 million | $70.0 million | $237.9 million | $193.6 million |
| Operating margin | 16.1% | 14.2% | 15.1% | 13.9% |
| Net income | $71.4 million | $26.6 million | $185.1 million | $129.7 million |
| Net income attributable to Genpact shareholders | $70.3 million | $25.2 million | $180.9 million | $124.8 million |
| Diluted EPS | $0.30 | $0.11 | $0.77 | $0.55 |
| Cash flow from operations | Not separately provided | Not separately provided | $233.2 million | $209.5 million |
Q3 revenue increased 8.9% year over year, while nine-month revenue increased 12.9%. Global Client revenue grew 14.0% in Q3 and 18.5% for the nine-month period; GE revenue declined 5.8% and 2.9%, respectively. Q3 IT-services revenue increased 15.5% to $133.0 million, while BPM revenue increased 6.9% to $401.9 million.
Q3 net income attributable to Genpact shareholders represented 13.1% of revenue, compared with 5.1% in the prior-year quarter. The nine-month ratio was 11.5%, compared with 9.0%. The improvement benefited from operating leverage, foreign-exchange gains and a lower effective tax rate.
Liquidity, debt and balance-sheet developments
- Cash and cash equivalents were $481.5 million at September 30, 2013, up from $459.2 million at December 31, 2012. Approximately $469.9 million was held outside Bermuda, and the company stated that $454.9 million was expected to be permanently reinvested or repatriated tax-free; the effect of recent Indian tax legislation on repatriation remained unclear.
- Long-term debt, excluding capital leases, was $658.9 million at September 30, 2013, compared with $661.9 million at year-end 2012. Short-term borrowings declined from $80.0 million to zero; $4.4 million of revolving capacity was utilized through non-funded draws.
- The June 2013 debt amendment reduced the term-loan margin to 2.75% from 3.25% and the revolving-facility margin to 2.50%. The term loan matures in August 2019, with approximately $636.3 million scheduled at maturity based on the disclosed amortization schedule.
- Current assets were $1.217 billion and current liabilities were $481.7 million at September 30, 2013. Net accounts receivable were approximately $477.1 million, including a doubtful-receivables reserve of $14.5 million.
- Total contractual cash obligations were $2.068 billion, including $796.3 million of long-term debt obligations, $163.9 million of operating leases, $283.5 million of other long-term liabilities and $13.0 million of contingent consideration.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Global Clients, acquisitions and increased BPM and IT-services activity. Global Clients represented 77.9% of Q3 revenue, versus 74.5% in the prior-year quarter; GE represented 22.1%, versus 25.5%.
- Gross margin declined 110 basis points in Q3 and 110 basis points for the nine-month period. Management attributed the pressure to wage inflation, increased personnel costs, facility and infrastructure expansion, communications and travel expenses.
- Operating margin improved because SG&A declined as a percentage of revenue and 2012 included recapitalization-related costs. Q3 SG&A was $117.0 million, or 21.9% of revenue, compared with $118.5 million, or 24.1%, in Q3 2012.
- The Q3 2013 effective tax rate was 23.8%, compared with 37.7% in Q3 2012; the nine-month rate was 24.4%, compared with 29.9%. Management cited greater activity in low-tax and tax-exempt locations, primarily India, and prior-year recapitalization and withholding-tax items.
- Operating cash flow increased 11.3% to $233.2 million. Management said normalized operating cash flow, excluding a $45.0 million nonrecurring 2012 client receipt, increased by $68.7 million.
- Cash used for investing activities decreased to $87.7 million from $113.9 million, while capital expenditures declined to $37.1 million from $60.1 million. Acquisition payments totaled $49.2 million in 2013, principally for Jawood, NGEN and Third Pillar.
- The company acquired Third Pillar Systems’ assets for $2.5 million, acquired the remaining interest in NGEN, and completed the $47.2 million Jawood/Felix acquisition. It also divested Clearbizz B.V. for nominal cash consideration, recording a $1.2 million loss, and reserved $2.3 million for the planned divestiture or discontinuance of Gantthead.com.
Guidance, outlook, commentary and risks
The filing does not provide a clear numerical revenue, earnings or cash-flow guidance range. Management stated that operating cash flow, cash reserves and debt capacity were expected to be sufficient to fund operations, growth and expansion.
Management emphasized continued growth in Global Client relationships, targeted verticals and IT services, while noting cost pressure from wage inflation, facility expansion and higher operating expenses. The company reported no material legal proceedings and stated that its disclosure controls were effective.
- Material risks include client retention and contract renewals, dependence on clients in the United States and Europe, GE concentration, pricing and utilization, employee attrition and wage inflation.
- Additional risks include foreign-exchange volatility, interest-rate and LIBOR exposure, debt covenants, tax-law changes, visa restrictions, acquisitions and integration, competition, technology or telecommunications disruptions, cybersecurity and intellectual-property issues.
- GE accounted for 23% of nine-month revenue and 27% of accounts receivable at September 30, 2013, creating ongoing customer-concentration and collection exposure.
- Foreign-exchange derivatives had aggregate notional amounts of approximately $1.82 billion at September 30, 2013 and a net balance-sheet exposure liability of approximately $270.7 million. Foreign-exchange gains were $10.8 million in Q3 and $24.6 million for nine months, making reported earnings sensitive to currency movements.
- Unrecognized tax benefits were $21.0 million at September 30, 2013, of which $20.8 million could affect the effective tax rate if recognized.
Important facts for investors to verify
- Whether Global Client growth can offset continued declines in GE revenue and reduce customer concentration.
- Whether gross-margin pressure from wage inflation and capacity expansion persists or reverses.
- The sustainability of the unusually favorable 2013 effective tax rate and foreign-exchange gains.
- Debt repayment capacity, LIBOR sensitivity, covenant compliance and the large $636.3 million term-loan maturity scheduled for 2019.
- The collectibility of receivables, including the increase in the doubtful-receivables reserve to $14.5 million.
- The financial performance and integration progress of Jawood, Third Pillar and other acquired businesses, together with the ultimate costs or proceeds from planned and completed divestitures.
- The impact of Indian tax-law changes on the repatriation of foreign cash.