Genpact Limited — Form 10-Q Summary
Business context and reporting period
Genpact is a global provider of business process management, information technology, analytics, consulting and related services, operating through approximately 51 delivery centers in 17 countries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods.
- Approximately 53,600 employees and more than 600 clients as of September 30, 2011.
- Global Clients represented 71.3% of third-quarter revenue and 69.0% of nine-month revenue; GE represented approximately 28.7% and 31.0%, respectively.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2011 | Change | 9M 2010 | 9M 2011 | Change |
|---|---|---|---|---|---|---|
| Net revenue | $321.6m | $429.6m | +33.6% | $917.4m | $1,157.7m | +26.2% |
| Gross profit | $116.7m | $161.3m | +38.1% | $344.8m | $420.9m | +22.1% |
| Gross margin | 36.3% | 37.5% | +1.2 pts | 37.6% | 36.4% | -1.2 pts |
| Income from operations | $42.4m | $56.7m | +33.7% | $118.0m | $154.3m | +30.8% |
| Operating margin | 13.2% | 13.2% | Flat | 12.9% | 13.3% | +0.4 pts |
| Net income attributable to Genpact shareholders | $40.1m | $48.0m | +19.7% | $96.2m | $123.2m | +28.1% |
| Net margin attributable to shareholders | 12.5% | 11.2% | -1.3 pts | 10.5% | 10.6% | +0.1 pts |
| Diluted EPS | $0.18 | $0.21 | +16.7% | $0.43 | $0.54 | +25.6% |
Q3 revenue growth was driven primarily by Global Clients and the Headstrong acquisition. Information technology revenue increased 146.5% in Q3 and 83.6% for the nine-month period, largely due to Headstrong; organic IT revenue growth was 9.2% and 4.7%, respectively.
Income tax expense increased to $18.9 million in Q3 and $46.4 million for the nine months, primarily because the India STPI tax holiday fully sunset for remaining exempt locations effective March 31, 2011, and because of Headstrong’s jurisdictional tax mix.
Cash flow, liquidity and debt
- Cash provided by operating activities was $177.1 million for the nine months ended September 30, 2011, compared with $78.0 million in the prior-year period.
- Investing activities used $506.4 million, primarily reflecting $561.8 million of net cash paid for acquisitions, including Headstrong.
- Financing activities provided $341.8 million, including $252.0 million of short-term borrowings and $120.0 million of new term debt, partially offset by $25.0 million of debt repayment and $9.1 million of debt-financing costs.
- Cash and cash equivalents were $409.1 million at September 30, 2011, compared with $404.0 million at December 31, 2010. Short-term investments declined from $77.0 million to zero.
- Debt at September 30, 2011 included $252.0 million of short-term borrowings, $28.9 million of current long-term debt and $88.7 million of long-term debt, excluding capital lease obligations.
- The new credit agreement provides $380.0 million of facilities: a $120.0 million term loan and a $260.0 million revolving facility. Borrowings bear interest at LIBOR plus 1.65%; the company stated that it was in material compliance with its covenants.
- Total contractual cash obligations were $653.4 million, including $146.1 million of operating lease obligations and $117.6 million of long-term debt.
Material changes versus the prior comparable period
- Headstrong was acquired on May 3, 2011 for preliminary estimated consideration of $565.1 million, including $390.0 million of goodwill. It contributed $111.7 million of revenue and $3.3 million of net income from acquisition through September 30, 2011.
- Other 2011 acquisitions included Akritiv, NHIS and the remaining interest in HPP. HPP became wholly owned in August 2011 through contingent consideration with a preliminary fair value of $6.4 million.
- Goodwill increased from $570.2 million at December 31, 2010 to $954.2 million at September 30, 2011, principally due to acquisitions.
- Global Client revenue increased 54.1% in Q3 and 41.8% for the nine months, while GE revenue increased only 0.3% and 1.3%, respectively, reducing GE’s revenue concentration.
- Q3 gross margin improved, but nine-month gross margin declined because personnel and operational costs grew faster than revenue. Nine-month cost of revenue increased to 63.6% of revenue from 62.4%.
- Foreign exchange gains were $9.7 million in Q3 and $12.4 million for the nine months, compared with gains of $5.5 million and a loss of $0.1 million, respectively, in the prior-year periods.
- Accumulated other comprehensive loss increased to $127.6 million from $50.2 million, largely reflecting foreign-currency hedge and translation effects.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a specific quantitative revenue, earnings or cash-flow guidance range. Management stated that operating cash flow, cash reserves and debt capacity were expected to be sufficient to finance operations, growth and expansion.
- Management cited client retention and new bookings, economic conditions, foreign exchange, employee attrition, wage inflation, pricing, utilization, competition, visa restrictions, technology disruptions, tax policy and acquisition integration as important risks.
- GE remains a significant customer despite declining concentration. The GE master service agreement includes minimum annual volume commitments of $360 million through 2011, declining to $270 million in 2012, $180 million in 2013 and $90 million in 2014, with extended commitments for 2014–2016 as disclosed.
- Other operating expense included $3.9 million of impairment charges in Q3 and $5.3 million for the nine months, resulting in net other operating expense of $2.9 million and $2.6 million, respectively.
- Amortization of acquired intangibles was $5.8 million in Q3 and $14.0 million for the nine months. Stock-based compensation expense was $9.1 million in Q3 and $17.7 million for the nine months.
- One client filed for bankruptcy protection after September 30, 2011; the company recorded a $3.9 million doubtful-receivable reserve in Q3 related to that client.
- Subsequent to quarter-end, Genpact acquired Empower Research for $17.1 million in cash, subject to closing adjustments and additional deferred or contingent consideration.
- Unrecognized tax benefits increased to $23.7 million at September 30, 2011, of which $23.5 million would affect the effective tax rate if recognized.
Important facts for investors to verify
- Whether Headstrong and the other acquisitions achieve expected growth, margins, synergies and cash generation, and whether goodwill remains recoverable.
- The effect of the India tax-holiday expiration and Headstrong’s tax profile on future effective tax rates.
- Debt repayment capacity, covenant compliance, interest-rate exposure and the refinancing or repayment of the $252.0 million revolving draw.
- Exposure to GE, including the remaining master service agreement commitments and the sustainability of Global Client growth.
- Foreign-exchange sensitivity, hedge performance and the potential effect of the $48.8 million net after-tax cash-flow hedge loss in accumulated other comprehensive income.
- Collection of receivables, including the bankruptcy-related exposure and the increase in net accounts receivable to $395.7 million, plus $139.9 million from related parties.
- Integration and internal-control coverage for Headstrong, which was excluded from management’s evaluation of disclosure controls as of the filing date.