g-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period ended June 30, 2018

Or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from              to             

Commission file number: 001-33626

 

GENPACT LIMITED

(Exact name of registrant as specified in its charter)

 

 

Bermuda

 

98-0533350

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Canon’s Court

22 Victoria Street

Hamilton HM 12

Bermuda

(441) 295-2244

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section l3(a) of the Exchange Act.          

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of the registrant’s common shares, par value $0.01 per share, outstanding as of August 2, 2018 was 189,949,196.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Item No.

 

 

 

Page No.

 

 

 

 

 

PART I

 

 

 

Financial Statements

 

 

 

 

1.

 

Unaudited Consolidated Financial Statements

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2017 and June 30, 2018

 

1

 

 

 

 

Consolidated Statements of Income for the three months and six months ended June 30, 2017 and 2018

 

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2017 and 2018

 

3

 

 

 

 

Consolidated Statements of Equity and Redeemable Non-controlling Interest for the six months ended June 30, 2017 and 2018

 

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2018

 

6

 

 

 

 

Notes to the Consolidated Financial Statements

 

7

 

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

56

 

 

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

73

 

 

4.

 

Controls and Procedures

 

73

 

 

 

 

 

 

 

PART II

 

 

 

Other Information

 

 

 

 

1.

 

Legal Proceedings

 

74

 

 

1A.

 

Risk Factors

 

74

 

 

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

74

 

 

3.

 

Defaults upon Senior Securities

 

74

 

 

5.

 

Other Information

 

74

 

 

6.

 

Exhibits

 

75

 

 

 

 

 

 

 

SIGNATURES

 

77

 

 

 

 


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share data and share count)

 

 

 

Notes

 

As of December 31,

2017

 

 

As of June 30,

2018

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4

 

$

504,468

 

 

$

333,903

 

Accounts receivable, net

 

5

 

 

693,085

 

 

 

691,347

 

Prepaid expenses and other current assets

 

8

 

 

236,342

 

 

 

207,334

 

Total current assets

 

 

 

$

1,433,895

 

 

$

1,232,584

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

9

 

 

207,030

 

 

 

202,669

 

Deferred tax assets

 

24

 

 

76,929

 

 

 

88,278

 

Investment in equity affiliates

 

25

 

 

886

 

 

 

834

 

Intangible assets, net

 

10

 

 

131,590

 

 

 

120,624

 

Goodwill

 

10

 

 

1,337,122

 

 

 

1,311,361

 

Contract cost assets

 

19

 

 

 

 

 

162,178

 

Other assets

 

 

 

 

262,169

 

 

 

147,550

 

Total assets

 

 

 

$

3,449,621

 

 

$

3,266,078

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

11

 

$

170,000

 

 

$

215,000

 

Current portion of long-term debt

 

12

 

 

39,226

 

 

 

39,249

 

Accounts payable

 

 

 

 

15,050

 

 

 

20,942

 

Income taxes payable

 

24

 

 

30,026

 

 

 

54,513

 

           Accrued expenses and other current liabilities

 

13

 

 

584,482

 

 

 

483,241

 

Total current liabilities

 

 

 

$

838,784

 

 

$

812,945

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

12

 

 

1,006,687

 

 

 

987,314

 

Deferred tax liabilities

 

24

 

 

6,747

 

 

 

7,036

 

      Other liabilities

 

14

 

 

168,609

 

 

 

162,358

 

Total liabilities

 

 

 

$

2,020,827

 

 

$

1,969,653

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 

 

4,750

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

Preferred shares, $0.01 par value, 250,000,000 authorized, none issued

 

 

 

 

 

 

 

 

Common shares, $0.01 par value, 500,000,000 authorized, 192,825,207 and  189,876,061 issued and outstanding as of December 31, 2017 and June 30, 2018, respectively

 

 

 

 

1,924

 

 

 

1,895

 

Additional paid-in capital

 

 

 

 

1,421,368

 

 

 

1,438,072

 

Retained earnings

 

 

 

 

355,982

 

 

 

338,120

 

Accumulated other comprehensive income (loss)

 

 

 

 

(355,230

)

 

 

(481,662

)

Total equity

 

 

 

$

1,424,044

 

 

$

1,296,425

 

Commitments and contingencies

 

27

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and equity

 

 

 

$

3,449,621

 

 

$

3,266,078

 

 

See accompanying notes to the Consolidated Financial Statements.

1


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data and share count)

 

 

 

Three months ended June 30,

 

 

 

Six months ended June 30,

 

 

Notes

2017 (1)

 

 

2018 (1)

 

 

 

2017 (1)

 

 

2018 (1)

 

Net revenues

19

$

670,697

 

 

$

728,561

 

 

 

$

1,293,692

 

 

$

1,417,473

 

Cost of revenue

20, 25

 

414,508

 

 

 

462,898

 

 

 

 

797,845

 

 

 

907,222

 

Gross profit

 

$

256,189

 

 

$

265,663

 

 

 

$

495,847

 

 

$

510,251

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

21, 25

 

167,758

 

 

 

176,166

 

 

 

 

328,616

 

 

 

347,275

 

Amortization of acquired intangible assets

10

 

8,387

 

 

 

9,826

 

 

 

 

15,629

 

 

 

19,762

 

Other operating (income) expense, net

22

 

(915

)

 

 

149

 

 

 

 

(8,453

)

 

 

(69

)

Income from operations

 

$

80,959

 

 

$

79,522

 

 

 

$

160,055

 

 

$

143,283

 

Foreign exchange gains (losses), net

 

 

1,913

 

 

 

2,805

 

 

 

 

(3,000

)

 

 

7,603

 

Interest income (expense), net

23

 

(9,850

)

 

 

(10,407

)

 

 

 

(15,343

)

 

 

(18,507

)

Other income (expense), net

26

 

11,560

 

 

 

9,748

 

 

 

 

12,113

 

 

 

25,298

 

Income before equity-method investment activity, net and income tax expense

 

$

84,582

 

 

$

81,668

 

 

 

$

153,825

 

 

$

157,677

 

Equity-method investment activity, net

 

 

(9

)

 

 

(15

)

 

 

 

(4,567

)

 

 

(15

)

Income before income tax expense

 

$

84,573

 

 

$

81,653

 

 

 

$

149,258

 

 

$

157,662

 

Income tax expense

24

 

15,471

 

 

 

17,079

 

 

 

 

27,716

 

 

 

29,154

 

Net income

 

$

69,102

 

 

$

64,574

 

 

 

$

121,542

 

 

$

128,508

 

Net loss (income) attributable to redeemable non-controlling interest

 

 

(156

)

 

 

-

 

 

 

 

742

 

 

 

761

 

Net income attributable to Genpact Limited shareholders

 

$

68,946

 

 

$

64,574

 

 

 

$

122,284

 

 

$

129,269

 

Net income available to Genpact Limited common shareholders

 

$

68,946

 

 

$

64,574

 

 

 

$

122,284

 

 

$

129,269

 

Earnings per common share attributable to Genpact Limited common shareholders

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.34

 

 

 

$

0.63

 

 

$

0.68

 

Diluted

 

$

0.36

 

 

$

0.33

 

 

 

$

0.62

 

 

$

0.66

 

Weighted average number of common shares used  in computing earnings per common share attributable to Genpact Limited common shareholders

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

191,469,593

 

 

 

190,132,664

 

 

 

 

195,269,561

 

 

 

191,474,645

 

Diluted

 

 

193,732,406

 

 

 

193,365,974

 

 

 

 

198,194,172

 

 

 

194,827,272

 

(1) Cost of revenue, selling and administrative expenses, other income (expense) and income from operations for the three and six months ended June 30, 2017 have been restated due to the adoption of ASU No. 2017-07 with effect from January 1, 2018.

 

 

See accompanying notes to the Consolidated Financial Statements.

2


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands, except per share data and share count)

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

Genpact Limited Shareholders

 

 

Redeemable Non-controlling interest

 

 

Genpact Limited Shareholders

 

 

Redeemable Non-controlling interest

 

 

Genpact

Limited

Shareholders

 

 

Redeemable

Non-

controlling

interest

 

 

Genpact

Limited

Shareholders

 

 

Redeemable

Non-

controlling

interest

 

Net income (loss)

$

68,946

 

 

$

156

 

 

$

64,574

 

 

$

 

 

$

122,284

 

 

$

(742

)

 

$

129,269

 

 

$

(761

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation  adjustments

 

20,085

 

 

 

(66

)

 

 

(73,681

)

 

 

 

 

 

71,712

 

 

 

(78

)

 

 

(83,016

)

 

 

(424

)

Net income (loss) on cash flow hedging derivatives, net of taxes (Note 7)

 

(9,611

)

 

 

 

 

 

(27,879

)

 

 

 

 

 

9,247

 

 

 

 

 

 

(46,811

)

 

 

 

Retirement benefits, net of taxes

 

223

 

 

 

 

 

 

617

 

 

 

 

 

 

342

 

 

 

 

 

 

1,130

 

 

 

 

Other comprehensive income (loss)

 

10,697

 

 

 

(66

)

 

 

(100,943

)

 

 

 

 

 

81,301

 

 

 

(78

)

 

 

(128,697

)

 

 

(424

)

Comprehensive income (loss)

$

79,643

 

 

$

90

 

 

$

(36,369

)

 

$

 

 

$

203,585

 

 

$

(820

)

 

$

572

 

 

$

(1,185

)

 

See accompanying notes to the Consolidated Financial Statements.

3


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Equity and Redeemable Non-controlling Interest

(Unaudited)

(In thousands, except share count)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Redeemable

 

 

 

No. of Shares

 

 

Amount

 

 

Additional Paid-

in Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Total

Equity

 

 

non-controlling

interest

 

Balance as of January 1, 2017

 

 

198,794,052

 

 

$

1,984

 

 

$

1,384,468

 

 

$

358,121

 

 

$

(457,925

)

 

$

1,286,648

 

 

$

4,520

 

Issuance of common shares on

exercise of options (Note 16)

 

 

548,086

 

 

 

5

 

 

 

7,762

 

 

 

 

 

 

 

 

 

7,767

 

 

 

 

Issuance of common shares under the

employee stock purchase plan (Note 16)

 

 

100,357

 

 

 

1

 

 

 

2,312

 

 

 

 

 

 

 

 

 

2,313

 

 

 

 

Net settlement on vesting of

restricted share units (Note 16)

 

 

81,471

 

 

 

1

 

 

 

(11

)

 

 

 

 

 

 

 

 

(10

)

 

 

 

Net settlement on vesting of

performance units (Note 16)

 

 

731,701

 

 

 

7

 

 

 

(9,946

)

 

 

 

 

 

 

 

 

(9,939

)

 

 

 

Stock repurchased and retired (Note 17)

 

 

(7,387,240

)

 

 

(74

)

 

 

(40,000

)

 

 

(179,710

)

 

 

 

 

 

(219,784

)

 

 

 

Expenses related to stock repurchase (Note 17)

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

 

 

 

 

(16

)

 

 

 

Stock-based compensation expense (Note 16)

 

 

 

 

 

 

 

 

12,351

 

 

 

 

 

 

 

 

 

12,351

 

 

 

 

Change in fair value of redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

(980

)

 

 

 

 

 

(980

)

 

 

980

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

122,284

 

 

 

 

 

 

122,284

 

 

 

(742

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81,301

 

 

 

81,301

 

 

 

(78

)

Dividend (Note 17 )

 

 

 

 

 

 

 

 

 

 

 

(23,515

)

 

 

 

 

 

(23,515

)

 

 

 

Balance as of  June 30, 2017

 

 

192,868,427

 

 

$

1,924

 

 

$

1,356,936

 

 

$

276,184

 

 

$

(376,624

)

 

$

1,258,420

 

 

$

4,680

 

 

See accompanying notes to the Consolidated Financial Statements.

4


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Equity and Redeemable Non-controlling Interest

(Unaudited)

(In thousands, except share count)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Redeemable

 

 

 

No. of

Shares

 

 

Amount

 

 

Additional Paid-

in Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Total

Equity

 

 

non-controlling

interest

 

Balance as of January 1, 2018, as previously reported

 

 

192,825,207

 

 

$

1,924

 

 

$

1,421,368

 

 

$

355,982

 

 

$

(355,230

)

 

$

1,424,044

 

 

$

4,750

 

Adoption of ASU 2014-09  (Note 2(f))

 

 

 

 

 

 

 

 

 

 

 

17,924

 

 

 

 

 

 

17,924

 

 

 

 

Adjusted balance as of January 1, 2018

 

 

192,825,207

 

 

$

1,924

 

 

$

1,421,368

 

 

$

373,906

 

 

$

(355,230

)

 

$

1,441,968

 

 

$

4,750

 

Adoption of ASU 2018-02 (Note 7, 24)

 

 

 

 

 

 

 

 

 

 

 

(2,265

)

 

 

2,265

 

 

 

 

 

 

 

Issuance of common shares on exercise of options (Note 16)

 

 

366,382

 

 

 

4

 

 

 

6,207

 

 

 

 

 

 

 

 

 

6,211

 

 

 

 

Issuance of common shares under the employee stock purchase plan (Note 16)

 

 

114,951

 

 

 

1

 

 

 

3,176

 

 

 

 

 

 

 

 

 

3,177

 

 

 

 

Net settlement on vesting of restricted share units (Note 16)

 

 

156,420

 

 

 

2

 

 

 

(947

)

 

 

 

 

 

 

 

 

(945

)

 

 

 

Net settlement on vesting of performance units (Note 16)

 

 

691,958

 

 

 

7

 

 

 

(13,291

)

 

 

 

 

 

 

 

 

(13,284

)

 

 

 

Stock repurchased and retired (Note 17)

 

 

(4,278,857

)

 

 

(43

)

 

 

4,000

 

 

 

(134,060

)

 

 

 

 

 

(130,103

)

 

 

 

Expenses related to stock repurchase (Note 17)

 

 

 

 

 

 

 

 

 

 

 

(82

)

 

 

 

 

 

(82

)

 

 

 

Stock-based compensation expense (Note 16)

 

 

 

 

 

 

 

 

18,724

 

 

 

 

 

 

 

 

 

18,724

 

 

 

 

Payment for purchase of redeemable non-controlling interest

 

 

 

 

 

 

 

 

(1,165

)

 

 

 

 

 

 

 

 

(1,165

)

 

 

(3,565

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

129,269

 

 

 

 

 

 

129,269

 

 

 

(761

)

      Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(128,697

)

 

 

(128,697

)

 

 

(424

)

Dividend (Note 17)

 

 

 

 

 

 

 

 

 

 

 

(28,648

)

 

 

 

 

 

(28,648

)

 

 

 

Balance as of  June 30, 2018

 

 

189,876,061

 

 

$

1,895

 

 

$

1,438,072

 

 

$

338,120

 

 

$

(481,662

)

 

$

1,296,425

 

 

$

 

 

See accompanying notes to the Consolidated Financial Statements.

5


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

Six months ended June 30,

 

 

 

 

2017

 

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net income attributable to Genpact Limited shareholders

 

$

122,284

 

 

$

129,269

 

Net loss attributable to redeemable non-controlling interest

 

 

(742

)

 

 

(761

)

Net income

 

$

121,542

 

 

$

128,508

 

Adjustments to reconcile net income to net cash provided by  (used for) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

27,312

 

 

 

31,613

 

Amortization of debt issuance costs

 

 

877

 

 

 

979

 

Amortization of acquired intangible assets

 

 

15,629

 

 

 

19,762

 

Write-down of intangible assets and property, plant and equipment

 

 

-

 

 

 

850

 

Reserve for doubtful receivables

 

 

1,793

 

 

 

1,347

 

Unrealized loss (gain) on revaluation of foreign currency asset/liability

 

 

2,956

 

 

 

(7,350

)

Equity-method investment activity, net

 

 

4,567

 

 

 

15

 

Stock-based compensation expense

 

 

12,351

 

 

 

18,724

 

Deferred income taxes

 

 

(5,260

)

 

 

(4,194

)

Others, net

 

 

(4,816

)

 

 

294

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(1,958

)

 

 

(4,548

)

Increase in prepaid expenses, other current assets, contract cost assets and other assets

 

 

(35,248

)

 

 

(71,559

)

Increase in accounts payable

 

 

1,624

 

 

 

6,289

 

Decrease in accrued expenses, other current liabilities and other liabilities

 

 

(52,022

)

 

 

(96,965

)

Increase in income taxes payable

 

 

25,977

 

 

 

25,719

 

Net cash provided by operating activities

 

$

115,324

 

 

$

49,484

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(29,350

)

 

 

(37,703

)

Payment for internally generated intangible assets (including intangibles under development)

 

 

(8,950

)

 

 

(11,544

)

Proceeds from sale of property, plant and equipment

 

 

566

 

 

 

309

 

Investment in equity affiliates

 

 

(496

)

 

 

 

Payment for business acquisitions, net of cash acquired

 

 

(207,181

)

 

 

(728

)

Payment for purchase of redeemable non-controlling interest

 

 

 

 

 

(4,730

)

Net cash used for investing activities

 

$

(245,411

)

 

$

(54,396

)

Financing activities

 

 

 

 

 

 

 

 

Repayment of capital lease obligations

 

 

(1,106

)

 

 

(1,108

)

Payment of debt issuance costs

 

 

(1,481

)

 

 

 

Proceeds from long-term debt

 

 

350,000

 

 

 

 

Repayment of long-term debt

 

 

(20,000

)

 

 

(20,000

)

Proceeds from short-term borrowings

 

 

230,000

 

 

 

105,000

 

Repayment of short-term borrowings

 

 

(185,000

)

 

 

(60,000

)

Proceeds from issuance of common shares under stock-based compensation plans

 

 

10,080

 

 

 

9,388

 

Payment for net settlement of stock-based awards

 

 

(9,949

)

 

 

(14,229

)

Payment of earn-out/deferred consideration

 

 

(1,287

)

 

 

(1,476

)

Dividend paid

 

 

(23,515

)

 

 

(28,648

)

Payment for stock repurchased and retired

 

 

(219,784

)

 

 

(130,103

)

Payment for expenses related to stock repurchase

 

 

(16

)

 

 

(82

)

Net cash provided by/(used for) financing activities

 

$

127,942

 

 

$

(141,258

)

Effect of exchange rate changes

 

 

20,586

 

 

 

(24,395

)

Net increase (decrease) in cash and cash equivalents

 

 

(2,145

)

 

 

(146,170

)

Cash and cash equivalents at the beginning of the period

 

 

422,623

 

 

 

504,468

 

Cash and cash equivalents at the end of the period

 

$

441,064

 

 

$

333,903

 

Supplementary information

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

10,648

 

 

$

21,808

 

Cash paid during the period for income taxes

 

$

28,649

 

 

$

34,809

 

Property, plant and equipment acquired under capital lease obligations

 

$

1,485

 

 

$

668

 

 

See accompanying notes to the Consolidated Financial Statements.

6


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

 

1. Organization

The Company is a global professional services firm that drives digitally-led innovation and runs digitally-enabled intelligent operations for its clients, guided by its experience running thousands of processes for hundreds of Fortune Global 500 clients.  The Company has over 80,000 employees serving clients in key industry verticals from more than 20 countries. 

 

2. Summary of significant accounting policies

 

(a) Basis of preparation and principles of consolidation

 

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

The unaudited interim consolidated financial statements reflect all adjustments that management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for interim periods are not necessarily indicative of results for the full year.

 

The accompanying unaudited interim consolidated financial statements have been prepared on a consolidated basis and reflect the financial statements of Genpact Limited, a Bermuda company, and all of its subsidiaries that are more than 50% owned and controlled. When the Company does not have a controlling interest in an entity but exerts significant influence on the entity, the Company applies the equity method of accounting. All intercompany transactions and balances are eliminated in consolidation.

 

Non-controlling interest in subsidiaries that is redeemable outside of the Company’s control for cash or other assets is reflected in the mezzanine section between liabilities and equity in the consolidated balance sheets at the redeemable value, which approximates fair value. Redeemable non-controlling interest is adjusted to its fair value at each balance sheet date. Any resulting increases or decreases in the estimated redemption amount are affected by corresponding changes to additional paid in capital. The share of non-controlling interest in subsidiary earnings is reflected in net loss (income) attributable to redeemable non-controlling interest in the consolidated statements of income.

 

(b) Use of estimates

 

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, intangibles and goodwill, revenue recognition, reserves for doubtful receivables, valuation allowances for deferred tax assets, the valuation of derivative financial instruments, measurements of stock-based compensation, assets and obligations related to employee benefits, determining the nature and timing of satisfaction of performance obligations, determining the standalone selling price of performance obligations, variable consideration, and other obligations for revenue recognition

7


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

2. Summary of significant accounting policies (Continued)

 

and income tax uncertainties and other contingencies. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates. Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.

 

(c) Business combinations, goodwill and other intangible assets

 

The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations, by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Contingent consideration is included within the acquisition cost and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value as of each reporting date until the contingency is resolved. Changes in fair value are recognized in earnings. All assets and liabilities of the acquired businesses, including goodwill, are assigned to reporting units. Acquisition-related costs are expensed as incurred under selling, general and administrative expenses.

 

Goodwill represents the cost of acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill is not amortized but is tested for impairment at least on an annual basis on December 31, based on a number of factors, including operating results, business plans and future cash flows. The Company performs an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on the assessment of events or circumstances, the Company performs a quantitative assessment of goodwill impairment if it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on the quantitative impairment analysis, the carrying value of the goodwill of a reporting unit exceeds the fair value of such goodwill, an impairment loss is recognized in an amount equal to the excess. In addition, the Company performs a qualitative assessment of goodwill impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. See Note 10 for information and related disclosures.

 

Intangible assets acquired individually or with a group of other assets or in a business combination and developed internally are carried at cost less accumulated amortization based on their estimated useful lives as follows:

 

Customer-related intangible assets

 

1-14 years

Marketing-related intangible assets

 

1-10 years

Technology-related intangible assets

 

2-8 years

Other intangible assets

 

3-5 years

 

 

8


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

2. Summary of significant accounting policies (Continued)

Intangible assets are amortized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.

In business combinations where the fair value of identifiable tangible and intangible net assets purchased exceeds the cost of the acquired business, the Company recognizes the resulting gain under “Other operating (income) expense, net” in the consolidated statements of income.

 

(d) Financial instruments and concentration of credit risk

 

Financial instruments that potentially subject the Company to concentration of credit risk are reflected principally in cash and cash equivalents, derivative financial instruments and accounts receivable. The Company places its cash and cash equivalents and derivative financial instruments with corporations and banks with high investment grade ratings, limits the amount of credit exposure with any one corporation or bank and conducts ongoing evaluations of the creditworthiness of the corporations and banks with which it does business. To reduce its credit risk on accounts receivable, the Company conducts ongoing credit evaluations of its clients. GE accounted for 11% and 12% of receivables as of December 31, 2017 and June 30, 2018, respectively. GE accounted for 10% of total revenue for the six months ended June 30, 2017 and 2018.   

 

(e) Accounts receivable

 

Accounts receivable are recorded at the invoiced or to be invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and clients’ financial condition, the amount of receivables in dispute, and the current receivables’ aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its clients.

 

(f) Changes in accounting policies

 

Except as described below, the Company has applied accounting policies consistently to all periods presented in these consolidated financial statements. The Company adopted Topic 606, Revenue from Contracts with Customers, effective January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The Company applied Topic 606 using the modified retrospective method, which involves recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the Company’s opening equity balance as of January 1, 2018. Therefore, comparative information has not been adjusted and continues to be reported under Topic 605. As a result of the Company’s adoption of this new standard, certain sales incentive programs meet the requirements for capitalization. Such costs are amortized over the period of expected benefit rather than expensed as incurred as was the Company’s prior practice. The cumulative impact of the adoption of this standard resulted in an increase in retained earnings of $17,924 as of January 1, 2018 with a corresponding impact on contract cost assets of $23,227 and deferred tax liabilities of $5,303. As of January 1, 2018, contract assets and contract liabilities of $21,348 relating to the same customer contracts have been offset against each other.

9


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

2. Summary of significant accounting policies (Continued)

 

Revenue Recognition

 

The Company derives its revenue primarily from business process outsourcing and information technology services, which are provided primarily on a time-and-material, transaction or fixed-price basis. The Company recognizes revenue when the promised services are delivered to customers for an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. Revenues from services rendered under time-and-material and transaction-based contracts are recognized as the services are provided. The Company’s fixed-price contracts include contracts for application development, maintenance and support services. Revenues from these contracts are recognized ratably over the term of the agreement. The Company accrues for revenue and unbilled receivables for services rendered between the last billing date and the balance sheet date.

 

The Company’s customer contracts sometimes also include incentive payments received for discrete benefits delivered or promised to be delivered to clients or service level agreements that could result in credits or refunds to the customer. Revenues relating to such arrangements are accounted for as variable consideration when the amount of revenue to be recognized can be estimated to the extent that it is probable that a significant reversal of any incremental revenue will not occur.

 

The Company records deferred revenue attributable to certain process transition activities where such activities do not represent separate performance obligations. Revenues relating to such transition activities are classified under contract liabilities and subsequently recognized ratably over the period in which the related services are performed. Costs relating to such transition activities are fulfillment costs which are directly related to the contract and result in the generation or enhancement of resources. Such costs are expected to be recoverable under the contract and are therefore classified as contract cost assets and recognized ratably over the estimated expected period of benefit under cost of revenue.

 

Revenues are reported net of value-added tax, business tax and applicable discounts and allowances. Reimbursements of out-of-pocket expenses received from clients have been included as part of revenues.

 

Revenue for performance obligations that are satisfied over time is recognized in accordance with the methods prescribed for measuring progress. The input (effort or cost expended) method has been used to measure progress towards completion as there is a direct relationship between input and productivity. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates.

 

The Company enters into multiple-element revenue arrangements in which a client may purchase a combination of products or services. Revenue from multiple-element arrangements is recognized, for each element, based on an allocation of the transaction price to each performance obligation on a relative standalone basis.

 

Certain contracts may include offerings such as sale of licenses, which may be perpetual or subscription-based. Revenue from distinct perpetual licenses is recognized upfront at the point in time when the software is made available to the customer. Revenue from subscription-based licenses is recognized ratably over the subscription term.

 

All incremental and direct costs incurred for acquiring contracts, such as certain sales commissions, are classified as contract cost assets. Such costs are amortized over the expected period of benefit and recorded under selling, general and administrative expenses.

 

Other upfront fees paid to customers are classified as contract assets. Such costs are amortized over the expected period of benefit and recorded as an adjustment to the transaction price and subtracted from revenue.

 

Timing of revenue recognition may differ from the timing of invoicing. If a payment is received in respect of services prior to the delivery of services, the payment is recognized as an advance from customers and classified as a contract liability. Contract assets and contract liabilities relating to the same customer contract are offset against each other and presented on a net basis in the consolidated financial statements. See note 19 for information and related disclosures regarding contract balances.

10


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

2. Summary of significant accounting policies (Continued)

 

For a description of the Company’s revenue recognition accounting policy in effect before the Company’s adoption of ASC 606, see Note 2—“Summary of significant accounting policies” to the consolidated financial statements and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations”—“Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Significant judgements

 

The Company often enters into contracts with customers that include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment.

 

Judgment is also required to determine the standalone selling price for each distinct performance obligation. In instances where the standalone selling price is not directly observable, it is determined using information that may include market conditions and other observable inputs.

 

Customer contracts sometimes include incentive payments received for discrete benefits delivered to clients or service level agreements that could result in credits or refunds to the customer. Such amounts are estimated at contract inception and are adjusted at the end of each reporting period as additional information becomes available only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.

 

Impact on consolidated financial statements

 

The following tables summarize the impact of the Company’s adoption of Topic 606 on its consolidated financial statements for the three and six months ended June 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


11


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

Consolidated Balance Sheet

 

 

As of June 30, 2018

As reported

 

Adjustments

 

Balances without adoption of Topic 606

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

333,903

 

 

 

 

$

333,903

 

Accounts receivable, net

 

691,347

 

 

 

 

 

691,347

 

Prepaid expenses and other current assets (a, c)

 

207,334

 

 

79,777

 

 

287,111

 

Total current assets

$

1,232,584

 

 

79,777

 

$

1,312,361

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

202,669

 

 

 

 

 

202,669

 

Deferred tax assets (b)

 

88,278

 

 

5,635

 

 

93,913

 

Investment in equity affiliates

 

834

 

 

 

 

 

834

 

Intangible assets, net

 

120,624

 

 

 

 

 

120,624

 

Goodwill

 

1,311,361

 

 

 

 

 

1,311,361

 

Contract cost assets (a, b)

 

162,178

 

 

(162,178

)

 

 

Other assets (a, c)

 

147,550

 

 

81,328

 

 

228,878

 

Total assets

$

3,266,078

 

 

4,562

 

$

3,270,640

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

215,000

 

 

 

 

 

215,000

 

Current portion of long-term debt

 

39,249

 

 

 

 

 

39,249

 

Accounts payable

 

20,942

 

 

 

 

 

20,942

 

Income taxes payable

 

54,513

 

 

 

 

 

54,513

 

Accrued expenses and other current liabilities (c)

 

483,241

 

 

10,996

 

 

494,237

 

Total current liabilities

$

812,945

 

 

10,996

 

$

823,941

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

987,314

 

 

 

 

 

987,314

 

Deferred tax liabilities

 

7,036

 

 

 

 

 

7,036

 

Other liabilities (c)

 

162,358

 

 

12,739

 

 

175,097

 

Total liabilities

$

1,969,653

 

 

23,735

 

$

1,993,388

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

Preferred shares, $0.01 par value, 250,000,000 authorized, none issued

 

 

 

 

 

 

 

Common shares, $0.01 par value, 500,000,000 authorized,192,825,207 and  189,876,061 issued and outstanding as of  December 31, 2017 and June 30, 2018, respectively

 

1,895

 

 

 

 

 

1,895

 

Additional paid-in capital

 

1,438,072

 

 

 

 

 

1,438,072

 

Retained earnings (b)

 

338,120

 

 

(19,173

)

 

318,947

 

Accumulated other comprehensive income (loss)

 

(481,662

)

 

 

 

 

(481,662

)

Total equity

$

1,296,425

 

 

(19,173

)

$

1,277,252

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and equity

$

3,266,078

 

 

4,562

 

$

3,270,640

 

(a) As a result of its adoption of ASC 606, the Company has reclassified deferred transition costs from “Prepaid expenses and other current assets” amounting to $68,781 and “Other assets” amounting to $68,589 to “Contract cost assets” amounting to $137,370.

(b) The cumulative impact of the adoption of ASC 606 resulted in a $162,178 increase in "Contract cost assets," which includes the reclassification of $137,370 (refer to note (a) in the table above) and a closing balance of $24,808 related to sales incentive programs, with a corresponding impact on retained earnings of $19,173 and on deferred tax liabilities of $5,635 which has been offset against deferred tax assets.

(c) As a result of its adoption of ASC 606, the Company has offset (i) contract assets amounting to $10,996 under “Prepaid expenses and other current assets” against contract liabilities under “Accrued expenses and other current liabilities” related to the same customer contract and (ii) contract assets amounting to $12,739 under “Other assets” against contract liabilities under “Other liabilities” related to the same customer contract.

 

 

12


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

 

Consolidated Statement of Income

 

 

Three months ended June 30, 2018

As reported

 

Adjustments

 

Balances without adoption of Topic 606

 

Net revenues

$

728,561

 

 

 

 

$

728,561

 

Cost of revenue

 

462,898

 

 

 

 

 

462,898

 

Gross profit

$

265,663

 

 

 

$

265,663

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (d)

 

176,166

 

 

1,537

 

 

177,703

 

Amortization of acquired intangible assets

 

9,826

 

 

 

 

 

9,826

 

Other operating (income) expense, net

 

149

 

 

 

 

 

149

 

Income from operations

$

79,522

 

 

(1,537

)

$

77,985

 

Foreign exchange gains (losses), net

 

2,805

 

 

 

 

 

2,805

 

Interest income (expense), net

 

(10,407

)

 

 

 

 

(10,407

)

Other income (expense), net

 

9,748

 

 

 

 

 

9,748

 

Income before equity-method investment activity, net and income tax expense

$

81,668

 

 

(1,537

)

$

80,131

 

Equity-method investment activity, net

 

(15

)

 

 

 

(15

)

Income before income tax expense

$

81,653

 

 

(1,537

)

$

80,116

 

Income tax expense

 

17,079

 

 

(332

)

 

16,747

 

Net income

$

64,574

 

 

(1,205

)

$

63,369

 

Net loss (income) attributable to non-controlling interest

 

 

 

 

 

 

Net income attributable to Genpact Limited shareholders

$

64,574

 

 

(1,205

)

$

63,369

 

 

 

 

 

 

 

 

 

 

 

(d) During the three months ended June 30, 2018, the Company amortized $3,604 in contract costs related to obtaining a contract. Following the adoption of ASC 606, the Company capitalized such costs in an amount of $5,141, resulting in a net adjustment of $1,537 with a corresponding impact on income tax expense of $332.

 

 

13


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

Consolidated Statement of Income

 

 

Six months ended June 30, 2018

As reported

 

Adjustments

 

Balances without adoption of Topic 606

 

Net revenues

$

1,417,473

 

 

 

 

$

1,417,473

 

Cost of revenue

 

907,222

 

 

 

 

 

907,222

 

Gross profit

$

510,251

 

 

 

$

510,251

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (e)

 

347,275

 

 

1,581

 

 

348,856

 

Amortization of acquired intangible assets

 

19,762

 

 

 

 

 

19,762

 

Other operating (income) expense, net

 

(69

)

 

 

 

 

(69

)

Income from operations

$

143,283

 

 

(1,581

)

$

141,702

 

Foreign exchange gains (losses), net

 

7,603

 

 

 

 

 

7,603

 

Interest income (expense), net

 

(18,507

)

 

 

 

 

(18,507

)

Other income (expense), net

 

25,298

 

 

 

 

 

25,298

 

Income before equity-method investment activity, net and income tax expense

$

157,677

 

 

(1,581

)

$

156,096

 

Equity-method investment activity, net

 

(15

)

 

 

 

(15

)

Income before income tax expense

$

157,662

 

 

(1,581

)

$

156,081

 

Income tax expense

 

29,154

 

 

(332

)

 

28,822

 

Net income

$

128,508

 

 

(1,249

)

$

127,259

 

Net loss (income) attributable to non-controlling interest

 

761

 

 

 

 

761

 

Net income attributable to Genpact Limited shareholders

$

129,269

 

 

(1,249

)

$

128,020

 

 

 

 

 

 

 

 

 

 

 

(e) During the six months ended June 30, 2018, the Company amortized $6,843 in contract costs related to obtaining a contract. Following the adoption of ASC 606, the Company capitalized such costs in an amount of $8,424, resulting in a net adjustment of $1,581 with a corresponding impact on income tax expense of $332.

 

 


14


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

Consolidated Statement of Cash flow

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

As reported

 

Adjustments

 

Balances without adoption of Topic 606

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income attributable to Genpact Limited shareholders (f)

$

129,269

 

 

(1,249

)

$

128,020

 

Net loss attributable to redeemable non-controlling interest

 

(761

)

 

 

 

 

(761

)

Net income  (f)

$

128,508

 

 

(1,249

)

$

127,259

 

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

31,613

 

 

 

 

 

31,613

 

Amortization of debt issuance costs

 

979

 

 

 

 

 

979

 

Amortization of acquired intangible assets

 

19,762

 

 

 

 

 

19,762

 

Write-down of intangible assets and property, plant and equipment

 

850

 

 

 

 

 

850

 

Reserve for doubtful receivables

 

1,347

 

 

 

 

 

1,347

 

Unrealized loss (gain) on revaluation of foreign currency asset/liability

 

(7,350

)

 

 

 

 

(7,350

)

Equity-method investment activity, net

 

15

 

 

 

 

 

15

 

Stock-based compensation expense

 

18,724

 

 

 

 

 

18,724

 

Deferred income taxes (f)

 

(4,194

)

 

(332

)

 

(4,526

)

Others, net

 

294

 

 

 

 

 

294

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

(4,548

)

 

 

 

 

(4,548

)

Increase in prepaid expenses, other current assets, contract cost assets and other assets (f, g)

 

(71,559

)

 

(805

)

 

(72,364

)

Increase in accounts payable

 

6,289

 

 

 

 

 

6,289

 

Decrease in accrued expenses, other current liabilities and other liabilities (g)

 

(96,965

)

 

2,386

 

 

(94,579

)

Increase in income taxes payable

 

25,719

 

 

 

 

 

25,719

 

Net cash provided by operating activities

$

49,484

 

 

 

$

49,484

 

Investing activities

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(37,703

)

 

 

 

 

(37,703

)

Payment for internally generated intangible assets (including intangibles under development)

 

(11,544

)

 

 

 

 

(11,544

)

Proceeds from sale of property, plant and equipment

 

309

 

 

 

 

 

309

 

Payment for business acquisitions, net of cash acquired

 

(728

)

 

 

 

 

(728

)

Payment for redeemable non-controlling interest

 

(4,730

)

 

 

 

 

(4,730

)

Net cash used for investing activities

$

(54,396

)

 

 

$

(54,396

)

Financing activities

 

 

 

 

 

 

 

 

 

Repayment of capital lease obligations

 

(1,108

)

 

 

 

 

(1,108

)

Repayment of long-term debt

 

(20,000

)

 

 

 

 

(20,000

)

Proceeds from short-term borrowings

 

105,000

 

 

 

 

 

105,000

 

Repayment of short-term borrowings

 

(60,000

)

 

 

 

 

(60,000

)

Proceeds from issuance of  common shares under stock-based compensation plans

 

9,388

 

 

 

 

 

9,388

 

Payment for net settlement of stock-based awards

 

(14,229

)

 

 

 

 

(14,229

)

Payment of earn-out/deferred consideration

 

(1,476

)

 

 

 

 

(1,476

)

Dividend paid

 

(28,648

)

 

 

 

 

(28,648

)

Payment for stock repurchased and retired

 

(130,103

)

 

 

 

 

(130,103

)

Payment for expenses related to stock repurchase

 

(82

)

 

 

 

 

(82

)

Net cash used for financing activities

$

(141,258

)

 

 

$

(141,258

)

Effect of exchange rate changes

 

(24,395

)

 

 

 

 

(24,395

)

Net increase (decrease) in cash and cash equivalents

 

(146,170

)

 

 

 

 

(146,170

)

Cash and cash equivalents at the beginning of the period

 

504,468

 

 

 

 

 

504,468

 

Cash and cash equivalents at the end of the period

$

333,903

 

 

 

$

333,903

 

(f) During the six months ended June 30, 2018, the Company amortized $6,843 in contract costs related to obtaining a contract. Following the adoption of ASC 606, the Company capitalized such costs in an amount of $8,424, resulting in a net adjustment of $1,581 and a tax impact of $332 which is further adjusted by note (g) below.

(g) Following the adoption of ASC 606, the Company offset certain contract assets against contract liabilities related to the same customer contract in an amount of $2,386.

 

15


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

 

2. Summary of significant accounting policies (Continued)

 

(g) Recently issued accounting pronouncements

 

The authoritative bodies release standards and guidance which are assessed by management for their impact on the Company’s consolidated financial statements.

 

The Company has adopted the following recently released accounting standards:

 

The Company adopted Topic 606, Revenue from Contracts with Customers, with a date of initial application of January 1, 2018 using the modified retrospective method. The cumulative impact of the adoption of this standard has been described in section (f) above.

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new standard provides guidance to “allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.” The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and the guidance may be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal income tax rate in the Tax Cuts and Jobs Act is recognized. Early adoption is permitted. On January 1, 2018, the Company elected the early adoption of ASU 2018-02, which was adopted at the beginning of the period and no prior periods have been adjusted.

 

In addition, the Company has adopted the following recently released accounting standards. Adoption of these standards did not have a material impact on the Company’s consolidated results of operations, cash flows, financial position or disclosures:

 

Effective January 1, 2017, the Company adopted FASB ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with a four-step decision sequence.

 

Effective January 1, 2018, the Company adopted FASB ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The new guidance revises the definition of a business. The definition of a business affects many areas of accounting (e.g., acquisitions, disposals, goodwill impairment, consolidation).

 

Effective January 1, 2018, the Company adopted FASB ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The new guidance eliminates the exception for deferment of tax recognition until the transferred asset is sold to a third party or otherwise recovered through use for all intra-entity sales of assets other than inventory.

 

Effective January 1, 2018, the Company adopted FASB ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The ASU requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the

16


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

2. Summary of significant accounting policies (Continued)

 

ASU requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines.

 

Effective January 1, 2017, the Company early adopted FASB ASU 2016-15, "Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments." The new guidance is intended to reduce diversity in how certain transactions are classified in the statement of cash flows.

 

The following recently released accounting standards have not yet been adopted by the Company:

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The core principle of the ASU is that a lessee should recognize the assets and liabilities that arise from its leases other than those that meet the definition of a short-term lease. The ASU requires extensive qualitative and quantitative disclosures, including with respect to significant judgments made by management. Subsequently, the FASB issued ASU No. 2017-13, in September 2017, which amends and clarifies ASU 2016-02. The ASU will be effective for the Company beginning January 1, 2019, including interim periods in the fiscal year 2019. Early adoption is permitted. The Company will use a modified retrospective adoption approach. The Company expects to complete its assessment of adopting ASU No. 2016-02 in the third quarter of 2018. The Company’s implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. The Company expects a gross-up on its consolidated statements of financial position upon recognition of the right-of-use assets and lease liabilities. The Company continues to evaluate the impact of its pending adoption of ASU 2016-02, which may identify additional impacts this guidance will have on its consolidated results of operations, cash flows, financial position and disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of credit losses on financial instruments.” The ASU requires measurement and recognition of expected credit losses for financial assets held by the Company. The ASU is effective for the Company beginning January 1, 2020, including interim periods in fiscal year 2020. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its consolidated results of operations, cash flows, financial position and disclosures.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging.” The amendment expands an entity’s ability to hedge accounting to non-financial and financial risk components and requires changes in fair value of hedging instruments to be presented in the same income statement line as the hedged item. The ASU also amends the presentation and disclosure requirements for the effect of hedge accounting. The ASU must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date. The ASU is effective for the Company beginning January 1, 2019, including interim periods in the fiscal year 2019. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its consolidated results of operations, cash flows, financial position and disclosures.

 

(h) Reclassification

 

Certain reclassifications have been made in the consolidated financial statements of prior periods to conform to the classification used in the current period. The impact of such reclassifications on the consolidated financial statements is not material.

 

 

17


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

3. Business acquisitions

 

A. Certain acquisitions

 

(a) Strategic Sourcing Excellence Limited

 

On January 8, 2016, the Company acquired 51% of the outstanding equity interest in Strategic Sourcing Excellence LLC (“SSE”), a Delaware limited liability company. The total consideration paid by the Company to the selling equity holders for the acquired interest in SSE was $14,541. This amount includes the fair value of earn-out consideration, cash consideration of $2,550, adjusted for working capital, transaction expenses, indebtedness and measurement period adjustments which did not have a significant impact on the Company’ consolidated statements of income, balance sheets or cash flows in the adjustment periods. The equity purchase agreement between the Company and the selling equity holders of SSE also provided for contingent earn-out consideration of up to $20,000, payable by the Company to the selling equity holders based on the future performance of the acquired business relative to the thresholds specified in the earn-out calculation. Up to $9,800 of the total potential earn-out consideration, representing the selling equity holders’ redeemable, non-controlling 49% interest in SSE, was payable only if either the put or call option, each as described below, was exercised. This acquisition enhanced the Company’s sourcing and procurement consulting domain expertise.

 

The equity purchase agreement granted the Company a call option to purchase the remaining 49% equity interest in SSE, which the Company had the right to exercise between January 1, 2018 and January 31, 2018. As the Company did not exercise its call option during such period, the selling equity holders exercised their put option on March 1, 2018 in accordance with the terms of the equity purchase agreement to require the Company to purchase their 49% interest in SSE for $2,950. The Company also paid $1,780 in earn-out consideration to the selling equity holders during the three months ended March 31, 2018. The amount paid in excess of carrying amount has been recorded in additional paid-in capital.

 

Acquisition-related costs of $164 have been included in selling, general and administrative expenses as incurred. Through this transaction, the Company acquired assets with a value of $412 and assumed liabilities amounting to $617. The results of operations of the acquired business, the fair value of the acquired assets and assumed liabilities, and redeemable non-controlling interest are included in the Company’s Consolidated Financial Statements with effect from the date of the acquisition.

 

In connection with the transaction, the Company recorded $300 in customer-related intangible assets with an amortization period of five years. Goodwill arising from the acquisition amounted to $14,445, which has been allocated to the Company’s India reporting unit and is deductible for tax purposes. The goodwill represents future economic benefits the Company expects to derive from its expanded presence in the sourcing and procurement consulting domains, operating synergies and other anticipated benefits of combining the acquired operations with those of the Company.

 

(b) TandemSeven, Inc.

 

On September 5, 2017, the Company acquired 100% of the outstanding equity interest in TandemSeven, Inc. (“TandemSeven”), a Massachusetts corporation, for total purchase consideration of $35,637. This amount includes cash consideration of $31,784, net of cash acquired of $3,853, and an adjustment for working capital and indebtedness. During the quarter ended March 31, 2018, the Company recorded certain measurement period adjustments. These adjustments did not have a significant impact on the Company’s consolidated statements of income, balance sheets or cash flows. TandemSeven’s focus on improving the design of customer experiences complements the Company’s existing capabilities aimed at transforming clients’ processes end-to-end.

 

 


18


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

3. Business acquisitions (Continued)

 

In connection with the acquisition of TandemSeven, the Company recorded $2,000 in customer-related intangibles, $1,700 in marketing-related intangibles and $800 in technology-related intangible assets, which have a weighted average amortization period of two years. Goodwill arising from the acquisition amounted to $25,227, which has been allocated to the Company’s India reporting unit and is deductible for tax purposes. The goodwill represents primarily the acquired design expertise, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company.

 

Acquisition-related costs of $932 have been included in selling, general and administrative expenses as incurred. In connection with the transaction, the Company also acquired certain assets with a value of $7,378, assumed certain liabilities amounting to $1,207 and recognized a net deferred tax liability of $260. The results of operations of the acquired business and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the date of the acquisition.

 

(c) BrightClaim LLC and associated companies

 

On May 3, 2017, the Company acquired 100% of the outstanding equity interest in each of BrightClaim LLC, a Delaware limited liability company, BrightServe LLC, a Georgia limited liability company, National Vendor LLC, a Delaware limited liability company, and BrightClaim Blocker, Inc., a Delaware corporation (collectively referred to as “BrightClaim”) for total purchase consideration of $56,461. This amount includes cash consideration of $52,395, net of cash acquired of $4,002, adjusted for working capital, net debt, transaction expenses and measurement period adjustments which did not have a significant impact on the Company’ consolidated statements of income, balance sheets or cash flows in the period of adjustments. This acquisition enhanced the Company’s breadth and depth of service offerings for clients in the insurance industry.

 

In connection with the acquisition of BrightClaim, the Company recorded $8,000 in customer-related intangibles, $3,200 in marketing related intangibles, $2,200 in technology-related intangibles and $200 in other intangibles, which have a weighted average amortization period of four years. Goodwill arising from the acquisition amounted to $42,638, which has been allocated to the Company’s India reporting unit and is partially deductible for tax purposes. The goodwill represents primarily the capabilities, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company.

 

Acquisition-related costs of $1,563 have been included in selling, general and administrative expenses as incurred. In connection with the transaction, the Company also acquired certain assets with a value of $10,367, assumed certain liabilities amounting to $7,415, and recognized a net deferred tax liability of $2,728. The results of operations of the acquired business and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the date of the acquisition.

 

(d) RAGE Frameworks, Inc.

 

On April 13, 2017, the Company acquired 100% of the outstanding equity interest in RAGE Frameworks, Inc. (“RAGE”), a Delaware corporation, for total consideration of $125,329. This amount includes cash consideration of $124,149, net of cash acquired of $1,605, and an adjustment for working capital and indebtedness. During the quarters ended December 31, 2017 and June 30, 2018, the Company recorded certain measurement period adjustments. These measurement period adjustments did not have a significant impact on the Company’s consolidated statements of income, balance sheets or cash flows. This acquisition enhances the Company’s digital and artificial intelligence capabilities by adding knowledge-based automation technology and services.

 

 


19


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

3. Business acquisitions (Continued)

 

In connection with the acquisition of RAGE, the Company recorded $1,600 in customer-related intangibles, $600 in marketing-related intangibles, $12,400 in technology-related intangible assets and $100 in other intangible assets, which have a weighted average amortization period of seven years. Goodwill arising from the acquisition amounted to $105,451, which has been allocated to the Company’s India reporting unit and is not deductible for tax purposes. The goodwill represents primarily the acquired digital and artificial intelligence capabilities, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company.

 

Acquisition-related costs of $881 have been included in selling, general and administrative expenses as incurred. In connection with the transaction, the Company also acquired certain assets with a value of $13,836 and assumed certain liabilities amounting to $9,752. The Company also recognized a net deferred tax asset of $1,094. The results of operations of the acquired business and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the date of the acquisition.

 

(e) Other acquisitions in 2017

 

In 2017, the Company also completed five individually immaterial business acquisition transactions, namely the acquisition of a supply chain management delivery center in the U.S. (“U.S. Delivery Center”), the purchase of all of the outstanding equity interest in OnSource, LLC (“OnSource”), the purchase of the IT business of Birlasoft (“Birlasoft”), the purchase of the image processing business of Fiserv Solutions of Australia Pty Ltd. (“Fiserv”) and the purchase of all of the outstanding equity interest in Lease Dimensions, Inc. (“Lease Dimensions”). The aggregate total estimated consideration the Company paid to consummate these acquisitions was $87,586. This aggregate amount includes the estimated fair value of contingent earn-out consideration, cash consideration of $76,612, net of cash acquired of $254, and adjustments for closing date working capital, indebtedness, value transfer, seller transaction expenses and certain employee-related liabilities. In addition, this amount reflects measurement period adjustments related to the Birlasoft and Fiserv transactions. These adjustments did not have a significant impact on the Company’s consolidated statements of income, balance sheets or cash flows in the periods in which they were made.

 

The U.S. Delivery Center acquisition enhanced the Company’s supply chain management capabilities for its clients in the consumer packaged goods industry. The OnSource acquisition brought incremental digital capabilities to the Company’s insurance service offerings. The Birlasoft transaction expanded the Company’s end-to-end capabilities for its clients in the healthcare and aviation industries. The Fiserv transaction strengthened the Company’s financial services portfolio and expanded its Australia footprint. The Lease Dimensions acquisition enhanced the Company’s capabilities in commercial lending and leasing.

 

The purchase agreement for the acquisition of the U.S. Delivery Center provides for contingent earn-out consideration ranging from $0 to $10,000, payable by the Company to the seller based on the achievement of certain milestones relative to the thresholds specified in the earn-out calculation. The purchase agreement for the Lease Dimensions acquisition provides for contingent earn-out consideration ranging from $0 to $3,000, payable by the Company to the sellers based on the future performance of the business relative to the thresholds specified in the earn-out calculation.

 

In connection with these transactions, the Company recorded $33,494 in customer-related intangibles, $1,936 in marketing-related intangibles, $2,956 in technology-related intangibles and $100 in other intangibles, which have a weighted average amortization period of five years. Goodwill arising from these acquisitions amounted to $56,521. The goodwill represents primarily the capabilities, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company.


20


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

3. Business acquisitions (Continued)

 

The following table sets forth, with respect to each of the five acquisitions, the acquisition date, goodwill reporting unit and the tax deductibility of the goodwill:

 

Acquisition

Acquisition date

Goodwill reporting unit

Tax deductibility - goodwill

U.S. Delivery Center

October 16, 2017

India

Deductible

OnSource

July 18, 2017

India

Deductible

Birlasoft

July 18, 2017

IT Services

Deductible

Fiserv

May 11, 2017

India

Non-deductible

Lease Dimensions

February 15, 2017

Americas

Non-deductible

 

Acquisition-related costs for these acquisitions, amounting to $2,369 in the aggregate, have been included in selling, general and administrative expenses as incurred. Through these transactions, the Company acquired assets with a value of $10,387, assumed liabilities amounting to $11,239, and recognized a net deferred tax liability of $6,570. The results of operations of the acquired businesses and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the respective dates of the acquisitions.

 

B. Divestiture

 

(a) A portion of IT support business in Europe

 

In November 2017, the Company completed the sale of a portion of its legacy IT support business in Europe (the “Business”). Sale proceeds were $0. During the year ended December 31, 2017, the Business recorded net revenues of $4,546 and a net loss of $9,706.

 

The Company recorded a loss of $5,668 in its consolidated statement of income in connection with the sale of the Business, calculated as follows:

 

Net sale proceeds

 

$

               —

Net assets of the business, including the translation impact thereof

 

 

5,569

Selling expenses

 

 

99

Loss on divestiture included in other income (expense), net

 

$

        5,668

 

 

21


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

4. Cash and cash equivalents

Cash and cash equivalents as of December 31, 2017 and June 30, 2018 are set out in the table below:

 

 

 

As of December 31,

 

 

As of June 30,

 

 

 

2017

 

 

2018

 

Cash and other bank balances

 

 

504,468

 

 

 

333,903

 

Total

 

$

504,468

 

 

$

333,903

 

 

5. Accounts receivable, net of reserve for doubtful receivables

The following table provides details of the Company’s reserve for doubtful receivables:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2017

 

 

Six months

ended June 30, 2018

 

Opening balance as of January 1

 

$

15,519

 

 

$

23,660

 

Additions due to acquisitions

 

 

235

 

 

 

 

Additions charged/reversal released to cost and expense

 

 

9,819

 

 

 

1,347

 

Deductions/effect of exchange rate fluctuations

 

 

(1,913

)

 

 

(617

)

Closing balance

 

$

23,660

 

 

$

24,390

 

 

Accounts receivable were $716,745 and $715,737, and reserves for doubtful receivables were $23,660 and $24,390, resulting in net accounts receivable balances of $693,085 and $691,347 as of December 31, 2017 and June 30, 2018, respectively. In addition, accounts receivable due after one year amounting to $1,624 and $3,880 as of December 31, 2017 and June 30, 2018, respectively, are included under other assets in the consolidated balance sheets.

 

Accounts receivable from related parties were $36 and $183 as of December 31, 2017 and June 30, 2018, respectively.  There are no doubtful receivables in amounts due from related parties.

 

6. Fair value measurements

 

The Company measures certain financial assets and liabilities, including derivative instruments, at fair value on a recurring basis. The fair value measurements of these financial assets and liabilities were determined using the following inputs as of December 31, 2017 and June 30, 2018:

 

 

 

As of December 31, 2017

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

 

 

Significant Other

Observable Inputs

 

 

Significant Other

Unobservable

Inputs

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments (Note a, c)

 

$

73,098

 

 

$

 

 

$

73,098

 

 

$

 

Total

 

$

     73,098

 

 

$

 

 

$

73,098

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out consideration (Note b, d)

 

$

24,732

 

 

$

 

 

$

 

 

$

24,732

 

Derivative instruments (Note b, c)

 

$

18,188

 

 

$

 

 

$

18,188

 

 

$

 

Total

 

$

42,920

 

 

$

 

 

$

18,188

 

 

$

24,732

 

Redeemable non-controlling interest (Note e)

 

$

4,750

 

 

$

 

 

$

 

 

$

4,750

 

22


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

6. Fair value measurements (Continued)

 

 

 

As of June 30, 2018

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

 

 

Significant Other

Observable Inputs

 

 

Significant Other

Unobservable

Inputs

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments (Note a, c)

 

$

32,095

 

 

$

 

 

$

32,095

 

 

$

 

Total

 

$

32,095

 

 

$

 

 

$

32,095

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out consideration (Note b, d)

 

$

23,609

 

 

$

 

 

$

 

 

$

23,609

 

Derivative instruments (Note b, c)

 

$

49,378

 

 

$

 

 

$

49,378

 

 

$

 

Total

 

$

72,987

 

 

$

 

 

$

49,378

 

 

$

23,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Included in prepaid expenses and other current assets and other assets in the consolidated balance sheets.

(b)

Included in accrued expenses and other current liabilities and other liabilities in the consolidated balance sheets.

(c)

The Company values its derivative instruments based on market observable inputs, including both forward and spot prices for the relevant currencies and interest rate indices for relevant interest rates. The quotes are taken from an independent market database.

(d)

The fair value of earn-out consideration, calculated as the present value of expected future payments to be made to the sellers of acquired businesses, was derived by estimating the future financial performance of the acquired businesses using the earn-out formula and performance targets specified in each purchase agreement and adjusting the result to reflect the Company’s estimate of the likelihood of achievement of such targets. Given the significance of the unobservable inputs, the valuations are classified in level 3 of the fair value hierarchy.

(e)

The Company’s estimate of the fair value of redeemable non-controlling interest is based on unobservable inputs considering the assumptions that market participants would make in pricing the obligation. Given the significance of the unobservable inputs, the valuation is classified in level 3 of the fair value hierarchy. See Note 3—Business Acquisitions.

 

The following table provides a roll-forward of the fair value of earn-out consideration categorized as level 3 in the fair value hierarchy for the three and six months ended June 30, 2017 and 2018:

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Opening balance

 

$

21,262

 

 

$

23,900

 

 

$

22,435

 

 

$

24,732

 

Earn-out consideration payable in connection with acquisitions

 

 

 

 

 

 

 

 

2,320

 

 

 

 

Payments made on earn-out consideration

 

 

(275

)

 

 

 

 

 

(1,482

)

 

 

(1,476

)

Change in fair value of earn-out consideration (Note a)

 

 

1,713

 

 

 

(650

)

 

 

(1,425

)

 

 

(633

)

Others (Note b)

 

 

574

 

 

 

359

 

 

 

1,426

 

 

 

986

 

Ending balance

 

$

23,274

 

 

$

23,609

 

 

$

23,274

 

 

$

23,609

 

23


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

(a) Changes in the fair value of earn-out consideration are reported in other operating (income) expense, net in the consolidated statements of income.

(b) Others is comprised of interest expense included in “interest income (expense), net” and the impact of changes in foreign exchange reported in “foreign exchange gains (losses), net” in the consolidated statements of income. This change also includes a cumulative translation adjustment reported as a component of other comprehensive income (loss).

 

7. Derivative financial instruments

 

The Company is exposed to the risk of rate fluctuations on its foreign currency assets and liabilities and on foreign currency denominated forecasted cash flows and interest rate. The Company has established risk management policies, including the use of derivative financial instruments to hedge foreign currency assets and liabilities, foreign currency denominated forecasted cash flows and interest rate risk. These derivative financial instruments are largely deliverable and non-deliverable forward foreign exchange contracts and interest rate swaps. The Company enters into these contracts with counterparties that are banks or other financial institutions, and the Company considers the risk of non-performance by such counterparties not to be material. The forward foreign exchange contracts and interest rate swaps mature during a period of up to 54 months and the forecasted transactions are expected to occur during the same period.

 

The following table presents the aggregate notional principal amounts of outstanding derivative financial instruments together with the related balance sheet exposure: 

 

 

 

Notional principal amounts

(note a)

 

 

Balance sheet exposure asset

(liability)  (note b)

 

 

 

As of December 31,

2017

 

 

As of June 30,

2018

 

 

As of December 31,

2017

 

 

As of June 30,

2018

 

Foreign exchange forward contracts denominated in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States Dollars (sell) Indian Rupees (buy)

 

$

1,289,400

 

 

$

1,255,200

 

 

$

54,398

 

 

$

(28,423

)

United States Dollars (sell) Mexican Peso (buy)

 

 

9,000

 

 

 

6,000

 

 

 

(441

)

 

 

(72

)

United States Dollars (sell) Philippines Peso (buy)

 

 

76,650

 

 

 

58,250

 

 

 

69

 

 

 

(3,309

)

Euro (sell) United States Dollars (buy)

 

 

170,542

 

 

 

134,950

 

 

 

(2,069

)

 

 

3,715

 

Pound Sterling (buy) United States Dollars (sell)

 

 

24,041

 

 

 

27,675

 

 

 

253

 

 

 

(1,333

)

Euro (sell) Romanian Leu (buy)

 

 

35,826

 

 

 

20,929

 

 

 

(892

)

 

 

(267

)

Japanese Yen (sell) Chinese Renminbi (buy)

 

 

60,768

 

 

 

47,243

 

 

 

1,918

 

 

 

(418

)

Pound Sterling (sell) United States Dollars (buy)

 

 

80,871

 

 

 

54,194

 

 

 

(2,478

)

 

 

(460

)

Australian Dollars (sell) United States Dollars (buy)

 

 

136,092

 

 

 

102,782

 

 

 

(5,180

)

 

 

1,435

 

Interest rate swaps (floating to fixed)

 

 

432,117

 

 

 

419,771

 

 

 

9,332

 

 

 

11,849

 

 

 

 

 

 

 

 

 

 

 

 

54,910

 

 

 

(17,283

)

 

(a)

Notional amounts are key elements of derivative financial instrument agreements but do not represent the amount exchanged by counterparties and do not measure the Company’s exposure to credit foreign exchange, interest rate or market risks. However, the amounts exchanged are based on the notional amounts and other provisions of the underlying derivative financial instrument agreements.

(b)

Balance sheet exposure is denominated in U.S. dollars and denotes the mark-to-market impact of the derivative financial instruments on the reporting date.

 

FASB guidance on derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. In accordance with the FASB guidance on derivatives and hedging, the Company designates foreign exchange forward contracts and interest rate swaps as cash flow hedges. Foreign exchange forward contracts are entered into to cover the effects of future exchange rate variability on forecasted revenues and purchases of services, and interest rate swaps are entered into to cover interest rate fluctuation risk. In addition to this program, the Company uses derivative instruments that are not accounted for as hedges under the FASB guidance in order to hedge foreign exchange risks related to balance sheet items, such as receivables and intercompany borrowings, that are denominated in currencies other than the Company’s underlying functional currency.

24


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

7. Derivative financial instruments (Continued)

 

The fair value of the Company’s derivative instruments and their location in the Company’s financial statements are summarized in the table below:

 

 

 

Cash flow hedges

 

 

Non-designated

 

 

 

As of December 31,

2017

 

 

As of June 30,

2018

 

 

As of December 31,

2017

 

 

As of June 30,

2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

43,557

 

 

$

18,782

 

 

$

4,635

 

 

$

1,655

 

Other assets

 

$

24,906

 

 

$

11,658

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

$

10,092

 

 

$

16,099

 

 

$

254

 

 

$

8,661

 

Other liabilities

 

$

7,842

 

 

$

24,618

 

 

$

 

 

$

 

 

Cash flow hedges

 

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain (loss) on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is recognized in the consolidated statements of income. Gains (losses) on the derivatives, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in earnings as incurred.

 

In connection with cash flow hedges, the gains (losses) recorded as a component of other comprehensive income (loss), or OCI, and the related tax effects are summarized below: 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

Before-Tax amount

 

Tax (Expense) or Benefit

 

Net of tax Amount

 

Before-Tax amount

 

Tax (Expense) or Benefit

 

 

Net of tax Amount

 

Before-Tax

amount

 

Tax (Expense) or Benefit

 

Net of tax Amount

 

Before-Tax

amount

 

Tax (Expense) or Benefit

 

Net of tax Amount

 

Opening balance

 

$

67,674

 

$

(25,334

)

$

42,340

 

$

26,357

 

$

(6,931

)

 

$

19,426

 

$

37,461

 

$

(13,979

)

$

23,482

 

$

50,529

 

$

(14,436

)

$

36,093

 

Adoption of ASU 2018-02 (refer to note 24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,265

 

 

2,265

 

Net gains (losses) reclassified into statement of

income on completion of hedged transactions

 

 

15,505

 

 

(5,667

)

 

9,838

 

 

4,282

 

 

(760

)

 

 

3,522

 

 

24,800

 

 

(9,099

)

 

15,701

 

 

12,561

 

 

(2,376

)

 

10,185

 

Changes in fair value of effective portion of

outstanding derivatives, net

 

 

(2

)

 

229

 

 

227

 

 

(32,352

)

 

7,995

 

 

 

(24,357

)

 

39,506

 

 

(14,558

)

 

24,948

 

 

(48,245

)

 

11,619

 

 

(36,626

)

Gain (loss) on cash flow hedging derivatives, net

 

 

(15,507

)

 

5,896

 

 

(9,611

)

 

(36,634

)

 

8,755

 

 

 

(27,879

)

 

14,706

 

 

(5,459

)

 

9,247

 

 

(60,806

)

 

13,995

 

 

(46,811

)

Closing balance

 

$

52,167

 

$

(19,438

)

$

32,729

 

$

(10,277

)

$

1,824

 

 

$

(8,453

)

$

52,167

 

$

(19,438

)

$

32,729

 

$

(10,277

)

$

1,824

 

$

(8,453

)

 

 

 

25


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

7. Derivative financial instruments (Continued)

 

The Company’s gains or losses recognized in other comprehensive income (loss) and their effects on financial performance are summarized below: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

 

 

 

Amount of Gain (Loss) reclassified

 

 

 

recognized in OCI on

 

 

Location of Gain (Loss)

 

from OCI into Statement of Income

 

 

Derivatives in

Derivatives (Effective Portion)

 

 

reclassified

 

(Effective Portion)

 

 

Cash Flow

Three months ended

 

 

Six months ended

 

 

from OCI into

 

Three months ended

 

 

Six months ended

 

 

Hedging

June 30,

 

 

June 30,

 

 

Statement of Income

 

June 30,

 

 

June 30,

 

 

Relationships

2017

 

 

2018

 

 

2017

 

 

2018

 

 

(Effective Portion)

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

Forward foreign

exchange contracts

$

1,615

 

 

$

(33,541

)

 

$

40,911

 

 

$

(52,220

)

 

Revenue

 

$

2,266

 

 

$

(1,295

)

 

$

6,026

 

 

$

(2,769

)

 

Interest rate swaps

 

(1,617

)

 

 

1,189

 

 

 

(1,405

)

 

 

3,975

 

 

Cost of revenue

 

 

10,419

 

 

 

3,678

 

 

 

14,989

 

 

 

10,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and

administrative expenses

 

 

2,907

 

 

$

991

 

 

 

4,155

 

 

 

2,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(87

)

 

 

908

 

 

 

(370

)

 

 

1,457

 

 

 

$

(2

)

 

$

(32,352

)

 

$

39,506

 

 

$

(48,245

)

 

 

 

$

15,505

 

 

$

4,282

 

 

$

24,800

 

 

$

12,561

 

 

 

There are no gains (losses) recognized in income on the ineffective portion of derivatives and excluded from effectiveness testing for the three and six months ended June 30, 2017 and 2018, respectively.

 

Non-designated Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss) recognized in Statement of Income on Derivatives

 

 

 

 

 

Three months ended

June 30,

 

 

Six months ended June 30,

 

Derivatives not designated as hedging instruments

 

Location of Gain (Loss)  recognized in Statement of Income on Derivatives

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Forward foreign exchange

   contracts (Note a)

 

Foreign exchange gains

   (losses), net

 

$

1,203

 

 

$

(12,541

)

 

$

10,113

 

 

$

(16,829

)

 

 

 

 

$

1,203

 

 

$

(12,541

)

 

$

10,113

 

 

$

(16,829

)

 

(a)

These forward foreign exchange contracts were entered into to hedge fluctuations in foreign exchange rates for recognized balance sheet items such as receivables and intercompany borrowings, and were not originally designated as hedges under FASB guidance on derivatives and hedging. Realized gains (losses) and changes in the fair value of these derivatives are recorded in foreign exchange gains (losses), net in the consolidated statements of income.

26


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

8. Prepaid expenses and other current assets

 

Prepaid expenses and other current assets consist of the following:

 

 

 

As of December 31,

 

 

As of June 30,

 

 

 

2017

 

 

2018

 

Advance income and non-income taxes

 

$

51,832

 

 

$

76,368

 

Deferred transition costs

 

 

62,029

 

 

 

 

Contract asset (Note 19)

 

 

 

 

 

14,454

 

Customer acquisition cost

 

 

19,327

 

 

 

 

Prepaid expenses

 

 

16,944

 

 

 

28,793

 

Derivative instruments

 

 

48,192

 

 

 

20,437

 

Employee advances

 

 

5,014

 

 

 

3,425

 

Deposits

 

 

4,719

 

 

 

7,783

 

Advances to suppliers

 

 

2,705

 

 

 

5,668

 

Others

 

 

25,580

 

 

 

50,406

 

 

 

$

236,342

 

 

$

207,334

 

 

9. Property, plant and equipment, net

 

The following table provides the gross and net amount of property, plant and equipment:

 

 

 

As of December 31,

 

 

As of June 30,

 

 

 

2017

 

 

2018

 

Property, plant and equipment, gross

 

$

666,031

 

 

$

656,348

 

Less: Accumulated depreciation and amortization

 

 

(459,001

)

 

 

(453,679

)

Property, plant and equipment, net

 

$

207,030

 

 

$

202,669

 

 

Depreciation expense on property, plant and equipment for the six months ended June 30, 2017 and 2018 was $21,212 and $24,634, respectively, and for the three months ended June 30, 2017 and 2018 was $9,983 and $12,360, respectively.  Computer software amortization for the six months ended June 30, 2017 and 2018 amounted to $5,406 and $5,573, respectively, and for the three months ended June 30, 2017 and 2018 amounted to $2,727 and $ 2,760, respectively.  

 

The depreciation and amortization expenses set forth above include the effect of the reclassification of foreign exchange (gains) losses related to the effective portion of foreign currency derivative contracts, amounting to $(694) and $(502) for the six months ended June 30, 2017 and 2018, respectively and $(466) and $(162) for the three months ended June 30, 2017 and 2018, respectively.

 

  During the three months ended June 30, 2018, the Company tested for recoverability a group of assets, comprised of computer software and a technology-related intangible asset, as a result of the termination of related customer contracts. Based on the results of its testing, the Company determined that the carrying value of the group of assets was not recoverable and the Company recorded a complete write-down of the carrying value of $850. This write-down has been recorded in other operating (income) expenses, net in the consolidated statement of income and has been allocated to computer software and technology-related intangible assets, amounting to $512 and $338, respectively.

  

27


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

10. Goodwill and intangible assets

 

The following table presents the changes in goodwill for the year ended December 31, 2017 and six months ended June 30, 2018:

 

 

 

As of December 31,

 

 

As of June 30,

 

 

 

2017

 

 

2018

 

Opening balance

 

$

1,069,408

 

 

$

1,337,122

 

Goodwill relating to acquisitions consummated during the period

 

 

229,745

 

 

 

 

Impact of measurement period adjustments

 

 

(106

)

 

 

254

 

Effect of exchange rate fluctuations

 

 

38,075

 

 

 

(26,015

)

Closing balance

 

$

1,337,122

 

 

$

1,311,361

 

 

 

The total amount of goodwill deductible for tax purposes was $120,617 and $130,160 as of December 31, 2017 and June 30, 2018, respectively.

 

The Company’s intangible assets are as follows:

 

 

 

As of December 31, 2017

 

 

As of June 30, 2018

 

 

 

Gross carrying amount

 

 

Accumulated amortization & Impairment

 

 

Net

 

 

Gross carrying amount

 

 

Accumulated amortization & Impairment

 

 

Net

 

Customer-related intangible assets

 

$

369,173

 

 

$

293,029

 

 

$

76,144

 

 

$

358,968

 

 

$

296,603

 

 

$

62,365

 

Marketing-related intangible assets

 

 

52,443

 

 

 

39,212

 

 

 

13,231

 

 

 

51,699

 

 

 

41,063

 

 

 

10,636

 

Technology-related intangible assets

 

 

54,189

 

 

 

28,278

 

 

 

25,911

 

 

 

55,826

 

 

 

33,628

 

 

 

22,198

 

Other intangible assets

 

 

3,081

 

 

 

2,314

 

 

 

767

 

 

 

2,315

 

 

 

1,917

 

 

 

398

 

Intangible assets under development

 

 

15,537

 

 

 

-

 

 

 

15,537

 

 

 

25,027

 

 

 

-

 

 

 

25,027

 

 

 

 

494,423

 

 

 

362,833

 

 

$

131,590

 

 

$

493,835

 

 

$

373,211

 

 

$

120,624

 

 

Amortization expenses for intangible assets disclosed in the consolidated statements of income under amortization of acquired intangible assets for the six months ended June 30, 2017 and 2018 were $15,629 and $19,762, respectively, and for the three months ended June 30, 2017 and 2018 were $8,387 and $9,826, respectively.  

 

Amortization expenses for technology-related, internally-developed intangible assets disclosed in the consolidated statements of income under cost of revenue and selling, general and administrative expenses for the six months ended June 30, 2017, and 2018 were $0, and $ 890, respectively, and for the three months ended June 30, 2017 and 2018 were $0, and $490 , respectively.

 

Amortization expenses for the technology-related internally-developed intangible assets set forth above include the effect of the reclassification of foreign exchange (gains) losses related to the effective portion of foreign currency derivative contracts, amounting to $0 and $(14) for the six months ended June 30, 2017 and 2018, respectively, and $0 and $(5) for the three months ended June 30, 2017 and 2018, respectively.

 

The Company recorded a write-down to a technology-related intangible asset during the three months ended June 30, 2018, as described in note 9.

  

28


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

11. Short-term borrowings

 

The Company has the following borrowing facilities:

 

 

(a)

Fund-based and non-fund-based credit facilities with banks, which are available for operational requirements in the form of overdrafts, letters of credit, guarantees and short-term loans. As of December 31, 2017 and June 30, 2018, the limits available were $15,064 and $14,486, respectively, of which $7,900 and $7,588 was utilized, constituting non-funded drawdown.

 

 

(b)

A fund-based and non-fund based revolving credit facility of $350,000, which the Company obtained in June 2015 as described in note 12. As of December 31, 2017 and June 30, 2018, a total of $170,978 and $217,098 respectively, was utilized, of which $170,000 and $215,000, respectively, constituted funded drawdown and $978 and $2,098, respectively, constituted non-funded drawdown. The revolving facility expires in June 2020. The funded drawdown amount bore interest at a rate equal to LIBOR plus a margin of 1.50% per annum as of December 31, 2017 and June 30, 2018. The unutilized amount on the revolving facility bore a commitment fee of 0.25% as of December 31, 2017 and June 30, 2018. The credit agreement contains certain customary covenants, including a maximum leverage covenant and a minimum interest coverage ratio. During the six months ended June 30, 2018, the Company was in compliance with the financial covenants.      

 

12. Long-term debt

 

In June 2015, the Company refinanced its 2012 credit facility through a new credit facility comprised of an $800,000 term loan and a $350,000 revolving credit facility. Borrowings under the new facility bear interest at a rate equal to, at the election of the Company, either LIBOR plus an applicable margin equal to 1.50% per annum or a base rate plus an applicable margin equal to 0.50% per annum, in each case subject to adjustment based on the Company’s debt ratings provided by Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. Based on the Company’s election and then current credit rating, the applicable interest rate is equal to LIBOR plus 1.50% per annum. The credit agreement contains certain customary covenants, and during the six months ended June 30, 2018, the Company was in compliance with the financial covenants of the credit agreement.

 

As of December 31, 2017 and June 30, 2018, the amount outstanding under the term loan, net of debt amortization expense of $1,848 and $1,459, was $698,152 and $678,541, respectively. As of December 31, 2017 and June 30, 2018, the term loan bore interest at a rate equal to LIBOR plus a margin of 1.50% per annum based on the Company’s election and current credit rating. Indebtedness under the refinanced facility is unsecured. The amount outstanding on the term loan as of June 30, 2018 requires quarterly payments of $10,000, and the balance of the loan is due and payable upon the maturity of the term loan on June 30, 2020.

 

The maturity profile of the term loan outstanding as of June 30, 2018, net of debt amortization expense, is as follows:

 

Year ended

 

Amount

 

2018

 

 

19,616

 

2019

 

 

39,272

 

2020

 

 

619,653

 

Total

 

$

678,541

 

 

In March 2017, Genpact Luxembourg S.à r.l. (the “Issuer”), a wholly owned subsidiary of the Company, issued $350,000 aggregate principal amount of 3.70% senior notes in a private offering, resulting in cash proceeds of approximately $348,519, net of an underwriting fee of $1,481. The issuance was fully guaranteed by the Company. In connection with the offering, the Company incurred other debt issuance costs of $1,161. The total debt issuance cost of $2,642 is being amortized over the life of the notes as additional interest expense. As of December 31, 2017 and June 30, 2018, the amount outstanding under the notes, net of debt amortization expense of $2,239 and $1,978, was $347,761 and $348,022 respectively, which is payable on April 1, 2022. The Issuer will pay interest on the notes semi-annually in arrears on April 1 and October 1 of each year, ending on the maturity date of April 1, 2022. The Company, at its option,

29


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

may redeem the notes at any time in whole or in part, at a redemption price equal to (i) 100% of the principal amount of the notes

 

12. Long-term debt (Continued)

 

redeemed, together with accrued and unpaid interest on the redeemed amount, and (ii) if the notes are redeemed prior to March 1, 2022, a specified “make-whole” premium. The notes are subject to certain customary covenants, including limitations on the ability of the Company and certain of its subsidiaries to incur debt secured by liens, engage in certain sale and leaseback transactions and consolidate, merge, convey or transfer their assets, and during the six months ended June 30, 2018, the Company and its applicable subsidiaries were in compliance with the covenants. Upon certain change of control transactions, the Issuer will be required to make an offer to repurchase the notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest.  The interest rate payable on the notes is subject to adjustment if the credit rating of the notes is downgraded, up to a maximum increase of 2.0%. In connection with the 3.70% senior notes private offering, the Issuer and the Company entered into a registration rights agreement with the initial purchasers of the outstanding unregistered notes pursuant to which the Issuer and the Company agreed to complete an exchange offer within 455 days after the date of the private offering upon terms identical in all material respects to the terms of the outstanding unregistered notes, except that the transfer restrictions, registration rights and additional interest provisions applicable to the outstanding unregistered notes would not apply to the exchange notes. On July 24, 2018, the unregistered notes exchange offer was completed and all outstanding unregistered notes were exchanged for freely tradable notes registered under the Securities Act of 1933, as amended.

13. Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

As of December 31,

 

 

As of June 30,

 

 

 

2017

 

 

2018

 

Accrued expenses

 

$

204,997

 

 

$

169,986

 

Accrued employee cost

 

 

204,506

 

 

 

131,085

 

Earn-out consideration

 

 

14,928

 

 

 

17,938

 

Statutory liabilities

 

 

36,283

 

 

 

30,556

 

Retirement benefits

 

 

21,074

 

 

 

21,272

 

Derivative instruments

 

 

10,346

 

 

 

24,760

 

Advance from customers

 

 

25,476

 

 

 

 

Contract liabilities (Note 19)

 

 

 

 

 

74,682

 

Deferred transition revenue

 

 

52,233

 

 

 

 

Other liabilities

 

 

13,093

 

 

 

11,529

 

Capital lease obligations

 

 

1,546

 

 

 

1,433

 

 

 

$

584,482

 

 

$

483,241

 

 

30


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

14. Other liabilities

 

Other liabilities consist of the following:

 

 

 

As of December 31,

 

 

As of June 30,

 

 

 

2017

 

 

2018

 

Accrued employee cost

 

$

14,020

 

 

$

10,133

 

Earn-out consideration

 

 

9,804

 

 

 

5,671

 

Retirement benefits

 

 

40,520

 

 

 

43,726

 

Derivative instruments

 

 

7,842

 

 

 

24,618

 

Advance from customers

 

 

790

 

 

 

 

Contract liabilities (Note 19)

 

 

 

 

 

54,621

 

Deferred transition revenue

 

 

70,900

 

 

 

 

Others

 

 

22,069

 

 

 

21,494

 

Capital lease obligations

 

 

2,664

 

 

 

2,095

 

 

 

$

168,609

 

 

$

162,358

 

 

15. Employee benefit plans

 

The Company has employee benefit plans in the form of certain statutory and other schemes covering its employees.

 

Defined benefit plans

 

In accordance with Indian law, the Company maintains a defined benefit retirement plan covering substantially all of its Indian employees. In accordance with Mexican law, the Company provides termination benefits to all of its Mexican employees. In addition, certain of the Company’s subsidiaries in the Philippines and Japan sponsor defined benefit retirement programs.

 

Net defined benefit plan costs for the three and six months ended June 30, 2017 and 2018 include the following components:

 

 

Three months ended June 30,

 

 

 

Six months ended June 30,

 

 

2017

 

 

2018

 

 

 

2017

 

 

2018

 

Service costs

$

1,857

 

 

$

2,058

 

 

 

$

3,577

 

 

$

4,053

 

Interest costs

 

793

 

 

 

939

 

 

 

 

1,527

 

 

 

1,934

 

Amortization of actuarial loss

 

227

 

 

 

235

 

 

 

 

432

 

 

 

555

 

Expected return on plan assets

 

(539

)

 

 

(744

)

 

 

 

(1,031

)

 

 

(1,480

)

Net defined benefit plan costs

$

2,338

 

 

$

2,488

 

 

 

$

4,505

 

 

$

5,062

 

 

On January 1, 2018, the Company adopted ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The service cost is recognized within cost of revenue and selling, general and administrative expenses, depending on the functional area of the underlying employees included in the plans, and the non-operating components of net benefit plan costs are included within other income (expense), net in the consolidated statements of income.

 

31


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

Defined contribution plans

 

During the three and six months ended June 30, 2017 and 2018, the Company contributed the following amounts to defined contribution plans in various jurisdictions:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

India

 

$

5,566

 

 

$

6,061

 

 

$

10,783

 

 

$

12,005

 

U.S.

 

 

2,640

 

 

 

2,359

 

 

 

6,920

 

 

 

6,958

 

U.K.

 

 

2,354

 

 

 

3,187

 

 

 

4,074

 

 

 

5,324

 

China

 

 

3,740

 

 

 

4,408

 

 

 

7,568

 

 

 

8,802

 

Other regions

 

 

948

 

 

 

1,172

 

 

 

2,077

 

 

 

2,332

 

Total

 

$

15,248

 

 

$

17,187

 

 

$

31,422

 

 

$

35,421

 

 

32


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

16. Stock-based compensation

The Company has issued options under the Genpact Limited 2007 Omnibus Incentive Compensation Plan (the “2007 Omnibus Plan”) and the Genpact Limited 2017 Omnibus Incentive Compensation Plan (the “2017 Omnibus Plan”) to eligible persons, including employees, directors and certain other persons associated with the Company.

Under the 2007 Omnibus Plan, shares underlying options forfeited, expired, terminated or cancelled under any of the Company’s predecessor plans were added to the number of shares otherwise available for grant under the 2007 Omnibus Plan. The 2007 Omnibus Plan was amended and restated on April 11, 2012 to increase the number of common shares authorized for issuance by 5,593,200 shares to 15,000,000 shares.

On May 9, 2017, the Company’s shareholders approved the adoption of the Genpact Limited 2017 Omnibus Incentive Compensation Plan (the “2017 Omnibus Plan”), pursuant to which 15,000,000 Company common shares are available for issuance. No grants may be made under the 2007 Omnibus Plan after the date of adoption of the 2017 Omnibus Plan.  Grants that were outstanding under the 2007 Omnibus Plan as of the date of Company’s adoption of the 2017 Omnibus Plan remain subject to the terms of the 2007 Omnibus Plan.

Stock-based compensation costs relating to the foregoing plans during the six months ended June 30, 2017 and June 30, 2018 were $12,078 and $18,343, respectively, and for the three months ended June 30, 2017 and 2018 were $7,233 and $10,746, respectively. These costs have been allocated to cost of revenue and selling, general, and administrative expenses.

 

Stock options

 

All options granted under the 2007 and 2017 Omnibus Plans are exercisable into common shares of the Company, have a contractual period of ten years and vest over four to five years unless specified otherwise in the applicable award agreement. The Company recognizes compensation cost over the vesting period of the option.

 

Compensation cost is determined at the date of grant by estimating the fair value of an option using the Black-Scholes option-pricing model.

 

The following table shows the significant assumptions used in determining the fair value of options granted in the six months ended June 30, 2017 and June 30, 2018.

 

 

Six months ended

June 30, 2017

 

 

Six months ended

June 30, 2018

 

Dividend yield

0.97%

 

 

 

 

0.95% - 0.99%

 

Expected life (in months)

84

 

 

 

 

84

 

Risk-free rate of interest

2.25%

 

 

 

2.67%-2.93%

 

Volatility

24.28%

 

 

 

22.67%-22.73%

 

 

33


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

16. Stock-based compensation (Continued)

 

A summary of stock option activity during the six months ended June 30, 2018 is set out below:

 

 

 

Six months ended June 30, 2018

 

 

 

Shares arising

out of options

 

 

Weighted average

exercise price

 

 

Weighted average

remaining

contractual life

(years)

 

 

Aggregate

intrinsic

value

 

Outstanding as of January 1, 2018

 

 

5,134,645

 

 

$

19.52

 

 

 

5.6

 

 

$

     —

 

Granted

 

 

2,568,106

 

 

 

30.49

 

 

 

 

 

 

 

Forfeited

 

 

(70,000)

 

 

 

27.65

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(366,382

)

 

 

16.95

 

 

 

 

 

 

4,389

 

Outstanding as of June 30, 2018

 

 

7,266,369

 

 

$

23.45

 

 

 

6.8

 

 

$

43,836

 

Vested as of June 30, 2018 and expected to vest thereafter (Note a)

 

 

7,082,892

 

 

$

23.34

 

 

 

6.8

 

 

$

43,429

 

Vested and exercisable as of June 30, 2018

 

 

3,388,264

 

 

$

17.61

 

 

 

4.2

 

 

$

      38,347

 

Weighted average grant date fair value of grants during the period

 

$

8.33

 

 

 

 

 

 

 

 

 

 

 

 

 

  (a) Options expected to vest reflect an estimated forfeiture rate.

 

As of June 30, 2018, the total remaining unrecognized stock-based compensation cost for options expected to vest amounted to $25,160, which will be recognized over the weighted average remaining requisite vesting period of 4.4 years.

Restricted share units

The Company has granted restricted share units, or RSUs, under the 2007 and 2017 Omnibus Plans. Each RSU represents the right to receive one common share. The fair value of each RSU is the market price of one common share of the Company on the date of the grant. The RSUs granted to date have graded vesting schedules of three months to four years. The compensation expense is recognized on a straight-line basis over the vesting term. A summary of RSU activity during the six months ended June 30, 2018 is set out below:

 

 

 

Six months ended June 30, 2018

 

 

 

 

Number of Restricted Share Units

 

 

Weighted Average Grant Date Fair Value

 

Outstanding as of January 1, 2018

 

 

1,605,251

 

 

$

26.17

 

Granted

 

 

79,562

 

 

 

29.51

 

Vested (Note a)

 

 

(202,251

)

 

 

25.12

 

Forfeited

 

 

      (116,004)

 

 

 

26.18

 

Outstanding as of June 30, 2018

 

 

1,366,558

 

 

$

26.52

 

Expected to vest (Note b)

 

 

1,203,082

 

 

 

 

 

 

(a)

149,376 RSUs that vested during the period were net settled upon vesting by issuing 104,365 shares (net of minimum statutory tax withholding). 52,875 RSUs vested in the year ended December 31, 2017, shares in respect of which will be issuable on December 31, 2018 after withholding shares to the extent of minimum statutory withholding taxes.

(b)

The number of RSUs expected to vest reflects an estimated forfeiture rate.

 

52,482 RSUs vested in the year ended December 31, 2016, in respect of which 52,055 shares were issued during the six months ended June 30, 2018 after withholding shares to the extent of minimum statutory withholding taxes.

34


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

16. Stock-based compensation (Continued)

 

As of June 30, 2018, the total remaining unrecognized stock-based compensation cost related to RSUs amounted to $22,709, which will be recognized over the weighted average remaining requisite vesting period of 2.4 years.

 

Performance units

 

The Company also grants stock awards in the form of performance units, or PUs, and has granted PUs under both the 2007 and 2017 Omnibus Plans.

 

Each PU represents the right to receive one common share at a future date based on the Company’s performance against specified targets. PUs granted to date have vesting schedules of six months to three years. The fair value of each PU is the market price of one common share of the Company on the date of grant and assumes that performance targets will be achieved. PUs granted under the plans are subject to cliff vesting. The compensation expense for such awards is recognized on a straight-line basis over the vesting terms. During the performance period, the Company’s estimate of the number of shares to be issued is adjusted upward or downward based upon the probability of achievement of the performance targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets.

 

A summary of PU activity during the six months ended June 30, 2018 is set out below:

 

 

 

Six months ended June 30, 2018

 

 

 

Number of

Performance Units

 

 

Weighted

Average Grant

Date Fair Value

 

 

Maximum Shares

Eligible to Receive

 

Outstanding as of January 1, 2018

 

 

2,900,940

 

 

$

24.40

 

 

 

2,900,940

 

Granted

 

 

1,642,740

 

 

 

30.64

 

 

 

3,285,480

 

Vested (Note a)

 

 

(1,087,751)

 

 

 

22.73

 

 

 

(1,087,751)

 

Forfeited

 

 

(186,279

)

 

 

25.24

 

 

 

(186,279

)

Adjustment upon final determination of level of performance goal achievement (Note b)

 

 

(4,780

)

 

 

25.22

 

 

 

 

 

Adjustment upon final determination of level of performance goal achievement (Note b)

 

 

 

 

 

 

 

 

 

 

(4,780

)

Outstanding as of June 30, 2018

 

 

3,264,870

 

 

$

28.05

 

 

 

4,907,610

 

Expected to vest (Note c)

 

 

2,681,322

 

 

 

 

 

 

 

 

 

 

 

(a)

PUs that vested during the period were net settled upon vesting by issuing 691,958 shares (net of minimum statutory tax withholding).

 

(b)

Represents an adjustment made in March 2018 to the number of shares subject to the PUs granted in 2017 upon         certification of the level of achievement of the performance targets underlying such awards.

 

(c)

The number of PUs expected to vest has been adjusted by an estimated forfeiture rate.

 

As of June 30, 2018, the total remaining unrecognized stock-based compensation cost related to PUs amounted to $56,414, which will be recognized over the weighted average remaining requisite vesting period of 2.3 years.

35


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

16. Stock-based compensation (Continued)

 

Employee Stock Purchase Plan (ESPP)

 

On May 1, 2008, the Company adopted the Genpact Limited U.S. Employee Stock Purchase Plan and the Genpact Limited International Employee Stock Purchase Plan (together, the “ESPP”). In April 2018, these plans were amended and restated, and their terms were extended to August 31, 2028.  

 

The ESPP allows eligible employees to purchase the Company’s common shares through payroll deductions at 90% of the closing price of the Company’s common shares on the last business day of each purchase interval. The dollar amount of common shares purchased under the ESPP must not exceed 15% of the participating employee’s base salary, subject to a cap of $25 per employee per calendar year. With effect from September 1, 2009, the offering periods commence on the first business day in March, June, September and December of each year and end on the last business day of the subsequent May, August, November and February. 4,200,000 common shares have been reserved for issuance in the aggregate over the term of the ESPP.

 

During the six months ended June 30, 2017 and 2018, 100,357 and 114,951 common shares, respectively, were issued under the ESPP.

 

The ESPP is considered compensatory under the FASB guidance on Compensation-Stock Compensation.

 

The compensation expense for the ESPP is recognized in accordance with the FASB guidance on Compensation-Stock Compensation. The compensation expense for the ESPP during the six months ended June 30, 2017 and 2018 was $273 and $381, respectively, and for the three months ended June 30, 2017 and 2018 was $132 and $191 respectively, and has been allocated to cost of revenue and selling, general, and administrative expenses.

 

36


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

17. Capital stock

 

Share repurchases

 

As of December 31, 2016, the Company’s board of directors (the “Board”) had authorized the Company to repurchase up to $750,000 in value of the Company’s common shares under its existing share repurchase program. On February 10, 2017 the Board approved up to an additional $500,000 in share repurchases, bringing the total authorization under the Company’s existing program to $1,250,000. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be purchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

 

On March 29, 2017, the Company entered into an accelerated share repurchase (“ASR”) agreement with Morgan Stanley & Co. LLC (the “Dealer”) to repurchase Company common shares for an aggregate purchase price of $200,000. Pursuant to the ASR agreement, as amended in November 2017, the Company paid the aggregate purchase price to the Dealer upfront and received an initial delivery of 6,578,947 common shares on March 30, 2017, an additional delivery of 350,006 common shares on December 29, 2017 and a final delivery of 163,975 common shares on January 17, 2018 upon final settlement of the transaction. The weighted average price per share of the common shares delivered was $28.20. The Company’s purchase of its common shares under the ASR has been recorded as a reduction in retained earnings. All repurchased shares have been retired.

 

The final number of common shares repurchased by the Company under the ASR agreement was based on the volume-weighted average share price of the Company’s common shares during the term of the transaction, less a discount and subject to adjustments pursuant to the terms of the ASR agreement.

 

During the six months ended June 30, 2017 and June 30, 2018, the Company also purchased 808,293 and 4,114,882 of its common shares, respectively, on the open market at a weighted average price of $24.48 and $31.62 per share, respectively, for an aggregate cash amount of $19,784 and $130,103, respectively. All repurchased shares have been retired.

 

The Company records repurchases of its common shares on the settlement date of each transaction. Shares purchased and retired are deducted to the extent of their par value from common stock and from retained earnings for the excess over par value. Direct costs incurred to acquire the shares are included in the total cost of the shares purchased. For the six months ended June 30, 2017 and June 30, 2018, $16 and $82, respectively, was deducted from retained earnings in direct costs related to share repurchases.

 

Dividend

 

In February 2017, the Company’s board of directors approved a dividend program under which the Company paid a regular quarterly cash dividend of $0.06 per share to holders of its common shares, representing an annual dividend of $0.24 per share. On March 28, 2017 and June 28, 2017, the Company paid dividends of $0.06 per share, amounting to $11,957 and $11,558 in the aggregate, to shareholders of record as of March 10, 2017 and June 12, 2017, respectively.

 

On February 12, 2018, the Company announced that its Board of Directors had approved a 25% increase in its quarterly cash dividend to $0.075 per share, up from $0.06 per share in 2017, representing a planned annual dividend of $0.30 per common share, up from $0.24 per share in 2017, payable to holders of the Company’s common shares. On March 21, 2018 and June 20, 2018, the Company paid dividends of $0.075 per share, amounting to $14,408 and $14,240 in the aggregate, to shareholders of record as of March 9, 2018 and June 8, 2018, respectively.

 

37


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

18. Earnings per share

 

The Company calculates earnings per share in accordance with FASB guidance on earnings per share. Basic and diluted earnings per common share give effect to the change in the number of Company common shares outstanding. The calculation of basic earnings per common share is determined by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the respective periods. Potentially dilutive shares, consisting of outstanding options on common shares, restricted share units, performance units and common shares to be issued under the employee stock purchase plan, have been included in the computation of diluted net earnings per share and the weighted average shares outstanding, except where the result would be anti-dilutive.

 

The number of stock awards outstanding but not included in the computation of diluted earnings per common share because their effect was anti-dilutive is 1,127,185 and 1,465,442 for the six months ended June 30, 2017 and 2018, respectively, and 1,251,323 and 2,270,885 for the three months ended June 30, 2017 and 2018, respectively.

 

 

 

Three months ended June 30,

 

 

 

Six months ended June 30,

 

 

 

2017

 

 

2018

 

 

 

2017

 

 

2018

 

Net income  available to Genpact Limited common shareholders

 

$

68,946

 

 

$

64,574

 

 

 

$

122,284

 

 

$

129,269

 

Weighted average number of common shares used in computing basic earnings per common share

 

 

191,469,593

 

 

 

190,132,664

 

 

 

 

195,269,561

 

 

 

191,474,645

 

Dilutive effect of stock-based awards

 

 

2,262,813

 

 

 

3,233,310

 

 

 

 

2,924,611

 

 

 

3,352,627

 

Weighted average number of common shares used in computing dilutive earnings per common share

 

 

193,732,406

 

 

 

193,365,974

 

 

 

 

198,194,172

 

 

 

194,827,272

 

Earnings per common share attributable to Genpact  Limited common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.34

 

 

 

$

0.63

 

 

$

0.68

 

Diluted

 

$

0.36

 

 

$

0.33

 

 

 

$

0.62

 

 

$

0.66

 

 

 

 

38


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

19. Net revenues

 

Disaggregation of revenue

 

In the following tables, the Company’s revenue is disaggregated by customer classification, service type, major industrial vertical and location of service delivery center.

 

 

Three months ended June 30,

Six months ended June 30,

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

GE

$

63,192

 

 

$

65,444

 

 

$

132,446

 

 

$

123,493

 

 

Global Clients

 

607,505

 

 

 

663,117

 

 

 

1,161,246

 

 

 

1,293,980

 

 

Total net revenues

$

670,697

 

 

$

728,561

 

 

$

1,293,692

 

 

$

1,417,473

 

 


 

Three months ended June 30,

Six months ended June 30,

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

Business process outsourcing

$

556,227

 

 

$

605,911

 

 

$

1,067,510

 

 

$

1,179,972

 

 

Information technology services

 

114,470

 

 

 

122,650

 

 

 

226,182

 

 

 

237,501

 

 

Total net revenues

$

670,697

 

 

$

728,561

 

 

$

1,293,692

 

 

$

1,417,473

 

 

 

 

Three months ended June 30,

Six months ended June 30,

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

Banking, financial services and insurance

$

269,295

 

 

$

280,290

 

 

$

507,583

 

 

$

554,413

 

 

Consumer goods, retail, life sciences and healthcare

 

205,814

 

 

 

208,546

 

 

 

401,537

 

 

 

408,174

 

 

High tech, manufacturing and services

 

195,588

 

 

 

239,725

 

 

 

384,572

 

 

 

454,886

 

 

Total net revenues

$

670,697

 

 

$

728,561

 

 

$

1,293,692

 

 

$

1,417,473

 

 

 

         The Company has reclassified the disaggregation of its revenue to reflect how the Company groups its clients into key industry verticals. Revenue from prior periods is also presented based on the classifications used in the current period.

 

 

Three months ended June 30,

Six months ended June 30,

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

India

$

412,323

 

 

$

464,922

 

 

$

823,378

 

 

$

854,056

 

 

Asia, other than India

 

70,747

 

 

 

78,230

 

 

 

137,409

 

 

 

157,691

 

 

North and Latin America

 

109,016

 

 

 

151,840

 

 

 

194,058

 

 

 

304,120

 

 

Europe

 

78,611

 

 

 

33,569

 

 

 

138,847

 

 

 

101,606

 

 

Total net revenues

$

670,697

 

 

$

728,561

 

 

$

1,293,692

 

 

$

1,417,473

 

 


39


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

19. Net revenues (Continued)

 

Contract balances

 

Accounts receivable include amounts for services that the Company has performed but for which payment has not been received. The Company typically follows a 30-day billing cycle and, as such, at any point in time may have accrued up to 30 days of revenues that have not been billed. The Company has determined that in instances where the timing of revenue recognition differs from the timing of invoicing, the related contracts generally do not include a significant financing component. Refer to note 5 for details on the Company’s accounts receivable and reserve for doubtful receivables.

 

The following table provides details of the Company’s contract liabilities:

 

 

Three months ended June 30, 2018

 

 

Six months ended June 30, 2018

 

Particulars

Advance from customers

 

 

Deferred transition revenue

 

 

Advance from customers

 

 

Deferred transition revenue

 

Opening balance

$

34,570

 

 

$

102,428

 

 

$

26,266

 

 

$

101,785

 

Impact of opening balance offset

 

 

 

$

24,427

 

 

 

 

 

$

21,348

 

Gross opening balance

$

34,570

 

 

$

126,855

 

 

$

26,266

 

 

$

123,133

 

Additions

 

5,488

 

 

 

18,375

 

 

 

16,736

 

 

 

32,711

 

Revenue recognized

 

(8,959

)

 

 

(21,752

)

 

 

(11,903

)

 

 

(32,356

)

Currency translation adjustments

 

(758

)

 

 

(781

)

 

 

(758

)

 

 

(791

)

Gross closing balance

$

30,341

 

 

$

122,697

 

 

$

30,341

 

 

$

122,697

 

Impact of offset with contract asset

 

 

 

 

(23,735

)

 

 

 

 

 

(23,735

)

Closing balance (Note a)

$

30,341

 

 

$

98,962

 

 

$

30,341

 

 

$

98,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Included in "accrued expenses and other current liabilities" and "other liabilities" in the consolidated balance sheet.

 

 

 

The following table includes estimated revenue expected to be recognized in the future related to remaining performance obligations as of June 30, 2018:

 

Particulars

Total

 

 

Less than 1 year

 

 

1-3 years

 

 

3-5 years

 

 

After 5 years

 

Transaction price allocated to remaining performance obligations

$

99,666

 

 

 

44,970

 

 

 

45,059

 

 

 

9,220

 

 

 

417

 

 

The Company has applied the practical expedient related to contract duration and has not disclosed information about remaining performance obligations that have original expected durations of one year or less.

40


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

19. Net revenues (Continued)

 

The following table provides details of the Company’s contract assets:

 

 

Particulars

Three months ended June 30, 2018

 

 

Six months ended June 30, 2018

 

Opening balance

$

48,303

 

 

$

43,366

 

Impact of opening balance offset

 

24,427

 

 

 

21,348

 

Gross opening balance

$

72,730

 

 

$

64,714

 

Additions

 

5,428

 

 

 

19,518

 

Reduction in revenue recognized

 

(12,752

)

 

 

(18,826

)

Gross closing balance

$

65,406

 

 

$

65,406

 

Impact of offset with contract liability

 

(23,735

)

 

 

(23,735

)

Closing balance (Note b)

$

41,671

 

 

$

41,671

 

 

 

 

 

 

 

 

 

(b) Included in "prepaid expenses and other current assets" and "other assets" in the consolidated balance sheet.

 

 

The following table provides details of the Company’s contract cost assets:

 

 

 

Three months ended

June 30, 2018

 

 

Six months ended

June 30, 2018

 

Particulars

Sales incentive programs

 

 

Transition activities

 

 

Sales incentive programs

 

 

Transition activities

 

Opening balance

$

23,271

 

 

$

139,164

 

 

$

23,227

 

 

$

139,284

 

Closing balance

 

24,808

 

 

 

137,370

 

 

 

24,808

 

 

 

137,370

 

Amortization

 

3,604

 

 

 

23,321

 

 

 

6,843

 

 

 

34,900

 

 

20. Cost of revenue

 

Cost of revenue consists of the following:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Personnel expenses

$

284,557

 

 

$

322,799

 

 

$

553,746

 

 

$

632,931

 

Operational expenses

 

119,589

 

 

 

127,109

 

 

 

222,305

 

 

 

248,466

 

Depreciation and amortization

 

10,362

 

 

 

12,990

 

 

 

21,794

 

 

 

25,825

 

 

$

414,508

 

 

$

462,898

 

 

$

797,845

 

 

$

907,222

 

 

21. Selling, general and administrative expenses

 

Selling, general and administrative expenses consist of the following:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Personnel expenses

$

122,543

 

 

$

126,626

 

 

$

245,112

 

 

$

254,694

 

Operational expenses

 

42,867

 

 

 

46,920

 

 

 

78,680

 

 

 

87,309

 

Depreciation and amortization

 

2,348

 

 

 

2,620

 

 

 

4,824

 

 

 

5,272

 

 

$

167,758

 

 

$

176,166

 

 

$

328,616

 

 

$

347,275

 

 

41


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

22. Other operating (income) expense, net

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Other operating (income) expense

$

(2,628

)

 

$

(51

)

 

$

(7,028

)

 

$

(286

)

Provision for impairment of intangible assets and property, plant and equipment

 

-

 

 

 

850

 

 

 

-

 

 

 

850

 

Change in fair value of earn-out consideration and deferred consideration (relating to business acquisitions)

 

1,713

 

 

 

(650

)

 

$

(1,425

)

 

$

(633

)

Other operating (income) expense, net

$

(915

)

 

$

149

 

 

$

(8,453

)

 

$

(69

)

 

23. Interest income (expense), net

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Interest income

$

863

 

 

$

1,774

 

 

$

1,994

 

 

$

5,144

 

Interest expense

 

(10,713

)

 

 

(12,181

)

 

 

(17,337

)

 

 

(23,651

)

Interest income (expense), net

$

(9,850

)

 

$

(10,407

)

 

$

(15,343

)

 

$

(18,507

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24. Income taxes

 

The Company determines its tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code. The Tax Act also establishes new tax laws that will affect 2018 and subsequent years, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. 

 

The Company’s estimate of transition tax on mandatory repatriation introduced under the Tax Act was provisional as of December 31, 2017 and remains provisional as of June 30, 2018 based on information available as of June 30, 2018. The Company has not recorded any tax liability for transition tax as of December 31, 2017 and June 30, 2018 pending the calculation of the earnings and profit pool of its controlled foreign corporations. The Company will recognize any changes to provisional amounts as it refines its estimates and interpretations of the application of the Tax Act. The Company expects to complete its analysis of the provisional items during the second half of 2018. The effects of other provisions of the Tax Act are not expected to have a material impact on the Company’s consolidated financial statements for the three and six months ended June 30, 2018.

42


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

24. Income taxes (Continued)

 

The Company reports its gain/loss on derivatives designated as cash flow hedges, actuarial gain/loss on retirement benefits and currency translation adjustment, net of taxes to the extent applicable, in accumulated other comprehensive

income. The Company follows the specific identification approach for releasing stranded tax effects from accumulated other comprehensive income (loss) (“AOCI”) upon recognition of these AOCI items in the statement of income.

 

As of December 31, 2017, due to a reduction in the U.S. federal corporate income tax rate under the Tax Act, the Company revalued its net deferred tax assets, including deferred tax liabilities recorded through AOCI. Based on this revaluation, the Company recorded a tax gain of $2,265 relating to derivatives, reducing its net deferred tax liability balance, which was recorded as an income tax benefit in continuing operations for the year ended December 31, 2017.

 

In the quarter ended March 31, 2018, the Company elected to early adopt ASU 2018-02, effective January 1, 2018, and made an election to reclassify the stranded income tax effects of the Tax Act from AOCI to retained earnings for all items of AOCI. The Company has elected to adopt the new guidance at the beginning of the period, and no prior periods have been adjusted. Accordingly, a stranded tax effect in AOCI of $2,265 resulting from the Tax Act has been adjusted through retained earnings.

 

As of December 31, 2017, the Company had unrecognized tax benefits amounting to $26,060, including an amount of $24,877, which, if recognized, would impact the effective tax rate.

 

The following table summarizes activities related to the Company’s unrecognized tax benefits for uncertain tax positions from January 1, 2018 to June 30, 2018: 

 

 

2018

 

Opening balance at January 1

 

$

26,060

 

Increase related to prior year tax positions, including recorded in acquisition accounting

 

 

231

 

Decrease related to prior year tax positions

 

 

(234

)

Decrease related to prior year tax position due to lapse of applicable statute of limitation

 

 

(479

)

Effect of exchange rate changes

 

 

(1,142

)

Closing balance at June 30

 

$

24,436

 

 

The Company’s unrecognized tax benefits as of June 30, 2018 include an amount of $23,254, which, if recognized, would impact the effective tax rate. As of June 30, 2018 and December 31, 2017, the Company had accrued approximately $4,634 and $4,614, respectively, in interest relating to unrecognized tax benefits. During the year ended December 31, 2017 and the six months ended June 30, 2018, the company recognized approximately $(224) and $345, respectively, excluding the impact of exchange rate differences, in interest on unrecognized tax benefits. As of December 31, 2017 and June 30, 2018, the Company had accrued approximately $1,033 and $951, respectively, for penalties.

 

43


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

25. Related party transactions

 

The Company has entered into related party transactions with its non-consolidating affiliates. The Company has also entered into related party transactions with a significant shareholder and its affiliates.

 

The Company’s related party transactions can be categorized as follows:

 

Revenue from services

 

During the six months ended June 30, 2017 and 2018, the Company recognized net revenues of $187 and $439, respectively, and for three months ended June 30, 2017 and 2018, the Company recognized net revenues of $104 and $135 respectively, from a client that is a significant shareholder of the Company.

 

During the six months ended June 30, 2017, the Company recognized net revenues of $5,400, and during the three months ended June 30, 2017, the Company recognized net revenues of $2,189, from a client that was a non-consolidating affiliate of the Company.

 

Cost of revenue

 

The Company purchases certain services from its non-consolidating affiliates, mainly relating to training and recruitment, which are included in cost of revenue. For the six months ended June 30, 2017 and 2018, cost of revenue includes an amount of $909 and $449, respectively, and for the three months ended June 30, 2017 and 2018, cost of revenue includes an amount of $335 and $258, respectively, attributable to the cost of services provided by the Company’s non-consolidating affiliates.

 

Selling, general and administrative expenses

 

The Company purchases certain services from its non-consolidating affiliates, mainly relating to training and recruitment, the costs of which are included in selling, general and administrative expenses. For the six months ended June 30, 2017 and 2018, selling, general and administrative expenses include an amount of $148 and $90, respectively, the three months ended June 30, 2017 and 2018, selling, general and administrative expenses include an amount of $54 and $41, respectively, attributable to the cost of services provided by the Company’s non-consolidating affiliates.

 

During the three and six months ended June 30, 2017 and 2018, the Company engaged a significant shareholder to provide certain services to the Company, the costs of which are included in selling, general and administrative expenses. For the six months ended June 30, 2017 and 2018, selling, general and administrative expenses include an amount of $45 and $10, respectively, and for the three months ended June 30, 2017 and 2018, selling, general and administrative expenses include an amount of $45 and $0, respectively.    

 

Investment in equity affiliates

 

During the six months ended June 30, 2017, the Company invested $496 in its non-consolidating affiliates.   

 

During the three and six months ended June 30, 2017, the Company recorded a charge of $28 and $2,849 related to an investment in one of its non-consolidating affiliates. This charge was included in equity-method investment activity, net in the Company’s consolidated statement of income.

 

As of December 31, 2017 and June 30, 2018, the Company’s investments in its non-consolidating affiliates amounted to $886 and $834, respectively.

 

Others

 

During the six months ended June 30, 2017, the Company also entered into transactions with one of its non-consolidating affiliates for certain cost reimbursements amounting to $477, and for the three months ended June 30, 2017, such cost reimbursements amounted to $239.  

44


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

25. Related party transactions (Continued)

During the three and six months ended June 30, 2017, the Company made payments of $2,540  and $3,847, respectively, to one of its non-consolidating affiliates under a tax-sharing arrangement in the U.K. This amount represents a portion of the non-consolidated affiliate’s net operating losses surrendered to the Company under the tax sharing arrangement for the years 2015 and 2016. On June 30, 2017, this non-consolidating affiliate ceased to be a related party.

 

26. Other Income (expense), net

 

 

Three months ended June 30,

Six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Government incentives

$

11,882

 

 

$

10,196

 

 

$

11,882

 

 

$

25,696

 

Other income/(expense)

 

(322

)

 

 

(448

)

 

 

231

 

 

 

(398

)

Other Income (expense), net

$

11,560

 

 

$

9,748

 

 

$

12,113

 

 

$

25,298

 

 

 

 

 

27. Commitments and contingencies

 

Capital commitments

 

As of December 31, 2017 and June 30, 2018, the Company has committed to spend $8,314 and $15,636, respectively, under agreements to purchase property, plant and equipment. This amount is net of capital advances paid in respect of these purchases.

 

Bank guarantees

 

The Company has outstanding bank guarantees amounting to $8,879 and $9,686 as of December 31, 2017 and June 30, 2018, respectively. Bank guarantees are generally provided to government agencies and excise and customs authorities for the purpose of maintaining a bonded warehouse. These guarantees may be revoked if the government agencies suffer any losses or damages through the breach of any of the covenants contained in the agreements governing such guarantees.

 

Other commitments

 

Certain units of our Indian subsidiaries are established as Software Technology Parks of India (“STPI”) units or Special Economic Zone (“SEZ”) units under the relevant regulations issued by the Government of India.  These units are exempt from customs and central excise duties, and other levies on imported and indigenous capital goods, stores and spares, and service tax on services.  SEZ units are also exempt from the goods and services tax (“GST”) that was introduced in India in 2017.  The Company has undertaken to pay taxes and duties, if any, in respect of capital goods, stores, spares and services consumed duty-free, in the event that certain terms and conditions are not fulfilled.

 

28. Subsequent Events

 

Acquisition

 

On July 16, 2018, the Company signed a definitive agreement to acquire the outstanding equity interests in Barkawi Management Consultants GmbH & Co. KG and certain related entities (collectively referred to as “Barkawi”) for estimated cash consideration of $100,090, subject to certain adjustments. The closing of the transaction is subject to certain customary closing conditions. Barkawi is a leading supply chain management consulting business.

 

Dividend

 

On July 25, 2018, the Company announced that its Board of Directors has declared a dividend for the third quarter of 2018 of $0.075 per common share, which will be paid on or about September 19, 2018 to shareholders of record as of the close of business on September 10, 2018. The declaration of any future dividends will be at the discretion of the Board of Directors.

45


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

 

Credit Facility

 

On August 9, 2018, the Company refinanced its 2015 credit facility with certain amended terms and net settled the outstanding borrowings of $910,000 through a new credit facility comprised of a $680,000 term loan and a $500,000 revolving credit facility, each having a term of five years. Borrowings under the new facility bear interest at a rate equal to, at the election of the Company, either LIBOR plus an applicable margin equal to 1.375% per annum or a base rate plus an applicable margin equal to 0.375% per annum, in each case subject to adjustment based on the Company’s debt ratings provided by Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. Based on the Company’s election and current credit rating, the applicable interest rate is equal to LIBOR plus 1.375% per annum.

 

29. Guarantor financial information

In March 2017, the Issuer issued $350,000 aggregate principal amount of 3.70% senior notes in a private offering. See Note 12 for additional information. The issuance is fully and unconditionally guaranteed by the Company. The Company has prepared the following condensed consolidating financial statements, which set forth consolidated financial statements of the Issuer, the Company as parent guarantor and the non-guarantor subsidiaries of the company, as well as intercompany elimination adjustments relating to intercompany transactions. Investments in subsidiaries have been accounted for using the equity method.

 

 

29. Guarantor financial information (continued)

46


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

Condensed Consolidating Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,326

 

 

$

576

 

 

$

329,001

 

 

$

 

 

$

333,903

 

Accounts receivable intercompany, net

 

 

88,551

 

 

 

 

 

 

 

 

 

(88,551

)

 

 

 

Accounts receivable, net

 

 

 

 

 

 

 

 

691,347

 

 

 

 

 

 

691,347

 

Intercompany loans

 

 

323,168

 

 

 

1,000

 

 

 

1,714,063

 

 

 

(2,038,231

)

 

 

 

Intercompany other receivable

 

 

10,106

 

 

 

86,960

 

 

 

106,318

 

 

 

(203,384

)

 

 

 

Prepaid expenses and other current assets

 

 

-

 

 

 

2,003

 

 

 

205,331

 

 

 

 

 

 

207,334

 

Total current assets

 

$

426,151

 

 

$

90,539

 

 

$

3,046,060

 

 

$

(2,330,166

)

 

$

1,232,584

 

Property, plant and equipment, Net

 

 

313

 

 

 

 

 

 

202,356

 

 

 

 

 

 

202,669

 

Intercompany loans

 

 

 

 

 

 

 

 

500,000

 

 

 

(500,000

)

 

 

 

Deferred tax assets

 

 

 

 

 

 

 

 

88,278

 

 

 

 

 

 

88,278

 

Investment in subsidiaries

 

 

402,500

 

 

 

2,900,132

 

 

 

507,630

 

 

 

(3,810,262

)

 

 

 

Investment in equity affiliates

 

 

 

 

 

 

 

 

834

 

 

 

 

 

 

834

 

Investment in debentures, intercompany

 

 

582,845

 

 

 

 

 

 

 

 

 

(582,845

)

 

 

 

Intercompany other receivable

 

 

 

 

 

60,391

 

 

 

 

 

 

(60,391

)

 

 

 

Intangible assets, net

 

 

 

 

 

 

 

 

120,624

 

 

 

 

 

 

120,624

 

Goodwill

 

 

 

 

 

 

 

 

1,311,361

 

 

 

 

 

 

1,311,361

 

Contract cost assets

 

 

 

 

 

 

 

 

162,178

 

 

 

 

 

 

162,178

 

Other assets

 

 

 

 

 

 

 

 

147,550

 

 

 

 

 

 

147,550

 

Total assets

 

$

1,411,809

 

 

$

3,051,062

 

 

$

6,086,871

 

 

$

(7,283,664

)

 

$

3,266,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

 

 

$

 

 

$

215,000

 

 

$

 

 

$

215,000

 

Intercompany loans

 

 

16,026

 

 

 

1,758,537

 

 

 

263,668

 

 

 

(2,038,231

)

 

 

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

39,249

 

 

 

 

 

 

39,249

 

Accounts payable

 

 

81

 

 

 

11

 

 

 

20,850

 

 

 

 

 

 

20,942

 

Intercompany accounts payable

 

 

 

 

 

 

 

 

88,551

 

 

 

(88,551

)

 

 

 

Income taxes payable

 

 

692

 

 

 

(377

)

 

 

54,198

 

 

 

 

 

 

54,513

 

Intercompany other payable

 

 

31,257

 

 

 

75,209

 

 

 

96,918

 

 

 

(203,384

)

 

 

 

Accrued expenses and other current liabilities

 

 

7,765

 

 

 

4,353

 

 

 

471,123

 

 

 

 

 

 

483,241

 

Total current liabilities

 

$

55,821

 

 

$

1,837,733

 

 

$

1,249,557

 

 

$

(2,330,166

)

 

$

812,945

 

Long-term debt, less current portion

 

 

348,022

 

 

 

 

 

 

639,292

 

 

 

 

 

 

987,314

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

7,036

 

 

 

 

 

 

7,036

 

Intercompany other payable

 

 

 

 

 

 

 

 

60,391

 

 

 

(60,391

)

 

 

 

Non-current intercompany loans payable

 

 

500,000

 

 

 

 

 

 

582,848

 

 

 

(1,082,848

)

 

 

 

Other liabilities

 

 

336

 

 

 

151

 

 

 

161,871

 

 

 

 

 

 

162,358

 

Total liabilities

 

$

904,179

 

 

$

1,837,884

 

 

$

2,700,995

 

 

$

(3,473,405

)

 

$

1,969,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

28

 

 

 

1,894

 

 

 

190,000

 

 

 

(190,027

)

 

 

1,895

 

Additional paid-in capital

 

 

574,698

 

 

 

1,438,071

 

 

 

1,110,610

 

 

 

(1,685,307

)

 

 

1,438,072

 

Retained earnings

 

 

65,278

 

 

 

254,875

 

 

 

2,509,035

 

 

 

(2,491,068

)

 

 

338,120

 

Accumulated other comprehensive income (loss)

 

 

(132,374

)

 

 

(481,662

)

 

 

(423,769

)

 

 

556,143

 

 

 

(481,662

)

Total equity

 

 

507,630

 

 

 

1,213,178

 

 

 

3,385,876

 

 

 

(3,810,259

)

 

 

1,296,425

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and equity

 

$

1,411,809

 

 

$

3,051,062

 

 

$

6,086,871

 

 

$

(7,283,664

)

 

$

3,266,078

 


47


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,  2017

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,507

 

 

$

2,136

 

 

$

497,825

 

 

$

 

 

$

504,468

 

Accounts receivable intercompany, net

 

 

82,935

 

 

 

 

 

 

 

 

 

(82,935

)

 

 

 

Accounts receivable, net

 

 

 

 

 

 

 

 

693,085

 

 

 

 

 

 

693,085

 

Intercompany loans

 

 

194,854

 

 

 

 

 

 

1,620,537

 

 

 

(1,815,391

)

 

 

 

Intercompany other receivable

 

 

25,343

 

 

 

82,631

 

 

 

89,189

 

 

 

(197,163

)

 

 

 

Prepaid expenses and other current assets

 

 

311

 

 

 

1,276

 

 

 

234,755

 

 

 

 

 

 

236,342

 

Total current assets

 

$

307,950

 

 

$

86,043

 

 

$

3,135,391

 

 

$

(2,095,489

)

 

$

1,433,895

 

Property, plant and equipment, net

 

 

391

 

 

 

 

 

 

206,639

 

 

 

 

 

 

207,030

 

Intercompany loans

 

 

 

 

 

 

 

 

500,000

 

 

 

(500,000

)

 

 

 

Deferred tax assets

 

 

 

 

 

 

 

 

76,929

 

 

 

 

 

 

76,929

 

Investment in subsidiaries

 

 

426,410

 

 

 

2,864,386

 

 

 

529,179

 

 

 

(3,819,975

)

 

 

 

Investment in equity affiliates

 

 

 

 

 

 

 

 

886

 

 

 

 

 

 

886

 

Investment in debentures, intercompany

 

 

717,909

 

 

 

 

 

 

 

 

 

(717,909

)

 

 

 

Intercompany other receivable

 

 

 

 

 

49,761

 

 

 

 

 

 

(49,761

)

 

 

 

Intangible assets, net

 

 

 

 

 

 

 

 

131,590

 

 

 

 

 

 

131,590

 

Goodwill

 

 

 

 

 

 

 

 

1,337,122

 

 

 

 

 

 

1,337,122

 

Other assets

 

 

 

 

 

 

 

 

262,169

 

 

 

 

 

 

262,169

 

Total assets

 

$

1,452,660

 

 

$

3,000,190

 

 

$

6,179,905

 

 

$

(7,183,134

)

 

$

3,449,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

 

 

$

 

 

$

170,000

 

 

$

 

 

$

170,000

 

Intercompany loans

 

 

38,000

 

 

 

1,597,537

 

 

 

179,854

 

 

 

(1,815,391

)

 

 

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

39,226

 

 

 

 

 

 

39,226

 

Accounts payable

 

 

103

 

 

 

58

 

 

 

14,889

 

 

 

 

 

 

15,050

 

Intercompany accounts payable

 

 

 

 

 

 

 

 

82,935

 

 

 

(82,935

)

 

 

 

Income taxes payable

 

 

885

 

 

 

 

 

 

29,141

 

 

 

 

 

 

30,026

 

Intercompany other payable

 

 

29,526

 

 

 

59,266

 

 

 

108,371

 

 

 

(197,163

)

 

 

 

Accrued expenses and other current liabilities

 

 

5,995

 

 

 

2,390

 

 

 

576,097

 

 

 

 

 

 

584,482

 

Total current liabilities

 

$

74,509

 

 

$

1,659,251

 

 

$

1,200,513

 

 

$

(2,095,489

)

 

$

838,784

 

Long-term debt, less current portion

 

 

347,761

 

 

 

 

 

 

658,926

 

 

 

 

 

 

1,006,687

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

6,747

 

 

 

 

 

 

6,747

 

Intercompany other payable

 

 

 

 

 

 

 

 

49,761

 

 

 

(49,761

)

 

 

 

Non-current intercompany loans payable

 

 

500,000

 

 

 

 

 

 

717,909

 

 

 

(1,217,909

)

 

 

 

Other liabilities

 

 

1,211

 

 

 

153

 

 

 

167,245

 

 

 

 

 

 

168,609

 

Total liabilities

 

$

923,481

 

 

$

1,659,404

 

 

$

2,801,101

 

 

$

(3,363,159

)

 

$

2,020,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 

 

 

 

 

4750

 

 

 

 

 

4750

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

1,924

 

 

 

189,649

 

 

 

(189,649

)

 

 

1,924

 

Additional paid-in capital

 

 

575,890

 

 

 

1,421,354

 

 

 

1,107,383

 

 

 

(1,683,259

)

 

 

1,421,368

 

Retained earnings

 

 

(12,277

)

 

 

272,738

 

 

 

2,504,580

 

 

 

(2,409,059

)

 

 

355,982

 

Accumulated other comprehensive income (loss)

 

 

(34,434

)

 

 

(355,230

)

 

 

(427,558

)

 

 

461,992

 

 

 

(355,230

)

Total equity

 

 

529,179

 

 

 

1,340,786

 

 

 

3,374,054

 

 

 

(3,819,975

)

 

 

1,424,044

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and equity

 

$

1,452,660

 

 

$

3,000,190

 

 

$

6,179,905

 

 

$

(7,183,134

)

 

$

3,449,621

 


48


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Statement of Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,  2018

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Net revenues

 

$

12,119

 

 

$

 

 

$

731,024

 

 

$

(14,582

)

 

$

728,561

 

Cost of revenue

 

 

 

 

 

 

 

 

462,898

 

 

 

 

 

 

462,898

 

Gross profit

 

$

12,119

 

 

$

 

 

$

268,126

 

 

$

(14,582

)

 

$

265,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

2,378

 

 

 

10,270

 

 

 

178,100

 

 

 

(14,582

)

 

 

176,166

 

Amortization of acquired intangible assets

 

 

48

 

 

 

 

 

 

9,778

 

 

 

 

 

 

9,826

 

Other operating (income) expense, net

 

 

 

 

 

 

 

 

149

 

 

 

 

 

 

149

 

Income (loss) from operations

 

$

9,693

 

 

$

(10,270

)

 

$

80,099

 

 

$

-

 

 

$

79,522

 

Foreign exchange gains (losses), net

 

 

208

 

 

 

281

 

 

 

2,316

 

 

 

 

 

 

2,805

 

Interest income (expense), net

 

 

(3,489

)

 

 

 

 

 

(6,918

)

 

 

 

 

 

(10,407

)

Intercompany interest income (expense), net

 

 

19,583

 

 

 

(4,068

)

 

 

(15,515

)

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

9,748

 

 

 

 

 

 

9,748

 

Income (loss) before equity-method investment activity, net and income tax expense

 

$

25,995

 

 

$

(14,057

)

 

$

69,730

 

 

$

-

 

 

$

81,668

 

Gain (loss) on equity-method investment activity, net

 

 

3,588

 

 

 

78,631

 

 

 

27,987

 

 

 

(110,221

)

 

 

(15

)

Income before income tax expense

 

$

29,583

 

 

$

64,574

 

 

$

97,717

 

 

$

(110,221

)

 

$

81,653

 

Income tax expense

 

 

1,596

 

 

 

 

 

 

15,483

 

 

 

 

 

 

17,079

 

Net income

 

$

27,987

 

 

$

64,574

 

 

$

82,234

 

 

$

(110,221

)

 

$

64,574

 

Net loss attributable to redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Genpact Limited shareholders

 

$

27,987

 

 

$

64,574

 

 

$

82,234

 

 

$

(110,221

)

 

$

64,574

 

 


49


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Statement of Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,  2018

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Net revenues

 

$

24,058

 

 

$

 

 

$

1,417,473

 

 

$

(24,058

)

 

$

1,417,473

 

Cost of revenue

 

 

 

 

 

 

 

 

907,222

 

 

 

 

 

 

907,222

 

Gross profit

 

$

24,058

 

 

$

 

 

$

510,251

 

 

$

(24,058

)

 

$

510,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

4,001

 

 

 

11,762

 

 

 

355,636

 

 

 

(24,124

)

 

 

347,275

 

Amortization of acquired intangible assets

 

 

48

 

 

 

 

 

 

19,714

 

 

 

 

 

 

19,762

 

Other operating (income) expense, net

 

 

17

 

 

 

 

 

 

(86

)

 

 

 

 

 

(69

)

Income (loss) from operations

 

$

19,992

 

 

$

(11,762

)

 

$

134,987

 

 

$

66

 

 

$

143,283

 

Foreign exchange gains (losses), net

 

 

1,161

 

 

 

502

 

 

 

5,940

 

 

 

 

 

 

7,603

 

Interest income (expense), net

 

 

(6,978

)

 

 

 

 

 

(11,529

)

 

 

 

 

 

(18,507

)

Intercompany interest income (expense), net

 

 

40,125

 

 

 

(7,303

)

 

 

(32,822

)

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

25,298

 

 

 

 

 

 

25,298

 

Income (loss) before equity-method investment activity, net and income tax expense

 

$

54,300

 

 

$

(18,563

)

 

$

121,874

 

 

$

66

 

 

$

157,677

 

Gain (loss) on equity-method investment activity, net

 

 

11,030

 

 

 

147,832

 

 

 

62,045

 

 

 

(220,922

)

 

 

(15

)

Income before income tax expense

 

$

65,330

 

 

$

129,269

 

 

$

183,919

 

 

$

(220,856

)

 

$

157,662

 

Income tax expense

 

 

3,287

 

 

 

 

 

 

25,867

 

 

 

 

 

 

29,154

 

Net income

 

$

62,043

 

 

$

129,269

 

 

$

158,052

 

 

$

(220,856

)

 

$

128,508

 

Net loss attributable to redeemable non-controlling interest

 

 

 

 

 

 

 

 

(761

)

 

 

 

 

 

(761

)

Net income attributable to Genpact Limited shareholders

 

$

62,043

 

 

$

129,269

 

 

$

158,813

 

 

$

(220,856

)

 

$

129,269

 

 


50


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Statement of Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,  2017

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Net revenues

 

$

15,164

 

 

$

 

 

$

670,697

 

 

$

(15,164

)

 

$

670,697

 

Cost of revenue

 

 

116

 

 

 

1,476

 

 

 

412,916

 

 

 

 

 

 

414,508

 

Gross profit

 

$

15,048

 

 

$

(1,476

)

 

$

257,781

 

 

$

(15,164

)

 

$

256,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

3,009

 

 

 

6,622

 

 

 

173,291

 

 

 

(15,164

)

 

 

167,758

 

Amortization of acquired intangible assets

 

 

 

 

 

 

 

 

8,387

 

 

 

 

 

 

8,387

 

Other operating (income) expense, net

 

 

1,997

 

 

 

 

 

 

(2,912

)

 

 

 

 

 

(915

)

Income (loss) from operations

 

$

10,042

 

 

$

(8,098

)

 

$

79,015

 

 

$

-

 

 

$

80,959

 

Foreign exchange gains (losses), net

 

 

1,412

 

 

 

 

 

 

501

 

 

 

 

 

 

1,913

 

Interest income (expense), net

 

 

(3,762

)

 

 

 

 

 

(6,088

)

 

 

 

 

 

(9,850

)

Intercompany interest income (expense), net

 

 

24,586

 

 

 

(2,472

)

 

 

(22,114

)

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

11,560

 

 

 

 

 

 

11,560

 

Income (loss) before equity-method investment activity, net and income tax expense

 

$

32,278

 

 

$

(10,570

)

 

$

62,874

 

 

$

-

 

 

$

84,582

 

Gain (loss) on equity-method investment activity, net

 

 

5,982

 

 

 

79,516

 

 

 

36,418

 

 

 

(121,925

)

 

 

(9

)

Income before income tax expense

 

$

38,260

 

 

$

68,946

 

 

$

99,292

 

 

$

(121,925

)

 

$

84,573

 

Income tax expense

 

 

1,842

 

 

 

 

 

 

13,629

 

 

 

 

 

 

15,471

 

Net income

 

$

36,418

 

 

$

68,946

 

 

$

85,663

 

 

$

(121,925

)

 

$

69,102

 

Net loss attributable to redeemable non-controlling interest

 

 

 

 

 

 

 

 

(156

)

 

 

 

 

 

(156

)

Net income attributable to Genpact Limited shareholders

 

$

36,418

 

 

$

68,946

 

 

$

85,507

 

 

$

(121,925

)

 

$

68,946

 

 


51


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Statement of Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,  2017

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Net revenues

 

$

22,726

 

 

$

 

 

$

1,293,692

 

 

$

(22,726

)

 

$

1,293,692

 

Cost of revenue

 

 

116

 

 

 

1,476

 

 

 

796,253

 

 

 

 

 

 

797,845

 

Gross profit

 

$

22,610

 

 

$

(1,476

)

 

$

497,439

 

 

$

(22,726

)

 

$

495,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

4,150

 

 

 

10,411

 

 

 

336,781

 

 

 

(22,726

)

 

 

328,616

 

Amortization of acquired intangible assets

 

 

 

 

 

 

 

 

15,629

 

 

 

 

 

 

15,629

 

Other operating (income) expense, net

 

 

(1,141

)

 

 

 

 

 

(7,312

)

 

 

 

 

 

(8,453

)

Income (loss) from operations

 

$

19,601

 

 

$

(11,887

)

 

$

152,341

 

 

$

-

 

 

$

160,055

 

Foreign exchange gains (losses), net

 

 

3,028

 

 

 

(5

)

 

 

(6,023

)

 

 

 

 

 

(3,000

)

Interest income (expense), net

 

 

14,175

 

 

 

 

 

 

(29,518

)

 

 

 

 

 

(15,343

)

Intercompany interest income (expense), net

 

 

26,833

 

 

 

(4,769

)

 

 

(22,064

)

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

12,113

 

 

 

 

 

 

12,113

 

Income (loss) before equity-method investment activity, net and income tax expense

 

$

63,637

 

 

$

(16,661

)

 

$

106,849

 

 

$

-

 

 

$

153,825

 

Gain (loss) on equity-method investment activity, net

 

 

7,961

 

 

 

138,944

 

 

 

68,272

 

 

 

(219,744

)

 

 

(4,567

)

Income before income tax expense

 

$

71,598

 

 

$

122,283

 

 

$

175,121

 

 

$

(219,744

)

 

$

149,258

 

Income tax expense

 

 

3,325

 

 

 

 

 

 

24,391

 

 

 

 

 

 

27,716

 

Net income

 

$

68,273

 

 

$

122,283

 

 

$

150,730

 

 

$

(219,744

)

 

$

121,542

 

Net loss attributable to redeemable non-controlling interest

 

 

 

 

 

 

 

 

742

 

 

 

 

 

 

742

 

Net income attributable to Genpact Limited shareholders

 

$

68,273

 

 

$

122,283

 

 

$

151,472

 

 

$

(219,744

)

 

$

122,284

 

 


52


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Statement of Comprehensive Income (Loss)

 

 

Three months ended June 30,  2018

 

 

Issuer/ Subsidiary

 

 

Parent/ Guarantor

 

 

Non-Guarantor Subsidiaries

 

 

Eliminations

 

 

Genpact Limited Shareholders

 

 

Redeemable Non-controlling interest

 

Net income (loss)

$

27,987

 

 

$

64,574

 

 

$

82,234

 

 

$

(110,221

)

 

$

64,574

 

 

$

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

(47,357

)

 

 

(73,681

)

 

 

(73,681

)

 

 

121,038

 

 

 

(73,681

)

 

 

 

Net income (loss) on cash flow hedging derivatives, net of taxes (Note 7)

 

(26,429

)

 

 

(27,879

)

 

 

(26,429

)

 

 

52,858

 

 

 

(27,879

)

 

 

 

Retirement benefits, net of taxes

 

(7

)

 

 

617

 

 

 

(7

)

 

 

14

 

 

 

617

 

 

 

 

Other comprehensive income (loss)

 

(73,793

)

 

 

(100,943

)

 

 

(100,117

)

 

 

173,910

 

 

 

(100,943

)

 

 

 

Comprehensive income (loss)

$

(45,806

)

 

$

(36,369

)

 

$

(17,883

)

 

$

63,689

 

 

$

(36,369

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,  2018

 

 

Issuer/ Subsidiary

 

 

Parent/ Guarantor

 

 

Non-Guarantor Subsidiaries

 

 

Eliminations

 

 

Genpact Limited Shareholders

 

 

Redeemable Non-controlling interest

 

Net income (loss)

$

62,045

 

 

$

129,269

 

 

$

158,812

 

 

$

(220,857

)

 

$

129,269

 

 

$

(761

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

(53,709

)

 

 

(83,016

)

 

 

(83,016

)

 

 

136,725

 

 

 

(83,016

)

 

 

(424

)

Net income (loss) on cash flow hedging derivatives, net of taxes (Note 7)

 

(42,110

)

 

 

(46,811

)

 

 

(45,361

)

 

 

87,471

 

 

 

(46,811

)

 

 

 

Retirement benefits, net of taxes

 

73

 

 

 

1,130

 

 

 

506

 

 

 

(579

)

 

 

1,130

 

 

 

 

Other comprehensive income (loss)

 

(95,746

)

 

 

(128,697

)

 

 

(127,871

)

 

 

223,617

 

 

 

(128,697

)

 

 

(424

)

Comprehensive income (loss)

$

(33,701

)

 

$

572

 

 

$

30,941

 

 

$

2,760

 

 

$

572

 

 

$

(1,185

)

 

 

 

Three months ended June 30,  2017

 

 

Issuer/ Subsidiary

 

 

Parent/ Guarantor

 

 

Non-Guarantor Subsidiaries

 

 

Eliminations

 

 

Genpact Limited Shareholders

 

 

Redeemable Non-controlling interest

 

Net income (loss)

$

36,418

 

 

$

68,946

 

 

$

85,507

 

 

$

(121,925

)

 

$

68,946

 

 

$

156

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

16,557

 

 

 

20,085

 

 

 

20,085

 

 

 

(36,642

)

 

 

20,085

 

 

 

(66

)

Net income (loss) on cash flow hedging derivatives, net of taxes (Note 7)

 

(11,033

)

 

 

(9,611

)

 

 

(9,611

)

 

 

20,644

 

 

 

(9,611

)

 

 

 

Retirement benefits, net of taxes

 

 

 

 

223

 

 

 

223

 

 

 

(223

)

 

 

223

 

 

 

 

Other comprehensive income (loss)

 

5,524

 

 

 

10,697

 

 

 

10,697

 

 

 

(16,221

)

 

 

10,697

 

 

 

(66

)

Comprehensive income (loss)

$

41,942

 

 

$

79,643

 

 

$

96,204

 

 

$

(138,146

)

 

$

79,643

 

 

$

90

 

 

 

 

Six months ended June 30,  2017

 

 

Issuer/ Subsidiary

 

 

Parent/ Guarantor

 

 

Non-Guarantor Subsidiaries

 

 

Eliminations

 

 

Genpact Limited Shareholders

 

 

Redeemable Non-controlling interest

 

Net income (loss)

$

68,272

 

 

$

122,284

 

 

$

151,468

 

 

$

(219,740

)

 

$

122,284

 

 

$

(742

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

60,103

 

 

 

71,712

 

 

 

71,712

 

 

 

(131,815

)

 

 

71,712

 

 

 

(78

)

Net income (loss) on cash flow hedging derivatives, net of taxes (Note 7)

 

9,374

 

 

 

9,247

 

 

 

9,247

 

 

 

(18,621

)

 

 

9,247

 

 

 

 

Retirement benefits, net of taxes

 

70

 

 

 

342

 

 

 

342

 

 

 

(412

)

 

 

342

 

 

 

 

Other comprehensive income (loss)

 

69,547

 

 

 

81,301

 

 

 

81,301

 

 

 

(150,848

)

 

 

81,301

 

 

 

(78

)

Comprehensive income (loss)

$

137,819

 

 

$

203,585

 

 

$

232,769

 

 

$

(370,588

)

 

$

203,585

 

 

$

(820

)

 


53


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,  2018

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used for) provided by operating activities

 

$

(64,501

)

 

$

1,114

 

 

$

(110,032

)

 

$

222,903

 

 

$

49,484

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

 

 

 

 

 

 

(37,703

)

 

 

 

 

 

(37,703

)

Payment for internally generated intangible assets (including intangibles under development)

 

 

 

 

 

 

 

 

(11,544

)

 

 

 

 

 

(11,544

)

Proceeds from sale of property, plant and equipment

 

 

 

 

 

 

 

 

309

 

 

 

 

 

 

309

 

Investment in equity affiliates

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

-

 

Investment in subsidiaries

 

 

(2,000

)

 

 

 

 

 

2,063

 

 

 

(63

)

 

 

-

 

Proceeds from redemption of debentures, intercompany

 

 

91,761

 

 

 

 

 

 

-

 

 

 

(91,761

)

 

 

-

 

Payment for business acquisitions, net of cash acquired

 

 

 

 

 

 

 

 

(728

)

 

 

 

 

 

(728

)

Payment for purchase of redeemable non-controlling interest

 

 

 

 

 

 

 

 

(4,730

)

 

 

 

 

 

(4,730

)

Net cash (used for) provided by investing activities

 

$

89,761

 

 

$

 

 

 

(52,333

)

 

$

(91,824

)

 

$

(54,396

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of capital lease obligations

 

 

 

 

 

 

 

 

(1,108

)

 

 

 

 

 

(1,108

)

Payment of debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

 

 

 

 

 

 

(20,000

)

 

 

 

 

 

(20,000

)

Proceeds from short-term borrowings

 

 

 

 

 

 

 

 

105,000

 

 

 

 

 

 

105,000

 

Repayment of Short-term borrowings

 

 

 

 

 

 

 

 

(60,000

)

 

 

 

 

 

(60,000

)

Proceeds from intercompany loans

 

 

32,000

 

 

 

212,500

 

 

 

170,657

 

 

 

(415,157

)

 

 

 

Repayment of intercompany loans

 

 

(53,978

)

 

 

(51,500

)

 

 

(86,839

)

 

 

192,317

 

 

 

 

Proceeds from issuance of  common shares under stock-based compensation plans

 

 

 

 

 

9,388

 

 

 

 

 

 

 

 

 

9,388

 

Payment for net settlement of stock-based awards

 

 

 

 

 

(14,229

)

 

 

 

 

 

 

 

 

(14,229

)

Payment of earn-out/deferred consideration

 

 

 

 

 

 

 

 

(1,476

)

 

 

 

 

 

(1,476

)

Dividend paid

 

 

 

 

 

(28,648

)

 

 

 

 

 

 

 

 

(28,648

)

Payment for stock repurchased and retired

 

 

 

 

 

(130,103

)

 

 

 

 

 

 

 

 

(130,103

)

Payment for expenses related to stock repurchase

 

 

 

 

 

(82

)

 

 

 

 

 

 

 

 

(82

)

Payment for redemption of debentures, intercompany

 

 

 

 

 

 

 

 

(91,761

)

 

 

91,761

 

 

 

 

Net cash (used for) provided by financing activities

 

$

(21,978

)

 

$

(2,674

)

 

$

14,473

 

 

$

(131,079

)

 

$

(141,258

)

Effect of exchange rate changes

 

 

(3,463

)

 

 

 

 

 

(20,932

)

 

 

 

 

 

(24,395

)

Net increase (decrease) in cash and cash equivalents

 

 

3,282

 

 

 

(1,560

)

 

 

(147,892

)

 

 

 

 

 

(146,170

)

Cash and cash equivalents at the beginning of the period

 

 

4,507

 

 

 

2,136

 

 

 

497,825

 

 

 

 

 

 

504,468

 

Cash and cash equivalents at the end of the period

 

$

4,326

 

 

$

576

 

 

$

329,001

 

 

$

 

 

$

333,903

 

 


54


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data and share count)

 

29. Guarantor financial information (continued)

Condensed Consolidating Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,  2017

 

 

 

Issuer/

Subsidiary

 

 

Parent/

Guarantor

 

 

Non-

Guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used for) provided by operating activities

 

$

(331,065

)

 

$

(8,331

)

 

$

(142,528

)

 

$

597,248

 

 

$

115,324

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

 

 

 

 

 

 

(29,350

)

 

 

 

 

 

(29,350

)

Payment for internally generated intangible assets (including intangibles under development)

 

 

 

 

 

 

 

 

(8,950

)

 

 

 

 

 

(8,950

)

Proceeds from sale of property, plant and equipment

 

 

 

 

 

 

 

 

566

 

 

 

 

 

 

566

 

Investment in equity affiliates

 

 

 

 

 

 

 

 

(496

)

 

 

 

 

 

(496

)

Investment in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment for business acquisitions, net of cash acquired

 

 

 

 

 

 

 

 

(207,181

)

 

 

 

 

 

(207,181

)

Net cash (used for) provided by investing activities

 

$

 

 

$

 

 

$

(245,411

)

 

$

-

 

 

$

(245,411

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of capital lease obligations

 

 

 

 

 

 

 

 

(1,106

)

 

 

 

 

 

(1,106

)

Payment of debt issuance costs

 

 

(1,481

)

 

 

 

 

 

 

 

 

 

 

 

(1,481

)

Proceeds from long-term debt

 

 

350,000

 

 

 

 

 

 

 

 

 

 

 

 

350,000

 

Repayment of long-term debt

 

 

 

 

 

 

 

 

(20,000

)

 

 

 

 

 

(20,000

)

Proceeds from short-term borrowings

 

 

 

 

 

 

 

 

230,000

 

 

 

 

 

 

230,000

 

Repayment of short-term borrowings

 

 

 

 

 

 

 

 

(185,000

)

 

 

 

 

 

(185,000

)

Proceeds from intercompany loans

 

 

10,000

 

 

 

249,500

 

 

 

546,863

 

 

 

(806,363

)

 

 

 

Repayment of intercompany loans

 

 

(29,615

)

 

 

 

 

 

(179,500

)

 

 

209,115

 

 

 

 

Proceeds from issuance of  common shares under stock-based compensation plans

 

 

 

 

 

10,080

 

 

 

 

 

 

 

 

 

10,080

 

Payment for net settlement of stock-based awards

 

 

 

 

 

(9,949

)

 

 

 

 

 

 

 

 

(9,949

)

Payment of earn-out/deferred consideration

 

 

 

 

 

 

 

 

(1,287

)

 

 

 

 

 

(1,287

)

Dividend paid

 

 

 

 

 

(23,515

)

 

 

 

 

 

 

 

 

(23,515

)

Payment for stock repurchased and retired

 

 

 

 

 

(219,784

)

 

 

 

 

 

 

 

 

(219,784

)

Payment for expenses related to stock repurchase

 

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

(16

)

Net cash (used for) provided by financing activities

 

$

328,904

 

 

$

6,316

 

 

$

389,970

 

 

$

(597,248

)

 

$

127,942

 

Effect of exchange rate changes

 

 

810

 

 

 

 

 

 

19,776

 

 

 

 

 

 

20,586

 

Net increase (decrease) in cash and cash equivalents

 

 

(2,161

)

 

 

(2,015

)

 

 

2,031

 

 

 

 

 

 

(2,145

)

Cash and cash equivalents at the beginning of the period

 

 

11,215

 

 

 

7,849

 

 

 

403,559

 

 

 

 

 

 

422,623

 

Cash and cash equivalents at the end of the period

 

$

9,864

 

 

$

5,834

 

 

$

425,366

 

 

$

 

 

$

441,064

 

 


55


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2017 and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2017. In addition to historical information, this discussion includes forward-looking statements and information that involves risks, uncertainties and assumptions, including but not limited to those listed below and in our Annual Report on Form 10-K for the year ended December 31, 2017.

Special Note Regarding Forward-Looking Statements

We have made statements in this Quarterly Report on Form 10-Q (the “Quarterly Report”) in, among other sections, Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are forward-looking statements. In some cases, you can identify these statements by forward-looking terms such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “could,” “may,” “shall,” “will,” “would” and variations of such words and similar expressions, or the negative of such words or similar expressions. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, which in some cases may be based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks outlined in Part I, Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

These forward-looking statements include, but are not limited to, statements relating to:

 

our ability to retain existing clients and contracts;

 

our ability to win new clients and engagements;

 

the expected value of the statements of work under our master service agreements;

 

our beliefs about future trends in our market;

 

political, economic or business conditions in countries where we have operations or where our clients operate;

 

expected spending on business process outsourcing and information technology services by clients;

 

foreign currency exchange rates;

 

our ability to convert bookings to revenue;

 

our rate of employee attrition;

 

our effective tax rate; and

 

competition in our industry.

Factors that may cause actual results to differ from expected results include, among others:

 

our ability to grow our business and effectively manage growth and international operations while maintaining effective internal controls;

 

our dependence on favorable policies and tax laws that may be changed or amended in a manner adverse to us or be unavailable to us in the future, including as a result of recently adopted tax legislation in the United States, the overall impact of which on us we are currently unable to determine;

 

our ability to maintain the security and confidentiality of personal and other sensitive data of our clients, employees or others;

 

our dependence on revenues derived from clients in the United States and Europe and clients that operate in certain industries, such as the financial services industry;

 

our ability to successfully consummate or integrate strategic acquisitions;

 

our ability to maintain pricing and asset utilization rates;

56


 

 

our ability to hire and retain enough qualified employees to support our operations;

 

increases in wages in locations in which we have operations;

 

our relative dependence on the General Electric Company (GE) and our ability to maintain our relationships with divested GE businesses;

 

financing terms, including, but not limited to, changes in the London Interbank Offered rate, or LIBOR, and changes in our credit ratings;

 

our ability to meet our corporate funding needs, pay dividends and service debt, including our ability to comply with the restrictions that apply to our indebtedness that may limit our business activities and investment opportunities;  

 

restrictions on visas for our employees traveling to North America and Europe;

 

fluctuations in currency exchange rates between the U.S. dollar, Australian dollar, Chinese renminbi, Euro, Indian rupee, Japanese yen, Mexican peso, Philippine peso, Polish zloty, Romanian leu, and U.K. pound sterling;

 

our ability to retain senior management;

 

the selling cycle for our client relationships;

 

our ability to attract and retain clients and our ability to develop and maintain client relationships on attractive terms;

 

legislation in the United States or elsewhere that adversely affects the performance of business process outsourcing and information technology services offshore;

 

increasing competition in our industry;

 

telecommunications or technology disruptions or breaches, or natural or other disasters;

 

our ability to protect our intellectual property and the intellectual property of others;

 

deterioration in the global economic environment and its impact on our clients, including the bankruptcy of our clients;

 

regulatory, legislative and judicial developments, including the withdrawal of governmental fiscal incentives;

 

the international nature of our business;

 

technological innovation;

 

our ability to derive revenues from new service offerings; and

 

unionization of any of our employees.

Although we believe the expectations reflected in any forward-looking statements are reasonable at the time they are made, we cannot guarantee future results, level of activity, performance or achievements. Achievement of future results is subject to risks, uncertainties, and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. We undertake no obligation to update any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-K, Form 10-Q and Form 8-K reports to the SEC.

Overview

We are a global professional services firm that makes business transformation real.  We drive digital-led innovation and run digitally-enabled intelligent operations for our clients, guided by our experience running thousands of processes for hundreds of Fortune Global 500 clients.  We have over 80,000 employees serving clients in key industry verticals from more than 20 countries. Our registered office is located at Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda.

In the quarter ended June 30, 2018, we had net revenues of $728.6 million, of which $663.1 million, or 91.0%, was from clients other than GE, which we refer to as Global Clients, with the remaining $65.4 million, or 9.0%, coming from GE.

57


 

Acquisitions

On January 8, 2016, we acquired 51% of the outstanding equity interest in Strategic Sourcing Excellence LLC (“SSE”), a Delaware limited liability company, for total consideration of $14.5 million. This amount includes the fair value of earn-out consideration and cash consideration of $2.6 million, adjusted for working capital, transaction expenses, indebtedness and measurement period adjustments, which did not have a significant impact on the our consolidated statements of income, balance sheets or cash flows in the periods in which the adjustments were made. This acquisition strengthens our procurement consulting, transformation and strategic sourcing capabilities. The equity purchase agreement between us and the selling equity holders provides for contingent earn-out consideration of up to $20.0 million, payable by us to the selling equity holders based on the performance of SSE following closing relative to the thresholds specified in the earn-out calculation. Up to $9.8 million of the total potential earn-out consideration, representing the selling equity holders’ 49% interest in SSE, was payable by us to the selling equity holders only if either the put or call option, each as described below, was exercised. Goodwill arising from the acquisition amounted to $14.4 million, which has been allocated to our India reporting unit and is deductible for tax purposes.  The equity purchase agreement granted us a call option to purchase the remaining 49% equity interest in SSE, which option we had the right to exercise between January 1, 2018 and January 31, 2018. Since we did not exercise our call option during such period, the selling equity holders exercised their put option on March 1, 2018 in accordance with the terms of the equity purchase agreement to require us to purchase their 49% interest in SSE for $3.0 million. We also paid the selling equity holders $1.8 million in earn-out consideration in the first quarter of 2018. The amount we paid in excess of the carrying amount has been recorded in additional paid-in capital. The goodwill represents future economic benefits we expect to derive from our expanded presence in the sourcing and procurement consulting domains, operating synergies and other anticipated benefits of combining the acquired operations with our existing operations.

On September 5, 2017, we acquired 100% of the outstanding equity interest in TandemSeven, Inc. (“TandemSeven”), a Massachusetts corporation, for estimated total purchase consideration of $35.6 million. This amount includes cash consideration of $31.8 million, net of cash acquired of $3.9 million, and an adjustment for working capital and indebtedness. TandemSeven’s focus on improving the design of customer experiences complements our existing capabilities aimed at transforming clients’ processes end-to-end. Goodwill arising from the acquisition amounted to $25.2 million, which has been allocated to our India reporting unit and is deductible for tax purposes. The goodwill represents primarily the acquired expertise, operating synergies and other benefits expected to result from combining the acquired operations with our existing operations.

On May 3, 2017, we acquired 100% of the outstanding equity interest in each of BrightClaim LLC, a Delaware limited liability company, BrightServe LLC, a Georgia limited liability company, National Vendor LLC, a Delaware limited liability company, and BrightClaim Blocker, Inc., a Delaware corporation (collectively referred to as “BrightClaim”). The total purchase consideration for the acquisition of BrightClaim was $56.5 million. This amount includes cash consideration of $52.4 million, net of cash acquired of $4.0 million, adjusted for working capital, net debt, transaction expenses and measurement period adjustments which did not have a significant impact on our consolidated statements of income, balance sheets or cash flows in the applicable adjustment periods. This acquisition enhances our breadth and depth of service offerings for clients in the insurance industry. Goodwill arising from the acquisition amounted to $42.6 million, which has been allocated to our India reporting unit and is partially deductible for tax purposes. The goodwill represents primarily the capabilities, operating synergies and other benefits expected to be derived from combining the acquired operations with our existing operations.

On April 13, 2017, we acquired 100% of the outstanding equity interest in RAGE Frameworks, Inc. (“RAGE”), a Delaware corporation for total purchase consideration of $125.3 million. This amount includes cash consideration of $124.1 million, net of cash acquired of $1.6 million, and an adjustment for working capital and indebtedness. This acquisition enhances our digital and artificial intelligence capabilities by adding knowledge-based automation technology and services. Goodwill arising from the acquisition amounted to $105.5 million, which has been allocated to our India reporting unit and is not deductible for tax purposes. The goodwill represents primarily the acquired digital and artificial intelligence capabilities, operating synergies and other benefits expected to be derived from combining the acquired operations with our existing operations.

During 2017, we also completed five individually immaterial business acquisition transactions, namely the acquisition of a supply chain management delivery center in the U.S. (“U.S. Delivery Center”), the purchase of all of the outstanding equity interest in OnSource, LLC (“OnSource”), the purchase of the IT business of Birlasoft (“Birlasoft”), the purchase of the image processing business of Fiserv Solutions of Australia Pty Ltd. (“Fiserv”) and the purchase of all of the outstanding equity interest in Lease Dimensions, Inc. (“Lease Dimensions”). The aggregate total estimated consideration to consummate these acquisitions was $87.6 million. This aggregate amount includes the estimated fair value of contingent earn-out consideration, cash consideration of $76.6 million, net of cash acquired of $0.3 million, and

58


 

adjustments for closing date working capital, indebtedness, value transfer, seller transaction expenses and certain employee-related liabilities. In addition, this amount reflects measurement period adjustments related to the Birlasoft and Fiserv transactions. These adjustments did not have a significant impact on our consolidated statements of income, balance sheets or cash flows in the periods in which the adjustments were made.

The U.S. Delivery Center acquisition enhances our supply chain management capabilities for clients in the consumer packaged goods industry. The OnSource acquisition brings incremental digital capabilities to our insurance service offerings. The Birlasoft transaction expands our end-to-end capabilities for clients in the healthcare and aviation industries. The Fiserv transaction strengthens our financial services portfolio and expands our Australia footprint. The Lease Dimensions acquisition enhances our capabilities in commercial lending and leasing.

The purchase agreement for the acquisition of the U.S. Delivery Center provides for contingent earn-out consideration ranging from $0 to $10.0 million, payable by us to the seller based on the achievement of certain milestones relative to the thresholds specified in the earn-out calculation. The purchase agreement for the Lease Dimensions acquisition provides for contingent earn-out consideration ranging from $0 to $3.0 million, payable by us to the sellers based on the performance of the business following closing relative to the thresholds specified in the earn-out calculation.

Goodwill arising from these acquisitions amounted to $56.5 million. This goodwill represents primarily the capabilities, operating synergies and other benefits expected to result from combining the acquired operations with our existing operations. The following table sets forth, with respect to each of the five acquisitions, the acquisition date, goodwill reporting unit and goodwill deductibility for tax purposes:

 

Acquisition

Acquisition date

Goodwill reporting unit

Tax deductibility - goodwill

U.S. Delivery Center

October 16, 2017

India

Deductible

OnSource

July 18, 2017

India

Deductible

Birlasoft

July 18, 2017

IT Services

Deductible

Fiserv

May 11, 2017

India

Non-deductible

Lease Dimensions

February 15, 2017

Americas

Non-deductible

 

On July 16, 2018, we signed a definitive agreement to acquire the outstanding equity interests in Barkawi Management Consultants GmbH & Co. KG and certain related entities (collectively referred to as “Barkawi”) for estimated cash consideration of $100.1 million, subject to certain adjustments. The closing of the transaction is subject to certain customary closing conditions. Barkawi is a leading supply chain management consulting business.

Critical Accounting Policies and Estimates

For a description of our critical accounting policies, see Note 2—“Summary of significant accounting policies” under Part I, Item 1—“Financial Statements” above, Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates,” and Note 2—“Summary of significant accounting policies” under Part IV, Item 15—“Exhibits and Financial Statement Schedules” in our Annual Report on Form 10-K for the year ended December 31, 2017.

We adopted the new accounting standard for revenue recognition effective January 1, 2018, using the modified retrospective effect method. For further discussion and additional disclosure regarding our adoption of this standard, see Note 2—“Summary of significant accounting policies” and Note 19—“Net revenues” under Part I, Item 1—“Financial Statements” above.

59


 

Results of Operations

The following table sets forth certain data from our consolidated statements of income for the three and six months ended June 30, 2017 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

Three months

ended June 30,

 

 

 

Six months

ended June 30,

 

 

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

 

2018 vs. 2017

 

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues—GE*

 

$

63.2

 

 

$

65.4

 

 

$

132.4

 

 

$

123.5

 

 

 

 

3.6

 

%

 

 

(6.8

)

%

Net revenues—Global Clients*

 

 

607.5

 

 

 

663.1

 

 

 

1,161.2

 

 

 

1,294.0

 

 

 

 

9.2

 

%

 

 

11.4

 

%

Total net revenues

 

 

670.7

 

 

 

728.6

 

 

 

1,293.7

 

 

 

1,417.5

 

 

 

 

8.6

 

%

 

 

9.6

 

%

Cost of revenue

 

 

414.5

 

 

 

462.9

 

 

 

797.8

 

 

 

907.2

 

 

 

 

11.7

 

%

 

 

13.7

 

%

Gross profit

 

 

256.2

 

 

 

265.7

 

 

 

495.8

 

 

 

510.3

 

 

 

 

3.7

 

%

 

 

2.9

 

%

Gross profit margin

 

 

38.2

 

%

 

36.5

 

%

 

38.3

 

%

 

36.0

 

%

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

167.8

 

 

 

176.2

 

 

 

328.6

 

 

 

347.3

 

 

 

 

5.0

 

%

 

 

5.7

 

%

Amortization of acquired intangible assets

 

 

8.4

 

 

 

9.8

 

 

 

15.6

 

 

 

19.8

 

 

 

 

17.2

 

%

 

 

26.4

 

%

Other operating (income) expense, net

 

 

(0.9

)

 

 

0.1

 

 

 

(8.5

)

 

 

(0.1

)

 

 

 

(116.3

)

%

 

 

(99.2

)

%

Income from operations

 

 

81.0

 

 

 

79.5

 

 

 

160.1

 

 

 

143.3

 

 

 

 

(1.8

)

%

 

 

(10.5

)

%

Income from operations as a percentage of net revenues

 

 

12.1

 

%

 

10.9

 

%

 

12.4

 

 

 

10.1

 

%

 

 

 

 

 

 

 

 

 

 

Foreign exchange gains (losses), net

 

 

1.9

 

 

 

2.8

 

 

 

(3.0

)

 

 

7.6

 

 

 

 

46.6

 

%

 

 

(353.4

)

%

Interest income (expense), net

 

 

(9.9

)

 

 

(10.4

)

 

 

(15.3

)

 

 

(18.5

)

 

 

 

5.7

 

%

 

 

20.6

 

%

Other income (expense), net

 

 

11.6

 

 

 

9.7

 

 

 

12.1

 

 

 

25.3

 

 

 

 

(15.7

)

%

 

 

108.8

 

%

Income before equity-method investment activity, net and income tax expense

 

 

84.6

 

 

 

81.7

 

 

 

153.8

 

 

 

157.7

 

 

 

 

(3.4

)

%

 

 

2.5

 

%

Equity-method investment activity, net

 

 

 

 

 

 

 

 

(4.6

)

 

 

 

 

 

 

66.7

 

%

 

 

(99.7

)

%

Income before income tax expense

 

 

84.6

 

 

 

81.7

 

 

 

149.3

 

 

 

157.7

 

 

 

 

(3.5

)

%

 

 

5.6

 

%

Income tax expense

 

 

15.5

 

 

 

17.1

 

 

 

27.7

 

 

 

29.2

 

 

 

 

10.4

 

%

 

 

5.2

 

%

Net income

 

 

69.1

 

 

 

64.6

 

 

 

121.5

 

 

 

128.5

 

 

 

 

(6.6

)

%

 

 

5.7

 

%

Net loss (income) attributable to redeemable non-controlling interest

 

 

(0.2

)

 

 

 

 

 

0.7

 

 

 

0.8

 

 

 

 

(100.0

)

%

 

 

2.6

 

%

Net income attributable to Genpact Limited common shareholders

 

$

68.9

 

 

$

64.6

 

 

$

122.3

 

 

$

129.3

 

 

 

 

(6.3

)

%

 

 

5.7

 

%

Net income attributable to Genpact Limited common shareholders as a percentage of net revenues

 

 

10.3

 

%

 

8.9

 

%

 

9.5

 

%

 

9.1

 

%

 

 

 

 

 

 

 

 

 

 

 

*

At the end of each fiscal year, we reclassify revenue from certain divested GE businesses as Global Client revenue as of the dates of divestiture. Such reclassifications for 2017 are reflected in the revenue results and growth rates presented in the table above.

60


 

Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017

Net revenues. Our net revenues were $728.6 million in the second quarter of 2018, up $57.9 million, or 8.6%, from $670.7 million in the second quarter of 2017. The growth in our net revenues was driven primarily by an increase in business process outsourcing, or BPO, services – including our transformation services – delivered to our Global Clients, and incremental revenue from acquisitions completed in 2017. Adjusted for foreign exchange, primarily the impact of changes in the value of the euro against the U.S. dollar, our net revenues grew 8% compared to the second quarter of 2017 on a constant currency basis. Revenue growth on a constant currency basis is a non-GAAP measure. We provide information about our revenue growth on a constant currency basis so that our revenue may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of our business performance. Total net revenues on a constant currency basis are calculated by restating current-period activity using the prior fiscal period’s foreign currency exchange rates and adjusted for hedging gains/losses.

Our average headcount increased by 4.3% to approximately 78,400 in the second quarter of 2018 from approximately 75,200 in the second quarter of 2017.

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Three months ended June 30,

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

Global Clients:

 

 

 

 

 

 

 

 

 

 

 

 

 

BPO services

 

$

510.9

 

 

$

568.6

 

 

 

11.3

 

%

IT services

 

 

96.6

 

 

 

94.5

 

 

 

(2.2

)

 

Total net revenues from Global Clients

 

$

607.5

 

 

$

663.1

 

 

 

9.2

 

%

GE:

 

 

 

 

 

 

 

 

 

 

 

BPO services

 

 

45.4

 

 

 

37.3

 

 

 

(17.8

)

%

IT services

 

 

17.8

 

 

 

28.2

 

 

 

58.0

 

 

Total net revenues from GE

 

$

63.2

 

 

$

65.4

 

 

 

3.6

 

%

Total net revenues from BPO services

 

 

556.2

 

 

 

605.9

 

 

 

8.9

 

 

Total net revenues from IT services

 

 

114.5

 

 

 

122.7

 

 

 

7.1

 

 

Total net revenues

 

$

670.7

 

 

$

728.6

 

 

 

8.6

 

%

 

Net revenues from Global Clients in the second quarter of 2018 were $663.1 million, up $55.6 million, or 9.2%, from $607.5 million in the second quarter of 2017. This increase was primarily driven by growth in several of our chosen verticals, including banking and financial services, high tech and infrastructure, manufacturing and services. As a percentage of total net revenues, net revenues from Global Clients increased from 90.6% in the second quarter of 2017 to 91.0% in the second quarter of 2018.

Net revenues from GE in the second quarter of 2018 were $65.4 million, up $2.3 million, or 3.6%, from the second quarter of 2017. The increase is attributable to a large IT services engagement with GE which more than offset the impact of a decline in services delivered to certain GE businesses in the second quarter of 2018 compared to the second quarter of 2017. Prior to 2016, we reclassified revenues from GE-divested businesses as Global Client revenues in each fiscal quarter beginning on the dates of divestiture. However, beginning with 2016, we reclassify such revenue as Global Client revenue only at the end of each fiscal year. We believe that this change allows us to provide a more consistent view of quarterly trends underlying our Global Client and GE businesses. Net revenues from GE declined as a percentage of our total net revenues from 9.4% in the second quarter of 2017 to 9.0% in the second quarter of 2018.

Net revenues from BPO services in the second quarter of 2018 were $605.9 million, up $49.7 million, or 8.9%, from $556.2 million in the second quarter of 2017. This increase was primarily attributable to an increase in services delivered to our Global Clients, particularly transformation services. Net revenues from IT services were $122.7 million in the second quarter of 2018, up $8.2 million, or 7.1%, from $114.5 million in the second quarter of 2017.

Net revenues from BPO services as a percentage of total net revenues increased to 83.2% in the second quarter of 2018 from 82.9% in the second quarter of 2017, with a corresponding decline in the percentage of total net revenues attributable to IT services.

61


 

Cost of revenue and gross margin. The following table sets forth the components of our cost of revenue and the resulting gross margin:

 

 

 

Three Months Ended June 30,

 

 

As a Percentage of Total Net Revenues

 

 

 

 

2017

 

 

2018

 

 

2017

 

 

 

2018

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

Personnel expenses

 

$

284.6

 

 

$

322.8

 

 

 

42.4

 

%

 

 

44.3

 

%

Operational expenses

 

 

119.6

 

 

 

127.1

 

 

 

17.8

 

 

 

 

17.4

 

 

Depreciation and amortization

 

10.4

 

 

 

13.0

 

 

 

1.5

 

 

 

 

1.8

 

 

Cost of revenue

 

$

414.5

 

 

$

462.9

 

 

 

61.8

 

%

 

 

63.5

 

%

Gross margin

 

 

38.2

%

 

 

36.5

%

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue was $462.9 million in the second quarter of 2018, up $48.4 million, or 11.7%, from the second quarter of 2017. Wage inflation, increases in our operational headcount, including in the number of onshore personnel, incremental expenses from acquisitions completed in 2017, the unfavorable impact of foreign exchange on our expenditures in certain currencies, primarily the Indian rupee and U.K. pound sterling, and higher stock-based compensation expense contributed to the increase in cost of revenue in the second quarter of 2018 compared to the second quarter of 2017. Fluctuations in foreign exchange rates result in gains and losses on our foreign currency hedges and a translation impact when we convert our non-U.S. dollar income statement items to the U.S. dollar, our reporting currency. These increases were partially offset by improved operational efficiencies in the second quarter of 2018 compared to the second quarter of 2017.

Our gross margin decreased from 38.2% in the second quarter of 2017 to 36.5% in the second quarter of 2018 due to the factors described above and a reduction in the utilization of personnel.

Personnel expenses. Personnel expenses as a percentage of total net revenues increased from 42.4% in the second quarter of 2017 to 44.3% in the second quarter of 2018. Personnel expenses in the second quarter of 2018 were $322.8 million, up $38.2 million, or 13.4%, from $284.6 million in the second quarter of 2017. The impact of wage inflation, incremental expenses from acquisitions consummated in 2017, an approximately 1,800-person, or 2.7%, increase in our operational headcount, including in the number of onshore personnel, and the unfavorable impact of foreign exchange all contributed to higher personnel expenses in the second quarter of 2018 compared to the second quarter of 2017. Higher stock-based compensation expense also resulted in higher personnel expenses in the second quarter of 2018 compared to the second quarter of 2017.

Operational expenses. Operational expenses as a percentage of total net revenues decreased from 17.8% in the second quarter of 2017 to 17.4% in the second quarter of 2018. Operational expenses in the second quarter of 2018 were $127.1 million, up $7.5 million, or 6.3%, from the second quarter of 2017 primarily due to incremental expenses from acquisitions completed in 2017 and the unfavorable impact of foreign exchange. The increase in operational expenses was partially offset by improved operational efficiencies and lower IT expenses.

Depreciation and amortization expenses. Depreciation and amortization expenses as a percentage of total net revenues increased from 1.5% in the second quarter of 2017 to 1.8% in the second quarter of 2018. Depreciation and amortization expenses as a component of cost of revenue were $13.0 million, up $2.6 million, or 25.4%, from the second quarter of 2017. This increase was primarily due to the expansion of certain existing facilities.

Selling, general and administrative expenses. The following table sets forth the components of our selling, general and administrative, or SG&A, expenses:

 

 

 

Three Months Ended June 30,

 

 

As a Percentage of Total Net Revenues

 

 

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

Personnel expenses

 

$

122.5

 

 

$

126.6

 

 

 

18.3

 

%

 

17.4

 

%

Operational expenses

 

 

42.9

 

 

 

46.9

 

 

 

6.4

 

 

 

6.4

 

 

Depreciation and amortization

 

 

2.3

 

 

 

2.6

 

 

 

0.4

 

 

 

0.4

 

 

Selling, general and administrative expenses

 

$

167.8

 

 

$

176.2

 

 

 

25.0

 

%

 

24.2

 

%

 

62


 

SG&A expenses as a percentage of total net revenues decreased from 25.0% in the second quarter of 2017 to 24.2% in the second quarter of 2018. SG&A expenses were $176.2 million, up $8.4 million, or 5.0%, from the second quarter of 2017. Incremental expenses from acquisitions completed in 2017, higher stock-based compensation expenses, an increase in marketing expenditures, incremental sales headcount and the unfavorable impact of foreign exchange on our expenses in certain currencies, primarily the Indian rupee and U.K. pound sterling, all contributed to higher SG&A expenses in the second quarter of 2018 compared to the second quarter of 2017. These increases were partially offset by cost efficiencies in the second quarter of 2018 compared to the second quarter of 2017. Our sales and marketing expenses as a percentage of total net revenues in the second quarter of 2018 were approximately 7.3%, marginally higher than in the second quarter of 2017.

Personnel expenses. As a percentage of total net revenues, personnel expenses decreased from 18.3% in the second quarter of 2017 to 17.4% in the second quarter of 2018. Personnel expenses as a component of SG&A expenses were $126.6 million, up $4.1 million, or 3.3%, from the second quarter of 2017. This increase is primarily due to incremental expenses from acquisitions completed in 2017, wage inflation, and the unfavorable impact of foreign exchange. Higher stock-based compensation expense also resulted in higher personnel expenses in the second quarter of 2018 compared to the second quarter of 2017.

Operational expenses. As a percentage of total net revenues, operational expenses were 6.4% in the second quarter of 2018, unchanged from the second quarter of 2017. Operational expenses as a component of SG&A expenses were $46.9 million, up $4.1 million, or 9.5%, from the second quarter of 2017. This increase is primarily due to incremental expenses from acquisitions consummated in 2017, an increase in marketing expenditures and the unfavorable impact of foreign exchange. These increases were partially offset by cost efficiencies and lower infrastructure and travel expenses in the second quarter of 2018 compared to the second quarter of 2017.

Depreciation and amortization. Depreciation and amortization expenses as a percentage of total net revenues were 0.4% in the second quarter of 2018, unchanged from the second quarter of 2017. Depreciation and amortization expenses as a component of SG&A expenses were $2.6 million, up $0.3 million, or 11.6%, from the second quarter of 2017.

Amortization of acquired intangibles. Non-cash charges on account of amortization of acquired intangibles were $9.8 million in the second quarter of 2018, up $1.4 million, or 17.2%, from the second quarter of 2017. This increase was primarily due to the amortization of intangibles acquired after the second quarter of 2017.

Other operating (income) expense, net. The following table sets forth the components of other operating (income) expense, net:

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Three Months Ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Other operating (income) expense

 

$

(2.6

)

 

$

(0.1

)

 

 

(98.1

)

%

Provision for impairment of intangible assets and property, plant and equipment

 

 

 

 

 

0.9

 

 

 

 

 

Change in the fair value of earn-out consideration, deferred consideration (relating to business acquisitions)

 

 

1.7

 

 

 

(0.7

)

 

 

(137.9

)

 

Other operating (income) expense, net

 

$

(0.9

)

 

$

0.1

 

 

 

(116.3

)

%

Other operating (income) expense, net as a percentage of total net revenues

 

 

(0.1

)

%

 

 

%

 

 

 

 

 

Other operating expense, net of income, was $0.1 million in the second quarter of 2018, compared to other operating income of $0.9 million in the second quarter of 2017. We recorded a gain of $2.6 million in the second quarter of 2017, compared to a $0.1 million gain in the second quarter of 2018, primarily as a result of partially writing back certain liabilities. Additionally, in the second quarter of 2017 we recorded an expense of $1.7 million due to changes in the fair value of earn-out consideration payable in connection with certain acquisitions, compared to a gain of $0.7 million in the second quarter of 2018. We also recorded a $0.9 million non-recurring charge relating to a computer software and technology-related intangible asset, which charge we discuss in Note 9—“Property, plant and equipment, net” under Part I, Item 1—“Financial Statements” above. No such charge was recorded in the second quarter of 2017.

Income from operations. As a result of the foregoing factors, income from operations as a percentage of total net revenues decreased from 12.1% in the second quarter of 2017 to 10.9% in the second quarter of 2018. Income from

63


 

operations decreased by $1.4 million to $79.5 million in the second quarter of 2018 from $81.0 million in the second quarter of 2017.

Foreign exchange gains (losses), net. Foreign exchange gains (losses), net represents the impact of the re-measurement of our non-functional currency assets and liabilities and related foreign exchange contracts. We recorded a net foreign exchange gain of $2.8 million in the second quarter of 2018, compared to $1.9 million in the second quarter of 2017. The gain in the second quarter of 2018 resulted primarily from the depreciation of the Indian rupee and the U.K. pound sterling against the U.S. dollar. The gain in the second quarter of 2017 resulted primarily from the appreciation of the euro and the Australian dollar against the U.S. dollar.

Interest income (expense), net. The following table sets forth the components of interest income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Three Months Ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Interest income

 

$

0.9

 

 

$

1.8

 

 

 

105.6

 

%

Interest expense

 

 

(10.7

)

 

 

(12.2

)

 

 

13.7

 

 

Interest income (expense), net

 

$

(9.9

)

 

$

(10.4

)

 

 

5.7

 

%

Interest income (expense), net as a percentage of total net revenues

 

 

(1.5

)

%

 

(1.4

)

%

 

 

 

 

 

Our net interest expense increased by $0.6 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to a $1.5 million increase in interest expense, partially offset by an increase in interest income. The increase in interest expense is primarily due to (i) an increase in LIBOR, resulting in higher interest expense on the term loan under our LIBOR-linked credit facility, partially offset by gains on interest rate swaps in the second quarter of 2018 compared to losses in the second quarter of 2017, which we discuss in the section titled “Liquidity and Capital Resources—Financial Condition” below, and (ii) higher drawdown on our revolving credit facility in the second quarter of 2018 compared to the second quarter of 2017. Our interest income increased by $0.9 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to higher account balances in India, where we earn higher interest rates on our deposits than in other jurisdictions where we have deposits. The weighted average rate of interest on our debt, including the net impact of interest rate swaps, increased from 2.9% in the second quarter of 2017 to 3.2% in the second quarter of 2018.

Other income (expense), net. The following table sets forth the components of other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Three months ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Government incentives

 

$

11.9

 

 

$

10.2

 

 

 

(14.2

)

%

Other income/(expense)

 

 

(0.3

)

 

0.4

 

 

 

(239.1

)

 

Other income (expense), net

 

$

11.6

 

 

$

10.6

 

 

 

(7.9

)

%

Other income (expense), net as a percentage of total net revenues

 

 

1.7

 

%

 

1.5

 

%

 

 

 

 

 

Our net other income was $10.6 million in the second quarter of 2018, down $0.9 million from $11.6 million in the second quarter of 2017, primarily due to lower income recorded in connection with an export subsidy in the second quarter of 2018 compared to the second quarter of 2017. This subsidy was introduced under the Foreign Trade Policy of India to encourage the export of specified services from India and is currently available for eligible export services through March 31, 2019.

Equity-method investment activity, net. Equity-method investment activity, net primarily represents our share of loss in one of our non-consolidated affiliates that we divested on June 30, 2017.

Income tax expense. Our income tax expense was $17.1 million in the second quarter of 2018, up from $15.5 million in the second quarter of 2017, representing an effective tax rate, or ETR, of 20.9%, up from 18.3% in the second quarter of 2017. The increase in our ETR is primarily due to certain special economic zone units in India becoming partially taxable

64


 

in the second quarter of 2018, a change in the jurisdictional mix of our income quarter-over-quarter and the absence in the second quarter of 2018 of certain discrete benefits that we recorded in the second quarter of 2017.

Net income attributable to redeemable non-controlling interest. Non-controlling interest primarily refers to the loss associated with the redeemable non-controlling interest in the operations of SSE, which we acquired in the first quarter of 2016. We purchased the remaining share of the outstanding equity interest in SSE in the first quarter of 2018. See Note 3—“Business acquisitions” under Part I, Item 1—“Financial Statements” above.

Net income attributable to Genpact Limited shareholders. As a result of the foregoing factors, net income attributable to our common shareholders as a percentage of total net revenues was 8.9% in the second quarter of 2018, down from 10.3% in the second quarter of 2017. Net income attributable to our common shareholders decreased by $4.4 million from $68.9 million in the second quarter of 2017 to $64.6 million in the second quarter of 2018.

Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

Net revenues. Our net revenues were $1,417.5 million in first half of 2018, up $123.8 million, or 9.6%, from $1,293.7 million in first half of 2017. The growth in our net revenues was driven by an increase in BPO services – including our transformation services – delivered to our Global Clients, and incremental revenue from acquisitions completed in 2017. Adjusted for foreign exchange, primarily the impact of changes in the value of the euro against the U.S. dollar, our net revenues grew 8% compared to the first half of 2017. Revenue growth on a constant currency basis is a non-GAAP measure. We provide information about our revenue growth on a constant currency basis so that our revenue may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of our business performance. Total net revenues on a constant currency basis are calculated by restating current-period activity using the prior fiscal period’s foreign currency exchange rates and adjusted for hedging gains/losses.

Our average headcount increased by 3.3% to approximately 77,700 in first half of 2018 from approximately 75,200 in first half of 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Six months ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Global Clients:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BPO services

 

$

 

973.2

 

 

$

 

1,108.8

 

 

 

13.9

 

%

IT services

 

 

 

188.0

 

 

 

 

185.1

 

 

 

(1.5

)

 

Total net revenues from Global Clients

 

$

 

1,161.2

 

 

$

 

1,294.0

 

 

 

11.4

 

%

GE:

 

 

 

 

 

 

 

 

 

 

 

BPO services

 

 

 

94.3

 

 

 

 

71.1

 

 

 

(24.6

)

%

IT services

 

 

 

38.1

 

 

 

 

52.4

 

 

 

37.3

 

 

Total net revenues from GE

 

$

 

132.4

 

 

$

 

123.5

 

 

 

(6.8

)

%

Total net revenues from BPO services

 

 

 

1,067.5

 

 

 

 

1,180.0

 

 

 

10.5

 

 

Total net revenues from IT services

 

 

 

226.2

 

 

 

 

237.5

 

 

 

5.0

 

 

Total net revenues

 

$

 

1,293.7

 

 

$

 

1,417.5

 

 

 

9.6

 

%

 

Net revenues from Global Clients in the first half of 2018 were $1,294.0 million, up $132.7 million, or 11.4%, from $1,161.2 million in first half of 2017. This increase was driven by growth in several of our chosen verticals, including banking and financial services, high tech and infrastructure, manufacturing and services. As a percentage of total net revenues, net revenues from Global Clients increased from 89.8% in the first half of 2017 to 91.3% in the first half of 2018.

Net revenues from GE in the first half of 2018 were $123.5 million, down $9.0 million, or 6.8%, from the first half of 2017. The decline in net revenues from GE was largely due to the impact of a decline in services delivered to certain GE businesses and was partially offset by an increase in services delivered to GE in the first half of 2018 under an IT services engagement. Prior to 2016, we reclassified revenues from GE-divested businesses as Global Client revenues in each fiscal quarter beginning on the dates of divestiture. However, beginning with 2016, we reclassify such revenue as Global Client revenue only at the end of each fiscal year. We believe that this change allows us to provide a more consistent view of quarterly trends underlying our Global Client and GE businesses. Net revenues from GE declined as a percentage of our total net revenues from 10.2% in first half of 2017 to 8.7% in first half of 2018.

65


 

Net revenues from BPO services in the first half of 2018 were $1,180.0 million, up $112.5 million, or 10.5%, from $1,067.5 million in the first half of 2017. This increase was primarily attributable to an increase in services delivered to our Global Clients, particularly transformation services. Net revenues from IT services were $237.5 million in the first half of 2018, up $11.3 million, or 5.0%, from $226.2 million in the first half of 2017.

Net revenues from BPO services as a percentage of total net revenues increased to 83.2% in first half of 2018 from 82.5% in first half of 2017, with a corresponding decline in the percentage of total net revenues attributable to IT services.

Cost of revenue and gross margin. The following table sets forth the components of our cost of revenue and the resulting gross margin:

 

 

 

Six Months Ended June 30,

 

 

As a Percentage of Total Net Revenues

 

 

 

 

2017

 

 

2018

 

 

2017

 

 

 

2018

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

Personnel expenses

 

$

553.7

 

 

$

632.9

 

 

 

42.8

 

%

 

 

44.7

 

%

Operational expenses

 

 

222.3

 

 

 

248.5

 

 

 

17.2

 

 

 

 

17.5

 

 

Depreciation and amortization

 

21.8

 

 

 

25.8

 

 

 

1.7

 

 

 

 

1.8

 

 

Cost of revenue

 

$

797.8

 

 

$

907.2

 

 

 

61.7

 

%

 

 

64.0

 

%

Gross margin

 

 

38.3

%

 

 

36.0

%

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue was $907.2 million in the first half of 2018, up $109.4 million, or 13.7%, from the first half of 2017. Wage inflation, increases in our operational headcount, including in the number of onshore personnel, incremental expenses from acquisitions consummated in 2017, the unfavorable impact of foreign exchange on our expenditures in certain currencies, primarily the Indian rupee and U.K. pound sterling, and higher stock-based compensation expense contributed to the increase in cost of revenue in the first half of 2018 compared to the first half of 2017. Fluctuations in foreign exchange rates result in gains and losses on our foreign currency hedges and a translation impact when we convert our non-U.S. dollar income statement items to the U.S. dollar, our reporting currency. These increases were partially offset by improved operational efficiencies and a decrease in IT expenses in the first half of 2018 compared to the first half of 2017.

Our gross margin decreased from 38.3% in the first half of 2017 to 36.0% in the first half of 2018 due to the factors described above and a reduction in the utilization of personnel.

Personnel expenses. Personnel expenses as a percentage of total net revenues increased from 42.8% in the first half of 2017 to 44.7% in the first half of 2018. Personnel expenses were $632.9 million in the first half of 2018, up $79.2 million, or 14.3%, from $553.7 million in the first half of 2017. The impact of wage inflation, incremental expenses from acquisitions completed in 2017,  an approximately 1,200-person, or 1.8%, increase in our operational headcount, including the number of onshore personnel, and the unfavorable impact of foreign exchange all contributed to higher personnel expenses in the first half of 2018 compared to the first half of 2017. Higher stock-based compensation expense also resulted in higher personnel expenses in the first half of 2018 compared to the first half of 2017.

Operational expenses. Operational expenses as a percentage of total net revenues increased from 17.2% in the first half of 2017 to 17.5% in the first half of 2018. Operational expenses were $248.5 million in the first half of 2018, up $26.2 million, or 11.8%, from the first half of 2017 primarily due to incremental expenses from acquisitions completed in 2017 and the unfavorable impact of foreign exchange. The increase in operational expenses was partially offset by improved operational efficiencies and lower IT expenses.

Depreciation and amortization expenses. Depreciation and amortization expenses as a percentage of total net revenues increased from 1.7% in the first half of 2017 to 1.8% in the first half of 2018. Depreciation and amortization expenses as a component of cost of revenue were $25.8 million in the first half of 2018, up $4.0 million, or 18.5%, from the first half of 2017. This increase was primarily due to the expansion of certain existing facilities.

66


 

Selling, general and administrative expenses. The following table sets forth the components of our selling, general and administrative, or SG&A, expenses:

 

 

 

Six Months Ended June 30,

 

 

As a Percentage of Total Net Revenues

 

 

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

Personnel expenses

 

$

245.1

 

 

$

254.7

 

 

 

18.9

 

%

 

18.0

 

%

Operational expenses

 

 

78.7

 

 

 

87.3

 

 

 

6.1

 

 

 

6.2

 

 

Depreciation and amortization

 

 

4.8

 

 

 

5.3

 

 

 

0.4

 

 

 

0.4

 

 

Selling, general and administrative expenses

 

$

328.6

 

 

$

347.3

 

 

 

25.4

 

%

 

24.5

 

%

 

SG&A expenses as a percentage of total net revenues decreased from 25.4% in the first half of 2017 to 24.5% in the first half of 2018. SG&A expenses were $347.3 million in the first half of 2018, up $18.7 million, or 5.7%, from the first half of 2017. Incremental expenses from acquisitions consummated in 2017, higher stock-based compensation expenses, an increase in marketing expenditures, incremental sales headcount and the unfavorable impact of foreign exchange on our expenses in certain currencies, primarily the Indian rupee and U.K. pound sterling, all contributed to higher SG&A expenses in the first half of 2018 compared to the first half of 2017. These increases were partially offset by cost efficiencies in the first half of 2018 compared to the first half of 2017. Our sales and marketing expenses as a percentage of total net revenues also decreased marginally from approximately 7.2% in the first half of 2017 to approximately 7.1 % in the first half of 2018.

Personnel expenses. As a percentage of total net revenues, personnel expenses decreased from 18.9% in the first half of 2017 to 18.0% in the first half of 2018. Personnel expenses as a component of SG&A expenses were $254.7 million in the first half of 2018, up $9.6 million, or 3.9%, from the first half of 2017. This increase is primarily due to incremental expenses from acquisitions consummated in 2017, wage inflation, and the unfavorable impact of foreign exchange. Higher stock-based compensation expense also resulted in higher personnel expenses in the first half of 2018 compared to the first half of 2017.

Operational expenses. As a percentage of total net revenues, operational expenses increased from 6.1% in the first half of 2017 to 6.2% in the first half of 2018. Operational expenses as a component of SG&A expenses were $87.3 million in the first half of 2018, up $8.6 million, or 11.0%, from the first half of 2017. This increase is primarily due to incremental expenses from acquisitions completed in 2017, an increase in marketing expenditures and the unfavorable impact of foreign exchange. These increases were partially offset by cost efficiencies and lower infrastructure expenses in the first half of 2018 compared to the first half of 2017.

Depreciation and amortization. Depreciation and amortization expenses as a percentage of total net revenues were 0.4% in the first half of 2018, unchanged from the first half of 2017. Depreciation and amortization expenses as a component of SG&A expenses were $5.3 million in the first half of 2018, up $0.4 million, or 9.3%, from the first half of 2017.

Amortization of acquired intangibles. Non-cash charges on account of amortization of acquired intangibles were $19.8 million in the first half of 2018, up $4.1 million, or 26.4%, from the first half of 2017. This increase was primarily due to the amortization of intangibles acquired after the first half of 2017.

67


 

Other operating (income) expense, net. The following table sets forth the components of other operating (income) expense, net:

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Six Months Ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Other operating (income) expense

 

$

(7.0

)

 

$

(0.3

)

 

 

(95.9

)

%

Provision for impairment of intangible assets and property, plant and equipment

 

 

 

 

 

0.9

 

 

 

 

 

Change in the fair value of earn-out consideration, deferred consideration (relating to business acquisitions)

 

 

(1.4

)

 

 

(0.6

)

 

 

(55.6

)

 

Other operating (income) expense, net

 

$

(8.5

)

 

$

(0.1

)

 

 

(99.2

)

%

Other operating (income) expense, net as a percentage of total net revenues

 

 

(0.7

)

%

 

 

%

 

 

 

 

 

Other operating income, net of expense, was $0.1 million in the first half of 2018, down $8.4 million from $8.5 million in the first half of 2017. We recorded a gain of $7.0 million in other operating income in the first half of 2017, primarily due to a gain on the sale of certain real property and as a result of writing back certain liabilities, compared to a gain of $0.3 million in the first half of 2018. We also recorded a gain of $1.4 million in the first half of 2017 due to changes in the fair value of earn-out consideration payable in connection with certain acquisitions compared to a gain of $0.6 million in the first half of 2018. Additionally, we recorded a $0.9 million non-recurring charge in the first half of 2018 relating to a computer software and technology-related intangible asset, which charge we discuss in Note 9—“Property, plant and equipment, net” under Part I, Item 1—“Financial Statements” above. No such charge was recorded in the first half of 2017.

Income from operations. As a result of the foregoing factors, income from operations as a percentage of total net revenues decreased from 12.4% in the first half of 2017 to 10.1% in the first half of 2018. Income from operations was $143.3 in the first half of 2018, down $16.8 million from $160.1 million in the first half of 2017.

Foreign exchange gains (losses), net.  We recorded a net foreign exchange gain of $7.6 million in the first half of 2018 compared to a net foreign exchange loss of $3.0 million in the first half of 2017. The gain in the first half of 2018 resulted primarily from the depreciation of the Indian rupee against the U.S. dollar. The loss in the first half of 2017 resulted primarily from the appreciation of the Indian rupee against the U.S. dollar.

Interest income (expense), net. The following table sets forth the components of interest income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Six Months Ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Interest income

 

$

2.0

 

 

$

5.1

 

 

 

158.0

 

%

Interest expense

 

 

(17.3

)

 

 

(23.7

)

 

 

36.4

 

 

Interest income (expense), net

 

$

(15.3

)

 

$

(18.5

)

 

 

20.6

 

%

Interest income (expense), net as a percentage of total net revenues

 

 

(1.2

)

%

 

(1.3

)

%

 

 

 

 

 

Our net interest expense was $18.5 million in the first half of 2018, up $3.2 million from $15.3 million in the first half of 2017, primarily due to a $6.3 million increase in interest expense, partially offset by a $3.2 million increase in interest income. The increase in interest expense is primarily due to (i) $3.1 million in interest on the senior notes we issued in March 2017, (ii) an increase in LIBOR, resulting in higher interest expense on the term loan under our LIBOR-linked credit facility, partially offset by gains on interest rate swaps in the first half of 2018 compared to losses in the first half of 2017, which we discuss in the section titled “Liquidity and Capital Resources—Financial Condition” below, and (iii) higher drawdown on our revolving credit facility in the first half of 2018 compared to the first half of 2017. Our interest income increased by $3.2 million in the first half of 2018 compared to the first half of 2017, primarily due to higher account balances in India, where we earn higher interest rates on our deposits than in other jurisdictions where we have deposits. The weighted average rate of interest on our debt, including the net impact of interest rate swaps, increased from 2.7% in the first half of 2017 to 3.2% in the first half of 2018.

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Other income (expense), net. The following table sets forth the components of other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Six months ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Government incentives

 

$

11.9

 

 

$

25.7

 

 

 

116.3

 

%

Other income/(expense)

 

0.2

 

 

0.4

 

 

 

72.3

 

 

Other income (expense), net

 

$

12.1

 

 

$

26.1

 

 

 

115.4

 

%

Other income (expense), net as a percentage of total net revenues

 

 

0.9

 

%

 

1.8

 

%

 

 

 

 

 

Our net other income was $26.1 million in the first half of 2018, up $14.0 million from $12.1 million in the first half of 2017, primarily due to one of our subsidiaries in India recording higher income in connection with an export subsidy in the first half of 2018 compared to the first half of 2017. This subsidy was introduced under the Foreign Trade Policy of India to encourage the export of specified services from India and is currently available for eligible export services through March 31, 2019.

Equity-method investment activity, net. Equity-method investment activity, net primarily represents our share of loss in one of our non-consolidated affiliates that we divested on June 30, 2017.

Income tax expense. Our income tax expense was $29.2 million in the first half of 2018, up $1.4 million from $27.7 million in the first half of 2017, representing an ETR of 18.4%, compared to 18.5% in the first half of 2017. The increase in our income tax expense is primarily due to higher pre-tax income.

Net income attributable to redeemable non-controlling interest. Non-controlling interest primarily refers to the loss associated with the redeemable non-controlling interest in the operations of SSE, which we acquired in the first quarter of 2016. We purchased the remainder of the outstanding equity interest in SSE in the first quarter of 2018. See Note 3—“Business acquisitions” under Part I, Item 1—“Financial Statements” above.

Net income attributable to Genpact Limited shareholders. As a result of the foregoing factors, net income attributable to our common shareholders as a percentage of total net revenues decreased from 9.5% in the first half of 2017 to 9.1% in the first half of 2018. Net income attributable to our common shareholders was $129.3 million in the first half of 2018, up $7.0 million from $122.3 million in the first half of 2017.

Liquidity and Capital Resources

Overview

Information about our financial position as of December 31, 2017 and June 30, 2018 is presented below:

 

 

 

As of December 31,

2017

 

 

As of June 30,

2018

 

 

Percentage Change

Increase/(Decrease)

 

 

 

 

(dollars in millions)

 

 

2018 vs. 2017

 

 

Cash and cash equivalents

 

$

504.5

 

 

$

333.9

 

 

 

(33.8

)

%

Short-term borrowings

 

 

170.0

 

 

 

215.0

 

 

 

26.5

 

 

Long-term debt due within one year

 

39.2

 

 

 

39.2

 

 

 

0.1

 

 

Long-term debt other than the current portion

 

 

1,006.7

 

 

 

987.3

 

 

 

(1.9

)

 

Genpact Limited total shareholders’ equity

 

$

1,424.0

 

 

$

1,296.4

 

 

 

(9.0

)

%

 

Financial Condition

We have historically financed our operations and our expansion, including acquisitions, with cash from operations and borrowing facilities.

In February 2017, our board of directors approved a dividend program under which we paid a regular quarterly cash dividend of $0.06 per share to holders of our common shares, representing a planned annual dividend of $0.24 per share.

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On March 28, 2017 and June 28, 2017, we paid dividends of $0.06 per share, amounting to $12.0 million and $11.6 million in the aggregate, to shareholders of record as of March 10, 2017 and June 12, 2017, respectively.

In February 2018, our board of directors approved a 25% increase in our quarterly cash dividend, to $0.075 per share to holders of our common shares, representing a planned annual dividend of $0.30 per common share.  On March 21, 2018 and June 20, 2018, we paid dividends of $0.075 per share, amounting to $14.4 million and $14.2 million in the aggregate, to shareholders of record as of March 9, 2018 and June 8, 2018, respectively.

On July 25, 2018, our board of directors declared a dividend for the third quarter of 2018 of $0.075 per common share, which will be paid on September 19, 2018 to shareholders of record as of the close of business on September 10, 2018. The declaration of any future dividends will be at the discretion of the board of directors.

As of June 30, 2018, $332.5 million of our $333.9 million in cash and cash equivalents was held by our foreign (non-Bermuda) subsidiaries. $9.2 million of this cash was held by foreign subsidiaries for which we expect to incur and have accrued a deferred tax liability on the repatriation of $7.0 million of retained earnings. $82.1 million of the cash and cash equivalents was held by foreign subsidiaries in jurisdictions where no tax is expected to be imposed upon repatriation. The remaining $241.2 million in cash and cash equivalents held by foreign subsidiaries is being indefinitely reinvested.

As of December 31, 2016, our board of directors had authorized repurchases of up to $750.0 million in value of our common shares under our existing share repurchase program. On February 10, 2017, our board of directors approved up to an additional $500.0 million in share repurchases, bringing the total authorization under our existing program to $1,250.0 million. On March 29, 2017, we entered into an accelerated share repurchase, or ASR, agreement with Morgan Stanley & Co. LLC to repurchase an aggregate of $200.0 million of our common shares. We received an initial delivery of 6,578,947 common shares on March 30, 2017, an additional delivery of 350,006 common shares on December 29, 2017 and a final delivery of 163,975 common shares on January 17, 2018 upon final settlement of the transaction. The weighted average price per share of the common shares delivered to us pursuant to the ASR agreement was $28.20.

During the six months ended June 30, 2018 and June 30, 2017, we purchased 4,114,882 and 808,293 of our common shares, respectively, on the open market at a weighted average price of $31.62 and $24.48 per share, respectively, for an aggregate cash amount of $130.1 million and $19.8 million, respectively. All repurchased shares have been retired

For additional information, see Note 17—“Capital stock” under Part I, Item 1—“Financial Statements” above.

We expect that in the future our cash from operations, cash reserves and debt capacity will be sufficient to finance our operations, our growth and expansion plans, dividend payments and additional share repurchases we may make under our share repurchase program. In addition, we may raise additional funds through public or private debt or equity financings. Our working capital needs are primarily to finance our payroll and other administrative and information technology expenses in advance of the receipt of accounts receivable. Our primary capital requirements include opening new delivery centers, expanding related operations to support our growth, financing acquisitions and enhancing capabilities.

Cash flows from operating, investing and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

Six months ended June 30,

 

 

Increase/(Decrease)

 

 

 

 

2017

 

 

2018

 

 

2018 vs. 2017

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

Net cash provided by (used for)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

115.3

 

 

$

49.5

 

 

 

(57.1

)

%

Investing activities

 

 

(245.4

)

 

 

(54.4

)

 

 

(77.8

)

 

Financing activities

 

127.9

 

 

 

(141.3

)

 

 

(210.4

)

 

Net increase (decrease) in cash and cash equivalents

 

$

(2.1

)

 

$

(146.2

)

 

 

6,714.5

 

%

 

Cash flows from operating activities. Net cash provided by operating activities was $49.5 million in the first half of 2018 compared to $115.3 million in the first half of 2017. This decrease is primarily due to a $79.5 million net change in our operating assets and liabilities in the first half of 2018 compared to the first half of 2017, mainly driven by the timing

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of certain payments to employees and vendors, higher interest and tax payments and higher income recorded in connection with an export subsidy which will be realized in the future.

Cash flows from investing activities. Our net cash used for investing activities was $54.4 million in the first half of 2018, down $191.0 million from $245.4 million in the first half of 2017. We made a payment of $4.7 million in the first half of 2018 to purchase the remaining 49% equity interest in SSE. We also made a payment of $0.7 million related to the settlement of closing adjustments for an acquisition completed in 2017, compared to payments of $207.2 million related to acquisitions completed in the first half of 2017. Payments for internally generated intangible assets and purchases of property, plant and equipment (net of sales proceeds) were $11.2 million higher in the first half of 2018 than in the first half of 2017. Additionally, investments we made in a non-consolidated affiliate that ceased to be a non-consolidating affiliate as of June 30, 2017 were $0.5 million in the first half of 2017.

Cash flows from financing activities. Our net cash used for financing activities was $141.3 million in the first half of 2018, compared to net cash generated from financing activities of $127.9 million in the first half of 2017. In March 2017, we issued $350.0 million aggregate principal amount of 3.70% senior notes in a private offering. We also made principal repayments of $20.0 million on our long-term debt in each of the first half of 2018 and 2017. We received proceeds from short-term borrowings of $105.0 million and $230.0 million in the first half of 2018 and 2017, respectively. Of the short-term borrowings, we also repaid $60.0 million and $185.0 million during the first half of 2018 and 2017, respectively. For additional information, see Notes 11 and 12 to our consolidated financial statements. Additionally, payments in connection with the issuance of common shares under stock-based compensation plans (net of proceeds) were $4.8 million in the first half of 2018 compared to proceeds of $0.1 million in the first half of 2017. Payments related to earn-out or deferred consideration were $0.2 million higher in the first half of 2018 than in the first half of 2017. In the first half of 2017, we paid cash dividends in an aggregate amount of $23.5 million compared to $28.6 million in the first half of 2018. Payments for share repurchases (net of expenses) were $130.1 million in the first half of 2018 compared to $219.8 million in the first half of 2017.

Financing Arrangements

In June 2015, we refinanced our 2012 credit facility through a new credit facility comprised of a term loan of $800 million and a revolving credit facility of $350 million. As of December 31, 2017 and June 30, 2018, our outstanding term loan, net of debt amortization expense of $1.8 million and $1.5 million, respectively, was $698.2 million and $678.5 million, respectively. We also have fund-based and non-fund based credit facilities with banks, which are available for operational requirements in the form of overdrafts, letters of credit, guarantees and short-term loans. As of December 31, 2017 and June 30, 2018, the limits available under such facilities were $15.1 million and $14.5 million, respectively, of which $7.9 million and $7.6 million, respectively, was utilized, constituting non-funded drawdown. As of December 31, 2017 and June 30, 2018, a total of $171.0 million and $217.1, respectively, of our revolving credit facility was utilized, of which $170.0 million and $215.0, respectively, constituted funded drawdown and $1.0 million and $2.1 million, respectively, constituted non-funded drawdown.

In March 2017, we issued $350.0 million aggregate principal amount of 3.70% senior notes in a private offering, resulting in cash proceeds of approximately $348.5 million and an underwriting fee of approximately $1.5 million. In addition, there were other debt issuance related costs of $1.2 million. The total debt issuance cost of $2.6 million incurred in connection with the offering of the notes is being amortized over the life of the notes as additional interest expense. As of December 31, 2017 and June 30, 2018, the amount outstanding under the notes, net of debt amortization expense of $2.2 million and $2.0 million, was $347.8 million and 348.0 million, respectively, which is payable on April 1, 2022 when the notes mature. For additional information, see Notes 11 and 12—“Short-term borrowings” and “Long-term debt” under Part I, Item 1—“Financial Statements” above.

On August 9, 2018, we refinanced our 2015 credit facility with certain amended terms and net settled the outstanding borrowings of $910 million through a new credit facility comprised of a $680 million term loan and a $500 million revolving credit facility, each having a term of five years. Borrowings under the new facility bear interest at a rate equal to, at our election, either LIBOR plus an applicable margin equal to 1.375% per annum or a base rate plus an applicable margin equal to 0.375% per annum, in each case subject to adjustment based on our debt ratings provided by Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. Based on our election and current credit rating, the applicable interest rate is equal to LIBOR plus 1.375% per annum. For additional information about the refinancing, see “Part II, Item 5—Other Information.”

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist of foreign exchange contracts and certain operating leases. For additional information, see Part I, Item 1A—Risk Factors—“Currency exchange rate fluctuations in various currencies in

71


 

which we do business, especially the Indian rupee, the euro and the U.S. dollar, could have a material adverse effect on our business, results of operations and financial condition” in our Annual Report on Form 10-K for the year ended December 31, 2017, the section titled “Contractual Obligations” below, and Note 7 in Part I, Item 1—“Financial Statements” above.

Contractual Obligations

The following table sets forth our total future contractual obligations as of June 30, 2018:

 

 

 

Total

 

 

Less than

1 year

 

 

1-3 years

 

 

3-5 years

 

 

After 5 years

 

 

 

(dollars in millions)

 

Long-term debt

 

$

1,122.1

 

 

$

76.4

 

 

$

688.0

 

 

$

357.7

 

 

 

— Principal payments

 

 

1,026.5

 

 

 

39.2

 

 

 

639.3

 

 

 

348.0

 

 

 

— Interest payments*

 

 

95.6

 

 

 

37.2

 

 

 

48.7

 

 

 

9.7

 

 

 

Short-term borrowings

 

 

217.0

 

 

 

217.0

 

 

 

 

 

 

 

— Principal payments

 

 

215.0

 

 

 

215.0

 

 

 

 

 

 

 

— Interest payments**

 

 

2.0

 

 

 

2.0

 

 

 

 

 

 

 

Capital leases

 

 

4.3

 

 

 

1.8

 

 

 

2.1

 

 

 

0.4

 

 

 

— Principal payments

 

 

3.5

 

 

 

1.4

 

 

 

1.8

 

 

 

0.3

 

 

 

 

— Interest payments

 

 

0.8

 

 

 

0.4

 

 

 

0.3

 

 

 

0.1

 

 

 

 

Operating leases

 

 

209.9

 

 

 

40.7

 

 

 

69.5

 

 

 

46.6

 

 

 

53.1

 

Purchase obligations

 

 

36.3

 

 

 

25.4

 

 

 

10.9

 

 

 

 

 

 

Capital commitments net of advances

 

 

15.6

 

 

 

15.6

 

 

 

 

 

 

 

Earn-out consideration

 

 

25.1

 

 

 

18.6

 

 

 

6.5

 

 

 

 

 

 

— Reporting date fair value

 

 

23.7

 

 

 

18.0

 

 

 

5.7

 

 

 

 

 

 

— Interest

 

 

1.4

 

 

 

0.6

 

 

 

0.8

 

 

 

 

 

 

Other liabilities

 

 

65.4

 

 

 

36.3

 

 

 

22.4

 

 

 

6.7

 

 

 

Total contractual obligations

 

$

1,695.7

 

 

$

431.8

 

 

$

799.4

 

 

$

411.4

 

 

 

53.1

 

 

*

Our interest payments on long-term debt are calculated based on our current debt rating at a rate equal to LIBOR plus a margin of 1.50% per annum as of June 30, 2018, which excludes the impact of interest rate swaps. Interest payments on long-term debt include interest on our senior notes due in 2022 at a rate of 3.70% per annum, which is not based on LIBOR.

**

Our interest payments on short-term debt are calculated based on our current debt rating at a rate equal to LIBOR plus a margin of 1.50% per annum as of June 30, 2018 and our expectation for the repayment of such debt.

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

For a description of recently adopted accounting pronouncements, see Note 2(g)—“Recently issued accounting pronouncements” under Item 1—“Financial Statements” above and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations”—“Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Recently issued accounting pronouncements

For a description of recently issued accounting pronouncements, see Note 2(g)—“Recently issued accounting pronouncements” under Item 1—“Financial Statements” above and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations”—“Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk arising from changes in interest rates on the floating rate indebtedness under our term loan and 3.70% senior notes issued in March 2017. Borrowings under our term loan bear interest at floating rates based on LIBOR, but in no event less than the floor rate of 0.0% plus an applicable margin. The interest rate on our 3.70% senior notes is subject to adjustment based on the ratings assigned to the notes by Moody’s and S&P from time to time. A decline in such ratings could result in an increase of up to 2% in the rate of interest on the notes. Accordingly, fluctuations in market interest rates or decline in ratings may increase or decrease our interest expense which will, in turn, increase or decrease our net income and cash flow.

We manage a portion of our interest rate risk related to floating rate indebtedness by entering into interest rate swaps under which we receive floating rate payments based on the greater of LIBOR and the floor rate under our term loan and make payments based on a fixed rate. As of June 30, 2018, we were party to interest rate swaps covering a total notional amount of $419.8 million. Under these swap agreements, the rate that we pay to banks in exchange for LIBOR ranges between 0.88% and 1.20%.

For a discussion of our market risk associated with foreign currency risk, interest rate risk and credit risk, see Part II, Item 7A—“Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are the Company’s controls and other procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarterly period ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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PART II

Item 1.

Legal Proceedings

There are no legal proceedings pending against us that we believe are likely to have a material adverse effect on our business, results of operations and financial condition.

Item 1A.

Risk Factors

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 the risk factors that materially affect our business, financial condition or results of operations. You should carefully consider the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 and the other information that appears elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2017 and in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us also may materially adversely affect our business, financial condition and/or results of operations.  

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

Share repurchase activity during the three months ended June 30, 2018 was as follows:

Period

 

Total Number of Shares

Purchased

 

 

Average Price Paid per

Share ($)

 

 

Total Number of Shares

Purchased as Part of Publicly

Announced Plan or Program

 

 

Approximate Dollar Value

of Shares that May Yet Be

Purchased Under the Plan

or Program ($)

 

April 1-April 30, 2018

 

 

346,824

 

 

 

31.75

 

 

 

346,824

 

 

 

351,106,350

 

May 1-May 31, 2018

 

 

752,059

 

 

 

30.73

 

 

 

752,059

 

 

 

327,997,960

 

June 1-June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

327,997,960

 

 

 In February 2017, our board of directors authorized a $500 million increase in our existing $750 million share repurchase program, bringing the total authorization under our existing program to $1.25 billion. This repurchase program does not obligate us to acquire any specific number of shares and does not specify an expiration date. All shares repurchased under the plan have been cancelled. For additional information, see note 17 to our consolidated financial statements.

Item 3.

Defaults Upon Senior Securities

None.

Item 5.

Other Information

 

On August 9, 2018, we amended and restated our existing credit agreement, dated as of June 30, 2015, or the Existing Credit Agreement, among us, Genpact International, Inc., a Delaware corporation, or Genpact International, Headstrong Corporation, a Delaware corporation, and Genpact Global Holdings (Bermuda) Limited, or GGH, an exempted company limited by shares organized under the laws of Bermuda, as borrowers, Wells Fargo Bank, National Association, as administrative agent, and the lenders and other financial institutions party thereto, that provided for a credit facility comprised of a term loan of $800 million and a revolving credit facility of $350 million.  For a description of the material terms and conditions of the Existing Credit Agreement, see the “Financing Arrangements (Credit Facility)” section under Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on February 26, 2016, which section is incorporated herein by reference.

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Our amended and restated credit agreement, or the 2018 Credit Agreement, is between Genpact International, GGH, and Genpact Luxembourg S.à r.l., a société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg, which we refer to together with Genpact International and GGH as the Borrowers, Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing bank, and the lenders party thereto.  The 2018 Credit Agreement provides for a $680 million term credit facility and a $500 million revolving credit facility. The Borrowers have an option to increase the commitments under the 2018 Credit Agreement, subject to certain approvals, compliance with the consolidated leverage ratio covenants, and other conditions as set forth in the 2018 Credit Agreement.  As of August 9, 2018, $680 million was outstanding pursuant to the term credit facility and $230 million was outstanding under the revolving credit facility.

In connection with our entry into the 2018 Credit Agreement, borrowings of $910 million outstanding under the Existing Credit Agreement have been net settled. Other borrowings under the 2018 Credit Agreement will be used (i) to pay related fees and expenses in connection with the foregoing and (ii) for our and our subsidiaries’ general corporate purposes, including working capital, capital expenditures and acquisitions.

The term credit facility and the revolving credit facility under the 2018 Credit Agreement each have a term of five years. The 2018 Credit Agreement is guaranteed by us and certain of our subsidiaries, and the obligations under the 2018 Credit Agreement are unsecured.

Borrowings under the 2018 Credit Agreement bear interest at a rate equal to, at the election of the Borrowers, either LIBOR plus an applicable margin equal to 1.375% per annum or a base rate plus an applicable margin equal to 0.375% per annum, in each case subject to adjustment based on the Borrowers’ debt ratings provided by S&P Global Ratings and Moody’s Investors Service, Inc. from time to time, or the Debt Ratings.  The revolving credit commitments under the 2018 Credit Agreement are subject to a commitment fee equal to 0.20% per annum, subject to adjustment based on the Debt Ratings. The commitment fee accrues on the actual daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations.

The 2018 Credit Agreement contains customary affirmative and negative covenants (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on the ability to incur additional indebtedness, create liens, make certain investments, make certain dividends and related distributions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions and dispose of certain assets or subsidiaries. In addition, the 2018 Credit Agreement requires us to maintain certain consolidated leverage ratios and consolidated interest coverage ratios.  The 2018 Credit Agreement also contains customary events of default (which are in some cases subject to certain exceptions, thresholds, notice requirements and grace periods), including, but not limited to, nonpayment of principal or interest, breaches of representations and warranties, failure to perform or observe covenants, cross-defaults with certain other agreements or indebtedness, final judgments or orders, certain change of control events and certain bankruptcy-related events or proceedings.

The foregoing description of the 2018 Credit Agreement is qualified in its entirety by the full text of the Credit Agreement, which is attached hereto as Exhibit 10.2 and is incorporated herein by reference.

The information set forth above is intended to satisfy the reporting requirements of Items 1.01, 1.02 and 2.03 of Form 8-K.

Item 6.

Exhibits

 

 Exhibit

Number

 

Description

 

 

 

    3.1

 

Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.1 to Amendment No. 2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142875) filed with the SEC on July 16, 2007).

 

 

 

    3.3

 

Bye-laws of the Registrant (incorporated by reference to Exhibit 3.3 to Amendment No. 4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142875) filed with the SEC on August 1, 2007).

 

 

 

  10.1†

 

Amended and Restated U.S. Employee Stock Purchase Plan and Amended and Restated International Employee Stock Purchase Plan (incorporated by reference to Exhibit 1 to the Registrant’s Proxy Statement on Schedule 14A filed with the SEC on April 10, 2018).

 

 

 

  10.2*

 

Credit Agreement among Genpact International, Inc., Genpact Global Holdings (Bermuda) Limited, Genpact Luxembourg S.à r.l., Genpact Limited, the lenders party thereto, Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing bank, and the other parties thereto, dated as of August 9, 2018.

 

 

 

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  31.1*

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2*

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1*

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2*

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document (1)

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document (1)

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (1)

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (1)

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document (1)

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (1)

 

*

Filed with this Quarterly Report on Form 10-Q.

Indicates a management contract or compensatory plan, contract or arrangement in which any director or executive officer participates.

(1)

Filed as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2017 and June 30, 2018, (ii) Consolidated Statements of Income for the three months and six months ended June 30, 2017 and June 30, 2018, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended June 30, 2017 and June 30, 2018, (iv) Consolidated Statements of Equity and Redeemable Non-controlling Interest for the six months ended June 30, 2017 and June 30, 2018, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and June 30, 2018, and (vi) Notes to the Consolidated Financial Statements.

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 9, 2018

GENPACT LIMITED

 

By:

 

/s/ N.V. TYAGARAJAN

 

 

N.V. Tyagarajan

 

 

Chief Executive Officer

 

 

 

By:

 

/s/ EDWARD J. FITZPATRICK

 

 

Edward J. Fitzpatrick

 

 

Chief Financial Officer

 

 

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