G 10-Q Quarter ended March 31, 2019

☒

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

☐

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

Bermuda

98-0533350

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common shares, par value $0.01 per share

G

New York Stock Exchange

Item No.

Page No.

PART I

Financial Information

1.

Unaudited Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2018 and March 31, 201 9

1

Consolidated Statements of Income for the three months ended March 31, 2018 and 2019

2

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2019

3

Consolidated Statements of Equity and Redeemable Non-controlling Interest for the three months ended March 31, 2018 and 2019

4

Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2019

6

Notes to the Consolidated Financial Statements

7

2.

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

52

3.

Quantitative and Qualitative Disclosures About Market Risk

64

4.

Controls and Procedures

64

PART II

Other Information

1.

Legal Proceedings

65

1A.

Risk Factors

65

2.

Unregistered Sales of Equity Securities and Use of Proceeds

65

6.

Exhibits

66

SIGNATURES

67

Notes

As of December 31,  2018

As of March 31,

2019

Assets

Current assets

Cash and cash equivalents

4

$

368,396

$

325,377

Accounts receivable, net

5

774,184

838,992

Prepaid expenses and other current assets

8

212,477

230,175

Total current assets

$

1,355,057

$

1,394,544

Property, plant and equipment, net

9

212,715

206,820

Operating lease right-of-use assets

—

266,947

Deferred tax assets

24

74,566

78,607

Investment in equity affiliates

25

836

852

Intangible assets, net

10

177,087

173,472

Goodwill

10

1,393,832

1,400,212

Contract cost assets

19

160,193

180,803

Other assets

155,159

202,557

Total assets

$

3,529,445

$

3,904,814

Liabilities and equity

Current liabilities

Short-term borrowings

11

$

295,000

$

320,000

Current portion of long-term debt

12

33,483

34,016

Accounts payable

42,584

29,494

Income taxes payable

24

33,895

49,929

Accrued expenses and other current liabilities

13

571,350

536,048

Operating leases liability

-

42,294

Total current liabilities

$

976,312

$

1,011,781

Long-term debt, less current portion

12

975,645

966,873

Operating leases liability

-

251,712

Deferred tax liabilities

24

8,080

8,409

Other liabilities

14

165,226

170,870

Total liabilities

$

2,125,263

$

2,409,645

Shareholders' equity

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

—

—

Common shares, $0.01 par value, 500,000,000 authorized, 189,346,101 and  189,659,709 issued and outstanding as of December 31, 2018 and March 31, 2019, respectively

1,888

1,891

Additional paid-in capital

1,471,301

1,493,706

Retained earnings

438,453

483,175

Accumulated other comprehensive income (loss)

(507,460

)

(483,603

)

Total equity

$

1,404,182

$

1,495,169

Commitments and contingencies

27

Total liabilities and equity

$

3,529,445

$

3,904,814

Three months ended March 31,

Notes

2018

2019

Net revenues

19,25

$

688,912

$

809,206

Cost of revenue

20, 25

444,324

519,137

Gross profit

$

244,588

$

290,069

Operating expenses:

Selling, general and administrative expenses

21,25

171,109

191,402

Amortization of acquired intangible assets

10

9,936

8,509

Other operating (income) expense, net

22

(218

)

86

Income from operations

$

63,761

$

90,072

Foreign exchange gains (losses), net

4,798

(3,432

)

Interest income (expense), net

23

(8,100

)

(11,123

)

Other income (expense), net

26

15,550

3,803

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

$

76,009

$

79,320

Equity-method investment activity, net

-

4

Income before income tax expense

$

76,009

$

79,324

Income tax expense

24

12,075

18,483

Net income

$

63,934

$

60,841

Net loss attributable to redeemable non-controlling interest

761

-

Net income attributable to Genpact Limited shareholders

$

64,695

$

60,841

Net income available to Genpact Limited common shareholders

$

64,695

$

60,841

Earnings per common share attributable to Genpact Limited common shareholders

18

Basic

$

0.34

$

0.32

Diluted

$

0.33

$

0.31

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

18

Basic

192,816,626

189,451,845

Diluted

196,288,569

193,394,208

Three months ended March 31,

2018

2019

Genpact

Limited

Shareholders

Redeemable

Non-

controlling

interest

Genpact

Limited

Shareholders

Net income (loss)

$

64,695

$

(761

)

$

60,841

Other comprehensive income:

Currency translation adjustments

(9,335

)

(424

)

10,491

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

(18,932

)

—

13,156

Retirement benefits, net of taxes

513

—

210

Other comprehensive income (loss)

(27,754

)

(424

)

23,857

Comprehensive income (loss)

$

36,941

$

(1,185

)

$

84,698

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

192,825,207

$

1,924

$

1,421,368

$

355,982

$

(355,230

)

$

1,424,044

$

4,750

Adoption of ASU 2014-09

—

—

—

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)

—

—

—

(2,265

)

2,265

—

—

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

161,837

2

2,549

—

-

2,551

-

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

58,476

1

1,650

—

—

1,651

—

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

55,631

1

(1

)

—

—

-

—

Net settlement on vesting of performance units (Note 16)

691,958

7

(13,291

)

—

—

(13,284

)

—

Stock repurchased and retired (Note 17)

(3,179,974

)

(32

)

4,000

(99,952

)

—

(95,984

)

—

Expenses related to stock repurchase (Note 17)

—

—

—

(60

)

—

(60

)

—

Stock-based compensation expense (Note 16)

—

—

7,787

—

—

7,787

-

Acquisition of redeemable non- controlling interest

—

—

(1,165

)

—

—

(1,165

)

(3,565

)

Comprehensive income (loss):

Net income (loss)

—

—

—

64,695

—

64,695

(761

)

Other comprehensive income (loss)

—

—

—

—

(27,754

)

(27,754

)

(424

)

Dividend ($0.075 per common share, Note 17)

—

—

—

(14,408

)

—

(14,408

)

—

Balance as of  March 31, 2018

190,613,135

$

1,903

$

1,422,897

$

321,916

$

(380,719

)

$

1,365,997

$

—

No. of

Shares

Amount

Additional Paid-

in Capital

Retained

Earnings

Comprehensive

Income (Loss)

Total

Equity

Balance as of January 1, 2019

189,346,101

$

1,888

$

1,471,301

$

438,453

$

(507,460

)

$

1,404,182

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

135,535

1

2,658

—

—

2,659

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

64,869

1

1,939

—

—

1,940

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

113,204

1

(653

)

—

—

(652

)

Net settlement on vesting of performance units (Note 16)

—

—

—

—

—

—

Stock repurchased and retired (Note 17)

—

—

—

—

—

—

Expenses related to stock repurchase (Note 17)

—

—

—

—

—

—

Stock-based compensation expense (Note 16)

—

—

18,461

—

—

18,461

Comprehensive income (loss):

Net income (loss)

—

—

—

60,841

—

60,841

Other comprehensive income (loss)

—

—

—

—

23,857

23,857

Dividend ($0.085 per common share, Note 17)

—

—

—

(16,119

)

—

(16,119

)

Balance as of  March 31, 2019

189,659,709

$

1,891

$

1,493,706

$

483,175

$

(483,603

)

$

1,495,169

Three months ended March 31,

2018

2019

Operating activities

Net income attributable to Genpact Limited shareholders

$

64,695

$

60,841

Net loss attributable to redeemable non-controlling interest

(761

)

—

Net income

$

63,934

$

60,841

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

Depreciation and amortization

15,836

21,919

Amortization of debt issuance costs (including loss on extinguishment of debt)

488

443

Amortization of acquired intangible assets

9,936

8,509

Reserve for doubtful receivables

(103

)

2,026

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

(8,525

)

257

Equity-method investment activity, net

—

(4

)

Stock-based compensation expense

7,787

18,461

Deferred income taxes

(4,625

)

(5,522

)

Others, net

(28

)

(504

)

Change in operating assets and liabilities:

Increase in accounts receivable

(6,025

)

(64,763

)

Increase in prepaid expenses, other current assets, contract cost assets, operating lease right-of-use assets and other assets

(37,008

)

(36,220

)

Decrease in accounts payable

(1,224

)

(12,189

)

Decrease in accrued expenses, other current liabilities, operating lease liabilities and other liabilities

(77,734

)

(12,087

)

Increase in income taxes payable

9,969

13,417

Net cash used for operating activities

$

(27,322

)

$

(5,416

)

Investing activities

Purchase of property, plant and equipment

(18,706

)

(14,072

)

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

(4,365

)

(7,914

)

Proceeds from sale of property, plant and equipment

144

1,478

Payment for business acquisitions, net of cash acquired

—

(6,305

)

Payment for purchase of redeemable non-controlling interest

(4,730

)

—

Net cash used for investing activities

$

(27,657

)

$

(26,813

)

Financing activities

Repayment of capital/finance lease obligations

(537

)

(1,780

)

Repayment of long-term debt

(10,000

)

(8,500

)

Proceeds from short-term borrowings

105,000

50,000

Repayment of short-term borrowings

—

(25,000

)

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

4,202

4,599

Payment for net settlement of stock-based awards

(13,284

)

(652

)

Payment of earn-out/deferred consideration

(1,476

)

(8,400

)

Dividend paid

(14,408

)

(16,119

)

Payment for stock repurchased and retired

(95,984

)

—

Payment for expenses related to stock repurchase

(60

)

—

Net cash used for financing activities

$

(26,547

)

$

(5,852

)

Effect of exchange rate changes

1,284

(4,938

)

Net increase (decrease) in cash and cash equivalents

(81,526

)

(38,081

)

Cash and cash equivalents at the beginning of the period

504,468

368,396

Cash and cash equivalents at the end of the period

$

424,226

$

325,377

Supplementary information

Cash paid during the period for interest

$

13,194

$

8,486

Cash paid during the period for income taxes

$

24,157

19,286

Property, plant and equipment acquired under capital lease obligations

$

297

$

-

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

As reported December 31, 2018

Adoption of ASC 842 Increase (Decrease)

Balance as of January 1, 2019

Prepaid expenses and other current assets

212,477

(3,529) ¹

208,948

Operating lease right-of-use assets

-

273,732

273,732

Other assets: finance lease right-of-use assets

-

35,955 ⁶

35,955

Other assets

155,159

(5,126) ³

150,033

Property, plant and equipment, net

212,715

(2,343) ²

210,372

Accrued expenses and other current liabilities

571,350

(1,123) ⁴

570,227

Operating leases liability (current)

-

42,200

42,200

Operating leases liability (non-current)

-

258,378

258,378

Other liabilities

165,226

(767) ⁵

164,459

1.

Includes prepaid rent amounting to $3,160 and leasehold land amounting to $369, which have been reclassified to operating lease right-of-use assets and finance lease right-of-use assets, respectively.

2.

Represents vehicles recognized as capital leases under ASC 840 and reclassified as a finance lease right-of-use asset.

3.

Includes prepaid rent amounting to $284 and leasehold land amounting to $4,842, which have been reclassified to operating lease right-of-use assets and finance lease right-of-use assets, respectively.

4.

Includes accrued lease liabilities of $4,562 adjusted with operating lease right-of-use assets offset by additional current portion of finance lease liabilities of $3,439 recognized upon the adoption of ASC 842.

5.

Includes accrued lease liabilities of $25,728 adjusted with operating lease right-of-use assets offset by additional finance lease liabilities of $24,961 recognized upon the adoption of ASC 842.

6.

The balance is included in “other assets” in the consolidated balance sheet.

As of

December 31,

As of

March 31,

2018

2019

Cash and other bank balances

368,396

325,377

Total

$

368,396

$

325,377

Year ended December 31, 2018

Three months

ended March 31, 2019

Opening balance as of January 1

$

23,660

$

23,960

Additions charged/reversal released to cost and expense

1,857

2,026

Deductions/effect of exchange rate fluctuations

(1,557

)

(85

)

Closing balance

$

23,960

$

25,901

As of December 31, 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)

$

44,099

$

—

$

44,099

$

—

Deferred compensation plan assets (a, e)

$

1,613

$

—

$

—

$

1,613

Total

$

45,712

$

—

$

44,099

$

1,613

Liabilities

Earn-out consideration (Note b, d)

$

17,073

$

—

$

—

$

17,073

Derivative instruments (Note b, c)

$

35,245

$

—

$

35,245

$

—

Deferred compensation plan liability (b, f)

$

1,582

$

—

$

—

$

1,582

Total

$

53,900

$

—

$

35,245

$

18,655

As of March 31, 2019

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)

$

43,863

$

—

$

43,863

$

—

Deferred compensation plan assets (a, e)

8,066

—

—

8,066

Total

$

51,929

$

—

$

43,863

$

8,066

Liabilities

Earn-out consideration (Note b, d)

$

7,476

$

—

$

—

$

7,476

Derivative instruments (Note b, c)

23,631

—

23,631

—

Deferred compensation plan liability (b, f)

7,935

—

—

7,935

Total

$

39,042

$

—

$

23,631

$

15,411

(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)

Deferred compensation plan assets consist of life insurance policies held under a Rabbi Trust. Assets held in the Rabbi Trust are valued based on the cash surrender value of the insurance contract, which is determined based on the fair value of the underlying assets included in the insurance portfolio and are therefore classified within level 3 of the fair value hierarchy.

(f)

The fair value of the deferred compensation plan liability is derived based on the fair value of the underlying assets in the insurance policies and is therefore classified within level 3 of the fair value hierarchy.

Three months ended

March 31,

2018

2019

Opening balance

$

24,732

$

17,073

Earn-out consideration payable in connection with acquisitions

—

—

Payments made on earn-out consideration

(1,476

)

(10,000

)

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

17

-

Others (Note b)

627

403

Ending balance

$

23,900

$

7,476

(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 also includes a cumulative translation adjustment reported as a component of “other comprehensive income (loss).”

Three months ended March 31,

2018

2019

Opening balance

$

—

$

1,613

Redemptions

—

—

Additions

—

6,165

Change in fair value of deferred compensation plan assets (note a)

—

288

Closing balance

$

—

$

8,066

(a)

Changes in the fair value of plan assets are reported in “other income (expense), net” in the consolidated statements of income.

Three months ended March 31,

2018

2019

Opening balance

$