GENPACT LIMITED 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 endedDecember 31, 2019 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 endedDecember 31, 2019 . 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 under "Risk Factors" in our Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 , and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 II, Item 1A-"Risk Factors" in our Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 , and Part I, Item 1A-"Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . For a discussion of risks of which we are aware in relation to the novel coronavirus ("COVID-19") pandemic, see "The ongoing coronavirus (COVID-19) pandemic has adversely impacted our business and results of operations. The ultimate impact of COVID-19 on our business, financial condition and results of operations will depend on future developments which are highly uncertain and cannot be predicted at this time, including the scope and duration of the pandemic and actions taken by governmental authorities and our clients in response to the pandemic" under Part II, Item 1A-"Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Many of the risks, uncertainties and other factors identified below are, and will be, amplified by the COVID-19 pandemic.
Forward-looking statements we may make 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, including the uncertainty related
to the withdrawal of the
known as Brexit, and heightened economic and political uncertainty within
and among other European Union member states;
• 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:
• the impact of the COVID-19 pandemic and related response measures on our
business, results of operations and financial condition, including the
impact of governmental lockdowns and other restrictions on our operations
and processes and those of our clients and suppliers;
• our ability to develop and successfully execute our business strategies;
45
--------------------------------------------------------------------------------• our ability to grow our business and effectively manage growth and
international operations while maintaining effective internal controls;
• our ability to comply with data protection laws and regulations and to
maintain the security and confidentiality of personal and other sensitive
data of our clients, employees or others;
• telecommunications or technology disruptions or breaches, natural or other
disasters, or medical epidemics or pandemics, including the COVID-19
pandemic;
• 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 the 2017 tax legislation in
tax policy changes in India , and our ability to effectively execute our
tax planning strategies;
• our dependence on revenues derived from clients in
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 employee utilization rates; • our ability to maintain pricing and asset utilization rates;
• our ability to hire and retain enough qualified employees to support our
operations;
• increases in wages in locations in which we have operations;
• our ability to service our defined contribution and benefit plans payment
obligations;
• clarification as to the possible retrospective application of a judicial
pronouncement in
plans payment obligations;
• our relative dependence on the General Electric Company (GE) and our
ability to maintain our relationships with divested
• financing terms, including, but not limited to, changes in the
Interbank Offered rate, or LIBOR, including the pending global phase-out
of LIBOR, and changes to 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
• fluctuations in currency exchange rates between the currencies in which we
transact business, primarily the
renminbi, Euro, Indian rupee, Japanese yen, Mexican peso, Polish zloty,
Romanian leu, Hungarian forint 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
performance of business process outsourcing and information technology
services offshore;
• increasing competition in our industry;
• 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
acquisitions; and
• unionization of any of our employees.
46
-------------------------------------------------------------------------------- Although we believe the expectations reflected in the 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 theSecurities and Exchange Commission (the "SEC").
Continued impact of COVID-19 on our business and results of operations
The outbreak of COVID-19 across the globe and responsive government measures have adversely impacted the global economy and the markets in which we operate since the first quarter of 2020, leading to disruptions to our business. This section provides a brief overview of how we are responding to known and anticipated impacts of the COVID-19 pandemic on our business, financial condition and results of operations. We also provide additional information about the effects of the COVID-19 pandemic on our business and results of operations in other relevant sections of this Quarterly Report on Form 10-Q. The safety and well-being of our employees have been and will continue to be our top priorities during this global crisis, followed immediately by continuing to deliver high-quality services to our clients. The vast majority of our employees continue to work remotely. For the limited number of employees who have returned to our offices, we have implemented new safety, cleaning and medical screening procedures in our offices. We have also created a response team, which includes members of ourGlobal Leadership Council , to coordinate and oversee our actions in response to the COVID-19 pandemic, including with respect to business continuity planning, revenue and profitability, transformation service offerings to address new and developing client needs, and human resource policies. We believe that this coordinated effort will maximize our flexibility and allow us to quickly implement necessary protocols for devising unique solutions to the problems we and our clients are facing and may face in the future in relation to the pandemic. In addition, we took a series of actions during the second and third quarters of 2020 to address the challenges being placed on our operations by the pandemic and the potential impact to our business in the near term and to protect the long-term health of our business. For additional information, see Note 27-"Restructuring" under Part I, Item 1-"Financial Statements" above. We continue to evaluate market conditions and are taking precautionary measures to strengthen our financial position, including reevaluating the pace of our investment plans, hiring practices, investments in capital assets, use of our real estate and facilities, and discretionary spending, including marketing and travel expenses. We continued to maintain a strong liquidity position through the third quarter of 2020, ending the quarter with$803.4 million of consolidated cash and cash equivalents after partially repaying our revolving credit facility, which we had drawn down in the second quarter of 2020. Given our strengthened liquidity and the recent improvement in debt market conditions, we are likely to reduce the balance outstanding on our revolving credit facility in the fourth quarter of 2020. See "Liquidity and Capital Resources" below for further information. Overall, the pandemic has had an adverse impact on our financial results year-to-date. Our net revenues from various service lines, including transformation services, have also been adversely impacted by market developments, including delays or cancellations of new projects and new orders. Total net revenues increased approximately 5.3% compared to the third quarter of 2019 and 3.9% compared to the second quarter of 2020, which was better than we anticipated at the beginning of the quarter. We currently anticipate that many of the impacts we experienced in the nine months endedSeptember 30, 2020 related to demand, profitability and cash flows will continue into future periods depending on the severity and duration of the pandemic. For more information about the effects of the COVID-19 pandemic on our results of operations for the three and nine months endedSeptember 30, 2020 , see the section titled "Results of Operations" below and Note 20-"Net revenues" under Part I, Item 1-"Financial Statements" above. 47 -------------------------------------------------------------------------------- As the COVID-19 pandemic evolves, we will continue to assess its impact on the Company and respond accordingly. The ultimate impact of COVID-19 on our business and the industry in which we operate remains unknown and unpredictable. Our past results may not be indicative of our future performance, and our financial results in future periods, including but not limited to net revenues, income from operations, income from operations margin, net income and earnings per share, may differ materially from historical trends. The extent of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including but not limited to the duration and severity of the pandemic; advances in testing, treatment and prevention; the macroeconomic impact of government measures to contain the spread of the virus; and related government stimulus measures. We are currently unable to predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the related macroeconomic impacts. For example, to the extent the pandemic continues to disrupt economic activity globally, we, like other businesses, will not be immune from its effects, and our business, results of operations and financial condition may be adversely affected, possibly materially, by prolonged decreases in spending on the types of services we provide, deterioration of our clients' credit, or reduced economic activities. In addition, some of our expenses are less variable in nature and do not closely correlate in revenues, which may lead to a decrease in our profitability. We continue to actively monitor the COVID-19 situation and may take further actions that alter our business operations as may be required by any regulatory authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. For additional information about the risks we face in relation to the pandemic, see Part II, Item 1A-"Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . 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 96,300 employees serving clients in key industry verticals from more than 30 countries. Our registered office is located atVictoria Place , 5th Floor,31 Victoria Street , Hamilton HM 10,Bermuda . In the quarter endedSeptember 30, 2020 , we had net revenues of$935.5 million , of which$824.2 million , or 88.1%, was from clients other than General Electric ("GE"), which we refer to as Global Clients, with the remaining$111.3 million , or 11.9%, fromGE . Certain Acquisitions OnNovember 12, 2019 , we acquired the outstanding equity/limited liability company interests inRightpoint Consulting, LLC , anIllinois limited liability company, and certain affiliated entities inthe United States andIndia (collectively referred to as "Rightpoint") for total purchase consideration of$270.7 million . This amount includes cash consideration of$268.2 million , net of cash acquired of$2.5 million . This acquisition expands our capabilities in improving customer experience and strengthens our reputation as a thought leader in this space. The securities purchase agreement provided certain of the selling equity holders the option to elect to either (a) receive 100% consideration in cash at the closing date for their limited liability company interests and vested options or (b) "roll over" and retain 25% of their Rightpoint limited liability company interests and vested options and receive consideration in cash at closing for the remaining 75% of their Rightpoint limited liability company interests and vested options. Certain selling equity holders elected to receive deferred, variable earnout consideration with an estimated value of$21.5 million over the three-year rollover period. The amount of deferred consideration ultimately paid to the rollover sellers will be based on the future revenue multiple of the acquired business and is included in the purchase consideration outstanding as ofSeptember 30, 2020 .Goodwill arising from the acquisition amounting to$182.8 million has been allocated among our three reporting units as follows: Banking, Capital Markets and Insurance ("BCMI") in the amount of$17.5 million , Consumer Goods, Retail, Life Sciences and Healthcare ("CGRLH") in the amount of$44.4 million and High Tech, Manufacturing and Services ("HMS") in the amount of$120.9 million , using a relative fair value allocation method. Of the total goodwill amount,$97.8 million is deductible for income tax purposes. The goodwill primarily represents the acquired capabilities, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company. OnJanuary 7, 2019 , we acquired 100% of the outstanding equity interests in riskCanvasHoldings, LLC , aDelaware limited liability company, for total purchase consideration of$5.75 million . This amount includes cash consideration of$5.7 million , net of adjustment for working capital. This acquisition expands our services in the areas of financial institution fraud, anti-money laundering and financial transaction surveillance and enhances our consulting capabilities for clients in the financial services industry.Goodwill arising from the acquisition amounted to$2.6 million , which has 48 --------------------------------------------------------------------------------
been allocated to our BCMI reporting unit and is deductible for income tax purposes. The goodwill primarily represents the acquired capabilities, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company.
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 endedDecember 31, 2019 . We adopted the new accounting standard for current expected credit losses (Topic 326) effectiveJanuary 1, 2020 , using the modified retrospective transition approach. For further discussion and additional disclosure regarding our adoption of this standard, see Note 2-"Summary of significant accounting policies" and Note 5-"Accounts receivable, net of allowance for credit losses" under Part I, Item 1-"Financial Statements" above.
Due to rounding, the numbers presented in the tables included in this "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations" may not add up precisely to the totals provided.
Results of Operations
The following table sets forth certain data from our consolidated statements of
income for the three and nine months ended
Percentage Change
Increase/(Decrease)
Nine
Three months months
ended ended
Three months ended Nine months ended September 30, September 30,
September 30, September 30,
2020 vs. 2020 vs.
2019 2020 2019 2020 2019 2019
(dollars in millions) (dollars in millions)
Net revenues-Global Clients $ 767.7 $ 824.2 $ 2,231.1 $ 2,409.0 7.4 % 8.0 %
Net revenues-GE 121.1 111.3 348.7 349.8 (8.0 )% 0.3 %
Total net revenues 888.8 935.5 2,579.8 2,758.8 5.3 % 6.9 %
Cost of revenue 573.7 605.8 1,664.0 1,804.5 5.6 % 8.4 %
Gross profit 315.1 329.7 915.8 954.3 4.6 % 4.2 %
Gross profit margin 35.5 % 35.2 % 35.5 % 34.6 %
Operating expenses
Selling, general and
administrative expenses 194.5 198.3 582.3 582.0 2.0 % 0.0 %
Amortization of acquired
intangible assets 7.0 10.2 23.6 31.7 47.1 % 34.4 %
Other operating (income)
expense, net 0.1 (3.5 ) 0.1 15.0 NM * NM *
Income from operations 113.6 124.6 309.9 325.7 9.7 % 5.1 %
Income from operations as a
percentage of net revenues 12.8 % 13.3 % 12.0 % 11.8 %
Foreign exchange gains
(losses), net 6.7 (2.4 ) 3.6 11.6 (135.7 )% 218.5 %
Interest income (expense), net (10.2 ) (12.8 ) (33.5 ) (38.1 ) 24.8 % 13.7 %
Other income (expense), net 0.7 1.0 5.1 0.9 36.4 % (81.3 )%
Income before equity-method
investment activity, net and
income tax expense 110.8 110.4 285.1 300.1 (0.3 )% 5.3 %
Equity-method investment
activity, net - - - - - % - %
Income before income tax
expense 110.8 110.4 285.1 300.1 (0.3 )% 5.3 %
Income tax expense 22.7 25.0 62.4 66.9 10.3 % 7.2 %
Net income 88.1 85.4 222.7 233.3 (3.0 )% 4.8 %
Net income as a percentage of
net revenues 9.9 % 9.1 % 8.6 % 8.5 %
*N0t Meaningful
49
--------------------------------------------------------------------------------
Three Months Ended
Net revenues. Our net revenues were$935.5 million in the third quarter of 2020, up$46.7 million , or 5.3%, from$888.8 million in the third quarter of 2019. The growth in our net revenues was primarily driven by increases in both transformation services and intelligent operations delivered to Global Clients, primarily in our CGRLH segment, high tech clients within our HMS segment and insurance clients within our BCMI segment. Our net revenues fromGE declined in the third quarter of 2020 compared to the third quarter of 2019, mainly due to committed productivity and a reduction inGE's discretionary expenditures on IT and other shorter cycle projects resulting from the uncertain macro environment caused by the COVID-19 pandemic. Adjusted for foreign exchange, primarily the impact of changes in the value of the Australian dollar, Indian rupee, euro andU.K. pound sterling against theU.S. dollar, our net revenues grew 5.4% in the third quarter of 2020 compared to the third quarter of 2019 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 4.1% to approximately 96,700 in the third quarter of 2020 from approximately 92,900 in the third quarter of 2019.
Percentage Change
Three months ended
September 30, Increase/(Decrease)
2019 2020 2020 vs. 2019
(dollars in millions)
Net revenues - Global Clients $ 767.7 $ 824.2 7.4 %
Net revenues - GE $ 121.1 $ 111.3 (8.0) %
Total net revenues $ 888.8 $ 935.5 5.3 %
Net revenues from Global Clients in the third quarter of 2020 were $824.2
million , up $56.5 million , or 7.4%, from $767.7 million in the third quarter of
2019. This increase was primarily driven by growth in our CGRLH segment, high
tech clients within our HMS segment and insurance clients within our BCMI
segment. As a percentage of total net revenues, net revenues from Global Clients
increased from 86.4% in the third quarter of 2019 to 88.1% in the third quarter
of 2020.
Net revenues from GE in the third quarter of 2020 declined 8.0% compared to the
third quarter of 2019, mainly due to committed productivity and a reduction in
GE's discretionary expenditures on IT and other shorter cycle projects resulting
from the uncertain macro environment caused by the COVID-19 pandemic.
Revenues by segment were as follows:
Percentage
Change
Three months ended Increase
September 30, /(Decrease)
2019 2020 2020 vs. 2019
(dollars in millions)
BCMI 282.2 283.8 0.6 %
CGRLH $ 273.1 $ 318.3 16.6 %
HMS 338.2 339.0 0.2 %
Others (4.6 ) (5.6 ) (21.1) %
Total net revenues $ 888.8 $ 935.5 5.3 %
Net revenues from our BCMI segment were largely flat in the third quarter of
2020 compared to the third quarter of 2019, as higher revenues from clients in
our insurance vertical were partially offset by slightly lower revenues from
clients in our banking and capital markets vertical. Net revenues from our CGRLH
segment increased by 16.6% in the third quarter of 2020 compared to the third
quarter of 2019, primarily driven by an increase in transformation services,
which
50
-------------------------------------------------------------------------------- also included revenue from Rightpoint which was acquired in the fourth quarter of 2019. Net revenues from our HMS segment were flat in the third quarter of 2020 compared to the third quarter of 2019. An increase in revenues from clients in our high tech vertical was partially offset by lower revenues from clients in our manufacturing and services vertical, includingGE , who were adversely impacted by COVID-19. Net revenues from Others primarily represents the impact of foreign exchange fluctuations, which is not allocated to the Company's segments for management's internal reporting purposes. For additional information, see Note 19-"Segment reporting" under Part I, Item 1-"Financial Statements" above. Cost of revenue. Cost of revenue was$605.8 million in the third quarter of 2020, up$32.2 million , or 5.6%, from the third quarter of 2019. The increase in our cost of revenue in the third quarter of 2020 compared to the third quarter of 2019 was primarily due to (i) an increase in our operational headcount, including in the number of onshore personnel related to large new deals and transformation services delivery as well as from the acquisition of Rightpoint, (ii) wage inflation, (iii) a non-recurring employee severance charge as part of our COVID-19 related restructuring plan, (iv) a non-recurring charge related to retirement fund assets inIndia , and (v) an increase in depreciation expense due to the expansion of certain existing facilities and the purchase/deployment of new assets, including technology-related intangible assets, and finance leases entered into after the third quarter of 2019. This increase was partially offset by (i) improved utilization of transformation services resources and (ii) lower discretionary spending following the onset of the COVID-19 pandemic, in the third quarter of 2020 compared to the third quarter of 2019. For additional information, see Note 27-"Restructuring" under Part I, Item 1-"Financial Statements" above. Gross margin. Our gross margin decreased from 35.5% in the third quarter of 2019 to 35.2% in the third quarter of 2020, driven primarily by a non-recurring employee severance charge related to our COVID-19 related restructuring plan and a non-recurring charge related to retirement fund assets inIndia . Selling, general and administrative expenses (SG&A). SG&A expenses as a percentage of total net revenues decreased from 21.9% in the third quarter of 2019 to 21.2% in the third quarter of 2020. SG&A expenses were$198.3 million in the third quarter of 2020, up$3.8 million , or 2.0%, from the third quarter of 2019. This increase in expense was primarily due to (i) a non-recurring employee severance charge as part of our restructuring and (ii) wage inflation. This increase was partially offset by lower discretionary spending and travel costs due to the COVID-19 pandemic in the third quarter of 2020 compared to the third quarter of 2019. Amortization of acquired intangibles. Non-cash charges related to the amortization of acquired intangibles were$10.2 million in the third quarter of 2020, up$3.3 million , or 47.1%, from the third quarter of 2019. This increase is primarily due to higher amortization related to intangibles acquired after the third quarter of 2019 primarily related to the acquisition of Rightpoint in the fourth quarter of 2019, partially offset by the completion of the useful lives of intangibles acquired in prior periods in the third quarter of 2020. Other operating (income) expense, net. Other operating income (net of expense) increased by$3.6 million in the third quarter of 2020 compared to the third quarter of 2019. The increase is primarily due to a change in the fair value of an earn-out liability of$3.8 million that was recognized in the third quarter of 2020 compared to the third quarter of 2019. Income from operations. As a result of the foregoing factors, income from operations as a percentage of total net revenues increased from 12.8% in the third quarter of 2019 to 13.3% in the third quarter of 2020. Income from operations increased by$11.1 million to$124.6 million in the third quarter of 2020 from$113.6 million in the third quarter of 2019 driven by higher revenues and associated operating income margins. Foreign exchange gains (losses), net. We recorded a net foreign exchange loss of$2.4 million in the third quarter of 2020, compared to a net foreign exchange gain of$6.7 million in the third quarter of 2019. The loss in the third quarter of 2020 was due to the appreciation of Hungarian forint and Philippine peso against theU.S. dollar, and the gain in the third quarter of 2019 resulted primarily from the depreciation of the Indian rupee against theU.S. dollar. Interest income (expense), net. Our interest expense (net of interest income) was$12.8 million in the third quarter of 2020, up$2.5 million , or 24.8%, from the third quarter of 2019, primarily due to a$2.4 million increase in interest expense and a$0.1 million decrease in interest income. The increase in interest expense was primarily due to interest expense on our$400 million aggregate principal amount of 3.375% senior notes issued inNovember 2019 (the "2019 Senior Notes"). This increase was partially offset by a lower averageLondon Interbank Offered Rate ("LIBOR")-based rate on our revolving credit facility and our term loan due to a decrease in the average LIBOR rate during the third quarter of 2020 compared to the third quarter of 2019, reduced by lower gains on interest rate swaps in the third quarter of 2020 compared to the third quarter of 2019, which we discuss in the section titled "Liquidity and Capital Resources-Financial 51 -------------------------------------------------------------------------------- Condition" below. The weighted average rate of interest on our debt, including the net impact of interest rate swaps, decreased from 3.2% in the third quarter of 2019 to 2.9% in the third quarter of 2020. Other income (expense), net. Our other income (net of expense) was$1.0 million in the third quarter of 2020 compared to$0.7 million in the third quarter of 2019. The increase was primarily due to a gain on the fair value of the assets in our deferred compensation plan in the third quarter of 2020 compared to the third quarter of 2019, partially offset by a marked-to-market gain on investments held for sale recorded in the third quarter of 2019, for which there was no corresponding gain in the third quarter of 2020. Income tax expense. Our income tax expense was$25.0 million in the third quarter of 2020, up from$22.7 million in the third quarter of 2019, representing an effective tax rate ("ETR") of 22.6%, up from 20.5% in the third quarter of 2019. The increase in our effective tax rate is primarily due to a change in the jurisdictional mix of our income and the absence in the third quarter of 2020 of certain employment-related tax benefits inIndia that we recorded in the third quarter of 2019, partially offset by certain discrete benefits recorded in the third quarter of 2020. Net income. As a result of the foregoing factors, net income as a percentage of total net revenues was 9.1% in the third quarter of 2020, down from 9.9% in the third quarter of 2019. Net income decreased$2.7 million from$88.1 million in the third quarter of 2019 to$85.4 million in the third quarter of 2020. Adjusted income from operations. Adjusted income from operations ("AOI") increased by$17.7 million from$142.3 million in the third quarter of 2019 to$160.0 million in the third quarter of 2020. Our AOI margin increased from 16.0% in the third quarter of 2019 to 17.1% in the third quarter of 2020 due to an increase in revenues in the third quarter of 2020 compared to the third quarter of 2019 coupled with improved operating leverage and cost containment initiatives undertaken in the third quarter of 2020. These initiatives included lower discretionary spending and targeted reductions in our workforce, including in our transformation services, to improve utilization levels and align overall SG&A spending with revised revenue expectations in the context of the COVID-19 pandemic. AOI is a non-GAAP measure and is not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. We believe that presenting AOI together with our reported results can provide useful supplemental information to our investors and management regarding financial and business trends relating to our financial condition and results of operations. A limitation of using AOI versus net income calculated in accordance with GAAP is that AOI excludes certain recurring costs and certain other charges, namely stock-based compensation and amortization of acquired intangibles. We compensate for this limitation by providing specific information on the GAAP amounts excluded from AOI. We calculate AOI as net income, excluding (i) stock-based compensation, (ii) amortization and impairment of acquired intangible assets, (iii) acquisition-related expenses excluded in the period in which an acquisition is consummated, (iv) foreign exchange (gain)/loss, (v) restructuring expenses, (vi) interest (income) expense, and (vii) income tax expense, as we believe that our results after taking into account these adjustments more accurately reflect our ongoing operations. For additional information, see Note 19-"Segment reporting" under Part I, Item 1-"Financial Statements" above. During the second and third quarters of 2020, as a result of the COVID-19 pandemic, the Company undertook restructuring measures that resulted in a charge of$4.9 million in the third quarter of 2020. This charge has been excluded from AOI in the third quarter of 2020. For additional information, see Note 27-"Restructuring" under Part I, Item 1-"Financial Statements" above. 52 -------------------------------------------------------------------------------- The following table shows the reconciliation of AOI to net income, the most directly comparable GAAP measure for the three months endedSeptember 30, 2019 and 2020: Three months ended September 30, 2019 2020 (dollars in millions) Net income $ 88.1$ 85.4 Foreign exchange (gains) losses, net (6.7 ) 2.4 Interest (income) expense, net 10.2 12.8 Income tax expense 22.7 25.0 Stock-based compensation 21.3 19.5 Amortization and impairment of acquired intangible assets 6.7 10.0 Restructuring expenses - 4.9 Adjusted income from operations$ 142.3 $ 160.0
The following table sets forth our AOI by segment for the three months ended
Three months ended
September 30,
2019 2020
(dollars in millions)
BCMI $ 32.7 $ 38.8
CGRLH 42.7 47.8
HMS 58.5 61.0
Others 8.4 12.4
AOI of our BCMI segment increased to $38.8 million in the third quarter of 2020
from $32.7 million in the third quarter of 2019, primarily driven by more
efficient utilization of transformation resources on slightly higher revenue.
AOI of our CGRLH segment increased to $47.8 million in the third quarter of 2020
from $42.7 million in the third quarter of 2019, primarily due to revenue
growth, higher utilization of transformation resources and operating leverage.
AOI of our HMS segment increased to $61.0 million in the third quarter of 2020
from $58.5 million in the third quarter of 2019, primarily due to higher
utilization of resources in the third quarter of 2020 compared to the third
quarter of 2019 on slightly higher revenue. AOI for "Others" in the table above
primarily represents the impact of foreign exchange fluctuations, adjustment of
allowances for credit losses and over-absorption of overhead in the third
quarter of 2020, as well as the impact of foreign exchange fluctuations and
over-absorption of overhead in the third quarter of 2019, none of which are
allocated to any individual segment for management's internal reporting
purposes. See Note 19-"Segment reporting" to our consolidated financial
statements under Part I, Item 1- "Financial Statements" above.
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Nine Months Ended
Net revenues. Our net revenues were$2,758.8 million in the nine months endedSeptember 30, 2020 , up$179.0 million , or 6.9%, from$2,579.8 million in the nine months endedSeptember 30, 2019 . The growth in our net revenues was from Global Clients and derived from both transformation services and intelligent operations across all of our segments. The impact of the COVID-19 pandemic on our net revenues in the nine months endedSeptember 30, 2020 was primarily related to clients adapting to the shift in our delivery capabilities from a physical to a virtual, work-from-home operating environment as well as economic uncertainty impacted by market developments causing delays or cancellations of new projects and new orders, which impacted growth. Our BCMI segment was affected more than our other segments, most notably in the second quarter, as not all clients in this segment consented to work-from-home service delivery of processes managing highly sensitive customer information in that quarter. We anticipate that the impact of the COVID-19 pandemic in the nine months endedSeptember 30, 2020 related to client demand is likely to continue into future periods, and may have an adverse effect on our net revenues in future periods. Adjusted for foreign exchange, primarily the impact of changes in the value of the euro, Australian dollar, Indian rupee andU.K. pound sterling against theU.S. dollar, our net revenues grew 7.5% in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 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 7.9% to approximately 97,000 in the nine months endedSeptember 30, 2020 from approximately 90,000 in the nine months endedSeptember 30, 2019 . Percentage Change Nine months ended September 30, Increase/(Decrease) 2019 2020 2020 vs. 2019 (dollars in millions)
Net revenues - Global Clients
8.0 % Net revenues - GE $ 348.7$ 349.8 0.3 % Total net revenues$ 2,579.8 $ 2,758.8 6.9 % Net revenues from Global Clients in the nine months endedSeptember 30, 2020 were$2,409.0 million , up$178.0 million , or 8.0%, from$2,231.1 million in the nine months endedSeptember 30, 2019 . This increase was primarily driven by growth in our CGRLH and HMS segments. As a percentage of total net revenues, net revenues from Global Clients increased from 86.5% in the nine months endedSeptember 30, 2019 to 87.3% in the nine months endedSeptember 30, 2020 . Net revenues fromGE were flat in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The minor increase in revenue fromGE in the nine months endedSeptember 30, 2020 was driven by services delivered primarily in connection with incremental work awarded in the second half of 2019, partially offset by committed productivity and a reduction inGE's discretionary expenditures on IT and other shorter cycle projects resulting from the uncertain macro environment caused by the COVID-19 pandemic in the nine months endedSeptember 30, 2020 .
Revenues by segment were as follows:
Percentage Change
Nine months ended September 30, Increase/(Decrease)
2019 2020 2020 vs.2019
(dollars in millions)
BCMI $ 798.2 $ 805.8 1.0 %
CGRLH 802.7 930.2 15.9 %
HMS 988.7 1,045.9 5.8 %
Others (9.8 ) (23.1 ) (135.7 )%
Total net revenues $ 2,579.8 $ 2,758.8 6.9 %
54
-------------------------------------------------------------------------------- Net revenues from our BCMI segment increased 1.0% in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily due to an increase in revenue associated with the continued ramp-up of large new deals, largely offset by a decrease in revenue due to delayed approvals from clients to shift to a virtual operating environment. Net revenues from our CGRLH segment increased by 15.9% in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily driven by an increase in transformation services revenues, including revenue from Rightpoint, which we acquired in the fourth quarter of 2019. Net revenues from our HMS segment increased by 5.8% in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily driven by an increase in transformation services, including revenue from Rightpoint. Net revenues from "Others" primarily represents the impact of foreign exchange fluctuations, which is not allocated to the Company's segments for management's internal reporting purposes. For additional information, see Note 19-"Segment reporting" under Part I, Item 1-"Financial Statements" above. Cost of revenue. Cost of revenue was$1,804.5 million in the nine months endedSeptember 30, 2020 , up$140.5 million , or 8.4%, from the nine months endedSeptember 30, 2019 . The increase in our cost of revenue in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily due to (i) an increase in our operational headcount, including in the number of onshore personnel, related to large new deals and transformation services delivery as well as from the acquisition of Rightpoint, (ii) wage inflation, (iii) a non-recurring employee severance charge related to our COVID-19 related restructuring plan, (iv) a non-recurring charge related to retirement fund assets inIndia , and (v) an increase in depreciation expense due to the expansion of certain existing facilities and the purchase/deployment of new assets, including technology-related intangible assets, and finance leases entered into after the nine months endedSeptember 30, 2019 . This increase was partially offset by (i) improved utilization of transformation services resources and (ii) lower discretionary spending related to actions the Company took in response to the impact of the COVID-19 pandemic on our business in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . For additional information see Note 27-"Restructuring" under Part I, Item 1-"Financial Statements" above. Gross margin. Our gross margin decreased from 35.5% in the nine months endedSeptember 30, 2019 to 34.6% in the nine months endedSeptember 30, 2020 , driven primarily by the impact of the COVID-19 pandemic resulting in lower utilization of intelligent operations resources due to a lack of some client consents, primarily in our BCMI segment, for our employees to work from home, a non-recurring charge related to retirement fund assets inIndia , and a non-recurring restructuring charge related to employee severance, partially offset by improved operating leverage. Selling, general and administrative expenses (SG&A). SG&A expenses as a percentage of total net revenues decreased from 22.6% in the nine months endedSeptember 30, 2019 to 21.1% in the nine months endedSeptember 30, 2020 . SG&A expenses were$582.0 million in the nine months endedSeptember 30, 2020 , down$0.3 million compared to the nine months endedSeptember 30, 2019 . This decrease in expense was primarily due to lower marketing expenses and lower travel costs due to a significant reduction in travel following the onset of the COVID-19 pandemic, an adjustment to allowances for credit losses due to the collection of aged receivables, and efficient functional spending in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , partially offset by wage inflation afterSeptember 30, 2019 . Amortization of acquired intangibles. Non-cash charges related to the amortization of acquired intangibles were$31.7 million in the nine months endedSeptember 30, 2020 , up$8.1 million , or 34.4%, from the nine months endedSeptember 30, 2019 . This increase is primarily due to higher amortization related to intangibles acquired afterSeptember 30, 2019 primarily related to the acquisition of Rightpoint in the fourth quarter of 2019, partially offset by the completion of the useful lives of intangibles acquired in prior periods in the nine months endedSeptember 30, 2020 . Other operating (income) expense, net. Other operating expense (net of income) increased by$14.9 million in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase is primarily due to a non-recurring impairment charge of$10.2 million related to the abandonment of various office premises as part of a restructuring and an impairment charge of$10.0 million related to tangible and intangible assets, primarily technology- and customer-related, partially offset by a$4.3 million decrease in the fair value of earn-out liabilities in the nine months endedSeptember 30, 2020 . In the nine months endedSeptember 30, 2019 , we recorded a gain of$3.4 million related to the sale of a parcel of land inIndia , which was largely offset by an impairment charge of$3.5 million relating to certain computer software and technology-related intangible assets. For additional information, see Note 10-"Goodwill and intangible assets" and Note 27-"Restructuring" under Part I, Item 1-"Financial Statements" above.
Income from operations. As a result of the foregoing factors, income from
operations as a percentage of total net revenues decreased from 12.0% in the
nine months ended
55
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September 30, 2020 . Income from operations increased by $15.8 million to $325.7
million in the nine months ended September 30, 2020 from $309.9 million in the
nine months ended September 30, 2019 driven by higher revenues.
Foreign exchange gains (losses), net. We recorded a net foreign exchange gain of
$11.6 million in the nine months ended September 30, 2020 , compared to a net
foreign exchange gain of $3.6 million in the nine months ended September 30,
2019 . The gain in the nine months ended September 30, 2020 resulted primarily
from the depreciation of the Indian rupee and Australian dollar against the U.S.
dollar, while the gain in the nine months ended September 30, 2019 resulted
primarily from the depreciation of the Indian rupee against the U.S. dollar.
Interest income (expense), net. Our interest expense (net of interest income)
was $38.1 million in the nine months ended September 30, 2020 , up $4.6 million ,
or 13.7%, from the nine months ended September 30, 2019 , primarily due to a $5.1
million increase in interest expense, partially offset by a $0.5 million
increase in interest income. The increase in interest expense was due to
interest expense on our $400 million aggregate principal amount of 3.375% senior
notes issued in November 2019 (the "2019 Senior Notes"). This increase was
partially offset by a lower average London Interbank Offered Rate
("LIBOR")-based rate on our revolving credit facility and term loan due to a
decrease in the average LIBOR rate during the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 , reduced by lower
gains on interest rate swaps in the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019 , which we discuss in the
section titled "Liquidity and Capital Resources-Financial Condition" below. Our
interest income increased by $0.5 million in the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 , primarily due to
higher account balances in India . The weighted average rate of interest on our
debt, including the net impact of interest rate swaps, decreased from 3.4% in
the nine months ended September 30, 2019 to 2.9% in the nine months ended
September 30, 2020 .
Other income (expense), net. Our other income (net of expense) was $0.9 million
in the nine months ended September 30, 2020 compared to other income (net of
expense) of $5.1 million in the nine months ended September 30, 2019 . In the
nine months ended September 30, 2019 , we recognized $4.0 million of export
subsidy income in India , while no such subsidy income was recognized in nine
months ended September 30, 2020 . The export subsidy was introduced under the
Foreign Trade Policy of India to encourage the export of specified services from
India and was available for eligible export services through March 31, 2019 .
Income tax expense. Our income tax expense was $66.9 million in the nine months
ended September 30, 2020 , up from $62.4 million in the nine months ended
September 30, 2019 , representing an effective tax rate ("ETR") of 22.3%, up from
21.9% in the nine months ended September 30, 2019 . The increase in our ETR is
primarily due to a change in the jurisdictional mix of our income.
Net income. As a result of the foregoing factors, net income as a percentage of
total net revenues was 8.5% in the nine months ended September 30, 2020 , down
from 8.6% in the nine months ended September 30, 2019 . Net income increased by
$10.6 million from $222.7 million in the nine months ended September 30, 2019 to
$233.3 million in the nine months ended September 30, 2020 .
Adjusted income from operations. Adjusted income from operations ("AOI")
increased by $41.3 million from $399.9 million in the nine months ended
September 30, 2019 to $441.2 million in the nine months ended September 30,
2020 . Our AOI margin increased from 15.5% in the nine months ended September 30,
2019 to 16.0% in the nine months ended September 30, 2020 . This increase was due
to an increase in revenues in the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019 coupled with improved operating
leverage and cost containment initiatives undertaken in the nine months ended
September 30, 2020 . These initiatives included lower discretionary spending and
targeted reductions in our workforce, including in our transformation services,
to improve utilization levels and align overall SG&A spending with revised
revenue expectations in the context of the COVID-19 pandemic.
AOI is a non-GAAP measure and is not based on any comprehensive set of
accounting rules or principles and should not be considered a substitute for, or
superior to, financial measures calculated in accordance with GAAP, and may be
different from non-GAAP financial measures used by other companies. We believe
that presenting AOI together with our reported results can provide useful
supplemental information to our investors and management regarding financial and
business trends relating to our financial condition and results of operations. A
limitation of using AOI versus net income calculated in accordance with GAAP is
that AOI excludes certain recurring costs and certain other charges, namely
stock-based compensation and amortization of acquired intangibles. We compensate
for this limitation by providing specific information on the GAAP amounts
excluded from AOI.
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We calculate AOI as net income, excluding (i) stock-based compensation, (ii)
amortization and impairment of acquired intangible assets, (iii)
acquisition-related expenses excluded in the period in which an acquisition is
consummated, (iv) foreign exchange (gain)/loss, (v) restructuring expenses, (vi)
interest (income) expense, and (vii) income tax expense, as we believe that our
results after taking into account these adjustments more accurately reflect our
ongoing operations. For additional information, see Note 19-"Segment reporting"
under Part I, Item 1-"Financial Statements" above.
During the nine months ended September 30, 2020 , as a result of the COVID-19
pandemic, the Company undertook restructuring measures that resulted in a charge
of $26.5 million . This charge has been excluded from AOI in the nine months
ended September 30, 2020 . For additional information, see Note
27-"Restructuring" under Part I, Item 1-"Financial Statements" above.
The following table shows the reconciliation of AOI to net income, the most
directly comparable GAAP measure for the nine months ended September 30, 2019
and 2020:
Nine months ended September 30,
2019 2020
(dollars in millions)
Net income $ 222.7 $ 233.3
Foreign exchange (gains) losses, net (3.6 ) (11.6 )
Interest (income) expense, net 33.5 38.1
Income tax expense 62.4 66.9
Stock-based compensation 61.3 55.8
Amortization and impairment of acquired intangible
assets 22.7 32.2
Acquisition-related expenses 1.0 -
Restructuring expenses - 26.5
Adjusted income from operations $ 399.9 $ 441.2
The following table sets forth our AOI by segment for the nine months ended
Nine months ended September 30,
2019 2020
(dollars in millions)
BCMI $ 88.8 $ 88.9
CGRLH 115.2 134.7
HMS 175.3 178.7
Others 20.5 38.9
AOI of our BCMI segment was flat from the nine months ended September 30, 2019
to the nine months ended September 30, 2020 , primarily as a result of lower
revenues due to delayed work-from-home approvals from certain clients and
charges related to a write-down of certain technology assets that we no longer
plan to utilize or develop due to changing economic and operational conditions,
in the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019 , partially offset by revenue growth in the segment and more
efficient utilization of resources. AOI of our CGRLH segment increased to $134.7
million in the nine months ended September 30, 2020 from $115.2 million in the
nine months ended September 30, 2019 , primarily due to revenue growth in the
segment, more efficient utilization of transformation resources and operating
leverage. AOI of our HMS segment increased to $178.7 million in the nine months
ended September 30, 2020 from $175.3 million in the nine months ended September
30, 2019 , primarily due to incremental revenue in the nine months ended
September 30, 2020 . AOI for "Others" in the table above primarily represents the
impact of foreign exchange fluctuations, an adjustment to allowances for credit
losses and over-absorption of overhead in the nine months ended September 30,
2020 and the impact of foreign exchange fluctuations, government incentives and
over-absorption of overhead in the nine months ended September 30, 2019 , none of
which are allocated to any individual segment for management's internal
reporting purposes. See Note 19-"Segment reporting" to our consolidated
financial statements under Part I, Item 1-"Financial Statements" above.
57
--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
Information about our financial position as of
As of December 31, As of September 30, Percentage Change
2019 2020 Increase/(Decrease)
(dollars in millions) 2020 vs. 2019
Cash and cash equivalents $ 467.1 $ 803.4 72.0 %
Short-term borrowings 70.0 245.0 250.0
Long-term debt due within
one year 33.5 33.5 0.1
Long-term debt other than
the current portion 1,339.8 1,315.5 (1.8)
Genpact Limited total
shareholders' equity $ 1,689.2 $ 1,777.2 5.2 %
Financial Condition
We have historically financed our operations and our expansion, including acquisitions, with cash from operations and borrowing facilities.
OnFebruary 6, 2020 , our board of directors approved an approximately 15% increase in our quarterly cash dividend to$0.0975 per share, up from$0.085 per share in 2019, representing a planned annual dividend of$0.39 per common share, up from$0.34 per common share in 2019, payable to holders of our common shares. OnMarch 18, 2020 ,June 26, 2020 andSeptember 23, 2020 , the Company paid a dividend of$0.0975 per share, amounting to$18,543 ,$18,595 and$18,637 in the aggregate, to shareholders of record as ofMarch 9, 2020 ,June 11, 2020 andSeptember 11, 2020 , respectively. As ofSeptember 30, 2020 ,$789.8 million of our$803.4 million in cash and cash equivalents was held by our foreign (non-Bermuda ) subsidiaries.$11.6 million of this cash is held by foreign subsidiaries for which we expect to incur and have accrued a deferred tax liability on the repatriation of$5.6 million of retained earnings.$778.2 million of the cash and cash equivalents is held by foreign subsidiaries in jurisdictions where no tax is expected to be imposed upon repatriation of retained earnings or is being indefinitely reinvested. The total authorization under our existing share repurchase program is$1,250.0 million , of which$200.5 million remained available as ofSeptember 30, 2020 . Since our share repurchase program was initially authorized in 2015, we have repurchased 39,179,200 of our common shares at an average price of$26.8 per share, for an aggregate purchase price of approximately$1,049.5 million . This amount includes shares repurchased under our 2017 accelerated share repurchase program. During the nine months endedSeptember 30, 2020 , we repurchased 1,781,978 of our common shares on the open market at a weighted average price of$41.3 per share for an aggregate cash amount of$73.6 million . During the nine months endedSeptember 30, 2019 , we repurchased 608,285 of our common shares on the open market at a weighted average price of$39.29 per share for an aggregate cash amount of$23.9 million . 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. However, there is no assurance that the impacts we have experienced to date, and any future impact we may experience, from the COVID-19 pandemic will not have an adverse effect on our cash flows. 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 existing operations to support our growth, financing acquisitions and enhancing capabilities, including building digital solutions. 58
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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
Nine months ended September 30, Increase/(Decrease)
2019 2020 2020 vs. 2019
(dollars in millions)
Net cash provided by (used
for):
Operating activities $ 341.3 $ 425.2 24.6 %
Investing activities (86.0) (55.9) (35.0) %
Financing activities (154.2) (1.6) (99.0) %
Net increase in cash and cash 101.1 $ 367.7 263.7 %
equivalents $
Cash flows provided by operating activities. Net cash provided by operating
activities was $425.2 million in the nine months ended September 30, 2020 ,
compared to $341.3 million in the nine months ended September 30, 2019 . This
increase in cash inflow is primarily due to (i) a $10.6 million increase in net
income in the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019 , (ii) a $44.7 million increase in non-cash expenses,
primarily due to the write down of operating right-of-use assets and other
assets as part of our COVID-19 related restructuring plan, higher write-downs of
intangible assets and property, plant and equipment, higher depreciation and
amortization, and increased unrealized losses on the revaluation of foreign
currency assets/liabilities, partially offset by lower stock-based compensation
expenses in the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019 , and (iii) a $28.6 million decrease in operating assets
and liabilities driven by better days sales outstanding (DSO) and an increase in
accounts payable in the nine months ended September 30, 2020 compared to the
nine months ended September 30, 2019 , partially offset by higher annual
performance bonus payments and a tax deposit made in the nine months ended
September 30, 2020 in connection with a 2013 Indian tax matter which is
discussed under Part II, Item 1A-"Risk Factors" in our Quarterly Report on Form
10-Q for the quarter ended June 30, 2020 -"Tax matters may have an adverse effect
on our operations, effective tax rate and financial condition."
Cash flows used for investing activities. Our net cash used for investing
activities was $55.9 million in the nine months ended September 30, 2020 ,
compared to $86.0 million in the nine months ended September 30, 2019 . The
reduction in cash used for investing activities is primarily due to payments for
acquired/internally generated intangible assets and purchases of property, plant
and equipment (net of sales proceeds), which were $23.8 million lower in the
nine months ended September 30, 2020 than in the nine months ended September 30,
2019 . Additionally, we made payments of $6.3 million related to an acquisition
in the nine months ended September 30, 2019 for which there were no
corresponding payments in the nine months ended September 30, 2020 .
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Cash flows used for financing activities. Our net cash used for financing
activities was $1.6 million in the nine months ended September 30, 2020 ,
compared to net cash used for financing activities of $154.2 million in the nine
months ended September 30, 2019 . We received proceeds from short-term borrowings
(net of repayments) of $175.0 million in the nine months ended September 30,
2020 compared to the repayment of short-term borrowings (net of proceeds) of
$50.0 million in the nine months ended September 30, 2019 . For additional
information, see Note 11 to our consolidated financial statements. Additionally,
payments in connection with the net settlement of common shares under
stock-based compensation plans were $33.2 million in the nine months ended
September 30, 2020 compared to $3.2 million in the nine months ended September
30, 2019 . Payments for share repurchases (including expenses related to
repurchases) were $73.6 million in the nine months ended September 30, 2020 ,
compared to $23.9 million in the nine months ended September 30, 2019 . Dividend
payments were $55.8 million in the nine months ended September 30, 2020 compared
to $48.5 million in the nine months ended September 30, 2019 . There were no
payments related to earn-out or deferred consideration in the nine months ended
September 30, 2020 compared to a payment of $12.8 million in the nine months
ended September 30, 2019 .
Financing Arrangements
As of December 31, 2019 and September 30, 2020 , our outstanding term loan, net
of debt amortization expense of $1.6 million and $1.3 million , respectively, was
$627.4 million and $602.2 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, 2019 and September 30, 2020 , the limits
available under such facilities were $14.3 million and $14.2 million ,
respectively, of which $7.5 million and $6.2 million , respectively, was
utilized, constituting non-funded drawdown. As of December 31, 2019 and
September 30, 2020 , a total of $72.1 million and $247.6 million , respectively,
of our revolving credit facility was utilized, of which $70.0 million and $245.0
million , respectively, constituted funded drawdown and $2.1 million and $2.6
million , respectively, constituted non-funded drawdown.
In November 2019 , we issued the 2019 Senior Notes, resulting in cash proceeds of
approximately $398.3 million , net of an underwriting fee of $1.6 million and a
discount of $0.1 million . In connection with the offering of the 2019 Senior
Notes and the offering of $350 million aggregate principal amount of our 3.70%
senior notes in March 2017 (the "2017 Senior Notes" and together with the 2019
Senior Notes, the "Senior Notes"), the Company incurred other debt issuance
costs of $1.2 million related to the 2017 Senior Notes and $1.2 million related
to the 2019 Senior Notes. The Senior Notes are fully guaranteed by the Company.
The total debt issuance cost of $2.6 million and $2.9 million incurred in
connection with the 2017 and 2019 Senior Notes offerings, respectively, are
being amortized over the lives of the notes as an additional interest expense.
As of December 31, 2019 and September 30, 2020 , the amount outstanding under our
2019 Senior Notes, net of debt amortization expense of $2.9 million and $2.4
million , respectively, was $397.1 million and $397.6 million , respectively. As
of December 31, 2019 and September 30, 2020 , the amount outstanding under our
2017 Senior Notes, net of debt amortization expense of $1.2 million and $0.8
million , respectively, was $348.8 million and $349.2 million , respectively. We
pay interest on the 2017 Senior Notes semi-annually in arrears on April 1 and
October 1 of each year and on the 2019 Senior Notes semi-annually in arrears on
June 1 and December 1 of each year, ending on the maturity dates of April 1,
2022 and December 1, 2024 , respectively.
For additional information, see Notes 11 and 12-"Short-term borrowings" and "Long-term debt" under Part I, Item 1-"Financial Statements" above.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of foreign exchange contracts. For additional information, see Part I, Item 1A-"Risk Factors"-"Currency exchange rate fluctuations in various currencies in which we do business, especially the Indian rupee, the euro and theU.S. dollar, could have a material adverse effect on our business, results of operations and financial condition" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , the section titled "Contractual Obligations" below, and Note 7 in Part I, Item 1-"Financial Statements" above. 60 --------------------------------------------------------------------------------
Contractual Obligations
The following table sets forth our total future contractual obligations as ofSeptember 30, 2020 : Total Less than 1-3 years 3-5 years After 5 years 1 year (dollars in millions) Long-term debt$ 1,453.8 $ 69.1 $ 966.9 $ 417.8 $ - - Principal payments 1,349.0 33.5 917.9 397.6 - - Interest payments* 104.8 35.6 49.0 20.2 - Short-term borrowings 245.8 245.8 - - - - Principal payments 245.0 245.0 - - - - Interest payments** 0.8 0.8 - - - Finance leases 51.4 17.6 26.3 7.5 - - Principal payments 47.4 16.2 24.3 6.9 - - Interest payments*** 4.0 1.4 2.0 0.6 - Operating leases 479.4 89.4 149.4 109.9 130.7 - Principal payments 370.4 65.2 116.9 86.0 102.3 - Interest payments*** 109.0 24.2 32.5 23.9 28.4 Purchase obligations 32.8 28.2 4.6 - - Capital commitments net of advances 9.8 9.8 - - - Earn-out consideration 21.1 6.5 14.6 - - - Reporting date fair value 18.2 5.0 13.2 - - - Interest 2.9 1.5 1.4 - - Other liabilities 104.8 60.3 44.4 0.1 - Total contractual obligations$ 2,398.9 $ 526.7 $ 1,206.2 $ 535.3 $ 130.7
* 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 1.375% per annum as of
Interest payments on long-term debt also include interest on our senior notes
due in 2022 and 2024 at a rate of 3.70% per annum and 3.375% per annum
respectively, 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 1.375% per annum as of
*** Our interest payments on finance leases and operating leases are based on the
incremental borrowing rate prevailing in different jurisdictions.
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Supplemental Guarantor Financial Information
As discussed in Note 12, "Long-term debt," under Part I, Item 1-"Financial Statements" above, Genpact Luxembourg S.à r.l. (the "Issuer"), a wholly owned subsidiary of the Company (the "Guarantor"), issued the Senior Notes. As ofSeptember 30, 2020 , the outstanding balance for the 2017 Senior Notes and the 2019 Senior Notes was$349.2 million and$397.6 million , respectively. Each issuance of Senior Notes was fully and unconditionally guaranteed by the Guarantor. The other subsidiaries of the Guarantor do not guarantee the Senior Notes (such subsidiaries are referred to as the "non-Guarantors"). The Guarantor has fully and unconditionally guaranteed (i) that the payment of the principal, premium, if any, and interest on the Senior Notes shall be promptly paid in full when due, whether at stated maturity of the Senior Notes, by acceleration, redemption or otherwise, and that the payment of interest on the overdue principal and interest on the Senior Notes, if any, if lawful, and all other obligations of the Company to the holders of the Senior Notes or the trustee under the Senior Notes shall be promptly paid in full or performed, and (ii) in case of any extension of time of payment or renewal of any Senior Notes or any of such other obligations, that the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. With respect to the Senior Notes, failing payment by the Issuer when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantor shall be obligated to pay the same immediately. The Guarantor has agreed that this is a guarantee of payment of the Senior Notes and not a guarantee of collection. The following tables present summarized financial information for the Issuer and the Guarantor on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor.
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