10-Q 1 g-10q_20170331.htm 10-Q g-10q_20170331.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 March 31, 2017

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 HM12

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 April 28, 2017 was 192,743,610.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Item No.

 

 

 

Page No.

 

 

 

 

 

PART I

 

 

 

Financial Statements

 

 

 

 

1.

 

Unaudited Consolidated Financial Statements

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2016 and March 31, 2017

 

1

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2016 and 2017

 

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2017

 

3

 

 

 

 

Consolidated Statements of Equity and Redeemable Non-controlling Interest for the three months ended March 31, 2016 and 2017

 

5

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2017

 

6

 

 

 

 

Notes to the Consolidated Financial Statements

 

7

 

 

2.

 

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

 

30

 

 

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

4.

 

Controls and Procedures

 

42

 

 

 

 

 

 

 

PART II

 

 

 

Other Information

 

 

 

 

1.

 

Legal Proceedings

 

43

 

 

1A.

 

Risk Factors

 

43

 

 

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

3.

 

Defaults upon Senior Securities

 

44

 

 

5.

 

Other Information

 

44

 

 

6.

 

Exhibits

 

45

 

 

 

 

 

 

 

SIGNATURES

 

46

 

 

 

 


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

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

 

 

 

Notes

 

As of December 31,

2016

 

 

As of March 31,

2017

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4

 

$

422,623

 

 

$

388,186

 

Accounts receivable, net

 

5

 

 

615,265

 

 

 

602,871

 

Prepaid expenses and other current assets

 

8

 

 

189,149

 

 

 

227,635

 

Total current assets

 

 

 

$

1,227,037

 

 

$

1,218,692

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

9

 

 

200,115

 

 

 

212,562

 

Deferred tax assets

 

23

 

 

70,143

 

 

 

61,029

 

Investment in equity affiliates

 

24

 

 

4,800

 

 

 

769

 

Intangible assets, net

 

10

 

 

72,049

 

 

 

69,070

 

Goodwill

 

10

 

 

1,069,408

 

 

 

1,097,329

 

Other assets

 

 

 

 

242,328

 

 

 

252,279

 

Total assets

 

 

 

$

2,885,880

 

 

$

2,911,730

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

11

 

$

160,000

 

 

$

15,000

 

Current portion of long-term debt

 

12

 

 

39,181

 

 

 

39,192

 

Accounts payable

 

 

 

 

9,768

 

 

 

9,086

 

Income taxes payable

 

23

 

 

24,159

 

 

 

33,091

 

Accrued expenses and other current liabilities

 

13

 

 

498,247

 

 

 

426,953

 

Total current liabilities

 

 

 

$

731,355

 

 

$

523,322

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

12

 

 

698,152

 

 

 

1,035,778

 

Deferred tax liabilities

 

23

 

 

2,415

 

 

 

1,815

 

Other liabilities

 

14

 

 

162,790

 

 

 

165,561

 

Total liabilities

 

 

 

$

1,594,712

 

 

$

1,726,476

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 

 

4,520

 

 

 

3,610

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Common shares, $0.01 par value, 500,000,000 authorized, 198,794,052

   and  192,727,001 issued and outstanding as of December 31, 2016

   and March 31, 2017, respectively

 

 

 

 

1,984

 

 

 

1,924

 

Additional paid-in capital

 

 

 

 

1,384,468

 

 

 

1,347,265

 

Retained earnings

 

 

 

 

358,121

 

 

 

219,776

 

Accumulated other comprehensive income (loss)

 

 

 

 

(457,925

)

 

 

(387,321

)

Total equity

 

 

 

$

1,286,648

 

 

$

1,181,644

 

Commitments and contingencies

 

25

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and equity

 

 

 

$

2,885,880

 

 

$

2,911,730

 

 

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 March 31,

 

 

 

Notes

 

2016 (1)

 

 

2017

 

Net revenues

 

 

 

$

609,703

 

 

$

622,995

 

Cost of revenue

 

19, 24

 

 

372,848

 

 

 

383,337

 

Gross profit

 

 

 

$

236,855

 

 

$

239,658

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

20, 24

 

 

160,149

 

 

 

160,858

 

Amortization of acquired intangible assets

 

10

 

 

6,145

 

 

 

7,242

 

Other operating (income) expense, net

 

21

 

 

(5,061

)

 

 

(7,538

)

Income from operations

 

 

 

$

75,622

 

 

$

79,096

 

Foreign exchange gains (losses), net

 

 

 

 

(998

)

 

 

(4,913

)

Interest income (expense), net

 

22

 

 

(2,838

)

 

 

(5,493

)

Other income (expense), net

 

 

 

 

878

 

 

 

553

 

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

   expense

 

 

 

$

72,664

 

 

$

69,243

 

Equity-method investment activity, net

 

 

 

 

(2,145

)

 

 

(4,558

)

Income before income tax expense

 

 

 

$

70,519

 

 

$

64,685

 

Income tax expense

 

23

 

 

12,014

 

 

 

12,245

 

Net income

 

 

 

$

58,505

 

 

$

52,440

 

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

 

 

 

 

289

 

 

 

898

 

Net income attributable to Genpact Limited shareholders

 

 

 

$

58,794

 

 

$

53,338

 

Net income available to Genpact Limited common shareholders

 

18

 

$

58,794

 

 

$

53,338

 

Earnings per common share attributable to Genpact Limited

   common shareholders

 

18

 

 

 

 

 

 

 

 

Basic

 

 

 

$

0.28

 

 

$

0.27

 

Diluted

 

 

 

$

0.27

 

 

$

0.26

 

Weighted average number of common shares used in computing earnings per

   common share attributable to Genpact Limited common shareholders

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

210,780,165

 

 

 

199,069,528

 

Diluted

 

 

 

 

213,892,964

 

 

 

202,655,937

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Income taxes, net income, and basic and diluted net income per common share for the three months ended March 31, 2016 have been restated due to the adoption of ASU No. 2016-09 in 2016 with effect from January 1, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31,

 

 

 

2016 (1)

 

 

2017

 

 

 

Genpact

Limited

Shareholders

 

 

Redeemable

Non-

controlling

interest

 

 

Genpact

Limited

Shareholders

 

 

Redeemable

Non-

controlling

interest

 

Net Income (loss)

 

$

58,794

 

 

$

(289

)

 

$

53,338

 

 

$

(898

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

5,217

 

 

 

 

 

 

51,627

 

 

 

(12

)

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

   (Note 7)

 

 

1,970

 

 

 

 

 

 

18,858

 

 

 

 

Retirement benefits, net of taxes

 

 

153

 

 

 

 

 

 

119

 

 

 

 

Other comprehensive income

   (loss)

 

$

7,340

 

 

$

 

 

$

70,604

 

 

$

(12

)

Comprehensive income (loss)

 

$

66,134

 

 

$

(289

)

 

$

123,942

 

 

$

(910

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net income for the three months ended March 31, 2016 has been restated due to the adoption of ASU No. 2016-09 in 2016 with effect from January 1, 2016.

 

 

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 (1)

 

 

Retained

Earnings (1)

 

 

Comprehensive

Income (Loss)

 

 

Total

Equity

 

 

non-controlling

interest

 

Balance as of January 1, 2016

 

 

211,472,312

 

 

$

2,111

 

 

$

1,342,022

 

 

$

411,508

 

 

$

(451,285

)

 

$

1,304,356

 

 

$

-

 

Issuance of common shares on

   exercise of options (Note 16)

 

 

248,316

 

 

 

2

 

 

 

4,210

 

 

-

 

 

-

 

 

 

4,212

 

 

 

-

 

Issuance of common shares under the

   employee stock purchase plan

   (Note 16)

 

 

30,487

 

 

 

-

 

 

 

725

 

 

 

-

 

 

 

-

 

 

 

725

 

 

 

-

 

Net settlement on vesting of

   restricted share units (Note 16)

 

 

95,191

 

 

 

1

 

 

 

(50

)

 

 

-

 

 

 

-

 

 

 

(49

)

 

 

-

 

Stock repurchased and retired

   (Note 17)

 

 

(1,356,199

)

 

 

(14

)

 

 

-

 

 

 

(33,003

)

 

 

-

 

 

 

(33,017

)

 

 

-

 

Deferred tax assets recognized on early adoption of ASU

2016-09

 

-

 

 

 

-

 

 

 

-

 

 

 

24,912

 

 

 

-

 

 

 

24,912

 

 

 

-

 

Expenses related to stock purchase

   (Note 17)

 

-

 

 

-

 

 

-

 

 

 

(27

)

 

 

-

 

 

 

(27

)

 

 

-

 

Stock-based compensation expense

   (Note 16)

 

-

 

 

-

 

 

 

5,336

 

 

 

-

 

 

 

-

 

 

 

5,336

 

 

 

-

 

Acquisition of redeemable non-

  controlling interest

 

-

 

 

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,910

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

 

 

 

 

 

-

 

 

 

58,794

 

 

 

-

 

 

 

58,794

 

 

 

(289

)

Other comprehensive income

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance as of  March 31, 2016

 

 

210,490,107

 

 

$

2,100

 

 

$

1,352,243

 

 

$

462,185

 

 

$

(451,285

)

 

$

1,365,243

 

 

$

3,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net income, additional paid-in capital and retained earnings for the three months ended March 31, 2016 have been restated due to the adoption of ASU No. 2016-09 in 2016 with effect from January 1, 2016.

 

 

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, 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)

 

 

455,835

 

 

 

5

 

 

 

6,540

 

 

 

 

 

-

 

 

 

6,545

 

 

-

 

Issuance of common shares under the

   employee stock purchase plan

   (Note 16)

 

 

55,788

 

 

 

1

 

 

 

1,217

 

 

 

 

 

 

 

 

 

1,218

 

 

 

 

Net settlement on vesting of

   restricted share units (Note 16)

 

 

76,865

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

-

 

 

 

 

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 purchase

   (Note 17)

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

 

 

 

 

(16

)

 

 

 

Stock-based compensation expense

   (Note 16)

 

 

-

 

 

 

-

 

 

 

4,986

 

 

 

-

 

 

 

 

 

 

4,986

 

 

-

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

 

 

 

53,338

 

 

 

 

 

 

53,338

 

 

 

(898

)

Other comprehensive income

 

 

 

 

$

 

 

 

 

 

 

 

 

 

70,604

 

 

 

70,604

 

 

 

(12

)

Dividend (Note 17)

 

 

-

 

 

 

-

 

 

 

 

 

 

(11,957

)

 

 

 

 

 

(11,957

)

 

 

 

Balance as of March 31, 2017

 

 

192,727,001

 

 

$

1,924

 

 

$

1,347,265

 

 

$

219,776

 

 

$

(387,321

)

 

$

1,181,644

 

 

$

3,610

 

 

See accompanying notes to the Consolidated Financial Statements.

5


 

GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three months ended March 31,

 

 

 

2016 (1)

 

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income attributable to Genpact Limited shareholders

 

$

58,794

 

 

$

53,338

 

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

 

 

(289

)

 

 

(898

)

Net income

 

$

58,505

 

 

$

52,440

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,155

 

 

 

14,139

 

Amortization of debt issuance costs

 

 

385

 

 

 

375

 

Amortization of acquired intangible assets

 

 

6,145

 

 

 

7,242

 

Intangible assets write-down

 

 

4,943

 

 

 

-

 

Reserve  for doubtful receivables

 

 

3,120

 

 

 

-

 

Unrealized loss on revaluation of foreign currency asset/liability

 

 

354

 

 

 

8,757

 

Equity-method investment activity, net

 

 

2,145

 

 

 

4,558

 

Stock-based compensation expense

 

 

5,336

 

 

 

4,986

 

Deferred income taxes

 

 

(3,184

)

 

 

(2,890

)

Others, net

 

 

63

 

 

 

(4,301

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

 

(17,697

)

 

 

19,649

 

Increase in prepaid expenses, other current assets and other assets

 

 

(27,123

)

 

 

(12,025

)

Decrease in accounts payable

 

 

(70

)

 

 

(928

)

Decrease in accrued expenses, other current liabilities and other liabilities

 

 

(64,360

)

 

 

(69,131

)

Increase in income taxes payable

 

 

8,660

 

 

 

8,157

 

Net cash provided by (used for) operating activities

 

$

(9,623

)

 

$

31,028

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(25,495

)

 

 

(19,698

)

Proceeds from sale of property, plant and equipment

 

 

132

 

 

 

389

 

Investment in equity affiliates

 

 

(3,783

)

 

 

(467

)

Payment for business acquisitions, net of cash acquired

 

 

(2,339

)

 

 

(9,237

)

Net cash used for investing activities

 

$

(31,485

)

 

$

(29,013

)

Financing activities

 

 

 

 

 

 

 

 

Repayment of capital lease obligations

 

 

(454

)

 

 

(494

)

Payment of debt issuance costs

 

 

-

 

 

 

(1,481

)

Proceeds from long-term debt

 

 

-

 

 

 

350,000

 

Repayment of long-term debt

 

 

(10,000

)

 

 

(10,000

)

Proceeds from short-term borrowings

 

 

60,000

 

 

 

40,000

 

Repayment of short-term borrowings

 

 

-

 

 

 

(185,000

)

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

 

 

4,937

 

 

 

7,761

 

Payment for net settlement of stock-based awards

 

 

(49

)

 

 

(9,939

)

Payment of earn-out/deferred consideration

 

 

(965

)

 

 

(1,097

)

Dividend paid

 

 

-

 

 

 

(11,957

)

Payment for stock purchased and retired

 

 

(33,017

)

 

 

(219,784

)

Payment for expenses related to stock purchase

 

 

(27

)

 

 

(16

)

Net cash provided by (used for) financing activities

 

$

20,425

 

 

$

(42,007

)

Effect of exchange rate changes

 

 

(429

)

 

 

5,555

 

Net increase (decrease) in cash and cash equivalents

 

 

(20,683

)

 

 

(39,992

)

Cash and cash equivalents at the beginning of the period

 

 

450,907

 

 

 

422,623

 

Cash and cash equivalents at the end of the period

 

$

429,795

 

 

$

388,186

 

Supplementary information

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

3,968

 

 

$

5,324

 

Cash paid during the period for income taxes

 

$

23,229

 

 

$

16,426

 

Property, plant and equipment acquired under capital lease obligations

 

$

283

 

 

$

576

 

 

 

 

 

 

 

 

 

 

(1)   Income taxes, net income and cash flows for the three months ended March 31, 2016 have been restated due to the adoption of ASU No. 2016-09 in 2016 with effect from. January 1, 2016.

 

 

 

 

 

 

 

 

 

 

 

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 focused on delivering digital transformation for its clients. The Company’s Lean DigitalSM approach integrates lean principles, design thinking, analytics and digital technologies with its domain and industry expertise. The Company delivers value to its clients in two ways – through digital-led, domain-enabled solutions that drive innovation, and through digitally-enabled intelligent operations that design, transform and run clients’ operations. The Company employs over 77,000 people in more than 20 countries.

 Prior to December 30, 2004, the business of the Company was conducted through various entities and divisions of GE. On December 30, 2004, in a series of transactions referred to as the “2004 Reorganization,” GE transferred such operations to the Company. In August 2007, the Company completed an initial public offering of its common shares. On October 25, 2012, Glory Investments A Limited, formerly known as South Asia Private Investments, an affiliate of Bain Capital Investors, LLC (“Bain Capital”), became the Company’s largest shareholder when, together with its affiliated assignees and two additional co-investors, it purchased 67,750,678 common shares of the Company from the Company’s initial investors.

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, 2016.

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, 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.

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)

(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 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

Other intangible assets

 

2-9 years

 

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 15% and 12% of receivables as of December 31, 2016 and March 31, 2017, respectively. GE accounted for 16% and 11% of revenues for the three months ended March 31, 2016 and 2017, respectively.

(e) Recently adopted accounting pronouncements

 

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

 

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)

The following recently released accounting standard has been adopted by the Company:

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the requirement for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in income tax expense or in additional paid-in capital. In the quarter ended December 31, 2016, the Company elected to early adopt ASU 2016-09 effective January 1, 2016 and will apply ASU 2016-09 using a modified retrospective approach. The treatment of forfeitures has not changed as the Company is electing to continue its current process of estimating the number of forfeitures. With the early adoption of ASU 2016-09, the Company has elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted. As a result, the Company’s, income taxes, net income, cash flows, retained earnings, additional paid-in capital, and basic and diluted net income per common share for the first quarter of 2016 have been restated due to the adoption of ASU No. 2016-09.

In addition, the following recently released accounting standards have been adopted by the Company. 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, 2016, the Company adopted FASB ASU 2015-01 (Topic 225), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). Such items are defined as transactions or events that are both unusual in nature and infrequent in occurrence, and, currently, are required to be presented separately in the income statement, net of income tax, after income from continuing operations. The changes eliminate the concept of an extraordinary item and, therefore, the presentation of such items will no longer be required. Notwithstanding this change, the Company will still be required to present and disclose a transaction or event that is both unusual in nature and infrequent in occurrence in the notes to the financial statements.

Effective January 1, 2016, the Company adopted FASB ASU 2015-05 (Topic 350), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”), which provides explicit guidance to evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The new guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract.

Effective January 1, 2016, the Company adopted FASB ASU 2015-16 (Topic 805), Business Combinations (“ASU 2015-16”), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The guidance requires that the acquirer shall recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.

Effective January 1, 2016, the Company adopted FASB ASU 2015-02. In February 2015, the FASB issued ASU No. 2015-02, Amendment to the Consolidation Analysis, which specifies changes to the analysis that an entity must perform to determine whether it should consolidate certain types of legal entities. These changes (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

 

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.

9


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

3. Business acquisitions

Certain acquisitions

(a) LeaseDimensions, Inc.

           On February 15, 2017, the Company acquired 100% of the outstanding equity interest in LeaseDimensions, Inc. (“LeaseDimensions”), an Oregon corporation. The preliminary estimated total purchase consideration for LeaseDimensions is $11,626, subject to adjustment for closing date working capital and net debt. This amount includes the estimated fair value of contingent earn-out consideration, cash consideration of $9,089, net of cash acquired of $217, and a preliminary adjustment for working capital and net debt. As of March 31, 2017, the total consideration paid by the Company to the sellers is $9,454, resulting in a receivable of $148. The purchase agreement also 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. This acquisition enhances the Company’s capabilities in commercial lending and leasing.

           In connection with the transaction, the Company recorded $2,400 in customer-related intangibles and $1,000 in marketing-related intangibles, which have a weighted average amortization period of three years. Goodwill arising from the acquisition amounted to $8,307, which has been allocated to the Company’s Americas reporting unit and is not 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 $422 have been included in selling, general and administrative expenses as incurred. Through the transaction the Company acquired assets with a value of $2,277, assumed liabilities amounting to $1,038, and recognized a net deferred tax liability of $1,320. 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.

(b) Endeavour Software Technologies Private Limited

On April 13, 2016, the Company acquired 100% of the outstanding equity interest in Endeavour Software Technologies Private Limited (“Endeavour”), an Indian private limited company. The total purchase consideration paid by the Company to acquire Endeavour is $14,788. This amount includes the estimated fair value of the contingent earn-out consideration, cash consideration of $10,345, net of cash acquired of $2,373, and an adjustment for working capital and net debt. Of this amount, $95 is payable by the Company to one of the sellers. During the quarter ended March 31, 2017, the Company recorded a measurement period adjustment that resulted in a $346 increase in the purchase consideration as a result of an adjustment to closing date working capital and net debt. The adjustments included an increase of $161 in assets acquired, a decrease of $118 in liabilities assumed and a corresponding impact on goodwill of $67. These measurement period adjustments did not have a significant impact on the Company’s consolidated statements of income, balance sheets or cash flows.

In connection with the transaction, the Company recorded $800 in customer-related intangibles, $900 in marketing-related intangibles and $950 in other intangible assets, which have a weighted average amortization period of three years. Goodwill arising from the acquisition amounted to $8,936, which has been allocated to the Company’s India reporting unit and is not deductible for tax purposes. The goodwill represents primarily the capabilities in end-to-end mobility services, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company. In connection with the transaction, the Company also acquired certain assets with a value of $5,854 and assumed certain liabilities amounting to $1,735.

(c) 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 equityholders for the acquired interest in SSE was $14,541. This amount includes the fair value of earn-out consideration, cash consideration of $2,550, and an adjustment for working capital, transaction expenses and indebtedness. During the quarter ended December 31, 2016, the Company recorded a measurement period adjustment that resulted in a $51 increase in the purchase consideration through the recognition of $69 in current assets and $16 in non-current assets, with a corresponding impact on goodwill of $34. These measurement period adjustments did not have a significant impact on the Company’s consolidated statements of income, balance sheets or cash flows in any period. The equity purchase agreement between the Company and the selling equityholders of SSE also provides for contingent earn-out consideration of up to $20,000, payable by the Company to the selling equityholders based on 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 equityholders’ 49% interest in SSE, is payable only if either the put or call option, each as described below, is exercised.

10


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 equity purchase agreement grants the Company a call option to purchase the remaining 49% equity interest in SSE, which option the Company has the right to exercise between January 1, 2018 and January 31, 2018. If the Company does not exercise its call option during such period, the selling equityholders have the right to exercise a put option between March 1, 2018 and April 30, 2018 to require the Company to purchase their 49% interest in SSE at a price ranging from $2,450 to $2,950. This acquisition enhances the Company’s sourcing and procurement consulting domain expertise.

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.

 

4. Cash and cash equivalents

Cash and cash equivalents as of December 31, 2016 and March 31, 2017 are set out in the table below:

 

 

 

As of December 31,

 

 

As of March 31,

 

 

 

2016

 

 

2017

 

Cash and other bank balances

 

 

422,623

 

 

 

388,186

 

Total

 

$