10-Q 1 g-10q_20180331.htm 10-Q g-10q_20180331.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, 2018

Or

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

For the Transition Period from              to             

Commission file number: 001-33626

 

GENPACT LIMITED

(Exact name of registrant as specified in its charter)

 

 

Bermuda

 

98-0533350

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Canon’s Court

22 Victoria Street

Hamilton HM 12

Bermuda

(441) 295-2244

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

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

The number of the registrant’s common shares, par value $0.01 per share, outstanding as of May 2, 2018 was 190,388,217.

 

 

 


TABLE OF CONTENTS

 

 

 

Item No.

 

 

 

Page No.

 

 

 

 

 

PART I

 

 

 

Financial Statements

 

 

 

 

1.

 

Unaudited Consolidated Financial Statements

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2017 and March 31, 2018

 

1

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2017 and 2018

 

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2017 and 2018

 

3

 

 

 

 

Consolidated Statements of Equity and Redeemable Non-controlling Interest for the three months ended March 31, 2017 and 2018

 

5

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2018

 

6

 

 

 

 

Notes to the Consolidated Financial Statements

 

7

 

 

2.

 

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

 

43

 

 

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

56

 

 

4.

 

Controls and Procedures

 

56

 

 

 

 

 

 

 

PART II

 

 

 

Other Information

 

 

 

 

1.

 

Legal Proceedings

 

57

 

 

1A.

 

Risk Factors

 

57

 

 

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

 

 

3.

 

Defaults upon Senior Securities

 

57

 

 

5.

 

Other Information

 

57

 

 

6.

 

Exhibits

 

57

 

 

 

 

 

 

 

SIGNATURES

 

59

 

 

 


GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

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

 

 

 

Notes

 

As of December 31,

2017

 

 

As of March 31,

2018

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4

 

$

504,468

 

 

$

424,226

 

Accounts receivable, net

 

5

 

 

693,085

 

 

 

703,066

 

Prepaid expenses and other current assets

 

8

 

 

236,342

 

 

 

199,208

 

Total current assets

 

 

 

$

1,433,895

 

 

$

1,326,500

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

9

 

 

207,030

 

 

 

205,035

 

Deferred tax assets

 

24

 

 

76,929

 

 

 

81,734

 

Investment in equity affiliates

 

25

 

 

886

 

 

 

919

 

Intangible assets, net

 

10

 

 

131,590

 

 

 

125,781

 

Goodwill

 

10

 

 

1,337,122

 

 

 

1,337,051

 

Contract cost assets

 

19

 

 

-

 

 

 

162,435

 

Other assets

 

 

 

 

262,169

 

 

 

157,672

 

Total assets

 

 

 

$

3,449,621

 

 

$

3,397,127

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

11

 

$

170,000

 

 

$

275,000

 

Current portion of long-term debt

 

12

 

 

39,226

 

 

 

39,237

 

Accounts payable

 

 

 

 

15,050

 

 

 

13,811

 

Income taxes payable

 

24

 

 

30,026

 

 

 

40,026

 

           Accrued expenses and other current liabilities

 

13

 

 

584,482

 

 

 

503,116

 

Total current liabilities

 

 

 

$

838,784

 

 

$

871,190

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

12

 

 

1,006,687

 

 

 

996,999

 

Deferred tax liabilities

 

24

 

 

6,747

 

 

 

7,083

 

      Other liabilities

 

14

 

 

168,609

 

 

 

155,858

 

Total liabilities

 

 

 

$

2,020,827

 

 

$

2,031,130

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 

 

4,750

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Common shares, $0.01 par value, 500,000,000 authorized, 192,825,207

and 190,613,135 issued and outstanding as of December 31, 2017

and March 31, 2018, respectively

 

 

 

 

1,924

 

 

 

1,903

 

Additional paid-in capital

 

 

 

 

1,421,368

 

 

 

1,422,897

 

Retained earnings

 

 

 

 

355,982

 

 

 

321,916

 

Accumulated other comprehensive income (loss)

 

 

 

 

(355,230

)

 

 

(380,719

)

Total equity

 

 

 

$

1,424,044

 

 

$

1,365,997

 

Commitments and contingencies

 

27

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and equity

 

 

 

$

3,449,621

 

 

$

3,397,127

 

 

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

 

2017

 

 

2018

 

Net revenues

 

19

 

$

622,995

 

 

$

688,912

 

Cost of revenue

 

20, 25

 

 

383,337

 

 

 

444,324

 

Gross profit

 

 

 

$

239,658

 

 

$

244,588

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

21, 25

 

 

160,858

 

 

 

171,109

 

Amortization of acquired intangible assets

 

10

 

 

7,242

 

 

 

9,936

 

Other operating (income) expense, net

 

22

 

 

(7,538

)

 

 

(218

)

Income from operations

 

 

 

$

79,096

 

 

$

63,761

 

Foreign exchange gains (losses), net

 

 

 

 

(4,913

)

 

 

4,798

 

Interest income (expense), net

 

23

 

 

(5,493

)

 

 

(8,100

)

Other income (expense), net

 

26

 

 

553

 

 

 

15,550

 

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

 

 

 

$

69,243

 

 

$

76,009

 

Equity-method investment activity, net

 

 

 

 

(4,558

)

 

 

 

Income before income tax expense

 

 

 

$

64,685

 

 

$

76,009

 

Income tax expense

 

24

 

 

12,245

 

 

 

12,075

 

Net income

 

 

 

$

52,440

 

 

$

63,934

 

Net loss attributable to redeemable non-controlling interest

 

 

 

 

898

 

 

 

761

 

Net income attributable to Genpact Limited shareholders

 

 

 

$

53,338

 

 

$

64,695

 

Net income available to Genpact Limited common shareholders

 

18

 

$

53,338

 

 

$

64,695

 

Earnings per common share attributable to Genpact Limited

   common shareholders

 

18

 

 

 

 

 

 

 

 

Basic

 

 

 

$

0.27

 

 

$

0.34

 

Diluted

 

 

 

$

0.26

 

 

$

0.33

 

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

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

199,069,528

 

 

 

192,816,626

 

Diluted

 

 

 

 

202,655,937

 

 

 

196,288,569

 

 

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,

 

 

 

2017

 

 

2018

 

 

 

Genpact

Limited

Shareholders

 

 

Redeemable

Non-

controlling

interest

 

 

Genpact

Limited

Shareholders

 

 

Redeemable

Non-

controlling

interest

 

Net Income (loss)

 

$

53,338

 

 

$

(898

)

 

$

64,695

 

 

$

(761

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation  adjustments

 

 

51,627

 

 

 

(12

)

 

 

(9,335

)

 

 

(424

)

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

 

 

18,858

 

 

 

 

 

 

(18,932

)

 

 

 

Retirement benefits, net of taxes

 

 

119

 

 

 

 

 

 

513

 

 

 

 

Other comprehensive income (loss)

 

 

70,604

 

 

 

(12

)

 

 

(27,754

)

 

 

(424

)

Comprehensive income (loss)

 

$

123,942

 

 

$

(910

)

 

$

36,941

 

 

$

(1,185

)

 

See accompanying notes to the Consolidated Financial Statements.

3


GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Equity and Redeemable Non-controlling Interest

(Unaudited)

(In thousands, except share count)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Redeemable

 

 

 

No. of Shares

 

 

Amount

 

 

Additional Paid-

in Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Total

Equity

 

 

non-controlling

interest.

 

Balance as of January 1, 2017

 

 

198,794,052

 

 

$

1,984

 

 

$

1,384,468

 

 

$

358,121

 

 

$

(457,925

)

 

$

1,286,648

 

 

$

4,520

 

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

 

 

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.

4


GENPACT LIMITED AND ITS SUBSIDIARIES

Consolidated Statements of Equity and Redeemable Non-controlling Interest

(Unaudited)

(In thousands, except share count)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Redeemable

 

 

 

No. of

Shares

 

 

Amount

 

 

Additional Paid-

in Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Total

Equity

 

 

non-controlling

interest.

 

Balance as of January 1, 2018, as previously reported

 

 

192,825,207

 

 

$

1,924

 

 

$

1,421,368

 

 

$

355,982

 

 

$

(355,230

)

 

$

1,424,044

 

 

$

4,750

 

Adoption of ASU 2014-09 (Note 2(f))

 

 

 

 

 

 

 

 

 

 

 

17,924

 

 

 

 

 

 

17,924

 

 

 

 

 

Adjusted balance as of January 1, 2018

 

 

192,825,207

 

 

$

1,924

 

 

$

1,421,368

 

 

$

373,906

 

 

$

(355,230

)

 

$

1,441,968

 

 

$

4,750

 

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

 

 

 

 

 

 

 

 

 

 

 

(2,265

)

 

 

2,265

 

 

 

 

 

 

 

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

 

 

161,837

 

 

 

2

 

 

 

2,549

 

 

 

 

 

 

 

 

2,551

 

 

 

 

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

 

 

58,476

 

 

 

1

 

 

 

1,650

 

 

 

 

 

 

 

 

 

1,651

 

 

 

 

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

 

 

55,631

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Net settlement on vesting of performance units (Note 16)

 

 

691,958

 

 

 

7

 

 

 

(13,291

)

 

 

 

 

 

 

 

 

(13,284

)

 

 

 

Stock repurchased and retired (Note 17)

 

 

(3,179,974

)

 

 

(32

)

 

 

4,000

 

 

 

(99,952

)

 

 

 

 

 

(95,984

)

 

 

 

Expenses related to stock purchase (Note 17)

 

 

 

 

 

 

 

 

 

 

 

(60

)

 

 

 

 

 

(60

)

 

 

 

Stock-based compensation expense (Note 16)

 

 

 

 

 

 

 

 

7,787

 

 

 

 

 

 

 

 

 

7,787

 

 

 

 

Payment for purchase of redeemable non-controlling interest

 

 

 

 

 

 

 

 

(1,165

)

 

 

 

 

 

 

 

 

(1,165

)

 

 

(3,565

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

64,695

 

 

 

 

 

 

64,695

 

 

 

(761

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,754

)

 

 

(27,754

)

 

 

(424

)

Dividend (Note 17)

 

 

 

 

 

 

 

 

 

 

 

(14,408

)

 

 

 

 

 

(14,408

)

 

 

 

Balance as of  March 31, 2018

 

 

190,613,135

 

 

$

1,903

 

 

$

1,422,897

 

 

$

321,916

 

 

$

(380,719

)

 

$

1,365,997

 

 

$

 

 

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,

 

 

 

 

2017

 

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net income attributable to Genpact Limited shareholders

 

$

53,338

 

 

$

64,695

 

Net loss attributable to redeemable non-controlling interest

 

 

(898

)

 

 

(761

)

Net income

 

$

52,440

 

 

$

63,934

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,139

 

 

 

15,836

 

Amortization of debt issuance costs

 

 

375

 

 

 

488

 

Amortization of acquired intangible assets

 

 

7,242

 

 

 

9,936

 

Reserve for doubtful receivables

 

 

 

 

 

(103

)

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

 

 

8,757

 

 

 

(8,525

)

Equity-method investment activity, net

 

 

4,558

 

 

 

 

Stock-based compensation expense

 

 

4,986

 

 

 

7,787

 

Deferred income taxes

 

 

(2,890

)

 

 

(4,625

)

Others, net

 

 

(4,301

)

 

 

(28

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

 

19,649

 

 

 

(6,025

)

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

 

 

(12,025

)

 

 

(37,008

)

Decrease in accounts payable

 

 

(928

)

 

 

(1,224

)

Decrease in accrued expenses, other current liabilities and other liabilities

 

 

(69,131

)

 

 

(77,734

)

Increase in income taxes payable

 

 

8,157

 

 

 

9,969

 

Net cash provided by/(used for) operating activities

 

$

31,028

 

 

$

(27,322

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(17,084

)

 

 

(18,706

)

Payment for internally generated intangible assets

 

 

(2,614

)

 

 

(4,365

)

Proceeds from sale of property, plant and equipment

 

 

389

 

 

 

144

 

Investment in equity affiliates

 

 

(467

)

 

 

 

Payment for business acquisitions, net of cash acquired

 

 

(9,237

)

 

 

 

Payment for purchase of redeemable non-controlling interest

 

 

 

 

 

(4,730

)

Net cash used for investing activities

 

$

(29,013

)

 

$

(27,657

)

Financing activities

 

 

 

 

 

 

 

 

Repayment of capital lease obligations

 

 

(494

)

 

 

(537

)

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

 

 

40,000

 

 

 

105,000

 

Repayment of short-term borrowings

 

 

(185,000

)

 

 

 

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

 

 

7,761

 

 

 

4,202

 

Payment for net settlement of stock-based awards

 

 

(9,939

)

 

 

(13,284

)

Payment of earn-out/deferred consideration

 

 

(1,097

)

 

 

(1,476

)

Dividend paid

 

 

(11,957

)

 

 

(14,408

)

Payment for stock purchased and retired

 

 

(219,784

)

 

 

(95,984

)

Payment for expenses related to stock purchase

 

 

(16

)

 

 

(60

)

Net cash used for financing activities

 

$

(42,007

)

 

$

(26,547

)

Effect of exchange rate changes

 

 

5,555

 

 

 

1,284

 

Net increase (decrease) in cash and cash equivalents

 

 

(39,992

)

 

 

(81,526

)

Cash and cash equivalents at the beginning of the period

 

 

422,623

 

 

 

504,468

 

Cash and cash equivalents at the end of the period

 

$

388,186

 

 

$

424,226

 

Supplementary information

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

5,324

 

 

$

13,194

 

Cash paid during the period for income taxes

 

$

16,426

 

 

$

24,157

 

Property, plant and equipment acquired under capital lease obligations

 

$

576

 

 

$

297

 

 

See accompanying notes to the Consolidated Financial Statements

6


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

 

1. Organization

The Company is a global professional services firm that drives digitally-led innovation and runs digitally-enabled intelligent operations for its clients, guided by its experience running thousands of processes for hundreds of Fortune Global 500 clients.  The Company has over 78,000 employees serving clients in key industry verticals from more than 20 countries.  

 The business of the Company was initially conducted through various entities and divisions of GE. The Company began operating independently in 2004 when GE spun off the Company’s operations. In August 2007, the Company completed an initial public offering of its common shares. In 2012, affiliates of Bain Capital Investors, LLC, or Bain Capital, and their co-investors acquired the majority of the remaining interests held by the Company’s initial investors. On each of August 18, 2017 and November 20, 2017, affiliates of Bain Capital and their co-investors sold 10,000,000 common shares of the Company in underwritten public offerings. The Company did not receive any proceeds from these offerings.

 

2. Summary of significant accounting policies

 

(a) Basis of preparation and principles of consolidation

 

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

 

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

 

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

 

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

 

(b) Use of estimates

 

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

7


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

2. Summary of significant accounting policies (Continued)

 

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

 

(c) Business combinations, goodwill and other intangible assets

 

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

 

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

 

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

 

Customer-related intangible assets

 

1-14 years

Marketing-related intangible assets

 

1-10 years

Other intangible assets

 

2-9 years

 

 

8


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

2. Summary of significant accounting policies (Continued)

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

 

Customer-related intangible assets

 

1-14 years

Marketing-related intangible assets

 

1-10 years

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 11% and 10% of receivables as of December 31, 2017 and March 31, 2018, respectively. GE accounted for 11% and 8% of total revenue for the three months ended March 31, 2017 and 2018, respectively.   

 

(e) Accounts receivable

 

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

 

(f) Changes in accounting policies

 

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

9


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

2. Summary of significant accounting policies (Continued)

 

Revenue Recognition

 

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

 

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

 

The Company has deferred revenue attributable to certain process transition activities, with respect to its customers where such activities do not represent separate performance obligation. Revenues relating to such transition activities are classified under contract liabilities and subsequently recognized ratably over the period in which the related services are performed. Costs relating to such transition activities are fulfillment costs which are directly related to the contract and result in generation or enhancement of resources and are expected to be recoverable under the contract and thereby classified as contract cost assets and are recognized ratably over the estimated expected period of benefit, under Cost of Revenue.

 

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

 

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

 

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

 

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

 

All incremental and direct costs incurred for acquiring contracts, such as certain sales commission, are classified as contract cost asset. Such costs are amortized over the expected period of benefit and recorded under Selling, General and Administrative Expenses.

 

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

 

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

 

10


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

2. Summary of significant accounting policies (Continued)

 

For a description of the Company’s revenue recognition accounting policy in effect before the Company’s adoption of ASC 606, see Note 3—“Summary of significant accounting policies” under Item 1 —“Financial Statements” and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations”—“Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Significant judgements

 

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

 

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

 

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

 

Impacts on consolidated financial statements

 

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the three months ended March 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


GENPACT LIMITED AND ITS SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

Consolidated Balance sheet

As of March 31, 2018

As reported

Adjustments

Balances without adoption of Topic 606

Assets

 

 

 

Current assets

 

 

 

Cash and cash equivalents

$                 424,226

 

$                         424,226

Accounts receivable, net

703,066

 

703,066

Prepaid expenses and other current assets (a, c)

                     199,208

              74,092

                            273,300

Total current assets

$          1,326,500

74,092

$                  1,400,592

 

 

 

 

Property, plant and equipment, net

205,035

 

205,035

Deferred tax assets

                       81,734

 

                               81,734

Investment in equity affiliates

919

 

919

Intangible assets, net

                      125,781

 

                             125,781

Goodwill

1,337,051

 

1,337,051

Contract cost assets (a, b)

                      162,435

          (162,435)

                                          —  

Other assets (a, c)

157,672

89,499

247,171

Total assets

$          3,397,127

               1,156