Item 1. Unaudited Consolidated Financial Statements
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 98,000 employees serving clients in key industry verticals from more than 30 countries.
2. Summary of significant accounting policies
(a) Basis of preparation and principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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, 2020. The accompanying consolidated financial statements reflect all adjustments that management considers necessary for a fair presentation of the results of operations for these periods.
The accompanying 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 over the entity, the Company applies the equity method of accounting. All intercompany transactions and balances are eliminated in consolidation.
(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, intangible assets and goodwill, revenue recognition, allowance for credit losses, valuation allowances for deferred tax assets, the valuation of derivative financial instruments, the measurement of lease liabilities and right-of-use (“ROU”) assets, measurements of stock-based compensation, assets and obligations related to employee benefits, the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, variable consideration, other obligations for revenue recognition, income tax uncertainties and other contingencies. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable, and management has made assumptions about the possible effects of the ongoing COVID-19 pandemic on critical and significant accounting estimates. Although these estimates and assumptions 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 Accounting Standard Codification (“ASC”) Topic 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 re-measured 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.
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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)
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 and accumulated impairment loss based on their estimated useful lives as follows:
Customer-related intangible assets
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1-11 years
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Marketing-related intangible assets
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1-10 years
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Technology-related intangible assets
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2-8 years
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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.
The Company also capitalizes certain software and technology-related development costs incurred in connection with developing or obtaining software or technology for sale/lease to customers when the initial design phase is completed and commercial and technological feasibility has been established. Any development cost incurred before technological feasibility is established is expensed as incurred as research and development costs. Technological feasibility is established upon completion of a detailed design program or, in its absence, completion of a working model. Capitalized software and technology costs include only (i) external direct costs of materials and services utilized in developing or obtaining software and technology and (ii) compensation and related benefits for employees who are directly associated with the project.
Costs incurred in connection with developing or obtaining software or technology for sale/lease to customers which are under development and not put to use are disclosed under “intangible assets under development.” Advances paid towards the acquisition of intangible assets outstanding as of each balance sheet date are disclosed under “intangible assets under development.”
Capitalized software and technology costs are included in intangible assets under technology-related intangible assets on the Company’s balance sheet and are amortized on a straight-line basis when placed into service over the estimated useful lives of the software and technology.
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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 Company evaluates the remaining useful life of intangible assets that are being amortized at each reporting period wherever events and circumstances warrant a revision to the remaining period of amortization, and the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.
(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 customers. The General Electric Company (“GE”) accounted for 16% and 12% of the Company’s receivables as of December 31, 2020 and March 31, 2021, respectively. GE accounted for 13% and 10% of the Company’s revenues for the three months ended March 31, 2020 and 2021, 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 (used for)/provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for current expected credit losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses which are adjusted to current market conditions and a reasonable and supportable forecast. 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 customers.
(f) Revenue Recognition
The Company derives its revenue primarily from business process management services, including analytics, consulting and related digital solutions and information technology services, which are provided primarily on a time-and-material, transaction or fixed-price basis. The Company recognizes revenue upon the transfer of control of promised services to its customers in an amount that reflects the consideration the Company expects to receive 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 customization of applications, maintenance and support services. Revenues from these contracts are recognized ratably over the term of the agreement. The Company accrues for revenue and unbilled receivables for services rendered between the last billing date and the balance sheet date.
The Company’s contracts with its customers also include incentive payments received for discrete benefits delivered or promised to be delivered to the customer or service level agreements that could result in credits or refunds to the customer. Revenues relating to such arrangements are accounted for as variable consideration when the amount of revenue to be recognized can be estimated to the extent that it is probable that a significant reversal of any incremental revenue will not occur.
The Company records deferred revenue attributable to certain process transition activities where such activities do not represent separate performance obligations. Revenues relating to such transition activities are classified under contract liabilities and subsequently recognized ratably over the period in which the related services are performed. Costs relating to such transition activities are fulfillment costs which are directly related to the contract and result in the generation or enhancement of resources. Such costs are expected to be recoverable under the contract and are therefore classified as contract cost assets and recognized ratably over the estimated expected period of benefit under cost of revenue.
Revenues are reported net of value-added tax, business tax and applicable discounts and allowances. Reimbursements of out-of-pocket expenses received from customers have been included as part of revenues.
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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 for performance obligations that are satisfied over time is recognized in accordance with the methods prescribed for measuring progress. The input (cost expended) method has been used to measure progress towards completion as there is a direct relationship between input and the satisfaction of a performance obligation. 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 customer may purchase a combination of products or services. The Company determines whether each product or service promised to a customer is capable of being distinct, and is distinct in the context of the contract. If not, the promised products or services are combined and accounted for as a single performance obligation. In the event of a multiple-element revenue arrangement, the Company allocates the arrangement consideration to separately identifiable performance obligations based on their relative stand-alone selling prices.
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 distinct, non-cancellable, subscription-based licenses is recognized at the point in time it is transferred to the customer. Revenue from any associated maintenance or ongoing support services is recognized ratably over the term of the contract. For a combined software license/services performance obligation, revenue is recognized over the period that the services are performed.
All incremental and direct costs incurred for acquiring contracts, such as certain sales commissions, are classified as contract cost assets. Such costs are amortized over the expected period of benefit and recorded under selling, general and administrative expenses.
Other upfront fees paid to customers are classified as contract assets. Such fees are amortized over the expected period of benefit and recorded as an adjustment to the transaction price and deducted from revenue.
Timing of revenue recognition may differ from the timing of invoicing. If a payment is received in respect of services prior to the delivery of services, the payment is recognized as an advance from the customer and classified as a contract liability. Contract assets and contract liabilities relating to the same customer contract are offset against each other and presented on a net basis in the consolidated financial statements.
Significant judgements
The Company often enters into contracts with its customers that include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgement.
Judgement is also required to determine the standalone selling price for each distinct performance obligation. In instances where the standalone selling price is not directly observable, it is determined using information that may include market conditions and other observable inputs.
Customer contracts sometimes include incentive payments received for discrete benefits delivered to the customer 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.
(g) Leases
At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on whether: (1) the contract involves the use of a distinct identified asset, (2) the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the term of the contract, and (3) the Company has the right to direct the use of the asset. At the inception of a lease, the consideration in the contract is allocated to each lease component based on its relative standalone price to determine the lease payments.
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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)
Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset or (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of the above criteria.
For all leases at the lease commencement date, a right-of-use (ROU) asset and a lease liability are recognized. The lease liability represents the present value of the lease payments under the lease. Lease liabilities are initially measured at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at the lease commencement. The lease liabilities are subsequently measured on an amortized cost basis. The lease liability is adjusted to reflect interest on the liability and the lease payments made during the period. Interest on the lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability.
The ROU asset represents the right to use the leased asset for the lease term. The ROU asset for each lease initially includes the amount of the initial measurement of the lease liability adjusted for any lease payments made to the lessor at or before the commencement date, accrued lease liabilities and any lease incentives received or any initial direct costs incurred by the Company.
The ROU asset of finance leases is subsequently measured at cost, less accumulated amortization and any accumulated impairment losses. The ROU asset of operating leases is subsequently measured from the carrying amount of the lease liability at the end of each reporting period, and is equal to the carrying amount of lease liabilities adjusted for (1) unamortized initial direct costs, (2) prepaid/(accrued) lease payments and (3) the unamortized balance of lease incentives received.
The carrying value of ROU assets is reviewed for impairment, similar to long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
The Company has elected to not separate lease and non-lease components for all of its leases and to use the recognition exemptions for lease contracts that, at commencement date, have a lease term of 12 months or less and do not contain a purchase option (“short-term leases”).
Significant judgements
The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
Under certain of its leases, the Company has a renewal and termination option to lease assets for additional terms between one and ten years. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew or terminate the lease. The Company considers all relevant factors that create an economic incentive for it to exercise the renewal or termination option. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within the Company’s control and affects its ability to exercise (or not to exercise) the option to renew or terminate.
The Company has applied an incremental borrowing rate for the purpose of computing lease liabilities based on the remaining lease term and the rates prevailing in the jurisdictions where leases were executed.
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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)
(h) Cost of revenue
Cost of revenue primarily consists of salaries and benefits (including stock-based compensation), recruitment, training and related costs of employees who are directly responsible for the performance of services for customers, their supervisors and certain support personnel who may be dedicated to a particular client or a set of processes. It also includes operational expenses, which consist of facilities maintenance expenses, travel and living expenses, rent, IT expenses, and consulting and certain other expenses. Consulting charges represent the cost of consultants and contract resources with specialized skills who are directly responsible for the performance of services for clients and travel and other billable costs related to the Company’s clients. It also includes depreciation of property, plant and equipment, and amortization of intangible and ROU assets which are directly related to providing services that generate revenue.
(i) Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses consist of expenses relating to salaries and benefits (including stock-based compensation) as well as costs related to recruitment, training and retention of senior management and other support personnel in enabling functions such as human resources, finance, legal, marketing, sales and sales support, and other support personnel. The operational costs component of SG&A expenses also includes travel and living costs for such personnel. SG&A expenses also include acquisition-related costs, legal and professional fees (which represent the costs of third party legal, tax, accounting and other advisors), investment in research and development, digital technology, advanced automation and robotics, and an allowance for credit losses. It also includes depreciation of property, plant and equipment, and amortization of intangibles and ROU assets other than those included in cost of revenue.
(j) Credit losses
Allowance for credit losses is recognized for all debt instruments other than those held at fair value through profit or loss. The Company pools its accounts receivable (other than deferred billings) based on similar risk characteristics in estimating expected credit losses. Credit losses for accounts receivable are based on the roll-rate method, and the Company recognizes a loss allowance based on lifetime expected credit losses at each reporting date. The Company has established a provision matrix based on historical credit loss experience, adjusted for forward-looking factors and the economic environment. The Company believes the most relevant forward-looking factors are economic environment, gross domestic product, inflation rates and unemployment rates for each of the countries in which the Company or its customers operate, and accordingly the Company adjusts historical loss rates based on expected changes in these factors. At every reporting date, observed historical default rates are updated to reflect changes in the Company’s forward-looking estimates.
Credit losses for other financial assets and deferred billings are based on the discounted cash flow (“DCF”) method. Under the DCF method, the allowance for credit losses reflects the difference between the contractual cash flows due in accordance with the contract and the present value of the cash flows expected to be collected. The expected cash flows are discounted at the effective interest rate of the financial asset. Such allowances are based on the credit losses expected to arise over the life of the asset which includes consideration of prepayments based on the Company’s expectation as of the balance sheet date.
A financial asset is written off when it is deemed uncollectable and there is no reasonable expectation of recovering the contractual cash flows. Expected recoveries of amounts previously written off, not to exceed the aggregate amounts previously written off, are included in determining the allowance at each reporting period.
Credit losses are presented as a credit loss expense within “Selling, general and administrative expenses.” Subsequent recoveries of amounts previously written off are credited against the same line item.
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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)
(k) Reclassification
Certain reclassifications have been made in the consolidated financial statements of prior periods to conform to the classification used in the current period. The impact of such reclassifications on the consolidated financial statements is not material.
(l) Impairment of long-lived assets
Long-lived assets, including certain intangible assets, to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Such assets are required to be tested for impairment if the carrying amount of the assets is higher than the future undiscounted net cash flows expected to be generated by the assets. The impairment amount to be recognized is measured as the amount by which the carrying value of the assets exceeds their fair value. The Company determines fair value by using a discounted cash flow approach.
(m) Recently issued accounting pronouncements
The authoritative bodies release standards and guidance which are assessed by management for impact on the Company’s consolidated financial statements.
The Company has adopted the following recently released accounting standards:
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of credit losses on financial instruments.” The ASU requires measurement and recognition of expected credit losses for financial assets held by the Company. The ASU requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings. The ASU became effective for the Company beginning January 1, 2020, including interim periods in fiscal year 2020.
In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments—Credit Losses (Topic 326).” The ASU provides final guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets at amortized cost (except held-to-maturity securities) using the fair value option. The ASU is effective for the Company beginning January 1, 2020, including interim periods in fiscal year 2020.
In November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses.” This ASU clarifies that the scope of the guidance related to expected recoveries extends to purchased financial assets with credit deterioration. For entities that have not yet adopted ASU 2016-13, the amendments in ASU 2019-11 are effective on the same date as those in ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-11 are effective for fiscal years beginning January 1, 2020 and interim periods therein.
The Company adopted ASU 2016-13, ASU 2019-05 and ASU 2019-11 beginning January 1, 2020, including interim periods in fiscal year 2020. The cumulative impact of the adoption of these standards has been described in section (j) above.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU modifies the disclosure requirements with respect to fair value measurements. The ASU is effective for the Company beginning January 1, 2020, including interim periods in fiscal year 2020. The Company assessed the impact of this ASU and concluded that it does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
In August 2018, the FASB issued ASU No. 2018-14, “Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” The ASU modifies the disclosure requirements with respect to defined benefit pension plans. The Company adopted this ASU in its consolidated financial statements for the year ended December 31, 2020. The adoption of this ASU did not have a material impact on the Company’s disclosures.
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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)
In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” The ASU modifies the capitalization requirements with respect to implementation costs incurred by the customer in a hosting arrangement that is a service contract. The ASU is effective for the Company beginning January 1, 2020. The Company assessed the impact of this ASU and concluded that it does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” The ASU provides additional guidance on the recognition of credit losses and addresses partial-term fair value hedges, fair value hedge basis adjustments and certain transition requirements, among other things. The ASU also addresses the scope of the guidance on the requirement for re-measurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which foreign currency-denominated equity securities must be re-measured at historical exchange rates. The ASU is effective for the Company beginning January 1, 2020, including interim periods in fiscal year 2020. The Company assessed the impact of this ASU and concluded that it does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
In November 2019, the FASB issued ASU No. 2019-08, “Codification Improvements—Share-Based Consideration Payable to a Customer.” The ASU clarifies that share-based consideration payable to a customer is measured in accordance with guidance under AC 718--Share based payments. The ASU is effective for the Company beginning January 1, 2020, including interim periods in fiscal year 2020. The Company assessed the impact of this ASU and concluded that it does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.” This ASU removes certain exceptions for investments, intra-period tax allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning January 1, 2021. Early adoption is permitted. The Company assessed the impact of this ASU and concluded that it does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments.” This ASU includes amendments that make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications in relation to financial instruments. This guidance was effective immediately upon issuance. The additional elements of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position and or disclosures.
In October 2020, the FASB issued ASU No. 2020-09, “Codification Improvements to Topic 470, Debt— Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762.” The SEC in its Release No. 33-10762 in March 2020 has adopted new rules on financial disclosure requirements for guarantors and issuers of guaranteed securities and affiliates whose securities collateralize issuers’ securities. This ASU revises certain SEC paragraphs of the FASB’s Accounting Standards Codification (ASC) to reflect, as appropriate, the amended financial statement disclosure requirements in SEC Release 33-10762. The amended rules are effective January 4, 2021 but early compliance is permitted. The Company adopted the amended rules issued by the SEC in its Release No. 33-10762 in the first quarter of 2020. Accordingly, the Company has already adopted the amendments under this ASU, and the disclosures related to guarantor financial information have been omitted from the Notes to the Consolidated Financial Statements and included under Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In October 2020, the FASB issued ASU No. 2020-10, “Codification Improvements.” The amendments in this ASU do not change the GAAP requirements, but they improve consistency by amending the codification to include all disclosure guidance in the appropriate disclosure sections and also clarify the application of various provisions in the codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning January 1, 2021. Early application is permitted. The Company assessed the impact of this ASU and concluded that it does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
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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)
In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848).” This ASU expands the scope of Topic 848 to include derivative instruments impacted by discounting transition. Discounting transition refers to the changing of interest rates used for margining, discounting, or contract price alignment of derivative instruments to transition to alternative rates. ASU 2021-01 extends some of Topic 848’s optional expedients to derivative contracts impacted by the discounting transition, including for derivatives that do not reference LIBOR or other reference rates that are expected to be discontinued. The ASU is effective immediately upon issuance. However an entity may elect to apply this update on a full retrospective basis as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications made on or after any date within the interim period that includes January 7, 2021. The Company assessed the impact of this ASU and concluded that it does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
The following recently released accounting standards have not yet been adopted by the Company:
In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional expedients and exceptions to the guidance in US GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company has assessed the impact of this ASU, and since a substantial portion of the Company’s LIBOR-linked credit facilities are either hedged or short-term in nature, and the Company’s credit agreements address replacement mechanisms in the event LIBOR is discontinued, the Company concluded that the adoption of this ASU does not have any material impact on its consolidated results of operations, cash flows, financial position or disclosures.
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GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
3. Business acquisitions
On December 31, 2020, the Company acquired 100% of the outstanding equity interests in Enquero Inc, a California corporation, and certain affiliated entities in India, the Netherlands and Canada (collectively referred to as “Enquero”) for total purchase consideration of $148,905. This amount represents cash consideration of $137,274, net of cash acquired of $11,631. The total purchase consideration paid by the Company to the sellers on the closing date was $141,938, resulting in a payable of $6,967, of which $1,412 is outstanding as of March 31, 2021. The Company is evaluating adjustments related to certain income and other taxes, which, when determined, may result in the recognition of additional assets or liabilities as of the acquisition date. The measurement period will not exceed one year from the acquisition date. This acquisition is expected to increase the scale and depth of the Company’s data and analytics capabilities and enhance the Company’s ability to accelerate the digital transformation journeys of its clients through cloud technologies and advanced data analytics.
In connection with this acquisition, the Company recorded $49,000 in customer-related intangibles, $9,500 in marketing-related intangibles and $1,400 in technology-related intangibles, which have a weighted average amortization period of four years. Goodwill arising from the acquisition amounting to $86,669 has been allocated using a relative fair value allocation method to each of the Company’s reporting segments as follows: to the BCMI segment in the amount of $2,559, to the CGRLH segment in the amount of $22,239 and to the HMS segment in the amount of $61,871. The goodwill arising from this acquisition is not deductible for income tax purposes. The goodwill represents primarily the acquired capabilities, operating synergies and other benefits expected to result from combining the acquired operations with the Company’s existing operations.
Acquisition-related costs of $1,590 have been included in selling, general and administrative expenses as incurred. In connection with the transaction, the Company also acquired certain assets with a value of $32,759, assumed certain liabilities amounting to $17,113 and recognized a net deferred tax liability of $13,310. The agreement with the sellers provides a full indemnity to the Company for all pre-closing income and non-income tax liabilities up to a maximum of the purchase consideration, including interest and penalties thereon. The Company would not be financially or materially affected by any liabilities that may arise from such exposures. Accordingly, the Company recognized an indemnification asset of $5,848 based on the information that was available at the date of the acquisition, which is included in the assets taken over by the Company. 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)
|
SomethingDigital.Com LLC
|
On October 5, 2020, the Company acquired 100% of the outstanding equity/limited liability company interests in SomethingDigital.Com LLC, a New York limited liability company, for total purchase consideration of $57,451. This amount represents cash consideration of $56,073, net of cash acquired of $1,378. The total purchase consideration paid by the Company to the sellers on the closing date was $57,704, resulting in a recoverable of $253, which was received in the three months ended March 31, 2021. The Company is evaluating adjustments related to certain income and other taxes, which, when determined, may result in the recognition of additional assets or liabilities as of the acquisition date. The measurement period will not exceed one year from the acquisition date. This acquisition supports the Company’s strategy to integrate experience and process innovation to help clients on their digital transformation journeys and expands on the Company’s existing experience capabilities to support end-to-end digital commerce solutions, both business-to-business and business-to-consumer. Additionally, this acquisition expands the Company’s capabilities into Magento Commerce, which powers Adobe Commerce Cloud, and Shopify Plus, a cloud-based ecommerce platform for high volume merchants.
16
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
3. Business acquisitions (Continued)
In connection with this acquisition, the Company recorded $11,900 in customer-related intangibles and $3,500 in marketing-related intangibles which have a weighted average amortization period of four years. Goodwill arising from the acquisition amounting to $36,926 has been allocated using a relative fair value allocation method to two of the Company’s reporting segments as follows: to the CGRLH segment in the amount of $30,373 and to the HMS segment in the amount of $6,553. Of the total goodwill arising from this acquisition, $35,084 is deductible for income tax purposes. The goodwill represents primarily the acquired capabilities, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company’s existing operations.
Acquisition-related costs of $1,060 have been included in selling, general and administrative expenses as incurred. In connection with the transaction, the Company also acquired certain assets with a value of $9,538, assumed certain liabilities amounting to $4,494 and recognized a net deferred tax asset of $81. The results of operations of the acquired business and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the date of the acquisition.
|
(c)
|
Rightpoint Consulting, LLC
|
On November 12, 2019, the Company acquired 100% of the outstanding equity/limited liability company interests in Rightpoint Consulting, LLC, an Illinois limited liability company, and certain affiliated entities in the United States and India (collectively referred to as “Rightpoint”) for total purchase consideration of $270,669. This amount includes cash consideration of $268,170, net of cash acquired of $2,499. The total purchase consideration paid by the Company to the sellers on the acquisition date was $248,470, resulting in a payable of $22,199 on the acquisition date. This acquisition expands the Company’s capabilities in improving customer experience.
The securities purchase agreement between the Company and the selling equity holders of Rightpoint 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 for a three-year rollover period and receive cash consideration 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 earn-out consideration with an estimated value of $21,500 over the rollover period of three years which is included in the purchase consideration. The amount of deferred earn-out consideration ultimately payable by the Company to the selling equity holders of Rightpoint will be based on the future revenue multiple of the acquired business. Additionally, under the purchase agreement the selling equity holders are obligated to sell their rollover interests to the Company. Accordingly, the Company has obtained control over 100% of the outstanding equity/limited liability company interests of Rightpoint as of November 12, 2019. See Note 6, “Fair Value Measurements,” for additional details.
In connection with this acquisition, the Company recorded $46,000 in customer-related intangibles and $29,000 in marketing-related intangibles which have a weighted average amortization period of five years. Goodwill arising from the acquisition amounting to $177,181 has been allocated using a relative fair value allocation method to each of the Company’s reporting segments as follows: to the BCMI segment in the amount of $16,983, to the CGRLH segment in the amount of $42,993 and to the HMS segment in the amount of $117,205. Of the total goodwill arising from this acquisition, $91,929 is deductible for income tax purposes. The goodwill represents primarily the acquired capabilities, operating synergies and other benefits expected to result from combining the acquired operations with those of the Company.
Acquisition-related costs of $7,385 have been included in selling, general and administrative expenses as incurred. In connection with the transaction, the Company also acquired certain assets with a value of $39,140, assumed certain liabilities amounting to $22,295 and recognized a net deferred tax asset of $1,643. 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.
17
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
4. Cash and cash equivalents
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Cash and other bank balances
|
|
|
680,440
|
|
|
|
644,002
|
|
Total
|
|
$
|
680,440
|
|
|
$
|
644,002
|
|
5. Accounts receivable, net of allowance for credit losses
Accounts receivable were $908,727 and $914,513, allowance for credit losses were $27,707 and $28,290, resulting in net accounts receivable balances of $881,020 and $886,223 as of December 31, 2020 and March 31, 2021, respectively.
The following table provides details of the Company’s allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020
|
|
|
Three months ended March 31, 2021
|
|
Opening balance as of January 1
|
|
$
|
29,969
|
|
|
$
|
27,707
|
|
Transition period adjustment on accounts receivables (through retained
earnings) pursuant to adoption of ASC 326
|
|
|
4,185
|
|
|
|
—
|
|
Adjusted balance as of January 1
|
|
$
|
34,154
|
|
|
$
|
27,707
|
|
Additions due to acquisitions
|
|
|
200
|
|
|
|
—
|
|
Additions charged/reversal released to cost and expense
|
|
|
3,307
|
|
|
|
1,268
|
|
Deductions/effect of exchange rate fluctuations
|
|
|
(9,954
|
)
|
|
|
(685
|
)
|
Closing balance
|
|
$
|
27,707
|
|
|
$
|
28,290
|
|
In addition, deferred billings were $28,491 and $11,689 and allowances for credit losses were $3,134 and $2,593, resulting in net deferred billings balances of $25,357 and $9,096 as of December 31, 2020 and March 31, 2021, respectively. Total credit losses of $3,134 and $2,593 as of December 31, 2020 and March 31, 2021, respectively, includes $734 as a transition date adjustment through retained earnings pursuant to the adoption of ASC 326 and $2,400 and $1,859 as a current period charge for the period ended December 31, 2020 and March 31, 2021 respectively. The deferred billings and related allowance for credit losses are included under “other assets” in the Company’s consolidated balance sheet as of December 31, 2020 and March 31, 2021.
6. Fair value measurements
The Company measures certain financial assets and liabilities, including derivative instruments, at fair value on a recurring basis. The fair value measurements of these financial assets and liabilities were determined using the following inputs as of December 31, 2020 and March 31, 2021:
|
|
As of December 31, 2020
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
|
Significant Other
Observable
Inputs
|
|
|
Significant Other
Unobservable
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (Note a, c)
|
|
$
|
27,709
|
|
|
$
|
—
|
|
|
$
|
27,709
|
|
|
$
|
—
|
|
Deferred compensation plan assets (Note a, e)
|
|
|
26,832
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,832
|
|
Total
|
|
$
|
54,541
|
|
|
$
|
—
|
|
|
$
|
27,709
|
|
|
$
|
26,832
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out consideration (Note b, d)
|
|
$
|
8,272
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,272
|
|
Derivative instruments (Note b, c)
|
|
|
40,981
|
|
|
|
—
|
|
|
|
40,981
|
|
|
|
—
|
|
Deferred compensation plan liability (Note b, f)
|
|
|
26,390
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,390
|
|
Total
|
|
$
|
75,643
|
|
|
$
|
—
|
|
|
$
|
40,981
|
|
|
$
|
34,662
|
|
18
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
6. Fair value measurements (Continued)
|
|
As of March 31, 2021
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
|
Significant Other
Observable
Inputs
|
|
|
Significant Other
Unobservable
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (Note a, c)
|
|
$
|
20,274
|
|
|
$
|
—
|
|
|
$
|
20,274
|
|
|
$
|
—
|
|
Deferred compensation plan assets (Note a, e)
|
|
|
32,707
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,707
|
|
Total
|
|
$
|
52,981
|
|
|
$
|
—
|
|
|
$
|
20,274
|
|
|
$
|
32,707
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out consideration (Note b, d)
|
|
$
|
8,272
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,272
|
|
Derivative instruments (Note b, c)
|
|
|
34,751
|
|
|
|
—
|
|
|
|
34,751
|
|
|
|
—
|
|
Deferred compensation plan liability (Note b, f)
|
|
|
32,207
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,207
|
|
Total
|
|
$
|
75,230
|
|
|
$
|
—
|
|
|
$
|
34,751
|
|
|
$
|
40,479
|
|
(a)
|
Included in “prepaid expenses and other current assets” and “other assets” in the consolidated balance sheets.
|
(b)
|
Included in “accrued expenses and other current liabilities” and “other liabilities” in the consolidated balance sheets.
|
(c)
|
The Company values its derivative instruments based on market observable inputs, including both forward and spot prices for the relevant currencies and interest rate indices for relevant interest rates. The quotes are taken from an independent market database.
|
(d)
|
The fair value of earn-out consideration, calculated as the present value of expected future payments to be made to the sellers of acquired businesses, was derived by estimating the future financial performance of the acquired businesses using the earn-out formulas and performance targets specified in each purchase agreement and adjusting the result to reflect the Company’s estimate of the likelihood of achievement of such targets. Given the significance of the unobservable inputs, the valuations are classified in level 3 of the fair value hierarchy.
|
(e)
|
Deferred compensation plan assets consist of life insurance policies held under a Rabbi Trust. Assets held in the Rabbi Trust are valued based on the cash surrender value of the insurance contract, which is determined based on the fair value of the underlying assets included in the insurance portfolio and are therefore classified within level 3 of the fair value hierarchy.
|
(f)
|
The fair value of the deferred compensation plan liability is derived based on the fair value of the underlying assets in the insurance policies and is therefore classified within level 3 of the fair value hierarchy.
|
The following table provides a roll-forward of the fair value of earn-out consideration categorized as level 3 in the fair value hierarchy for the three months ended March 31, 2020 and 2021:
|
|
Three months ended March 31,
|
|
|
|
|
2020
|
|
|
2021
|
|
|
Opening balance
|
|
$
|
22,184
|
|
|
$
|
8,272
|
|
|
Interest expenses (Note a)
|
|
|
225
|
|
|
|
—
|
|
|
Closing balance
|
|
$
|
22,409
|
|
|
$
|
8,272
|
|
|
(a)
|
Interest expense is included in “interest income (expense), net” in the consolidated statements of income. This also includes a cumulative translation adjustment reported as a component of “other comprehensive income (loss).”
|
19
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
6. Fair value measurements (Continued)
The following table provides a roll-forward of the fair value of deferred compensation plan assets categorized as level 3 in the fair value hierarchy for the three months ended March 31, 2020 and 2021:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Opening balance
|
|
$
|
11,208
|
|
|
$
|
26,832
|
|
Additions (net of redemption)
|
|
|
985
|
|
|
|
5,014
|
|
Change in fair value of deferred compensation plan assets (Note a)
|
|
|
(1,558
|
)
|
|
|
861
|
|
Closing balance
|
|
$
|
10,635
|
|
|
$
|
32,707
|
|
(a)
|
Changes in the fair value of plan assets are reported in “other income (expense), net” in the consolidated statements of income.
|
The following table provides a roll-forward of the fair value of deferred compensation liabilities categorized as level 3 in the fair value hierarchy for the three months ended March 31, 2020 and 2021:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Opening balance
|
|
$
|
10,943
|
|
|
$
|
26,390
|
|
Additions (net of redemption)
|
|
|
8,187
|
|
|
|
5,014
|
|
Change in fair value of deferred compensation plan liabilities (Note a)
|
|
|
(1,547
|
)
|
|
|
803
|
|
Closing balance
|
|
$
|
17,583
|
|
|
$
|
32,207
|
|
(a)
|
Changes in the fair value of deferred compensation plan liabilities are reported in “selling, general and administrative expenses” in the consolidated statements of income.
|
7.
|
Derivative financial instruments
|
The Company is exposed to the risk of rate fluctuations on its foreign currency assets and liabilities and on foreign currency denominated forecasted cash flows and interest rates. The Company has established risk management policies, including the use of derivative financial instruments to hedge foreign currency assets and liabilities, foreign currency denominated forecasted cash flows and interest rate risk. These derivative financial instruments are largely deliverable, non-deliverable forward foreign exchange contracts, treasury rate locks and interest rate swaps. The Company enters into these contracts with counterparties that are banks or other financial institutions, and the Company considers the risk of non-performance by such counterparties not to be material. The forward foreign exchange contracts and interest rate swaps mature during a period of up to 45 months and the forecasted transactions are expected to occur during the same period.
20
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
7. Derivative financial instruments (Continued)
The following table presents the aggregate notional principal amounts of outstanding derivative financial instruments together with the related balance sheet exposure:
|
|
Notional principal amounts
(Note a)
|
|
|
Balance sheet exposure asset
(liability) (Note b)
|
|
|
|
|
As of
December 31,
2020
|
|
|
As of
March 31,
2021
|
|
|
As of
December 31,
2020
|
|
|
As of
March 31,
2021
|
|
|
Foreign exchange forward contracts denominated in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Dollars (sell) Indian Rupees (buy)
|
|
$
|
1,150,000
|
|
|
$
|
1,098,500
|
|
|
$
|
15,207
|
|
|
$
|
6,389
|
|
United States Dollars (sell) Mexican Peso (buy)
|
|
|
17,500
|
|
|
|
21,400
|
|
|
|
716
|
|
|
|
90
|
|
United States Dollars (sell) Philippines Peso (buy)
|
|
|
67,200
|
|
|
|
86,550
|
|
|
|
1,332
|
|
|
|
(65
|
)
|
Euro (sell) United States Dollars (buy)
|
|
|
96,651
|
|
|
|
92,960
|
|
|
|
(5,659
|
)
|
|
|
(295
|
)
|
Singapore Dollars (buy) United States Dollars (sell)
|
|
|
10,153
|
|
|
|
10,153
|
|
|
|
66
|
|
|
|
(143
|
)
|
Euro (sell) Romanian Leu (buy)
|
|
|
29,489
|
|
|
|
31,617
|
|
|
|
(22
|
)
|
|
|
(263
|
)
|
Japanese Yen (sell) Chinese Renminbi (buy)
|
|
|
19,230
|
|
|
|
13,419
|
|
|
|
473
|
|
|
|
1,344
|
|
United States Dollars (sell) Hungarian Font (buy)
|
|
|
30,000
|
|
|
|
21,900
|
|
|
|
904
|
|
|
|
(402
|
)
|
Hungarian Font (Sell) Euro (buy)
|
|
|
10,444
|
|
|
|
9,954
|
|
|
|
61
|
|
|
|
36
|
|
Australian Dollars (sell) Indian Rupees (buy)
|
|
|
140,525
|
|
|
|
118,354
|
|
|
|
(7,670
|
)
|
|
|
(5,507
|
)
|
Interest rate swaps (floating to fixed)
|
|
|
488,022
|
|
|
|
481,050
|
|
|
|
(18,680
|
)
|
|
|
(15,661
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,272
|
)
|
|
$
|
(14,477
|
)
|
(a)
|
Notional amounts are key elements of derivative financial instrument agreements but do not represent the amount exchanged by counterparties and do not measure the Company’s exposure to credit, foreign exchange, interest rate or market risks. However, the amounts exchanged are based on the notional amounts and other provisions of the underlying derivative financial instrument agreements. Notional amounts are denominated in U.S. dollars.
|
(b)
|
Balance sheet exposure is denominated in U.S. dollars and denotes the mark-to-market impact of the derivative financial instruments on the reporting date.
|
FASB guidance on derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. In accordance with the FASB guidance on derivatives and hedging, the Company designates foreign exchange forward contracts, interest rate swaps and treasury rate locks as cash flow hedges. Foreign exchange forward contracts are entered into to cover the effects of future exchange rate variability on forecasted revenues and purchases of services, and interest rate swaps and treasury rate locks are entered into to cover interest rate fluctuation risk. In addition to this program, the Company uses derivative instruments that are not accounted for as hedges under the FASB guidance in order to hedge foreign exchange risks related to balance sheet items, such as receivables and intercompany borrowings, that are denominated in currencies other than the Company’s underlying functional currency.
The fair value of the Company’s derivative instruments and their location in the Company’s financial statements are summarized in the table below:
|
|
Cash flow hedges
|
|
|
Non-designated
|
|
|
|
As of December 31, 2020
|
|
|
As of March 31, 2021
|
|
|
As of December 31, 2020
|
|
|
As of March 31, 2021
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
16,188
|
|
|
$
|
13,806
|
|
|
$
|
5,357
|
|
|
$
|
1,432
|
|
Other assets
|
|
$
|
6,164
|
|
|
$
|
5,036
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
16,387
|
|
|
$
|
13,936
|
|
|
$
|
3,785
|
|
|
$
|
5,817
|
|
Other liabilities
|
|
$
|
16,886
|
|
|
$
|
13,793
|
|
|
$
|
3,923
|
|
|
$
|
1,205
|
|
21
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
7. Derivative financial instruments (Continued)
Cash flow hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain (loss) on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is recognized in the consolidated statements of income. Gains (losses) on the derivatives, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in earnings as incurred.
In March 2021, the Company executed a treasury lock agreement for $350,000 in connection with future interest payments to be made on its senior notes issued by Genpact Luxembourg S.à r.l. (“Genpact Luxembourg”) and Genpact USA, Inc. (“Genpact USA”), both wholly-owned subsidiaries of the Company, in March 2021 (the “2021 Senior Notes”), and the treasury lock was designated as a cash flow hedge. The treasury lock agreement was terminated on March 23, 2021 and a deferred gain was recorded in accumulated other comprehensive income and is being amortized to interest expense over the life of the 2021 Senior Notes. The remaining gain to be amortized related to the treasury lock agreement as of March 31, 2021 was $814.
In connection with cash flow hedges, the gains (losses) recorded as a component of other comprehensive income (loss) (“OCI”), and the related tax effects are summarized below:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2021
|
|
|
|
Before
Tax
Amount
|
|
|
Tax
(Expense)
or
Benefit*
|
|
|
Net of
tax
Amount
|
|
|
Before
Tax
Amount
|
|
|
Tax
(Expense)
or
Benefit*
|
|
|
Net of
tax
Amount
|
|
Opening balance
|
|
$
|
(4,126
|
)
|
|
$
|
(1,466
|
)
|
|
$
|
(5,592
|
)
|
|
$
|
(10,921
|
)
|
|
$
|
1,861
|
|
|
$
|
(9,060
|
)
|
Net gains (losses) reclassified into statement of
income on completion of hedged transactions
|
|
|
3,740
|
|
|
|
(961
|
)
|
|
|
2,779
|
|
|
|
2,074
|
|
|
|
(466
|
)
|
|
|
1,608
|
|
Changes in fair value of effective portion of
outstanding derivatives, net
|
|
|
(63,000
|
)
|
|
|
12,674
|
|
|
|
(50,326
|
)
|
|
|
4,922
|
|
|
|
(1,233
|
)
|
|
|
3,689
|
|
Gain (loss) on cash flow hedging derivatives, net
|
|
|
(66,740
|
)
|
|
|
13,635
|
|
|
|
(53,105
|
)
|
|
|
2,848
|
|
|
|
(767
|
)
|
|
|
2,081
|
|
Closing balance
|
|
$
|
(70,866
|
)
|
|
$
|
12,169
|
|
|
$
|
(58,697
|
)
|
|
$
|
(8,073
|
)
|
|
$
|
1,094
|
|
|
$
|
(6,979
|
)
|
*The tax (expense) benefit includes the effect of novating certain hedging instruments as part of an intercompany transfer.
The gains or losses recognized in other comprehensive income (loss) and their effects on financial performance are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
Amount of Gain (Loss) reclassified
|
|
|
recognized in OCI on
|
|
|
Location of Gain (Loss)
|
|
from OCI into Statement of Income
|
|
Derivatives in
|
Derivatives (Effective Portion)
|
|
|
reclassified
|
|
(Effective Portion)
|
|
Cash Flow
|
|
Three months ended
|
|
|
from OCI into
|
|
Three months ended
|
|
Hedging
|
|
March 31,
|
|
|
Statement of Income
|
|
March 31,
|
|
Relationships
|
|
2020
|
|
|
2021
|
|
|
(Effective Portion)
|
|
2020
|
|
|
2021
|
|
Forward foreign
exchange contracts
|
|
$
|
(45,707
|
)
|
|
$
|
3,083
|
|
|
Revenue
|
|
$
|
2,032
|
|
|
$
|
(145
|
)
|
Interest rate swaps
|
|
|
(17,293
|
)
|
|
|
1,023
|
|
|
Cost of revenue
|
|
|
1,026
|
|
|
|
3,312
|
|
Treasury rate lock
|
|
|
—
|
|
|
|
816
|
|
|
Selling, general and
administrative expenses
|
|
|
323
|
|
|
|
901
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
359
|
|
|
|
(1,994
|
)
|
|
|
$
|
(63,000
|
)
|
|
$
|
4,922
|
|
|
|
|
$
|
3,740
|
|
|
$
|
2,074
|
|
There were no gains (losses) recognized in income on the ineffective portion of derivatives and excluded from effectiveness testing for the three months ended March 31, 2020 and 2021, respectively.
22
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
7. Derivative financial instruments (Continued)
Non-designated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Derivatives not designated
as hedging instruments
|
|
Location of Gain (Loss) recognized in
Statement of Income on Derivatives
|
|
2020
|
|
|
2021
|
|
Forward foreign exchange contracts (Note a)
|
|
Foreign exchange gains (losses), net
|
|
$
|
(14,759
|
)
|
|
$
|
1,611
|
|
Forward foreign exchange contracts (Note b)
|
|
Foreign exchange gains (losses), net
|
|
|
3,963
|
|
|
|
—
|
|
|
|
|
|
$
|
(10,796
|
)
|
|
$
|
1,611
|
|
(a)
|
These forward foreign exchange contracts were entered into to hedge fluctuations in foreign exchange rates for recognized balance sheet items such as receivables and intercompany borrowings, and were not originally designated as hedges under FASB guidance on derivatives and hedging. Realized gains (losses) and changes in the fair value of these derivatives are recorded in foreign exchange gains (losses), net in the consolidated statements of income.
|
(b)
|
These forward foreign exchange contracts were initially designated as cash flow hedges under ASC guidance on derivatives and hedging. These contracts were terminated because certain forecasted transactions were no longer expected to occur and therefore hedge accounting was no longer applied. Subsequently the realized gains (losses) were recorded in foreign exchange gains (losses) net in the consolidated statements of income.
|
In connection with the COVID-19 pandemic, the Company has reevaluated its hedging arrangements. The Company has considered the effect of changes, if any, in both counterparty credit risk and the Company’s own non-performance risk while assessing hedge effectiveness and measuring hedge ineffectiveness. The Company believes that its hedges continue to be effective after taking into account the expected impact of the COVID-19 pandemic on the Company’s hedged transactions.
8. Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Advance income and non-income taxes
|
|
$
|
73,008
|
|
|
$
|
78,574
|
|
Contract asset (Note 20)
|
|
|
9,035
|
|
|
|
10,414
|
|
Prepaid expenses
|
|
|
32,375
|
|
|
|
36,306
|
|
Derivative instruments
|
|
|
21,545
|
|
|
|
15,238
|
|
Employee advances
|
|
|
2,636
|
|
|
|
3,111
|
|
Deposits
|
|
|
8,774
|
|
|
|
7,404
|
|
Advances to suppliers
|
|
|
2,716
|
|
|
|
3,999
|
|
Others
|
|
|
37,319
|
|
|
|
26,359
|
|
|
|
$
|
187,408
|
|
|
$
|
181,405
|
|
23
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
9. Property, plant and equipment, net
The following table provides the gross and net amount of property, plant and equipment:
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Property, plant and equipment, gross
|
|
$
|
792,463
|
|
|
$
|
783,076
|
|
Less: Accumulated depreciation and amortization
|
|
|
(561,341
|
)
|
|
|
(564,903
|
)
|
Property, plant and equipment, net
|
|
$
|
231,122
|
|
|
$
|
218,173
|
|
Depreciation expense on property, plant and equipment for the three months ended March 31, 2020 and 2021 was $15,716 and $17,128, respectively. Computer software amortization for the three months ended March 31, 2020 and 2021 was $3,007 and $1,460, respectively.
The Company recorded a write-down to certain property, plant and equipment and computer software during the three months ended March 31, 2021, as described in Note 10.
10. Goodwill and intangible assets
The following table presents the changes in goodwill for the year ended December 31, 2020 and three months ended March 31, 2021:
|
|
For the year ended
December 31, 2020
|
|
|
For the three months
ended March 31, 2021
|
|
Opening balance
|
|
$
|
1,574,466
|
|
|
$
|
1,695,688
|
|
Goodwill relating to acquisitions consummated during the period
|
|
|
123,595
|
|
|
|
—
|
|
Impact of measurement period adjustments
|
|
|
(5,653
|
)
|
|
|
—
|
|
Effect of exchange rate fluctuations
|
|
|
3,280
|
|
|
|
(6,323
|
)
|
Closing balance
|
|
$
|
1,695,688
|
|
|
$
|
1,689,365
|
|
The following table presents the changes in goodwill by reporting unit for the year ended December 31, 2020:
|
|
BCMI
|
|
|
CGRLH
|
|
|
HMS
|
|
|
Total
|
|
Opening balance
|
|
$
|
417,213
|
|
|
|
555,130
|
|
|
|
602,123
|
|
|
|
1,574,466
|
|
Goodwill relating to acquisitions consummated during the period
|
|
|
2,559
|
|
|
|
52,612
|
|
|
|
68,424
|
|
|
|
123,595
|
|
Impact of measurement period adjustments
|
|
|
(542
|
)
|
|
|
(1,372
|
)
|
|
|
(3,739
|
)
|
|
|
(5,653
|
)
|
Effect of exchange rate fluctuations
|
|
|
942
|
|
|
|
1,204
|
|
|
|
1,134
|
|
|
|
3,280
|
|
Closing balance
|
|
$
|
420,172
|
|
|
|
607,574
|
|
|
|
667,942
|
|
|
|
1,695,688
|
|
The following table presents the changes in goodwill by reporting unit for the three months ended March 31, 2021:
|
|
BCMI
|
|
|
CGRLH
|
|
|
HMS
|
|
|
Total
|
|
Opening balance
|
|
$
|
420,172
|
|
|
|
607,574
|
|
|
|
667,942
|
|
|
|
1,695,688
|
|
Goodwill relating to acquisitions consummated during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impact of measurement period adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Effect of exchange rate fluctuations
|
|
|
(1,893
|
)
|
|
|
(2,354
|
)
|
|
|
(2,076
|
)
|
|
|
(6,323
|
)
|
Closing balance
|
|
$
|
418,453
|
|
|
|
605,203
|
|
|
|
665,710
|
|
|
|
1,689,365
|
|
The total amount of goodwill deductible for tax purposes was $296,046 and $289,773 as of December 31, 2020 and March 31, 2021, respectively.
24
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
10. Goodwill and intangible assets (Continued)
The Company’s intangible assets are as follows:
|
|
As of December 31, 2020
|
|
|
As of March 31, 2021
|
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization &
Impairment
|
|
|
Net
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization &
Impairment
|
|
|
Net
|
|
Customer-related intangible assets
|
|
$
|
478,189
|
|
|
$
|
359,652
|
|
|
$
|
118,537
|
|
|
$
|
476,053
|
|
|
$
|
367,753
|
|
|
$
|
108,300
|
|
Marketing-related intangible assets
|
|
|
96,561
|
|
|
|
61,154
|
|
|
|
35,407
|
|
|
|
96,410
|
|
|
|
66,020
|
|
|
|
30,390
|
|
Technology-related intangible assets
|
|
|
152,293
|
|
|
|
90,866
|
|
|
|
61,427
|
|
|
|
151,685
|
|
|
|
97,656
|
|
|
|
54,029
|
|
Intangible assets under development
|
|
|
23,864
|
|
|
|
2,503
|
|
|
|
21,361
|
|
|
|
23,257
|
|
|
|
—
|
|
|
|
23,257
|
|
|
|
|
750,907
|
|
|
|
514,175
|
|
|
$
|
236,732
|
|
|
$
|
747,405
|
|
|
$
|
531,429
|
|
|
$
|
215,976
|
|
Amortization expenses for intangible assets acquired as a part of business combination and disclosed in the consolidated statements of income under amortization of acquired intangible assets for the three months ended March 31, 2020 and 2021 were $10,741 and $16,176, respectively.
Amortization expenses for internally-developed and other intangible assets disclosed in the consolidated statements of income under cost of revenue and selling, general and administrative expenses for the three months ended March 31, 2020 and 2021 were $6,906 and $6,044, respectively.
During the three months ended March 31, 2020 and 2021, the Company tested the recoverability of certain technology-related intangible assets and certain property, plant and equipment, including computer software, as a result of changes in the Company’s investment strategy and market trends. Based on the results of this testing, the Company determined that the carrying values of the assets tested were not recoverable, and the Company recorded complete write-downs of the carrying values of these assets amounting to $0 and $837 for the three months ended March 31, 2020 and 2021, respectively. These write-downs have been recorded in “other operating (income) expense, net” in the consolidated statement of income.
The summary below represents the impairment charge recorded for various categories of assets during the three months ended March 31, 2020 and March 31, 2021:
|
Three months ended March 31,
|
|
|
2020
|
|
|
2021
|
|
Technology related intangibles
|
$
|
—
|
|
|
$
|
205
|
|
Total intangibles
|
$
|
—
|
|
|
$
|
205
|
|
Property, plant and equipment
|
$
|
—
|
|
|
$
|
632
|
|
Total property, plant and equipment
|
$
|
—
|
|
|
$
|
632
|
|
Grand total
|
$
|
—
|
|
|
$
|
837
|
|
11. Short-term borrowings
The Company has the following borrowing facilities:
|
(a)
|
Fund-based and non-fund-based credit facilities with banks, which are available for operational requirements in the form of overdrafts, letters of credit, guarantees and short-term loans. As of December 31, 2020 and March 31, 2021, the limits available were $14,311 and $14,260, respectively, of which $7,809 and $7,213, respectively, was utilized, constituting non-funded drawdown.
|
|
(b)
|
A fund-based and non-fund based revolving credit facility of $500,000, which the Company obtained through an amendment of its existing credit agreement on August 9, 2018, as described in Note 12. Prior to the amendment, the Company’s revolving credit facility was $350,000. The amended credit facility expires on August 8, 2023. The funded drawdown amount under the Company’s revolving facilities bore interest at a rate equal to LIBOR plus a margin of 1.375% as of December 31, 2020 and March 31, 2021. The unutilized amount on the revolving facilities bore a commitment fee of 0.20% as of December 31, 2020 and March 31, 2021. As of December 31, 2020 and March 31, 2021, a total of $252,347 and $2,347, respectively, was utilized, of which $250,000 and $0, respectively, constituted funded drawdown and $2,347 and $2,347, respectively, constituted non-funded drawdown. The Company’s amended credit agreement contains certain customary covenants, including a maximum leverage covenant and a minimum interest coverage ratio. During the period ended December 31, 2020 and March 31, 2021, the Company was in compliance with the financial covenants of the credit agreement.
|
25
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
12. Long-term debt
In August 2018, the Company amended its 2015 credit facility (“the 2015 Facility”), which was comprised of an $800,000 term loan and a $350,000 revolving credit facility. The amended facility is comprised of a $680,000 term loan, which represents the outstanding balance under the 2015 Facility as of the date of amendment, and a $500,000 revolving credit facility. The amended facility expires on August 8, 2023. The amendment did not result in a substantial modification of $550,814 of the outstanding term loan under the 2015 Facility. Further, as a result of the amendment, the Company extinguished the outstanding term loan under the 2015 Facility of $129,186 and obtained additional funding of $129,186, resulting in no change to the outstanding principal of the term loan under the amended facility. In connection with the amendment, the Company expensed $2,029, representing partial acceleration of the amortization of the existing unamortized debt issuance costs and an additional fee paid to the Company’s lenders related to the term loan. The overall borrowing capacity under the revolving credit facility increased from $350,000 to $500,000. The amendment of the revolving credit facility resulted in accelerated amortization of $82 relating to existing unamortized debt issuance cost. The remaining unamortized costs and an additional third-party fee paid in connection with the amendment will be amortized over the term of the amended facility, which will expire on August 8, 2023.
Borrowings under the amended credit facility bear interest at a rate equal to, at the election of the Company, either LIBOR plus an applicable margin equal to 1.375% per annum, compared to a margin of 1.50% under the 2015 Facility, or a base rate plus an applicable margin equal to 0.375% per annum, compared to a margin of 0.50% under the 2015 Facility, in each case subject to adjustment based on the Company’s debt ratings provided by Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. Based on the Company’s election and current credit rating, the applicable interest rate is equal to LIBOR plus 1.375% per annum. The amended credit agreement restricts certain payments, including dividend payments, if there is an event of default under the credit agreement or if the Company is not, or after making the payment would not be, in compliance with certain financial covenants contained in the amended credit agreement. These covenants require the Company to maintain a net debt to EBITDA leverage ratio of below 3x and an interest coverage ratio of more than 3x. During the period ended March 31, 2021, the Company was in compliance with the terms of the credit agreement, including all of the financial covenants therein. The Company’s retained earnings are not subject to any restrictions on availability to make dividend payments to shareholders, subject to compliance with the financial covenants described above that are contained in the amended credit agreement.
As of December 31, 2020 and March 31, 2021, the amount outstanding under the term loan, net of debt amortization expense of $1,150 and $1,033, was $593,850 and $585,467, respectively. As of December 31, 2020 and March 31, 2021, the term loan bore interest at a rate equal to LIBOR plus a margin of 1.375% per annum. Indebtedness under the amended credit facility is unsecured. The amount outstanding on the term loan as of March 31, 2021 requires quarterly payments of $8,500, and the balance of the loan is due and payable upon the maturity of the term loan on August 8, 2023.
The maturity profile of the term loan outstanding as of March 31, 2021, net of debt amortization expense, is as follows:
Year ended
|
|
Amount
|
|
2021
|
|
$
|
25,154
|
|
2022
|
|
|
33,564
|
|
2023
|
|
|
526,749
|
|
Total
|
|
$
|
585,467
|
|
26
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
12. Long-term debt (Continued)
Genpact Luxembourg S.à r.l., a wholly owned subsidiary of the Company, issued $350,000 aggregate principal amount of 3.70% senior notes in March 2017 (the “2017 Senior Notes”), and $400,000 aggregate principal amount of 3.375% senior notes in November 2019 (the “2019 Senior Notes”). The 2017 Senior Notes and 2019 Senior Notes are fully guaranteed by the Company. The total debt issuance costs of $2,642 and $2,937 incurred in connection with the 2017 Senior Notes and 2019 Senior Notes offerings, respectively, are being amortized over their respective lives as additional interest expense. As of December 31, 2020 and March 31, 2021, the amount outstanding under the 2017 Senior Notes, net of debt amortization expense of $658 and $528, respectively, was $349,342 and $349,472, respectively, which is payable on April 1, 2022. As of December 31, 2020 and March 31, 2021, the amount outstanding under the 2019 Senior Notes, net of debt amortization expense of $2,284 and $2,141, respectively, was $397,716 and $397,859, respectively, which is payable on December 1, 2024.
In March 2021, Genpact Luxembourg S.à r.l. and Genpact USA, Inc., both wholly-owned subsidiaries of the Company, co-issued $350,000 aggregate principal amount of 1.750% senior notes due 2026 (the “2021 Senior Notes,” and together with 2017 Senior Notes and 2019 Senior Notes, the “Senior Notes”). The 2021 Senior Notes are fully guaranteed by the Company. The total debt issuance cost of $3,032 incurred in connection with the 2021 Senior Notes is being amortized over the life of the 2021 Senior Notes as additional interest expense. As of March 31, 2021, the amount outstanding under the 2021 Senior Notes, net of debt amortization expense of $3,024, was $346,976, which is payable on April 10, 2026.
The Company pays interest on (i) the 2017 Senior Notes semi-annually in arrears on April 1 and October 1 of each year, (ii) the 2019 Senior Notes semi-annually in arrears on June 1 and December 1 of each year, and (iii) the 2021 Senior Notes semi-annually in arrears on April 10 and October 10 of each year, ending on the maturity dates of April 1, 2022, December 1, 2024 and April 10, 2026, respectively. The Company, at its option, may redeem the Senior Notes at any time in whole or in part, at a redemption price equal to (i) 100% of the principal amount of the notes redeemed, together with accrued and unpaid interest on the redeemed amount, and (ii) if the notes are redeemed prior to, in the case of the 2017 Senior Notes, March 1, 2022, in the case of the 2019 Senior Notes, November 1, 2024, and in the case of the 2021 Senior Notes, March 10, 2026, a specified “make-whole” premium. The Senior Notes are subject to certain customary covenants, including limitations on the ability of the Company and certain of its subsidiaries to incur debt secured by liens, engage in certain sale and leaseback transactions and consolidate, merge, convey or transfer their assets substantially as an entirety. During the period ended March 31, 2021, the Company and its applicable subsidiaries were in compliance with the covenants. Upon certain change of control transactions, the applicable issuer or issuers will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the aggregate principal amount of such Senior Notes, plus accrued and unpaid interest. The interest rate payable on the Senior Notes is subject to adjustment if the credit rating of the Senior Notes is downgraded, up to a maximum increase of 2.0%.
A summary of the company’s long-term debt is as follows:
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Credit facility, net of amortization expenses
|
|
$
|
593,850
|
|
|
$
|
585,467
|
|
3.70% Senior Notes, net of debt amortization expenses
|
|
|
349,342
|
|
|
|
349,472
|
|
3.375% Senior Notes, net of debt amortization expenses
|
|
|
397,716
|
|
|
|
397,859
|
|
1.750% Senior Notes, net of debt amortization expenses
|
|
|
—
|
|
|
|
346,976
|
|
|
|
$
|
1,340,908
|
|
|
$
|
1,679,774
|
|
Current portion
|
|
|
33,537
|
|
|
|
33,544
|
|
Non-current portion
|
|
|
1,307,371
|
|
|
|
1,646,230
|
|
Total
|
|
$
|
1,340,908
|
|
|
$
|
1,679,774
|
|
27
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
13. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Accrued expenses
|
|
$
|
150,390
|
|
|
$
|
144,102
|
|
Accrued employee cost
|
|
|
286,399
|
|
|
|
148,827
|
|
Earn-out consideration
|
|
|
2,651
|
|
|
|
3,051
|
|
Statutory liabilities
|
|
|
104,768
|
|
|
|
120,467
|
|
Retirement benefits
|
|
|
1,967
|
|
|
|
2,327
|
|
Compensated absences
|
|
|
28,635
|
|
|
|
32,411
|
|
Derivative instruments
|
|
|
20,172
|
|
|
|
19,753
|
|
Contract liabilities (Note 20)
|
|
|
154,717
|
|
|
|
148,014
|
|
Finance leases liability
|
|
|
18,066
|
|
|
|
18,653
|
|
Other liabilities
|
|
|
39,004
|
|
|
|
37,493
|
|
|
|
$
|
806,769
|
|
|
$
|
675,098
|
|
14. Other liabilities
Other liabilities consist of the following:
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Accrued employee cost
|
|
$
|
19,797
|
|
|
$
|
21,344
|
|
Earn-out consideration
|
|
|
5,621
|
|
|
|
5,221
|
|
Retirement benefits
|
|
|
11,947
|
|
|
|
12,220
|
|
Compensated absences
|
|
|
47,656
|
|
|
|
46,745
|
|
Derivative instruments
|
|
|
20,809
|
|
|
|
14,998
|
|
Contract liabilities (Note 20)
|
|
|
68,760
|
|
|
|
85,866
|
|
Finance leases liability
|
|
|
30,958
|
|
|
|
26,524
|
|
Others
|
|
|
32,850
|
|
|
|
44,186
|
|
|
|
$
|
238,398
|
|
|
$
|
257,104
|
|
15. Employee benefit plans
The Company has employee benefit plans in the form of certain statutory and other programs covering its employees.
Defined benefit plans
In accordance with Indian law, the Company maintains a defined benefit retirement plan covering substantially all of its Indian employees. In accordance with Mexican law, the Company provides termination benefits to all of its Mexican employees. In addition, certain of the Company’s subsidiaries in the Philippines, Israel and Japan sponsor defined benefit retirement programs.
Net defined benefit plan costs for the three months ended March 31, 2020 and 2021 include the following components:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Service costs
|
|
$
|
2,927
|
|
|
$
|
3,581
|
|
Interest costs
|
|
|
1,357
|
|
|
|
1,394
|
|
Amortization of actuarial loss
|
|
|
651
|
|
|
|
593
|
|
Expected return on plan assets
|
|
|
(1,181
|
)
|
|
|
(1,584
|
)
|
Net defined benefit plan costs
|
|
$
|
3,754
|
|
|
$
|
3,984
|
|
28
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
15. Employee benefit plans (Continued)
Defined contribution plans
During the three months ended March 31, 2020 and 2021 the Company contributed the following amounts to defined contribution plans in various jurisdictions:
|
|
Three months ended March 31,
|
|
|
|
|
2020
|
|
|
2021
|
|
India
|
|
$
|
8,201
|
|
|
$
|
8,604
|
|
|
U.S.
|
|
|
4,423
|
|
|
|
5,424
|
|
|
U.K.
|
|
|
4,858
|
|
|
|
4,814
|
|
|
China
|
|
|
3,923
|
|
|
|
6,398
|
|
|
Other regions
|
|
|
2,655
|
|
|
|
2,909
|
|
|
Total
|
|
$
|
24,060
|
|
|
$
|
28,149
|
|
|
Deferred compensation plan
On July 1, 2018, Genpact LLC, a wholly-owned subsidiary of the Company, adopted an executive deferred compensation plan (the “Plan”). The Plan provides a select group of U.S.-based members of Company management with the opportunity to defer from 1% to 80% of their base salary and from 1% to 100% of their qualifying bonus compensation (or such other minimums or maximums as determined by the Plan administrator from time to time) pursuant to the terms of the Plan. Participant deferrals are 100% vested at all times. The Plan also allows for discretionary supplemental employer contributions by the Company, in its sole discretion, which will be subject to a two-year vesting schedule (50% vesting on the one-year anniversary of approval of the contribution and 50% vesting on the second year anniversary of approval of the contribution) or such other vesting schedule as determined by the Company. However, no such contribution has been made by the Company to date.
The Plan also provides an option for participants to elect to receive deferred compensation and earnings thereon on either fixed date(s) no earlier than two years following the applicable Plan year (or end of the applicable performance period for performance-based bonus compensation) or following a separation from service, in each case either in a lump sum or in annual installments over a term of up to 15 years. Participants can elect to change or re-defer their rights to receive the deferred compensation until the 10th anniversary following their separation from service, subject to fulfillment of certain conditions. Each Plan participant’s compensation deferrals are credited or debited with notional investment gains and losses equal to the performance of selected hypothetical investment funds offered under the Plan and elected by the participant.
The Company has investments in funds held in Company-owned life insurance policies which are held in a Rabbi Trust that are classified as trading securities. Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The securities are classified as trading securities because they are held for resale in anticipation of short-term fluctuations in market prices. The trading securities are stated at fair value.
The liability for the deferred compensation plan was $26,390 and $32,207 as of December 31, 2020 and March 31, 2021, respectively, and is included in “accrued expenses and other current liabilities” and “other liabilities” in the consolidated balance sheets.
In connection with the administration of the Plan, the Company has purchased company-owned life insurance policies insuring the lives of certain employees. The cash surrender value of these policies was $26,832 and $32,707 as of December 31, 2020 and March 31, 2021, respectively. The cash surrender value of these insurance policies is included in “other assets” in the consolidated balance sheets.
During the three months ended March 31, 2020 and 2021, the change in the fair value of the Plan assets was $(1,558) and $861, respectively, which is included in “other income (expense), net,” in the consolidated statements of income. During the three months ended March 31, 2020 and 2021, the change in the fair value of deferred compensation liabilities was $(1,547) and $803, respectively, which is included in “selling, general and administrative expenses.”
29
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
16. Stock-based compensation
The Company has issued options under the Genpact Limited 2007 Omnibus Incentive Compensation Plan (the “2007 Omnibus Plan”) and the Genpact Limited 2017 Omnibus Incentive Compensation Plan (the “2017 Omnibus Plan”) to eligible persons, including employees, directors and certain other persons associated with the Company.
Under the 2007 Omnibus Plan, shares underlying options forfeited, expired, terminated or cancelled under any of the Company’s predecessor plans were added to the number of shares otherwise available for grant under the 2007 Omnibus Plan. The 2007 Omnibus Plan was amended and restated on April 11, 2012 to increase the number of common shares authorized for issuance by 5,593,200 shares to 15,000,000 shares. Further, during the year ended December 31, 2012, the number of common shares authorized for issuance under the 2007 Omnibus Plan was increased by 8,858,823 shares as a result of a one-time adjustment to outstanding unvested share awards in connection with a special dividend payment.
On May 9, 2017, the Company’s shareholders approved the adoption of the 2017 Omnibus Plan, pursuant to which 15,000,000 Company common shares are available for issuance. The 2017 Omnibus Plan was amended and restated on April 5, 2019 to increase the number of common shares authorized for issuance by 8,000,000 shares to 23,000,000 shares. No grants may be made under the 2007 Omnibus Plan after the date of adoption of the 2017 Omnibus Plan. Grants that were outstanding under the 2007 Omnibus Plan as of the date of Company’s adoption of the 2017 Omnibus Plan remain subject to the terms of the 2007 Omnibus Plan.
Stock-based compensation costs relating to the foregoing plans during the three months ended March 31, 2020 and March 31, 2021 were $17,135 and $17,084, respectively. These costs have been allocated to “cost of revenue” and “selling, general and administrative expenses.”
Stock options
All options granted under the 2007 and 2017 Omnibus Plans are exercisable into common shares of the Company, have a contractual period of ten years and vest over three to five years unless specified otherwise in the applicable award agreement. The Company recognizes compensation cost over the vesting period of the option.
Compensation cost is determined at the date of grant by estimating the fair value of an option using the Black-Scholes option-pricing model.
The following table shows the significant assumptions used in determining the fair value of options granted in the three months ended March 31, 2020 and March 31, 2021. The Company granted options covering 431,924 shares in the three months ended March 31, 2020.
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2021
|
|
Dividend yield
|
|
0.89
|
%
|
|
|
0.97-1.08
|
%
|
Expected life (in months)
|
|
|
84
|
|
|
|
84
|
|
Risk-free rate of interest
|
|
1.50
|
%
|
|
|
1.21-1.37
|
%
|
Volatility
|
|
20.96
|
%
|
|
|
26.05-26.07
|
%
|
30
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
16. Stock-based compensation (Continued)
A summary of stock option activity during the three months ended March 31, 2021 is set out below:
|
|
Three months ended March 31, 2021
|
|
|
|
|
Shares
arising
out of options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average
remaining
contractual life (years)
|
|
|
Aggregate
intrinsic
value
|
|
|
Outstanding as of January 1, 2021
|
|
|
7,347,241
|
|
|
$
|
26.41
|
|
|
|
5.7
|
|
|
$
|
—
|
|
|
Granted
|
|
|
771,196
|
|
|
|
40.33
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(158,000
|
)
|
|
|
23.97
|
|
|
|
—
|
|
|
|
2,978
|
|
|
Outstanding as of March 31, 2021
|
|
|
7,960,437
|
|
|
$
|
27.81
|
|
|
|
5.9
|
|
|
$
|
120,057
|
|
|
Vested as of March 31, 2021 and expected to vest thereafter (Note a)
|
|
7,597,739
|
|
|
$
|
27.42
|
|
|
|
5.9
|
|
|
$
|
117,500
|
|
Vested and exercisable as of March 31, 2021
|
|
|
2,880,405
|
|
|
$
|
19.95
|
|
|
2.6
|
|
|
$
|
65,871
|
|
|
Weighted average grant date fair value of grants during the period
|
|
$
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Options expected to vest reflect an estimated forfeiture rate.
|
As of March 31, 2021, the total remaining unrecognized stock-based compensation cost for options expected to vest amounted to $22,258, which will be recognized over the weighted average remaining requisite vesting period of 3.2 years.
Restricted share units
The Company has granted restricted share units (“RSUs”) under the 2007 and 2017 Omnibus Plans. Each RSU represents the right to receive one common share. The fair value of each RSU is the market price of one common share of the Company on the date of the grant. The RSUs granted to date have graded vesting schedules of three months to four years. The compensation expense is recognized on a straight-line basis over the vesting term. A summary of RSU activity during the three months ended March 31, 2021 is set out below:
|
|
Three months ended March 31, 2021
|
|
|
|
Number of Restricted
Share Units
|
|
|
Weighted Average Grant
Date Fair Value
|
|
Outstanding as of January 1, 2021
|
|
|
860,308
|
|
|
$
|
36.44
|
|
Granted
|
|
|
372,174
|
|
|
|
42.90
|
|
Vested (Note a)
|
|
|
(87,678)
|
|
|
|
32.60
|
|
Forfeited
|
|
|
(31,016)
|
|
|
|
34.61
|
|
Outstanding as of March 31, 2021
|
|
|
1,113,788
|
|
|
$
|
38.95
|
|
Expected to vest (Note b)
|
|
|
957,942
|
|
|
|
|
|
(a)
|
87,678 RSUs that vested during the period were net settled upon vesting by issuing 56,947 shares (net of minimum statutory tax withholding).
|
(b)
|
The number of RSUs expected to vest reflects the application of an estimated forfeiture rate.
|
34,092 RSUs that vested in the year ended December 31, 2019 were issued during the three months ended March 31, 2021.
31
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
16. Stock-based compensation (Continued)
As of March 31, 2021, the total remaining unrecognized stock-based compensation cost related to RSUs amounted to $25,895, which will be recognized over the weighted average remaining requisite vesting period of 2.8 years.
Performance units
The Company also grants stock awards in the form of performance units (“PUs”) and has granted PUs under both the 2007 and 2017 Omnibus Plans.
Each PU represents the right to receive one common share at a future date based on the Company’s performance against specified targets. PUs granted to date have vesting schedules of six months to three years. The fair value of each PU is the market price of one common share of the Company on the date of grant and assumes that performance targets will be achieved. PUs granted under the plans are subject to cliff vesting. The compensation expense for such awards is recognized on a straight-line basis over the vesting terms. During the performance period, the Company’s estimate of the number of shares to be issued is adjusted upward or downward based upon the probability of achievement of the performance targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets.
A summary of PU activity during the three months ended March 31, 2021 is set out below:
|
|
Three months ended March 31, 2021
|
|
|
|
Number of
Performance Units
|
|
|
Weighted Average Grant
Date Fair Value
|
|
|
Maximum Shares
Eligible to Receive
|
|
Outstanding as of January 1, 2021
|
|
|
4,876,196
|
|
|
$
|
34.56
|
|
|
|
4,876,196
|
|
Granted
|
|
|
350,533
|
|
|
|
41.28
|
|
|
|
701,066
|
|
Vested (Note a)
|
|
|
(1,784,140)
|
|
|
|
30.66
|
|
|
|
(1,784,140)
|
|
Forfeited
|
|
|
(26,067)
|
|
|
|
37.37
|
|
|
|
(26,067)
|
|
Adjustment upon final determination of level of performance goal achievement (Note b)
|
|
|
9,625
|
|
|
|
42.48
|
|
|
|
9,625
|
|
Outstanding as of March 31, 2021
|
|
|
3,426,148
|
|
|
$
|
37.29
|
|
|
|
3,776,681
|
|
Expected to vest (Note c)
|
|
|
3,183,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
1,784,140 PSUs that vested during the period were net settled upon vesting by issuing 1,102,440 shares (net of minimum statutory tax withholding).
|
(b)
|
Represents an adjustment made in March 2021 to the number of shares subject to the PUs granted in 2020 upon certification of the level of achievement of the performance targets underlying such awards.
|
(c)
|
The number of PUs expected to vest reflects the application of an estimated forfeiture rate.
|
As of March 31, 2021, the total remaining unrecognized stock-based compensation cost related to PUs amounted to $54,753, which will be recognized over the weighted average remaining requisite vesting period of 1.7 years.
Employee Stock Purchase Plan (ESPP)
On May 1, 2008, the Company adopted the Genpact Limited U.S. Employee Stock Purchase Plan and the Genpact Limited International Employee Stock Purchase Plan (together, the “ESPP”). In April 2018, these plans were amended and restated, and their terms were extended to August 31, 2028.
The ESPP allows eligible employees to purchase the Company’s common shares through payroll deductions at 90% of the closing price of the Company’s common shares on the last business day of each purchase interval. The dollar amount of common shares purchased under the ESPP may not exceed 15% of the participating employee’s base salary, subject to a cap of $25 per employee per calendar year. With effect from September 1, 2009, the offering periods commence on the first business day in March, June, September and December of each year and end on the last business day of the subsequent May, August, November and February. 4,200,000 common shares have been reserved for issuance in the aggregate over the term of the ESPP.
32
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
16. Stock-based compensation (Continued)
During the three months ended March 31, 2020 and 2021, 81,289 and 77,165 common shares, respectively, were issued under the ESPP.
The ESPP is considered compensatory under the FASB guidance on Compensation-Stock Compensation.
The compensation expense for the ESPP is recognized in accordance with the FASB guidance on Compensation-Stock Compensation. The compensation expense for the ESPP during the three months ended March 31, 2020 and 2021 was $352 and $346, respectively, and has been allocated to cost of revenue and selling, general and administrative expenses.
17. Capital stock
Share repurchases
The Board of Directors of the Company (the “Board”) has authorized repurchases of up to $1,750,000 under the Company’s existing share repurchase program, including an additional $500,000 approved during the first quarter of 2021. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be purchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
During the three months ended March 31, 2020 and 2021, the Company repurchased 1,042,188 and 3,297,966 of its common shares, respectively, on the open market at a weighted average price of $43.18 and $40.68 per share, respectively, for an aggregate cash amount of $45,000 and $134,152, respectively. All repurchased shares have been retired.
The Company records repurchases of its common shares on the settlement date of each transaction. Shares purchased and retired are deducted to the extent of their par value from common stock and from retained earnings for the excess over par value. Direct costs incurred to acquire the shares are included in the total cost of the shares purchased. For the three months ended March 31, 2020 and 2021, retained earnings were reduced by the direct costs related to share repurchases of $21 and $66, respectively.
Approximately $502,846 remained available for share repurchases under the Company’s existing share repurchase program as of March 31, 2021. This repurchase program does not obligate the Company to acquire any specific number of shares and does not specify an expiration date.
Dividend
On February 6, 2020, the Company announced that its Board had approved a 15% increase in its quarterly cash dividend to $0.0975 per share, up from $0.085 per share in 2019, representing an annual dividend of $0.39 per common share, up from $0.34 per share in 2019, payable to holders of the Company’s common shares. On March 18, 2020, the Company paid a dividend of $0.0975 per share, amounting to $18,543 in the aggregate, to shareholders of record as of March 9, 2020.
On February 9, 2021, the Company announced that its Board had approved a 10% increase in its quarterly cash dividend to $0.1075 per share, up from $0.0975 per share in 2020, representing a planned annual dividend of $0.43 per common share, up from $0.39 per share in 2020, payable to holders of the Company’s common shares. On March 19, 2021, the Company paid a dividend of $0.1075 per share, amounting to $20,115 in the aggregate, to shareholders of record as of March 10, 2021.
33
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
18. Earnings per share
The Company calculates earnings per share in accordance with FASB guidance on earnings per share. Basic and diluted earnings per common share give effect to the change in the number of Company common shares outstanding. The calculation of basic earnings per common share is determined by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the respective periods. The potentially dilutive shares, consisting of outstanding options on common shares, restricted share units, common shares to be issued under the ESPP and performance units, have been included in the computation of diluted net earnings per share and the number of weighted average shares outstanding, except where the result would be anti-dilutive.
The number of shares subject to stock awards outstanding but not included in the computation of diluted earnings per common share because their effect was anti-dilutive is 304,070 and 1,575,294 for the three months ended March 31, 2020 and 2021, respectively.
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Net income
|
|
$
|
85,698
|
|
|
$
|
91,273
|
|
Weighted average number of common shares used in computing basic earnings per common share
|
|
|
190,626,757
|
|
|
|
188,650,112
|
|
Dilutive effect of stock-based awards
|
|
|
5,905,756
|
|
|
|
4,563,146
|
|
Weighted average number of common shares used in computing dilutive earnings per common share
|
|
|
196,532,513
|
|
|
|
193,213,258
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.45
|
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
0.47
|
|
19. Segment reporting
The Company manages various types of business process and information technology services in an integrated manner for clients in various industries and geographic locations. The Company's operating segments are significant strategic business units that align its products and services with how it manages its business, approaches key markets and interacts with its clients. Effective from the quarter and year ended December 31, 2019, the Company implemented operational changes in how its Chief Operating Decision Maker (“CODM”) manages its businesses, including resource allocation and performance assessment. As a result of these changes, the Company now has three operating segments, representing the individual businesses that are run separately under the new structure.
The Company’s reportable segments are as follows: (1) Banking, Capital Markets and Insurance (“BCMI”); (2) Consumer Goods, Retail, Life Sciences and Healthcare (“CGRLH”); and (3) High Tech, Manufacturing and Services (“HMS”).
The Company has restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company's consolidated statements of income, balance sheets or statements of cash flows.
The Company’s Chief Executive Officer, who has been identified as the CODM, reviews operating segment revenue, which is a GAAP measure, and operating segment adjusted income from operations, which is a non-GAAP measure. The Company does not allocate and therefore the CODM does not evaluate stock based compensation expenses, amortization and impairment of acquired intangible assets, foreign exchange gain/(losses), interest income/(expense), restructuring expenses, acquisition related expenses, other income/(expense), or income taxes by segment. The Company’s operating assets and liabilities pertain to multiple segments. The Company manages assets and liabilities on a total company basis, not by operating segment, and therefore asset and liabilities information and capital expenditures by operating segment are not presented to the CODM and are not reviewed by the CODM.
34
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
19. Segment reporting (Continued)
Revenues and adjusted income from operations for each of the Company’s segments for the three months ended March 31, 2020 were as follows:
|
|
Reportable segments
|
|
|
|
|
|
|
|
|
|
|
|
BCMI
|
|
|
CGRLH
|
|
|
HMS
|
|
|
Total
Reportable
segment
|
|
|
Others**
|
|
|
Total
|
|
Revenues, net
|
|
|
268,757
|
|
|
|
305,221
|
|
|
|
354,218
|
|
|
|
928,196
|
|
|
|
(5,004
|
)
|
|
|
923,192
|
|
Adjusted income from 0perations
|
|
|
35,625
|
|
|
|
40,666
|
|
|
|
55,073
|
|
|
|
131,364
|
|
|
|
4,361
|
|
|
|
135,725
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,487
|
)
|
Amortization and impairment of acquired intangible assets (other than included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,514
|
)
|
Foreign exchange gains (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,531
|
|
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,696
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,861
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,698
|
|
**Revenues, net for “Others” primarily represents the impact of foreign exchange fluctuations, which is not allocated to the Company’s segments for management’s internal reporting purposes. Adjusted income from operations for “Others” primarily represents the impact of over-absorption of overhead, unallocated allowance for credit losses and foreign exchange fluctuations, which are not allocated to the Company’s segments for management’s internal reporting purposes.
Revenues and adjusted income from operations for each of the Company’s segments for the three months ended March 31, 2021 were as follows:
|
|
Reportable segments
|
|
|
|
|
|
|
|
|
|
|
|
BCMI
|
|
|
CGRLH
|
|
|
HMS
|
|
|
Total
Reportable
segment
|
|
|
Others*
|
|
|
Total
|
|
Revenues, net
|
|
|
242,312
|
|
|
|
340,035
|
|
|
|
356,927
|
|
|
|
939,274
|
|
|
|
6,797
|
|
|
|
946,071
|
|
Adjusted income from operations
|
|
|
32,367
|
|
|
|
57,816
|
|
|
|
67,618
|
|
|
|
157,801
|
|
|
|
4,855
|
|
|
|
162,656
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,430
|
)
|
Amortization and impairment of acquired intangible assets (other than included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,952
|
)
|
Foreign exchange gains (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,293
|
|
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,342
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,952
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,273
|
|
*Revenues, net for “Others” primarily represents the impact of foreign exchange fluctuations, which is not allocated to the Company’s segments for management’s internal reporting purposes. Adjusted income from operations for “Others” primarily represents the impact of over-absorption of overhead and foreign exchange fluctuations, which are not allocated to the Company’s segments for management’s internal reporting purposes.
35
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
20. Net revenues
Disaggregation of revenue
In the following table, the Company’s revenue is disaggregated by customer classification:
|
|
Three months ended March 31,
|
|
|
2020
|
|
|
2021
|
|
|
GE
|
|
$
|
121,657
|
|
|
$
|
93,014
|
|
|
Global Clients
|
|
|
801,535
|
|
|
|
853,057
|
|
|
Total net revenues
|
|
$
|
923,192
|
|
|
$
|
946,071
|
|
|
All revenue from GE is included in revenue from the HMS segment, and the remainder of revenue from the HMS segment consists of revenue from Global Clients. All of the segment revenue from both the BCMI and CGRLH segments consists of revenue from Global Clients. Refer to Note 19 for details on net revenues attributable to each of the Company’s segments.
The Company has evaluated the impact of the COVID-19 pandemic on the Company’s net revenues for the three months ended March 31, 2020 and March 31, 2021 to ensure that revenue is recognized after considering all impacts to the extent currently known. Impacts observed include constraints on the Company’s ability to render services, whether due to full or partial shutdowns of the Company’s facilities or significant travel restrictions, penalties relating to breaches of service level agreements, and contract terminations or contract performance delays initiated by clients. The Company’s net revenues for the three months ended March 31, 2020 were lower than expected before the onset of the pandemic, primarily due to delays in obtaining client approvals to shift to a virtual, work-from-home operating environment, whether as a result of regulatory constraints or due to privacy or security concerns. The COVID-19 pandemic did not have a significant impact on the Company’s net revenues for the quarter ended March 31, 2021. Due to the nature of the pandemic, the Company will continue to monitor developments to identify significant uncertainties relating to revenue in future periods.
Contract balances
Accounts receivable include amounts for services that the Company has performed but for which payment has not been received. The Company typically follows a 30-day billing cycle and, as such, at any point in time may have accrued up to 30 days of revenues that have not been billed. The Company has determined that in instances where the timing of revenue recognition differs from the timing of invoicing, the related contracts generally do not include a significant financing component. Refer to Note 5 for details on the Company’s accounts receivable and allowance for credit losses.
The following table shows the details of the Company’s contract balances:
|
|
|
|
|
|
As of December 31, 2020
|
|
|
As of March 31, 2021
|
|
Contract assets (Notes a)
|
|
$
|
15,805
|
|
|
$
|
18,927
|
|
Contract liabilities (Note b)
|
|
|
|
|
|
|
|
|
Deferred transition revenue
|
|
$
|
130,804
|
|
|
$
|
148,539
|
|
Advance from customers
|
|
$
|
92,673
|
|
|
$
|
85,341
|
|
(a)
|
Included in "prepaid expenses and other current assets" and "other assets" in the consolidated balance sheet.
|
(b)
|
Included in "accrued expenses and other current liabilities" and "other liabilities" in the consolidated balance sheet.
|
36
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
20. Net revenues (Continued)
Contract assets represent the contract acquisition fees or other upfront fees paid to a customer. Such costs are amortized over the expected period of benefit and recorded as an adjustment to the transaction price and deducted from revenue. The Company’s assessment did not indicate any significant impairment losses on its contract assets for the periods presented.
Contract liabilities include that portion of revenue for which payments have been received in advance from customers. The Company also defers revenues attributable to certain process transition activities for which costs have been capitalized by the Company as contract fulfillment costs. Consideration received from customers, if any, relating to such transition activities is also included as part of contract liabilities. The contract liabilities are included within “Accrued expenses and other current liabilities” and “Other liabilities” in the unaudited consolidated balance sheets. The revenues are recognized as (or when) the performance obligation is fulfilled under the contract with the customer.
Changes in the Company’s contract asset and liability balances during the year ended December 31, 2020 and the three months ended March 31, 2021 were a result of normal business activity and not materially impacted by any other factors.
Revenue recognized during the year ended December 31, 2020 and the three months ended March 31, 2021 that was included in the contract liabilities balance at the beginning of the period was $102,893 and $58,892, respectively.
The following table includes estimated revenue expected to be recognized in the future related to remaining performance obligations as of March 31, 2021:
Particulars
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
After 5 years
|
|
Transaction price allocated to remaining performance obligations
|
|
$
|
233,880
|
|
|
|
148,013
|
|
|
|
68,862
|
|
|
|
14,365
|
|
|
|
2,640
|
|
The following table provides details of the Company’s contract cost assets:
|
|
Three months ended March 31, 2020
|
|
|
Three months ended March 31, 2021
|
|
Particulars
|
|
Sales incentive programs
|
|
|
Transition activities
|
|
|
Sales incentive programs
|
|
|
Transition
activities
|
|
Opening balance
|
|
$
|
35,366
|
|
|
$
|
170,132
|
|
|
$
|
33,390
|
|
|
$
|
192,507
|
|
Closing balance
|
|
|
34,417
|
|
|
|
176,649
|
|
|
|
30,813
|
|
|
|
202,191
|
|
Amortization
|
|
|
4,119
|
|
|
|
13,533
|
|
|
|
4,796
|
|
|
|
17,145
|
|
21. Other operating (income) expense, net
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Write-down of intangible assets and property, plant and equipment
|
|
$
|
—
|
|
|
$
|
837
|
|
Other operating income
|
|
|
(320
|
)
|
|
|
(484
|
)
|
Other operating (income) expense, net
|
|
$
|
(320
|
)
|
|
$
|
353
|
|
22. Interest income (expense), net
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2021
|
|
Interest income
|
|
$
|
2,274
|
|
|
$
|
1,171
|
|
Interest expense
|
|
|
(13,970
|
)
|
|
|
(13,513
|
)
|
Interest income (expense), net
|
|
$
|
(11,696
|
)
|
|
$
|
(12,342
|
)
|
|
|
|
|
|
|
|
|
|
37
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
23. Income taxes
The Company determines its tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment.
The Company’s effective tax rate (“ETR”) was 24.1% for the three months ended March 31, 2021, up from 22.5% for the three months ended March 31, 2020. The increase in the Company’s ETR is primarily due to the expiration of certain tax benefits in 2021 and an increase in discrete benefits recorded in the first quarter of 2020 compared to the first quarter of 2021.
As of December 31, 2020, the Company had unrecognized tax benefits amounting to $34,300, which, if recognized, would impact the Company’s ETR.
The following table summarizes activities related to the Company’s unrecognized tax benefits for uncertain tax positions for the three months ended March 31, 2021:
|
|
Three months ended March, 2021
|
|
Opening balance at January 1
|
|
$
|
34,300
|
|
Decrease related to settlements with tax authorities
|
|
|
(1,168
|
)
|
Effect of exchange rate changes
|
|
|
(538
|
)
|
Closing balance at March 31
|
|
$
|
32,594
|
|
The Company’s unrecognized tax benefits as of March 31, 2021 amounted to $32,594, which, if recognized, would impact the Company’s ETR.
As of December 31, 2020 and March 31, 2021, the Company had accrued approximately $6,369 and $5,557, respectively, in interest and $900 and $723, respectively, for penalties relating to unrecognized tax benefits.
During the year ended December 31, 2020 and the three months ended March 31, 2021, the Company recognized approximately $662 and ($783), respectively, in interest on unrecognized tax benefits.
24. Other income (expense), net
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
|
|
2021
|
|
Other income (expense)
|
|
$
|
(2,934
|
)
|
|
|
|
$
|
1,392
|
|
Other income (expense), net
|
|
$
|
(2,934
|
)
|
|
|
|
$
|
1,392
|
|
38
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
25. Commitments and contingencies
Capital commitments
As of December 31, 2020 and March 31, 2021, the Company has committed to spend $5,128 and $4,405, respectively, under agreements to purchase property, plant and equipment. This amount is net of capital advances paid in respect of these purchases.
Bank guarantees
The Company has outstanding bank guarantees and letters of credit amounting to $10,156 and $9,560 as of December 31, 2020 and March 31, 2021, respectively. Bank guarantees are generally provided to government agencies and excise and customs authorities for the purpose of maintaining a bonded warehouse. These guarantees may be revoked if the government agencies suffer any losses or damages through the breach of any of the covenants contained in the agreements governing such guarantees.
Other commitments
Certain units of the Company’s Indian subsidiaries are established as Software Technology Parks of India units or Special Economic Zone (“SEZ”) units under the relevant regulations issued by the Government of India. These units are exempt from customs and other duties on imported and indigenous capital goods, stores and spares. SEZ units are also exempt from the Goods and Services Tax (“GST”) that was introduced in India in 2017. The Company has undertaken to pay taxes and duties, if any, in respect of capital goods, stores, spares and services consumed duty-free, in the event that certain terms and conditions are not fulfilled.
Contingency
In February 2019, there was a judicial pronouncement in India with respect to defined contribution benefit payments interpreting certain statutory defined contribution obligations of employees and employers. It is not currently clear whether the interpretation set out in the pronouncement has retrospective application. If applied retrospectively, the interpretation would result in an increase in contributions payable by the Company for past periods for certain of its India-based employees. There are numerous interpretative challenges concerning the retrospective application of the judgment. Due to such challenges and a lack of interpretive guidance and based on legal advice the Company has obtained on the matter, it is currently impracticable to reliably estimate the timing and amount of any payments the Company may be required to make. Accordingly, the Company plans to obtain further clarity and will evaluate the amount of a potential provision, if any.
The Indian taxing authorities (“ITA”) have initiated proceedings to examine the availability of the tax exemption claimed in respect of exports of services and related refunds under the GST tax regime and the previous service tax regime. In the second quarter of 2020, the ITA began to challenge or reject the Company’s Indian GST and service tax refunds in certain Indian states. In total, refunds of $16,090 have been denied or challenged by the ITA, and additional refunds may be denied.
The Company had requested these refunds pursuant to the tax exemption available for exports under the previous service tax regime as well as the current GST regime in respect of services performed by the Company in India for affiliates and clients outside of India. In denying the refunds, the ITA have taken the position that the services provided are local services, which interpretation, if correct, would make the service tax and GST exemption on exports unavailable to the Company in respect of such services. The Company is pursuing appeals of the denial of these refunds before relevant appellate authorities. The Company believes that the denial of the refunds claimed pursuant to the service tax and GST exemption is incorrect and that the risk that the liability will materialize is remote. Accordingly, no reserve has been provided as of March 31, 2021. Additional potentially material challenges and assessments may result from ongoing proceedings.
Additionally, an affiliate of the Company in India received an assessment order in 2016 seeking to assess tax amounting to $112,216 (including interest to the date of the order) on certain transactions that occurred in 2013. This amount excludes penalty or interest accrued since the date of the order. The Company filed an appeal against this assessment order with the Commissioner Income Tax (Appeals), the first tax appellant authority in India, which ruled against the Company.
39
GENPACT LIMITED AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data and share count)
25. Commitments and contingencies (continued)
Subsequently, the Company filed an appeal with the Income Tax Appellate Tribunal of India (“Tribunal”). The Tribunal has accepted the legal arguments raised by the Company and the assessment order has been cancelled. The taxes paid under protest amounting to $27,556 are yet to be refunded to the Company. The Indian tax authorities may appeal the order of the Tribunal before higher appellate authorities. Based on its evaluation of the facts underlying the transaction and legal advice received, the Company believes that it is more likely than not that this transaction would not be subject to tax liability in India. Accordingly, no reserve has been provided as of March 31, 2021.
In September 2020, the Indian Parliament approved the Code on Social Security, 2020 (the “Code”), which will impact the Company’s contributions to its defined contribution and defined benefit plans for employees based in India. The date the changes will take effect is not yet known and the rules for quantifying the financial impact have not yet been published. The Company will evaluate the impact of the Code on the Company in its financial statements for the period in which the Code becomes effective and the related rules are published.
26. Subsequent Events
Dividend
On May 5, 2021, the Company announced that its Board of Directors has declared a dividend for the second quarter of 2021 of $0.1075 per common share, which is payable on June 23, 2021 to shareholders of record as of the close of business on June 11, 2021. The declaration of any future dividends will be at the discretion of the Board of Directors and subject to Bermuda and other applicable laws.
40