# Genpact LTD (G) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Genpact LTD's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1398659/000139865924000031/g-20231231.htm
Accession: 0001398659-24-000031
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/G/
All MD&A years: /company/G/mda/
Previous year: /company/G/mda/fy2022/ (FY 2022)
Next year: /company/G/mda/fy2024/ (FY 2024)

Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts and uncertainties of cash flows from operations and from outside sources, so as to allow investors to better view our company from management’s perspective. The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management’s expectations. See “Special Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K.

Macroeconomic environment

Our results of operations are affected by various economic and macroeconomic conditions, including the inflationary environment, high interest rates, numerous geopolitical risks and levels of overall business confidence. Throughout 2023, continued economic and geopolitical uncertainty in many markets around the world, including with respect to slowing global economic growth, monetary policy and continued volatility in foreign currency exchange rates, impacted and may continue to impact our business.

The ongoing conflict between Russia and Ukraine and actions taken by the United States and other countries in response, including the imposition of sanctions, as well as the ongoing conflict between Hamas and Israel, have contributed to and may continue to exacerbate supply chain disruption and inflation, regional instability and geopolitical tensions. While we do not have operations in Russia or Ukraine, it is difficult to anticipate the future impacts of the Russia-Ukraine conflict on our business or our clients’ businesses. We have limited operations in Israel and are closely monitoring the situation. To date, we do not believe the conflicts between Russia and Ukraine and Hamas and Israel, or the economic or political impacts of these conflicts, have had a material impact on our business, financial position or operations, but we continue to monitor the situation.

For additional information about the risks we face, see Part I, Item 1A—“Risk Factors.”

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Overview

Our 2023 revenues were $4.5 billion, an increase of 2.4% year-over-year, or 3.1% on a constant currency1 basis.

Net Revenues

Revenue by top clients.    The table below sets forth the percentage of our total net revenues derived from our largest clients, in the years ended December 31, 2022 and 2023:

[[GREPCENT_TABLE]]
[["","Percentage of Total Net Revenues"],["","Year ended December 31,"],["","2022","","2023"],["Top five clients","22.1","%","","17.5","%"],["Top ten clients","31.2","%","","26.3","%"],["Top fifteen clients","37.3","%","","32.7","%"],["Top twenty clients","42.2","%","","37.2","%"]]
[[/GREPCENT_TABLE]]

We earn revenues pursuant to contracts that generally take the form of a master service agreement ("MSA"), which is a framework agreement that is then supplemented by statements of work ("SOWs"). Our MSAs specify the general terms applicable to the services we will provide. Our MSAs are generally for terms of three to seven years, although they may also have an indefinite term or be for terms of less than three years. In most cases they do not specify pricing terms or obligate the client to purchase a particular amount of services. We then enter into SOWs under an MSA, which specify particular services to be provided and the pricing terms. Most of our revenues are from SOWs with terms of two to five years. We typically have multiple SOWs under any given MSA, and the terms of our SOWs vary depending on the nature of the services to be provided. We seek to develop long-term relationships with our clients. We believe that these relationships best serve our clients as they create opportunities for us to provide a variety of services using the full range of our capabilities and to deliver continuous process improvement.

New business proposals are reviewed in line with our strategy to target specific industry verticals and geographical markets. We begin each year with a set of named accounts, including prospective clients with operations in our target areas, and all opportunities during the year are reviewed by business leaders from the applicable industry vertical, operations, and finance teams. In this way, we try to ensure that contract terms meet our pricing, cash and service objectives. See Item 1—“Business—Sales and marketing” for additional information.

Many factors affect how we price our contracts. Under some of our MSAs, we are able to share a limited amount of inflation and currency exchange risk for engagements lasting longer than 12 months. Many of our MSAs also provide that, under transaction-based and fixed-price SOWs, we are entitled to retain a portion of certain productivity benefits we achieve. However, some of our MSAs and SOWs require certain minimum productivity benefits to be passed on to our clients. Once an MSA and the related SOWs are signed and production of services commences, our revenues and expenses increase as services are ramped up to the agreed upon level. In many cases, we may have opportunities to increase our profit margins over the life of an MSA or SOW, driven by a number of factors. Our revenues include gains or losses arising upon the maturity of qualified cash flow hedges.

Classification of certain net revenues.   We classify our net revenues in two categories based on the nature of services rendered: Data-Tech-AI services and Digital Operations services.

Expenses.    Personnel expenses are a major component of both our cost of revenue and our selling, general and administrative expenses. Personnel expenses include salaries and benefits (including stock-based compensation) as well as costs related to recruitment and training. Personnel expenses are allocated between cost of revenue and selling, general and administrative expenses based on the classification of the employee. Stock-based compensation and depreciation and amortization expense are allocated between cost of revenue and selling, general and administrative expenses using an appropriate allocation basis.

Our industry is labor-intensive. Wage levels in the countries in which our delivery centers are located have historically increased on a year-over-year basis. We attempt to address the impact of wage increases, and pressures to increase wages, in a number of ways, which include seeking to control entry-level wages, managing attrition, delivering productivity and “right-skilling,” which refers to ensuring that positions are not filled by overqualified employees.

1 Revenue growth on a constant currency basis is a non-GAAP measure and is calculated by restating current-period activity using the prior fiscal period’s foreign currency exchange rates adjusted for hedging gains/losses in such period.

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We try to control increases in entry-level wages by implementing innovative recruitment policies, utilizing continuous training techniques, emphasizing promotion opportunities and maintaining an attractive work atmosphere and culture.

In planning capacity expansion, we look for locations that help us ensure global delivery capability while helping us control average salary levels. In India and in other countries where we may open multiple offices or delivery centers, we try to expand into cities where competition for personnel and wage levels may be lower than in more developed cities. In addition, under some of our contracts we can share with our clients a portion of any increase in costs due to inflation. Nevertheless, despite these steps, we expect general increases in wage levels in the future, which could adversely affect our margins. A significant increase in attrition rates would also increase our recruitment and training costs and decrease our operating efficiency, productivity and profit margins. Increased attrition rates or increased pricing may also cause some clients to be less willing to use our services. See Item 1A—“Risk Factors—Wage increases in the countries where we operate may reduce our profit margin.”

Our operational expenses include facilities maintenance expenses, travel and living expenses, IT expenses, and consulting and certain other expenses. Consulting charges, consisting of the cost of consultants and contract employees with specialized skills who are directly responsible for the performance of services for clients, are included in cost of revenue. Facilities maintenance expenses and certain other expenses are allocated between cost of revenue and selling, general and administrative expenses based on the employee’s function.

Cost of revenue.    The principal component of cost of revenue is personnel expenses. We include in cost of revenue all personnel expenses for employees who are directly responsible for the performance of services for clients, their supervisors and certain support personnel who may be dedicated to a particular client or a set of processes. Travel and living expenses are included in cost of revenue if the personnel expense for the employee incurring such expense is included in cost of revenue.

The ratio of cost of revenue to revenues for any particular SOW or for all SOWs under an MSA is typically higher in the early periods of the contract or client relationship than in later periods. This is because the number of supervisory and direct support personnel relative to the number of employees who are performing services typically declines in later periods of the contract. It is also because we may retain a portion of the benefit of productivity increases realized over time.

Selling, general and administrative expenses.  Our selling, general and administrative ("SG&A") expenses are primarily comprised of personnel expenses for senior management and other support personnel in enabling functions, such as human resources, finance, legal, marketing, sales and sales support, and other non-billable support personnel. The operational costs component of SG&A expenses also includes travel and living costs for such personnel. Additionally, the operational costs component of SG&A expenses includes acquisition related costs, legal and professional fees (which represent the costs of third-party legal, tax, accounting and other advisors), investments in research and development, digital technology, advanced automation and robotics, and an allowance for credit losses.

Amortization of acquired intangible assets.   Amortization of acquired intangible assets consists of amortization expenses relating to intangible assets acquired through acquisitions.

Other operating (income) expense, net.    Other operating (income) expense, net primarily consists of the impact of the change in the fair value of earn-out consideration and deferred consideration relating to business acquisitions, as well as certain operating losses resulting from the write-down of operating lease right-of-use assets, other assets, property, plant and equipment and intangible assets, impairment charges and losses on the sale of assets classified as held for sale and gains on termination of leases.

Foreign exchange gains (losses), net.   Foreign exchange gains (losses), net primarily consists of gains or losses on the re-measurement of non-functional currency assets and liabilities. In addition, it includes gains or losses from derivative contracts entered into to offset the impact of the re-measurement of non-functional currency assets and liabilities. It also includes the realized and unrealized gains or losses on derivative contracts that do not qualify for hedge accounting.

We also enter into derivative contracts to offset the impact of the re-measurement of non-functional currency expenditures and income. The gains or losses on derivative contracts that qualify for hedge accounting, which are cash flow hedges, are deferred and included under other comprehensive income (loss) until the derivative contracts mature, at which time the gains or losses on such cash flow hedges are classified as net revenues, cost of revenue or selling, general and administrative expenses based on the underlying risk being hedged. See Note 2—“Summary of significant accounting policies” to our Consolidated Financial Statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules’’ and Item 7A—“Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”

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77% of our fiscal 2023 revenues were earned in U.S. dollars. We also received payments in euros, U.K. pounds sterling, Australian dollars, Japanese yen and Indian rupees. Our costs are primarily incurred in U.S. dollars, as well as in Indian rupees, U.K. pounds sterling, Romanian leu, Chinese renminbi, euros and the currencies of the other countries in which we have operations. While some of our contracts provide for limited sharing of the risk of inflation and fluctuations in currency exchange rates, we bear a substantial portion of this risk, and therefore our operating results could be negatively affected by adverse changes in wage inflation rates and foreign currency exchange rates. See our discussion of wage inflation under “Expenses” above. We enter into forward currency contracts, which are generally designed to qualify for hedge accounting, in order to hedge most of our net cost currency exposure between the U.S. dollar and the Indian rupee and Mexican peso, between the Australian dollar and the Indian rupee, and between the euro and the Romanian leu, and our revenue currency exposure between the U.S. dollar and the U.K. pound sterling, Philippine peso, Hungarian forint, Chinese renminbi, Polish zloty and the euro, and between the Chinese renminbi and the Japanese yen. However, our ability to hedge such risks is limited by local law, the liquidity of the market for such hedges and other practical considerations. Thus, our results of operations may be adversely affected if we are not able to enter into the desired hedging arrangements or if our hedging strategies are not successful. See Note 2—“Summary of significant accounting policies” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules” for additional information.

Interest income (expense), net.  Interest income (expense), net consists primarily of interest expense on indebtedness, including resulting from interest rate swaps and a treasury rate lock agreement, finance lease obligations, interest adjustments relating to earn-out consideration in connection with certain acquisitions, certain items related to debt restructuring, and interest income on certain deposits. We manage a portion of our interest rate risk related to floating rate indebtedness by entering into interest rate swaps under which we receive floating rate payments based on the greater of London Interbank Offered Rate ("LIBOR") or Term Secured Overnight Financing Rate (“SOFR”), as applicable, and the floor rate under our term loan and make payments based on a fixed rate.

Other income (expense), net.  Other income (expense), net primarily includes certain government incentives received by our subsidiaries and changes in the fair value of assets in our deferred compensation plan.

Income taxes.   We are incorporated in Bermuda and have operations in many countries. Our effective tax rate has historically varied and will continue to vary from year to year based on the tax rate in the jurisdiction of our organization, the geographical sources of our earnings and the tax rates in those countries, the tax relief and incentives available to us, the financing and tax planning strategies employed by us, changes in tax laws or the interpretation thereof, and movements in our tax reserves, if any.

Bermuda taxes.    We are organized in Bermuda. Bermuda does not currently impose any income tax on us. On December 27, 2023, the government of Bermuda passed legislation introducing a corporate income tax of 15%, which will become effective on January 1, 2025. As a result of this new legislation, we recorded a deferred tax asset on net operating losses, which was fully offset by a valuation allowance.

Transfer pricing.    We have transfer pricing arrangements among our subsidiaries involved in various aspects of our business, including operations, marketing, sales and delivery functions. U.S., U.K., and Indian transfer pricing regulations, as well as the regulations applicable in the other countries in which we operate, require that any international transaction involving affiliated enterprises be made on arm’s-length terms. We consider the transactions among our subsidiaries to be substantially on arm’s-length pricing terms. If, however, a tax authority in any jurisdiction reviews any of our tax returns and determines that the transfer prices we have applied are not appropriate, or that other income of our affiliates should be taxed in that jurisdiction, we may incur increased tax liability, including accrued interest and penalties, which would cause our tax expense to increase, possibly materially, thereby reducing our profitability and cash flows.

Other taxes.    We have operating subsidiaries or branches in several countries, including Argentina, Australia, Brazil, Bulgaria, Canada, China, Costa Rica, the Czech Republic, Egypt, Germany, Guatemala, Hungary, India, Ireland, Israel, Japan, Malaysia, Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Singapore, South Africa, Thailand, Turkey, the United Kingdom and the United States, as well as sales and marketing subsidiaries in certain jurisdictions, including the United States and the United Kingdom, which are subject to tax in such jurisdictions.

One of our subsidiaries in China obtained a ruling from the Government of China certifying it to be a Technologically Advanced Service Enterprise. As a result, that subsidiary was subject to a lower corporate income tax rate of 15% through December 31, 2023, subject to the fulfillment of certain conditions. Our delivery centers also enjoy corporate tax holidays or concessional tax rates in certain other jurisdictions, including Costa Rica, Israel and the Philippines. These tax concessions will expire over the next few years, possibly increasing our overall tax rate.

The governments of foreign jurisdictions where we deliver services may assert that certain of our clients have a “permanent establishment” in such jurisdictions by reason of the activities we perform on their behalf, particularly those clients that exercise control over or have substantial dependency on our services. Such an assertion could affect the size and scope of the services requested by such clients in the future.

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Our ability to repatriate surplus earnings from our foreign subsidiaries in a tax-efficient manner is dependent upon interpretations of local laws, possible changes in such laws and the renegotiation of existing double tax avoidance treaties. Changes to any of these may adversely affect our overall tax rate.

Tax audits.    Our tax liabilities may also increase, including due to accrued interest and penalties, if the applicable income tax authorities in any jurisdiction, during the course of any audits, were to disagree with any of our tax return positions. We have an indemnity from GE for any additional taxes attributable to periods prior to December 30, 2004.

Tax losses and other deferred tax assets.    Our ability to utilize our tax loss carry forwards and other deferred tax assets and credits may be affected if our profitability deteriorates or if new legislation is introduced that changes carry-forward or crediting rules. Additionally, reductions in enacted tax rates may affect the value of our deferred tax assets and our tax expense.

Certain Acquisitions

From time to time we may make acquisitions or engage in other strategic transactions if suitable opportunities arise, and we may use cash, securities, other assets or a combination thereof as consideration.

On December 31, 2021, we acquired 100% of the outstanding equity/limited liability company interests in Hoodoo Digital, LLC, a Utah limited liability company, for total purchase consideration of $66.7 million. This amount represents cash consideration of $64.4 million, net of cash acquired of $2.3 million. This acquisition furthered our strategy to fuse experience and process innovation to help clients drive end-to-end digital transformation. Hoodoo’s expertise with Adobe Experience Manager and other Adobe applications complements our existing end-to-end client solution that seamlessly integrates digital content, e-commerce, data analytics, and marketing operations. Goodwill arising from the acquisition amounting to $46.0 million has been allocated among our three reporting units as follows: Financial Services in the amount of $4.3 million, Consumer and Healthcare in the amount of $7.3 million and High Tech and Manufacturing in the amount of $34.4 million, using a relative fair value allocation method. Goodwill arising from this acquisition is deductible for income tax purposes and represents primarily the acquired capabilities and other benefits expected to result from combining the acquired operations with our existing operations.

New Bookings

New bookings is an operating or other statistical measure. We define new bookings as the total contract value of new client contracts and certain changes to existing client contracts to the extent that such contracts represent incremental future revenue. In determining total contract value for this purpose, we assume the volume to which the client has committed or make a conservative projection where the client has not made a volume commitment. New bookings attributable to deals may exclude a portion of the total contract value if the services are subject to certain contingencies, such as regulatory or other approvals. Regular renewals of contracts with no change in scope, which we consider business as usual, are not included as new bookings. We provide information regarding our new bookings because we believe doing so provides useful trend information regarding changes in the volume of our new business and may be a useful metric as an indicator of future revenue growth potential. Our management also uses new bookings to measure our sales force productivity.

New bookings in 2023 were $4.9 billion, up 25.6% from $3.9 billion in 2022.

New bookings can vary significantly year to year depending in part on the timing of signing of large contracts. The types of services clients are demanding, the duration of the contract and the pace and level of client spending may impact the conversion of new bookings to revenues. For example, bookings for our Digital Operations services, which are typically provided under multi-year contracts, generally convert to revenue over a longer period of time than do bookings for our Data-Tech-AI services, which often include shorter cycle, project-based work.

Information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. The calculation of new bookings involves estimates and judgments. There are no third-party standards or requirements governing the calculation of new bookings. We do not update our new bookings for material subsequent terminations or reductions related to new bookings originally recorded in prior fiscal years. New bookings are recorded using then-existing foreign currency exchange rates and are not subsequently adjusted for foreign currency exchange rate fluctuations. Our revenues recognized each year will vary from the new bookings value since new bookings is a snapshot measurement of a portion of the total client contract value at a given time.

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Critical Accounting Policies and Estimates

A summary of our significant accounting policies is included in Note 2—“Summary of significant accounting policies” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.” An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if changes in the estimate that are reasonably possible could materially impact the financial statements or require a higher degree of judgment than others in their application. We base our estimates on historical experience, contractual commitments and on various other assumptions that we believe to be reasonable under the circumstances and at the time they are made. We believe the following critical accounting policies require a higher level of management judgment and estimates than others in preparing the consolidated financial statements. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates.

Business combinations.  The application of business combination accounting requires the use of significant estimates and assumptions. We account for business combinations using the acquisition method of accounting, 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. The measurement of purchase price, including future contingent consideration, if any, and its allocation, requires significant estimates in determining the fair values of assets acquired and liabilities assumed, including with respect to intangible assets and deferred and contingent consideration. Significant estimates and assumptions we may make include, but are not limited to, the timing and amount of future revenue and cash flows based on, among other things, anticipated growth rates, customer attrition rates, and the discount rate reflecting the risk inherent in future cash flows.

In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with business combinations are initially estimated as of the acquisition date, and we reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill within the measurement period (up to one year from the acquisition date).

Goodwill and other intangible assets.   Goodwill represents the cost of acquired businesses in excess of the fair value of the identifiable tangible and intangible net assets purchased. Goodwill is tested for impairment at least on an annual basis on December 31, or as circumstances warrant based on a number of factors, including operating results, business plans and future cash flows. We perform 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 our assessment of events or circumstances, we perform a quantitative assessment of goodwill impairment if it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on the results of our assessments of qualitative factors, we determined that the fair values of all of our reporting units are likely to be higher than their respective carrying amounts as of December 31, 2022 and 2023.

During the year ended December 31, 2022, we took actions to realign our portfolio to focus on services we believe have the greatest opportunities for growth, and deprioritized assets that no longer fit with our long-term strategy. As such, during 2022, we identified and divested a business that was part of our Consumer and Healthcare segment and classified certain technology-related intangible assets and goodwill as held for sale. We tested these assets for impairment and determined that the carrying values were not recoverable and accordingly recorded an impairment charge to adjust the carrying amount of these assets to their fair value. The impairment charge was recorded in “other operating (income) expense, net.” During 2023, the sale of these assets was completed and we recorded a loss on the sale in "other operating (income) expense, net." See Note 8—“Assets and liabilities held for sale” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules” for additional information.

We capitalize certain software and technology development costs incurred in connection with developing or obtaining software or technology for sale 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) the 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.

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We test our intangible assets for impairment whenever events occur or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether we have incurred an impairment loss requires comparing the carrying amounts of the assets to the sum of future undiscounted cash flows expected to be generated by the assets. When determining the fair value of our intangible assets, we utilize various assumptions, including discount rates, estimated growth rates, economic trends and projections of future cash flows. These projections also take into account factors such as the expected impact of new client contracts, expanded or new business from existing clients, efficiency initiatives, and the maturity of the markets in which each of our businesses operates. We generally categorize intangible assets acquired individually or with a group of other assets or in a business combination as customer-related, marketing-related, technology-related, and other intangible assets. See Note 2—“Summary of significant accounting policies—Business combinations, goodwill and other intangible assets” and Note 10—“Goodwill and intangible assets” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules’’ for more information about how we value our intangible assets. Actual results may vary, and may cause significant adjustments to the valuation of our assets in the future.

Income taxes.    We calculate and provide for income taxes in each of the tax jurisdictions in which we operate. We account for income taxes using the asset and liability method. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and for all operating losses and tax credits carried forward, if any. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or tax status is recognized in the statement of income in the period that includes the enactment date or the filing or approval date of the tax status change. Deferred tax assets are recognized in full, subject to a valuation allowance that reduces the amount recognized to that which is more likely than not to be realized. In assessing the likelihood of realization, we consider estimates of future taxable income.

In the case of an entity that benefits from a corporate tax holiday, deferred tax assets or liabilities for existing temporary differences are recorded only to the extent such temporary differences are expected to reverse after the expiration of the tax holiday. We also evaluate potential exposures related to tax contingencies or claims made by tax authorities in various jurisdictions and determine if a reserve is required. A reserve is recorded if we believe that a loss is more likely than not to occur and the amount can be reasonably estimated. Any such reserves are based on estimates and are subject to changing facts and circumstances considering the progress of ongoing audits, case law and new legislation. We believe that the reserves we have established are adequate.

We apply a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining, based on the technical merits, that the position is more likely than not to be sustained upon examination. The second step is to measure the tax benefit as the largest amount of the tax benefit that is greater than 50% likely of being realized upon settlement. We also include interest and penalties related to unrecognized tax benefits within our provision for income tax expense.

We generally plan to indefinitely reinvest the undistributed earnings of foreign subsidiaries, except for those earnings that can be repatriated in a tax-free manner. Accordingly, we do not currently accrue any material income, distribution or withholding taxes that would arise if such earnings were repatriated.

Due to rounding, the numbers presented in the tables included in this Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not add up precisely to the totals provided.

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Results of Operations

For a discussion of our results of operations for the year ended December 31, 2021, including a year-to-year comparison between 2022 and 2021, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following table sets forth certain data from our income statement for the years ended December 31, 2022 and 2023:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percentage change increase/ (decrease) 2023 vs. 2022"],["","2022","","2023"],["Data-Tech-AI services","$","1,959.9","","","$","1,993.1","","","1.7","%"],["Digital Operations services","$","2,411.3","","","$","2,483.8","","","3.0","%"],["Total net revenues","$","4,371.2","","","$","4,476.9","","","2.4","%"],["Cost of revenue","2,834.8","","","2,906.2","","","2.5","%"],["Gross profit","$","1,536.4","","","$","1,570.7","","","2.2","%"],["Gross profit margin","35.1","%","","35.1","%"],["Operating expenses"],["Selling, general and administrative expenses","938.4","","","913.1","","","(2.7)","%"],["Amortization of acquired intangible assets","42.7","","","31.5","","","(26.3)","%"],["Other operating (income) expense, net","53.2","","","(4.7)","","","(108.9)","%"],["Income from operations","$","502.2","","","$","630.9","","","25.6","%"],["Income from operations as a percentage of net revenues","11.5","%","","14.1","%"],["Foreign exchange gains (losses), net","15.4","","","4.3","","","(72.2)","%"],["Interest income (expense), net","(52.2)","","","(47.9)","","","(8.2)","%"],["Other income (expense), net","(0.1)","","","15.0","","","NM*"],["Income before income tax expense","$","465.2","","","$","602.2","","","29.4","%"],["Income tax expense (benefit)","111.8","","","(29.0)","","","(126.0)","%"],["Net income","$","353.4","","","$","631.3","","","78.6","%"],["Net income as a percentage of net revenues","8.1","%","","14.1","%"]]
[[/GREPCENT_TABLE]]

*Not Meaningful

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Fiscal Year Ended December 31, 2023 Compared to the Fiscal Year Ended December 31, 2022

Net revenues.    Our net revenues were $4,476.9 million in 2023, up $105.7 million, or 2.4%, from $4,371.2 million in 2022. Growth in our net revenues was driven by both Data-Tech-AI and Digital Operations services.

Adjusted for foreign exchange, primarily the impact of changes in the values of Japanese yen, Australian dollar, Indian Rupee and South African rand against the U.S. dollar, our net revenues grew 3.1% in 2023 compared to 2022 on a constant currency2 basis. Revenue growth on a constant currency2 basis is a non-GAAP measure. We provide information about our revenue growth on a constant currency2 basis so that our revenue may be viewed without the impact of foreign currency exchange rate fluctuations compared to prior fiscal periods, thereby facilitating period-to-period comparisons of our business performance. Total net revenues on a constant currency2 basis are calculated by restating current-period activity using the prior fiscal period’s foreign currency exchange rates and adjusted for hedging gains/losses.

Our average headcount increased to approximately 123,400 in 2023 from approximately 115,800 in 2022.

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percentage change increase/ (decrease) 2023 vs. 2022"],["","2022","","2023"],["","(dollars in millions)"],["Data-Tech-AI services","$","1,959.9","","","$","1,993.1","","","1.7","%"],["Digital Operations services","$","2,411.3","","","$","2,483.8","","","3.0","%"],["Total net revenues","$","4,371.2","","","$","4,476.9","","","2.4","%"]]
[[/GREPCENT_TABLE]]

Net revenues from Data-Tech-AI services in 2023 were $1,993.1 million, up $33.2 million, or 1.7%, from $1,959.9 million in 2022. This increase was largely driven by continued growth in our supply chain management services as well as an increase in revenue from automating core client finance and accounting processes in 2023 compared to 2022.

Net revenues from Digital Operations services in 2023 were $2,483.8 million, up $72.5 million, or 3.0%, from $2,411.3 million in 2022, primarily due to ramp-ups from certain new large deals and existing contracts.

Revenues by segment were as follows:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percentage change increase/ (decrease) 2023 vs. 2022"],["","2022","","2023"],["","(dollars in millions)"],["Financial Services","$","1,159.7","","","$","1,225.4","","","5.7","%"],["Consumer and Healthcare","1,593.5","","","1,570.7","","","(1.4)","%"],["High Tech and Manufacturing","1,617.9","","","1,680.8","","","3.9","%"],["Net revenues","4,371.2","","","4,476.9","","","2.4","%"],["Business held for sale","(12.0)","","","(0.5)","","","(95.9)","%"],["Net revenues (excluding business held for sale)","$","4,359.2","","","$","4,476.4","","","2.7","%"]]
[[/GREPCENT_TABLE]]

Net revenues from our Financial Services segment increased by 5.7% in 2023 compared to 2022, largely due to continued demand for our underwriting and risk management services in our insurance vertical, which leverage data and analytics, as well as our digital solutions involving automation of back-office processes, partially offset by a decline in client spending on short-cycle discretionary technology projects. Net revenues from our Consumer and Healthcare segment decreased by 1.4% in 2023 compared to 2022, largely driven by lower Data-Tech-AI services revenue in 2023 compared to 2022, and the impact of the recent divestiture of the business that we had previously classified as held for sale, which was completed in February 2023. Net revenues from our High Tech and Manufacturing segment increased by 3.9% in 2023 compared to 2022, largely driven by revenues from recently signed large deals, continued ramp-ups of existing client relationships and client demand for our supply chain management and sales and commercial engagements, partially offset by a change in the deal scope for a large client in early 2023. Net revenues from "Business held for sale" in the table above represent revenues from a business we had previously classified as held for sale with effect from April 1, 2022 as part of a series of actions we took in 2022 to focus our business on emerging solutions where we see the greatest opportunities for growth and to deprioritize assets that no longer fit with our long-term strategy. The sale of the business we had previously classified as held for sale was completed in the first quarter of 2023.

2 Revenue growth on a constant currency basis is a non-GAAP measure and is calculated by restating current-period activity using the prior fiscal period’s foreign currency exchange rates adjusted for hedging gains/losses in such period.

53

For additional information, see Note 8—“Assets and liabilities held for sale” and Note 24—“Segment reporting” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

With effect from January 1, 2023, we have modified the items that are allocated to our reportable segments for the purpose of evaluating segment performance, and we now allocate by segment certain foreign exchange gains/(losses) (to the extent included in income from operations) and unallocated resource costs. Segment results after such allocation are reviewed by the Chief Operating Decision Maker ("CODM") to evaluate segment performance. Prior to January 1, 2023, the CODM evaluated the performance of reportable segment revenue after excluding these items, which were previously included under "Others." Accordingly, we have recast the segment revenue of our reportable segments for 2022 to present comparable segment information. For additional information, see Note 24—“Segment reporting” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Cost of revenue.  Cost of revenue was $2,906.2 million in 2023, up $71.4 million, or 2.5%, from $2,834.8 million in 2022. The increase in our cost of revenue in 2023 compared to 2022 was primarily due to (i) an increase in our operational headcount to support revenue growth, (ii) wage inflation, and (iii) higher travel related expenses. This increase was partially offset by (i) lower depreciation and amortization expense, (ii) lower contractor expenses, and (iii) an employee severance charge of $8.4 million as part of the restructuring we undertook in 2022, while no corresponding charge was recorded in 2023. For additional information, see Note 27—“Restructuring” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Gross margin. Our gross margin remained flat at 35.1% from 2022 to 2023, primarily due to higher wage inflation, an increase in our operational headcount and higher travel-related expenses in 2023 compared to 2022, which were largely offset by lower depreciation and amortization expense and lower third party consultant expenses in 2023 compared to 2022. We also incurred an employee severance charge of $8.4 million in 2022 as part of a restructuring, while no corresponding charge was recorded in 2023. For additional information, see Note 27—“Restructuring” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Selling, general and administrative (SG&A) expenses. SG&A expenses as a percentage of total net revenues were 20.4% in 2023 and 21.5% 2022. SG&A expenses were $913.1 million in 2023, down $25.3 million, or 2.7%, from $938.4 million in 2022. The decrease in SG&A expenses was primarily due to the impact of the divestiture of the business we had previously classified as held for sale, controlled spending on support functions and an employee severance charge as part of a restructuring in 2022, while no corresponding charge was recorded in 2023. For additional information, see Note 8—“Assets and liabilities held for sale” and Note 27—“Restructuring” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Amortization of acquired intangibles.   Amortization of acquired intangibles was $31.5 million in 2023, down $11.2 million, or 26.3%, from $42.7 million in 2022. This decrease was primarily due to the completion of useful lives of intangibles acquired in prior periods.

Other operating (income) expense, net. Other operating income (net of expense) was $4.7 million in 2023, compared to other operating expense (net of income) of $53.2 million in 2022. This change was primarily due to (i) a gain of $4.9 million on the termination of an abandoned lease in 2023 with no corresponding gain recorded in 2022, (ii) a $20.3 million write-down related to the abandonment of various office premises and a $1.4 million write-down related to tangible assets, both of which were taken as part of a restructuring we undertook in 2022, and (iii) an impairment charge of $32.6 million in 2022 related to assets previously classified as held for sale, while no corresponding charge was recorded in 2023. For additional information, see Note 8—“Assets and liabilities held for sale” and Note 27—“Restructuring” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Income from operations.    As a result of the foregoing factors, income from operations as a percentage of total net revenues increased from 11.5% in 2022 to 14.1% in 2023. Income from operations increased by $128.7 million from $502.2 million in 2022 to $630.9 million in 2023, primarily due to an increase in gross margin and lower selling, general and administrative expenses in 2023, an impairment charge on assets previously classified as held for sale and the restructuring undertaken in 2022, as discussed above.

Foreign exchange gains (losses), net.   We recorded a net foreign exchange gain of $4.3 million in 2023, compared to $15.4 million in 2022. The gains in both the years resulted primarily from the depreciation of the Indian rupee against the U.S. dollar.

Interest income (expense), net.   Our interest expense (net of interest income) was $47.9 million in 2023, down $4.3 million from $52.2 million in 2022, primarily due to a $12.5 million increase in interest income in 2023 compared to 2022, offset by a $8.2 million increase in interest expense in 2023 compared to 2022.

54

Our interest income increased from $5.9 million in 2022 to $18.4 million in 2023 due to higher interest rates on deposits in 2023 compared to 2022. The increase in interest expense was largely due to (i) a higher average benchmark-based rate on our term loan, partially offset by lower volume and higher gains on interest rate swaps taken to hedge interest rate exposure under our term loan in 2023 compared to 2022, which we discuss in the section titled “Liquidity and Capital Resources—Financial Condition” below, and (ii) higher interest expense related to receivables sold under our revolving accounts receivable-based facilities in 2023 compared to 2022. This increase was partially offset by lower interest expense in 2023 compared to 2022 due to the repayment in April 2022 of our $350 million aggregate principal amount of 3.70% senior notes issued in March 2017. The weighted average rate of interest on our debt, including the net impact of interest rate swaps, increased from 3.0% in 2022 to 3.7% in 2023.

Other income (expense), net. Our other income (net of expense) was $15.0 million in 2023, compared to other expense (net of income) of $0.1 million in 2022. This change was primarily due to a gain on changes in the fair value of assets in our deferred compensation plan in 2023 compared to a loss on changes in the fair value of assets in our deferred compensation plan in 2022.

Income tax expense/(benefit). Our income tax expense was $111.8 million in 2022, compared to an income tax benefit of $29.0 million in 2023. Our effective tax rate ("ETR") was (4.8%) in 2023 and 24.0% in 2022. The change in our ETR in 2023 was primarily due to the recording of a non-recurring tax benefit of $169.9 million on an intra-entity transfer of certain intellectual property rights from certain non-US subsidiaries to certain wholly-owned US subsidiaries in an effort to better align with our business operations.

Net income.  As a result of the foregoing factors, net income as a percentage of net revenues was 14.1% in 2023, up from 8.1% in 2022. Net income increased by $277.9.0 million from $353.4 million in 2022 to $631.3 million in 2023, primarily due to a decrease in income tax expense due to a non-recurring tax benefit in 2023 and a change in other operating income during 2023.

Adjusted income from operations. Adjusted income from operations ("AOI"), increased by $44.7 million from $718.2 million in 2022 to $762.9 million in 2023. Our AOI margin increased from 16.5% in 2022 to 17.0% in 2023, primarily driven by cost efficiencies and operating leverage in 2023 compared to 2022. In calculating our AOI margin for 2023 and 2022, we adjusted total net revenues to exclude net revenues of $0.5 million in 2023 and $12.0 million in 2022 from the business previously classified as held for sale.

AOI is a non-GAAP measure and is not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. We believe that presenting AOI together with our reported results can provide useful supplemental information to our investors and management regarding financial and business trends relating to our financial condition and results of operations. A limitation of using AOI versus net income calculated in accordance with GAAP is that AOI excludes certain recurring costs and certain other charges, namely stock-based compensation and amortization of acquired intangibles. We compensate for this limitation by providing specific information on the GAAP amounts excluded from AOI.

We calculate AOI as net income, excluding (i) stock-based compensation, (ii) amortization and impairment of acquired intangible assets, (iii) acquisition-related expenses excluded in the period in which an acquisition is consummated, (iv) foreign exchange (gains)/losses (other than those included in income from operations), (v) restructuring (income) expense, (vi) any loss or gain on businesses held for sale, including impairment charges, (vii) interest (income) expense, and (viii) income tax expense/(benefit), as we believe that our results after taking into account these adjustments more accurately reflect our ongoing operations. For additional information, see Note 24—“Segment reporting” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

During the year ended December 31, 2022, we carried out certain restructuring activities in line with our long-term strategy to implement a flexible, hybrid global delivery model that incorporates a mix of offshore, onshore, near-shore, and remote working. As a result, we determined that certain leases and employee roles were unnecessary. Accordingly, we took a restructuring charge of $38.8 million, which was excluded from AOI during the year ended December 31, 2022. No corresponding charge was recorded during the year ended December 31, 2023. For additional information, see Note 27—“Restructuring” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

During the year ended December 31, 2022, management approved a plan to divest a business within our Consumer and Healthcare segment. We classified the assets and liabilities of this business as held for sale and recorded net revenues of $12.0 million and $0.5 million in 2022 and 2023, respectively, and losses of $24.8 million and $1.2 million in 2022 and 2023, respectively. We also recorded an impairment charge of $32.6 million on assets previously classified as held for sale in 2022. The sale of this business was completed in the first quarter of 2023, resulting in a loss of $0.8 million in 2023. The related loss and impairment charge were excluded from AOI.

55

For additional information, see Note 8—“Assets and liabilities held for sale” and Note 24—“Segment reporting” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

The following table shows the reconciliation of AOI to the most directly comparable GAAP measure for the years ended December 31, 2022 and 2023: 

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2023"],["","(dollars in millions)"],["Net income","$","353.4","","","$","631.3"],["Foreign exchange (gains) losses, net","$","(15.4)","","","$","(4.3)"],["Interest (income) expense, net","$","52.2","","","$","47.9"],["Income Tax Expense/ (Benefit)","$","111.8","","","$","(29.0)"],["Stock-based compensation","$","77.4","","","$","88.6"],["Amortization and impairment of acquired intangible assets","$","42.6","","","$","31.3"],["Loss on the sale of business classified as held for sale","$","\u2014","","","$","0.8"],["Restructuring expense (income)","$","38.8","","","$","(4.9)"],["Loss relating to business held for sale","$","24.8","","","$","1.2"],["Impairment charge on assets classified as held for sale","$","32.6","","","$","\u2014"],["Adjusted income from operations","$","718.2","","","$","762.9"]]
[[/GREPCENT_TABLE]]

The following table sets forth our AOI by reportable business segment for the years ended December 31, 2022 and 2023: 

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percentage change increase/ (decrease) 2023 vs. 2022"],["","2022","","2023"],["","(dollars in millions)"],["Financial Services","$","172.3","","","$","193.4","","","12.2","%"],["Consumer and Healthcare","$","233.0","","","$","242.5","","","4.0","%"],["High Tech and Manufacturing","$","303.6","","","$","297.9","","","(1.9)","%"],["Total reportable segment","$","708.9","","","$","733.7","","","3.5","%"],["Others","$","(15.5)","","","$","28.0","","","281.0","%"],["Total","$","693.4","","","$","761.7","","","9.9","%"],["Loss relating to business held for sale","$","24.8","","","$","1.2","","","NM*"],["Adjusted income from operations","$","718.2","","","$","762.9","","","6.2","%"]]
[[/GREPCENT_TABLE]]

*Not Meaningful

AOI of our Financial Services segment increased to $193.4 million in 2023 from $172.3 million in 2022, primarily due to higher revenues, improved efficiency and the net favorable impact of allocating foreign exchange gains/(losses) and resource costs in 2023 compared to 2022, partially offset by the impact of wage inflation. AOI of our Consumer and Healthcare segment increased to $242.5 million in 2023 from $233.0 million in 2022, primarily due to improved efficiencies, the net favorable impact of allocating foreign exchange gains/(losses) and resource costs, and the absence of a loss in 2023 from the business we had previously classified as held for sale, partially offset by the impact of wage inflation in 2023 compared to 2022. AOI of our High Tech and Manufacturing segment decreased to $297.9 million in 2023 from $303.6 million in 2022, primarily due to wage inflation and higher investments made in certain new large client deals in 2023 compared to 2022, partially offset by higher revenue and the net favorable impact of allocating foreign exchange gains/(losses) and resource costs in 2023 compared to 2022. With effect from January 1, 2023, we modified the items that are allocated to our reportable segments for the purpose of evaluating segment performance, and we now allocate by segment certain foreign exchange gains/(losses) (to the extent included in income from operations) and unallocated resource costs. Segment results after such allocation are reviewed by the CODM to evaluate segment performance. Prior to January 1, 2023, the CODM evaluated the performance of reportable segment adjusted income from operations after excluding these items, which were previously included under "Others." Accordingly, we have recast the segment adjusted income from operations of our reportable segments for 2022 to present comparable segment information. AOI for “Others” in the table above primarily represents the adjustment of allowances for credit losses and over- or under-absorption of overheads, none of which is allocated to any individual segment for management's internal reporting purposes.

56

AOI for "Business held for sale" in the table above primarily represents the loss attributable to a business previously classified as held for sale. See Note 8—"Assets and liabilities held for sale" and Note 24—“Segment reporting” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Seasonality

Our financial results may vary from period to period. Our revenues are typically higher in the third and fourth quarters than in other quarters, as a result of several factors. We generally find that demand for short-term Data-Tech-AI services, including analytics and IT projects, increases in the fourth quarter as our clients utilize the balance of their budgets for the year. In addition, contracts for long-term Digital Operations engagements are often signed in the first and second quarters as clients begin new budget cycles. Volumes under such contracts then increase in the latter part of the year as engagements ramp up. Additionally, demand for certain services, such as collections and transaction processing, is often greater in the second half of the year as our clients’ volumes in such areas increase.

Statement of financial position

Key changes in our financial position during 2023

Following are the significant changes in our financial position as of December 31, 2023 compared to December 31, 2022:

•Short-term borrowings decreased by $141.0 million

The decrease in our short-term debt is primarily due to payments made on our term loan in 2023 and lower utilization of the funded drawdown of the credit facility under our amended and restated credit agreement entered into in December 2022, which consists of a $530.0 million term loan and a $650.0 million revolving credit facility. For additional information, see Note 15—“Short-term borrowings” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules” for additional information.

•Prepaid expenses, other current assets, contract cost assets and other assets increased by $35.3 million

The increase in prepaid expenses, other current assets, contract cost assets and other assets is primarily due to higher tax payments (net of refunds), higher contract assets (net of amortization) and higher deferred billings. The increase was partially offset by a decrease in prepaid expenses, contract cost assets and a reduction in finance lease right-of-use assets. For additional information, see Note 25—“Net revenues—Contract balances” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules” for additional information.

•Accounts receivable, net increased by $122.0 million

The increase in our accounts receivable is primarily due to higher days sales outstanding.

•Goodwill and intangible assets decreased by $37.1 million

Goodwill decreased by $0.4 million, primarily due to the effect of exchange rate fluctuations. Our intangible assets decreased by $36.7 million due to the amortization of intangible assets. For additional information, see Note 10—“Goodwill and intangible assets” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

•Operating lease right-of-use assets decreased by $12.2 million

The decrease in operating lease right-of-use assets is due to amortization, partially offset by assets recognized due to leases entered into in 2023. For additional information, see Note 12—“Leases” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

•Operating lease liability decreased by $26.1 million

The decrease in operating lease liability is due to lease payments, partially offset by additions and modifications in 2023.

•Accounts payable, accrued expenses, other current liabilities and other liabilities decreased by $20.6 million

The decrease in accounts payable, accrued expenses, other current liabilities and other liabilities is primarily due to a reduction in accounts payable, contract liabilities, finance lease liabilities, statutory liabilities and lower mark-to-market losses on derivative financial instruments in 2023 compared to 2022. This decrease was partially offset by an increase in expense related accruals and employee related accruals in 2023.

57

•Long-term debt decreased by $18.3 million

The decrease in long-term debt is primarily due to installment payments made on our term loan in 2023. For additional information, see Note 14—“Long-term debt” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

•Net deferred tax assets increased by $155.9 million

Our net deferred tax assets increased by $155.9 million, primarily due to the recording of a non-recurring tax benefit of $169.9 million on an intra-entity transfer of certain intellectual property rights from certain non-US subsidiaries to certain wholly-owned US subsidiaries in an effort to better align with our business operations. For additional information, see Note 23—“Income taxes” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Liquidity and Capital Resources

Overview

Information about our financial position as of December 31, 2022 and 2023 is presented below:

[[GREPCENT_TABLE]]
[["","As of December 31,","","As of December 31,","","Percentage Change increase/(decrease)"],["","2022","","2023","","2023 vs. 2022"],["","(dollars in millions)"],["Cash and cash equivalents","$","646.8","","","$","583.7","","","(9.8)","%"],["Short-term borrowings","151.0","","","10.0","","","(93.4)","%"],["Long-term debt due within one year","26.1","","","432.2","","","1,553.8","%"],["Long-term debt other than the current portion","1,249.2","","","824.7","","","(34.0)","%"],["Genpact Limited total shareholders\u2019 equity","$","1,826.2","","","$","2,248.4","","","23.1","%"]]
[[/GREPCENT_TABLE]]

Financial Condition

We have historically financed our operations and our expansion, including acquisitions, with cash from operations and borrowing facilities.

As of December 31, 2023, $581.4 million of our $583.7 million in cash and cash equivalents was held by our foreign (non-Bermuda) subsidiaries. $208.0 million of this cash is held by foreign subsidiaries for which we expect to incur and have accrued a deferred tax liability on the repatriation of $92.3 million of retained earnings. $277.7 million of the cash and cash equivalents is held by foreign subsidiaries in jurisdictions where no tax is expected to be imposed upon repatriation. The remaining $95.7 million in cash and cash equivalents held by foreign subsidiaries is being indefinitely reinvested.

On February 10, 2022, our board of directors approved a 16% increase in our quarterly cash dividend from $0.1075 per common share to $0.125 per common share, representing an annual dividend of $0.50 per common share for 2022, up from $0.43 per common share in 2021. On March 23, 2022, June 24, 2022, September 23, 2022 and December 23, 2022, we paid dividends of $0.125 per share, amounting to $23.1 million, $22.9 million, $22.9 million and $22.9 million in the aggregate, to shareholders of record as of March 10, 2022, June 10, 2022, September 9, 2022 and December 9, 2022, respectively.

On February 9, 2023, our board of directors approved a 10% increase in our quarterly cash dividend from $0.125 per common share to $0.1375 per common share, representing an annual dividend of $0.55 per common share for 2023, up from $0.50 per common share in 2022. On March 24, 2023, June 26, 2023, September 26, 2023 and December 22, 2023, we paid dividends of $0.1375 per share, amounting to $25.3 million, $25.0 million, $24.9 million and $24.8 million in the aggregate, to shareholders of record as of March 10, 2023, June 9, 2023, September 8, 2023 and December 8, 2023, respectively.

On February 8, 2024, our board of directors approved an 11% increase in our quarterly cash dividend from $0.1375 per common share to $0.1525 per common share, representing a planned annual dividend of $0.61 per common share for 2024, up from $0.55 per common share in 2023. Any future dividends will be at the discretion of our board of directors and subject to Bermuda and other applicable laws.

58

As of December 31, 2023, the total authorization under our existing share repurchase program was $2,250.0 million, of which $399.5 million remained available as of December 31, 2023. Since our share repurchase program was initially authorized in 2015, we have repurchased 58,178,075 of our common shares at a weighted average price of $31.81 per share, for an aggregate purchase price of $1,850.5 million. This amount includes shares repurchased under our 2017 accelerated share repurchase program.

During the years ended December 31, 2022 and 2023, we repurchased 4,777,205 and 6,013,793 of our common shares, respectively, on the open market at a weighted average price of $44.79 and $37.48 per share, respectively, for an aggregate purchase price of $214.0 million and $225.4 million, respectively. All repurchased shares have been retired.

For additional information, see Note 19—“Capital stock” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

We expect that for the next twelve months and for the foreseeable future our cash from operations, cash reserves and debt capacity will be sufficient to finance our operations, our growth and expansion plans, dividend payments and additional share repurchases we may make under our share repurchase program. In addition, we may raise additional funds through public or private debt or equity financings. Our working capital needs are primarily to finance our payroll and other administrative and information technology expenses in advance of the receipt of accounts receivable. Our primary capital requirements include opening new delivery centers, expanding existing operations to support our growth, financing acquisitions and enhancing capabilities, including building certain digital solutions.

Cash flows from operating, investing and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percentage change increase/ (decrease) 2023 vs. 2022"],["","2022","","2023"],["","(dollars in millions)"],["Net cash provided by (used for)"],["Operating activities","$","443.7","","","$","490.8","","","10.6","%"],["Investing activities","(36.6)","","","(78.9)","","","115.7","%"],["Financing activities","(571.4)","","","(483.0)","","","(15.5)","%"],["Net decrease in cash and cash equivalents","$","(164.3)","","","$","(71.1)","","","(56.7)","%"]]
[[/GREPCENT_TABLE]]

Cash flows from operating activities.    Net cash provided by operating activities was $490.8 million in 2023, up from $443.7 million in 2022. This increase was primarily due to a (i) $277.9 million increase in net income in 2023 compared to 2022, (ii) a $195.5 million decrease in non-cash expenses in 2023 compared to 2022, primarily due to a deferred income tax asset recorded in connection with a non-recurring deferred tax benefit of $169.9 million in 2023 on an intra-entity transfer of certain intellectual property rights from certain non-US subsidiaries to certain wholly-owned US subsidiaries in an effort to better align with our business operations, lower write-downs of operating lease right-of-use assets, intangible assets and property, plant and equipment, including those previously classified as held for sale, lower depreciation and amortization expense, partially offset by an increase in stock-based compensation expense in 2023 compared to 2022, and (iii) a $35.2 million increase in net operating assets driven by higher investments in accounts receivable, higher tax payments (net of refunds) and higher payments for statutory liabilities, partially offset by higher Goods and Service Tax ("GST") refunds in India and lower vendor related payments.

Cash flows used for investing activities.   Our net cash used for investing activities was $78.9 million in 2023, compared to $36.6 million in 2022. This increase was primarily due to cash used for the divestiture of a business of $19.5 million in 2023 compared to proceeds of $17.8 million from the sale of a portion of the business previously classified as held for sale in 2022. Cash used for payments (net of sales proceeds) for the purchase of property, plant and equipment and acquired/internally generated intangible assets increased by $4.4 million in 2023 compared to 2022. For additional information, see Note 8—“Assets and liabilities held for sale” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Cash flows used for financing activities.  Our net cash used for financing activities was $483.0 million in 2023, compared to $571.4 million in 2022. This decrease was primarily due to (i) lower repayments of borrowings (net of proceeds), amounting to $160.9 million in 2023 compared to $230.0 million in 2022, (ii) higher proceeds from the issuance of common shares under our stock-based compensation plans, amounting to $39.5 million in 2023 compared to $27.8 million in 2022, and (iii) lower payments for the net settlement of stock-based awards, amounting to $21.5 million in 2023 compared to $44.9 million in 2022.

59

This decrease was partially offset by (i) higher payments for stock purchased and retired (including payments of expenses and taxes related to stock repurchase activity), amounting to $225.5 million in 2023 compared to $214.1 million in 2022, and (ii) higher dividend payments, amounting to $100.0 million in 2023 compared to $91.8 million in 2022.

Financing Arrangements (Credit facility)

In December 2022, we entered into an amended and restated credit agreement (the "2022 Credit Agreement") with Genpact USA, Inc. (“Genpact USA”), Genpact Global Holdings (Bermuda) Limited (“GGH”) and Genpact Luxembourg S.à r.l. (“Genpact Luxembourg”, and together with Genpact USA and GGH, the “Borrowers”), as borrowers, Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, swingline lender and issuing bank, and the lenders and other parties thereto, which consists of a $530.0 million term loan and a $650.0 million revolving credit facility. An additional third-party fee paid in connection with the 2022 Credit Agreement is being amortized over the term of the term loan and revolving credit facility, which expire on December 13, 2027. In connection with our entry into the 2022 Credit Agreement, we terminated our existing credit facility under our amended and restated credit agreement entered into August 2018 (the “2018 Credit Agreement”) with the Borrowers, as borrowers, Wells Fargo, as administrative agent, and the lenders and other financial institutions party thereto, which was comprised of a $680.0 million term loan and a $500.0 million revolving credit facility. The 2022 Credit Agreement replaced the 2018 Credit Agreement.

The 2022 Credit Agreement is guaranteed by us and certain of our subsidiaries. The obligations under the 2022 Credit Agreement are unsecured.

The outstanding balance of the term loan under the 2018 Credit Agreement as of the date of 2022 Credit Agreement was $527.0 million. The term loan and the revolving credit facility under the 2022 Credit Agreement have a term of five years and expire on December 13, 2027. The 2022 Credit Agreement did not result in a substantial modification of $290.9 million of the outstanding term loan under the 2018 Credit Agreement. As a result of the 2022 Credit Agreement, we extinguished $236.1 million of funding arrangements for the outstanding term loan under the 2018 Credit Agreement and obtained funding from new lenders of $239.1 million, resulting in outstanding principal of $530.0 million of the term loan under the 2022 Credit Agreement. In connection with the 2022 Credit Agreement, we expensed $0.1 million, representing partial acceleration of the amortization of the existing unamortized debt issuance costs and an additional fee paid to our lenders related to the term loan under the 2022 Credit Agreement. The overall borrowing capacity under the revolving credit facility under the 2022 Credit Agreement is $650.0 million, an increase from $500.0 million under the 2018 Credit Agreement. In connection with the 2022 Credit Agreement, we expensed $0.1 million relating to existing unamortized debt issuance cost. The remaining unamortized costs and an additional third-party fee paid in connection with the 2022 Credit Agreement will be amortized over the term of the facility, which will expire on December 13, 2027.

Borrowings under the 2022 Credit Agreement bear interest at a rate equal to, at our election, either Adjusted Term SOFR (which is the rate per annum equal to (a) Term SOFR (the forward-looking secured overnight financing rate) plus (b) a Term SOFR Adjustment of 0.10% per annum, but in no case lower than 0.00%) plus an applicable margin equal to 1.375% per annum or a base rate plus an applicable margin equal to 0.375% per annum, in each case subject to adjustment based on the Borrowers' debt ratings provided by Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. from time to time (the "Debt Ratings"). The revolving credit commitments under the 2022 Credit Agreement are subject to a commitment fee equal to 0.20% per annum, subject to adjustment based on the Debt Ratings. The commitment fee accrues on the actual daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations.

The 2022 Credit Agreement restricts certain payments, including dividend payments, if there is an event of default under the 2022 Credit Agreement or if we are not, or after making the payment would not be, in compliance with certain financial covenants contained in the 2022 Credit Agreement. These covenants require us to maintain a net debt to EBITDA leverage ratio of below 3x and an interest coverage ratio of more than 3x. During the year ended December 31, 2023, we were in compliance with the terms of the 2022 Credit Agreement, including all of the financial covenants therein. Our 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 2022 Credit Agreement.

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As of December 31, 2022 and 2023, our outstanding term loan, net of debt amortization expense of $1.6 million and $1.3 million, respectively, was $528.4 million and $508.9 million, respectively.

We also have fund-based and non-fund based credit facilities with banks, which are available for operational requirements in the form of overdrafts, letters of credit, guarantees and short-term loans. As of December 31, 2022 and 2023, the limit available under such facilities was $22.9 million and $23.3 million, respectively, of which $5.4 million and $9.3 million, respectively, was utilized, constituting non-funded drawdown. As of December 31, 2022 and 2023, a total of $153.7 million and $11.6 million, respectively, of our revolving credit facility was utilized, of which $151.0 million and $10.0 million, respectively, constituted funded drawdown, and $2.7 million and $1.6 million, respectively, constituted non-funded drawdown.

We manage a portion of our interest rate risk related to floating rate indebtedness by entering into interest rate swaps under which we receive floating rate payments based on the greater of Term SOFR and the floor rate under our term loan and make payments based on a fixed rate. As of December 31, 2023, we were party to interest rate swaps covering a total notional amount of $148.1 million. Under these swap agreements, the rate that we pay to banks in exchange for Term SOFR ranges between 0.15% and 4.72%.

Genpact Luxembourg issued $400 million aggregate principal amount of 3.375% senior notes in November 2019 (the “2019 Senior Notes”). The 2019 Senior Notes are fully guaranteed by the Company and Genpact USA, Inc. The total debt issuance cost of $2.9 million incurred in connection with the 2019 Senior Notes offering is being amortized over the life of the notes as additional interest expense. As of December 31, 2022 and 2023, the amount outstanding under the 2019 Senior Notes, net of debt amortization expense of $1.1 million and $0.5 million, was $398.9 million and $399.5 million, respectively, which is payable on December 1, 2024.

Genpact Luxembourg and Genpact USA co-issued $350 million aggregate principal amount of 1.750% senior notes in March 2021 (the "2021 Senior Notes"). The 2021 Senior Notes are fully guaranteed by the Company. The total debt issuance cost of $3.0 million incurred in connection with the 2021 Senior Notes offering is being amortized over the life of the notes as additional interest expense. As of December 31, 2022 and 2023, the amount outstanding under the 2021 Senior Notes, net of debt amortization expense of $2.0 million and $1.4 million, respectively, was $348.0 million and $348.6 million, respectively, which is payable on April 10, 2026.

We pay interest on (i) the 2019 Senior Notes semi-annually in arrears on June 1 and December 1 of each year, and (ii) the 2021 Senior Notes semi-annually in arrears on April 10 and October 10 of each year, ending on the maturity dates of December 1, 2024 and April 10, 2026, respectively.

For additional information, see Notes 14—“Long-term debt” and 15—“Short-term borrowings” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

We use a revolving accounts receivable-based facility for managing our cash flows. As part of this arrangement, accounts receivable sold under this facility are de-recognized upon sale along with the related allowances, if any. As of December 31, 2022 and 2023, we have a revolving accounts receivable-based facility of $100.0 million and $75.0 million, respectively, permitting us to sell accounts receivable to banks on a non-recourse basis in the ordinary course of business. The aggregate maximum capacity utilized at any time during the period ended December 31, 2022 and 2023 was $33.0 million and $51.4 million, respectively. The principal amount outstanding against this facility as of December 31, 2022 and 2023 was $33.0 million and $51.3 million, respectively. The cost of factoring accounts receivable sold under this facility during the years ended December 31, 2022 and 2023 was $0.6 million and $2.0 million, respectively.

We also have arrangements with financial institutions that manage the accounts payable program for certain of our large clients. We sell certain accounts receivable pertaining to such clients to these financial institutions on a non-recourse basis. There is no cap on the value of accounts receivable that can be sold under these arrangements. We used these arrangements to sell accounts receivable amounting to $299.9 million and $324.4 million during the years ended December 31, 2022 and December 31, 2023, respectively, which also represents the maximum utilization under these arrangements in each such year. The cost of factoring such accounts receivable during the years ended December 31, 2022 and 2023 was $4.2 million and $7.9 million, respectively.

For additional information, see Note 4—“Accounts receivable, net of allowance for credit losses” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

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Goodwill Impairment Testing

Goodwill of a reporting unit is tested for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In accordance with ASC 350, Intangibles-Goodwill and Other, we have an option to perform an assessment of qualitative factors, including but not limited to macro-economic conditions, industry and market considerations, overall financial performance, business plans and expected future cash flows, to determine whether events or circumstances exist which lead 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 our assessment of such qualitative factors, in accordance with ASC 350, we concluded that as of December 31, 2022 and 2023, the fair values of all of our reporting units are likely to be higher than their respective carrying values.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist of foreign exchange contracts. For additional information, see Item 1A—“Risk Factors—Currency exchange rate fluctuations in various currencies in which we do business, especially the Indian rupee, the euro and the U.S. dollar, could have a material adverse effect on our business, results of operations and financial condition" and Note 6—“Derivative financial instruments” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

Other Liquidity and Capital Resources Information

As of December 31, 2022 and 2023, we have purchase commitments, net of capital advances paid in respect of such purchases, of $18.0 million and $16.0 million, respectively, to be paid in respect of such purchases over the next year. For additional information, see Note 26—“Commitments and contingencies” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

As of December 31, 2022 and 2023, we also have operating and finance lease commitments of $330.1 million and $287.5 million, respectively, to be paid over the remaining lease terms. For additional information, see Note 12—“Leases” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”

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Supplemental Guarantor Financial Information

As discussed in Note 14, “Long-term debt,” to our consolidated financial statements under Part IV, Item 15- "Exhibits and Financial Statement Schedules," Genpact Luxembourg issued the 2019 Senior Notes, and Genpact Luxembourg and Genpact USA co-issued the 2021 Senior Notes. As of December 31, 2023, the outstanding balance for the 2019 Senior Notes and the 2021 Senior Notes (collectively, the "Senior Notes") was $399.5 million and $348.6 million, respectively. Each series of Senior Notes is fully and unconditionally guaranteed by the Company. The 2019 Senior Notes are also fully and unconditionally guaranteed by Genpact USA. Our other subsidiaries do not guarantee the Senior Notes (such subsidiaries are referred to as the “non-Guarantors”).

The Company (with respect to both series of Senior Notes) and Genpact USA (with respect to the 2019 Senior Notes) have fully and unconditionally guaranteed (i) that the payment of the principal, premium, if any, and interest on the Senior Notes shall be promptly paid in full when due, whether at stated maturity of the Senior Notes, by acceleration, redemption or otherwise, and that the payment of interest on the overdue principal and interest on the Senior Notes, if any, if lawful, and all other obligations of the applicable issuer or issuers of the Senior Notes, respectively, to the holders of the Senior Notes or the trustee under the Senior Notes shall be promptly paid in full or performed, and (ii) in case of any extension of time of payment or renewal of any Senior Notes or any of such other obligations, that the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. With respect to the 2019 Senior Notes, failing payment by Genpact Luxembourg when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Company and Genpact USA shall be obligated to pay the same immediately. With respect to the 2021 Senior Notes, failing payment by Genpact Luxembourg or Genpact USA when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Company shall be obligated to pay the same immediately. The Company and Genpact USA have agreed that the guarantees described above are guarantees of payment of the Senior Notes and not guarantees of collection.

The following tables present summarized financial information for Genpact Luxembourg, Genpact USA and the Company (collectively, the “Debt Issuers and Guarantors”) on a combined basis after elimination of (i) intercompany transactions and balances among the Debt Issuers and Guarantors and (ii) equity in earnings from and investments in the non-Guarantors.

[[GREPCENT_TABLE]]
[["Summarized Statements of Income","","Year endedDecember 31, 2022","","Year endedDecember 31, 2023"],["","","(dollars in millions)"],["Net revenues","","$","141.3","","","$","298.1"],["Gross profit","","141.3","","298.1"],["Net income","","72.3","","382.4"]]
[[/GREPCENT_TABLE]]

Below is a summary of transactions with non-Guarantors included in the summarized statement of income above:

[[GREPCENT_TABLE]]
[["","","Year endedDecember 31, 2022","","Year endedDecember 31, 2023"],["","","(dollars in millions)"],["Royalty income","","$","\u2014","","","$","0.7"],["Revenue from services","","141.3","","297.4"],["Interest income /(expense), net","","36.9","","52.1"],["Other income /(expense), net","","25.2","","(4.5)"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Summarized Balance Sheets","","As ofDecember 31, 2022","","As ofDecember 31, 2023"],["","","(dollars in millions)"],["Assets"],["Current assets","","$","2,181.4","","","$","2,193.4"],["Non-current assets","","178.3","","1,045.4"],["Liabilities"],["Current liabilities","","$","3,639.6","","","$","5,121.3"],["Non-current liabilities","","1,749.2","","904.7"]]
[[/GREPCENT_TABLE]]

Below is a summary of the balances with non-Guarantors included in the summarized balance sheets above:

[[GREPCENT_TABLE]]
[["","","As ofDecember 31, 2022","","As ofDecember 31, 2023"],["","","(dollars in millions)"],["Assets"],["Current assets"],["Accounts receivable, net","","$","62.1","","","$","114.4"],["Loans receivable","","1,420.3","","1,433.1"],["Others","","453.1","","594.8"],["Investment in debentures/bonds","","193.3","","\u2014"],["Non-current assets"],["Others","","$","79.5","","","$","69.5"],["Liabilities"],["Current liabilities"],["Loans payable","","$","2,805.8","","","$","3,559.7"],["Others","","620.2","","1,117.8"],["Non-Current liabilities"],["Loans payable","","$","500.0","","","$","75.0"]]
[[/GREPCENT_TABLE]]

The Senior Notes and the related guarantees rank pari passu in right of payment with all senior and unsecured debt of the Debt Issuers and the Guarantors and rank senior in right of payment to all of the Debt Issuer’s and the Guarantor’s future subordinated debt. The Senior Notes are effectively subordinated to all of the Debt Issuer’s and the Guarantor’s existing and future secured debt to the extent of the value of the assets securing such debt. The Senior Notes are structurally subordinated to all of the existing and future debt and other liabilities of the Guarantor’s subsidiaries (other than the Issuer), including the liabilities of certain subsidiaries pursuant to our senior credit facility. The non-Guarantors are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due under the Senior Notes or to make the funds available to pay those amounts, whether by dividend, distribution, loan or other payment. If the Debt Issuers or the Guarantors have any right to receive any assets of any of the non-Guarantors upon the insolvency, liquidation, reorganization, dissolution or other winding-up of any non-Guarantor, all of that non-Guarantor’s creditors (including trade creditors) would be entitled to payment in full out of that non-Guarantor’s assets before the holders of the Senior Notes would be entitled to any payment. Claims of holders of the Senior Notes are structurally subordinated to the liabilities of certain non-Guarantors pursuant to their liabilities under our senior credit facility.

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Recent Accounting Pronouncements

Recently adopted accounting pronouncements

For a description of recently adopted accounting pronouncements, see Note 2—“Summary of significant accounting policies—Recently issued accounting pronouncements” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules” and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

For a description of recently issued accounting pronouncements, see Note 2—“Summary of significant accounting policies—Recently issued accounting pronouncements” to our consolidated financial statements under Part IV, Item 15—“Exhibits and Financial Statement Schedules.”