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| SYNT > SEC Filings for SYNT > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
SYNTEL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Net Revenues. The Company's revenues consist of fees derived from its Applications Outsourcing, Knowledge Process Outsourcing ("KPO"), e-Business and TeamSourcing business segments. Net revenues in the three months ended March 31, 2009 decreased to $96.4 million from $98.5 million in the three months ended March 31, 2008, representing a 2.1% decrease. The decrease in revenue was primarily due to reduction in discretionery spending by the customers coupled with rupee depreciation and pricing pressure. However, the Company's verticalization sales strategy focusing on Banking and Financial Services; Healthcare; Insurance; Telecom; Automotive; Retail; Logistics and Travel has enabled better focus and relationships with key clients. Further, continued focus on execution and investments in new offerings such as our Testing and Center of Excellence have a potential to contribute growth in the business. The focus is to continue investments in more new offerings. Worldwide billable headcount as of March 31, 2009 increased by 7.8% to 8,529 employees as compared to 7,911 employees as of March 31, 2008. However, there is a decrease in revenues despite growth in the billable headcount. This is primarily because a significant growth in the billable headcount was in India, where our revenues per offshore billable resource are generally lower as compared to an on-site based resource in addition to curtailed customer spending programs, rupee depreciation and pricing pressure. As of March 31, 2009, the Company had approximately 82.0% of its billable workforce in India as compared to 80.0% as of March 31, 2008. The Company's top five clients accounted for 59.2% of the total revenues in the three months ended March 31, 2009, up from 56.2% of its total revenues in the three months ended March 31, 2008. Moreover, the Company's top 10 clients accounted for 74.1% of the total revenues in the three months ended March 31, 2009 as compared to 72.8% in the three months ended March 31, 2008.
Applications Outsourcing Revenues. Applications Outsourcing revenues increased to $67.5 million for the three months ended March 31, 2009 or 70.0% of total revenues, from $66.0 million, or 67.0% of total revenues for the three months ended March 31, 2008. The $1.5 million increase was attributable primarily to revenues from new engagements contributing $48.3 million, largely offset by $46.8 million in lost revenues as a result of project completion and net reduction in revenues from existing projects.
Applications Outsourcing Cost of Revenues. Applications Outsourcing cost of revenues consists of costs directly associated with billable consultants in the US and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Applications Outsourcing cost of revenues decreased to 59.3% of total Applications Outsourcing revenues for the three months ended March 31, 2009, from 66.2% for the three months ended March 31, 2008. The 6.9% decrease in cost of revenues, as a percent of revenues for the three months ended March 31, 2009 was attributable primarily to better utilization of resources, rupee depreciation and increase in revenue.
KPO Revenues. KPO revenues decreased to $18.7 million for the three months ended March 31, 2009, or 19.4% of total revenues, from $20.0 million, or 20.3% of total revenues for the three months ended March 31, 2008. The $1.3 million decrease was attributable primarily to $4.0 million in lost revenues as a result of project completion and net reduction in revenues from existing projects, largely offset by revenues from new engagements contributing $2.7 million
KPO Cost of Revenues. KPO cost of revenues consists of costs directly associated with billable consultants, including salaries, payroll taxes, benefits, finder's fees, trainee compensation, and travel. Cost of revenues for the three months ended March 31, 2009 decreased to 37.3% of KPO revenues from 39.0% for the three months ended March 31, 2008. The 1.7% decrease in cost of revenues, as a percent of total KPO revenues, was attributable primarily to better utilization of resources, rupee depreciation, lower travel and other costs.
e-Business Revenues. E-Business revenues decreased to $8.4 million for the three months ended March 31, 2009, or 8.7% of total revenues, from $10.1 million, or 10.3% of total revenues for the three months ended March 31, 2008. The $1.7 million decrease was
attributable primarily to $7.7 million in lost revenues as a result of project completion and net reduction in revenues from existing projects, largely offset by revenues from new engagements contributing $6.0 million.
e-Business Cost of Revenues. e-Business cost of revenues consists of costs directly associated with billable consultants in the US and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation, and travel. e-Business cost of revenues decreased to 42.1% of total e-Business revenues for the three months ended March 31, 2009, from 55.5% for the three months ended March 31, 2008. The 13.4% decrease in cost of revenues as a percent of e-Business revenues for the three months ended March 31, 2009 is principally attributable to rupee depreciation and better utilization of resources.
TeamSourcing Revenues. TeamSourcing revenues decreased to $1.8 million for the three months ended March 31, 2009, or 1.8% of total revenues, from $2.4 million, or 2.4% of total revenues for the three months ended March 31, 2008. The $0.6 million decrease was attributable primarily to $2.0 million in lost revenues as a result of project completion, including conversion of staffing engagements into Syntel managed engagements, and net reduction in revenues from existing projects, partially offset by revenues from new engagements and revenue from the SkillBay web portal, which helps clients of Syntel with their supplemental staffing requirements, contributing $1.4 million.
TeamSourcing Cost of Revenues. TeamSourcing cost of revenues consists of costs directly associated with billable consultants in the US, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation, and travel. TeamSourcing cost of revenues decreased to 54.0% of TeamSourcing revenues for the three months ended March 31, 2009, from 71.5% for the three months ended March 31, 2008. The 17.5 percentage point decrease in TeamSourcing cost of revenues, as a percent of TeamSourcing revenues, is attributable primarily to better utilization of resources.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses consist primarily of salaries, payroll taxes and benefits for sales, solutions, finance, administrative, and corporate staff; travel; telecommunications; business promotions; and marketing and various facility costs for the Company's global development centers and other offices. Selling, general, and administrative expenses for the three months ended March 31, 2009 were $18.7 million or 19.4% of total revenues, compared to $20.5 million or 20.8% of total revenues for the three months ended March 31, 2008.
The 1.4 percentage point decrease is primarily due to foreign exchange gain of $1.2 million that has resulted in an approximately 1.3 percentage point decrease and rupee depreciation for the three months ended March 31, 2009 as against the three months ended March 31, 2008, partly offset by decrease in revenue that resulted in 0.4 percentage point increase. Selling, general and administrative expenses for the three months ended March 31, 2009 was impacted by decrease in compensation and benefits of $0.9 million, decrease in facility related costs $0.9 million, decrease in other expenses $0.2 million partially offset by increase in provision for doubtful debts of $1.4 million, which has resulted in an approximately 0.5 percentage point decrease.
Other Income. Other income (expense) includes interest and dividend income, gains and losses from sale of securities, other investments and treasury operations.
Other income for the three months ended March 31, 2009 was $0.98 million or 1.0% of total revenues, compared to $1.01 million or 1.0% of total revenues for the three months ended March 31, 2008. The decrease in other income of $0.03 million was primarily due to loss on forward contract of $0.17 million partly offset by an increase in gain on sale of mutual fund of $0.12 million and an increase in interest income of $0.02 million.
Income Taxes
The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company has provided for tax contingencies based on FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") and on the Company's assessment of future regulatory reviews of filed tax
returns. Such reserves, which are recorded in income taxes payable, are based on FIN 48 interpretation and on management's estimates and may also be revised based on additional information. The provision no longer required for any particular tax year is credited to the current period's income tax expenses.
During the three months ended March 31, 2009 and 2008, the effective income tax rates were (0.8%) and (1.3%), respectively. The tax rate for the three months ended March 31, 2009 is impacted by a favorable adjustment of $4.3 million, as a result of the Company's review of its global FIN 48 liabilities and other tax positions, which is based on the expiration of the statute of limitations related to certain global tax contingencies and completion of certain tax audits. The tax rate for the three months ended March 31, 2008 is favorably impacted by a reversal of $2.99 million of taxes provided earlier under FIN 48 and $0.32 million towards credit of Michigan Single Business tax for the years 2001 to 2003.
FINANCIAL POSITION
Cash and Cash Equivalents: Cash and Cash equivalents increased from $41.1 million at March 31, 2008 to $57.8 million at March 31, 2009 primarily due to increased collections during the three months ended March 31, 2009.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through operations. The Mumbai, Chennai, Pune (India) and other expansion programs are financed from internally generated funds. The Company's cash and cash equivalents consist primarily of certificates of deposit, corporate bonds and treasury notes. These amounts are held by various banking institutions including US-based and India-based banks.
Net cash generated by operating activities was $14.4 million for the three months ended March 31, 2009. This includes a reduction of $11.8 million related to a decrease in accrued payroll and other liabilities. The net cash generated by operating activities was $3.6 million for the three months ended March 31, 2008. The number of days sales outstanding in net accounts receivable was approximately 51 days and 66 days as of March 31, 2009 and 2008, respectively. The decrease in the number of day's sales outstanding in net accounts receivable was due to higher collections.
Net cash used in investing activities was $19.2 million for the three months ended March 31, 2009, consisting principally of $3.5 million of capital expenditures primarily for construction/acquisition of Global Development Center at Pune, Knowledge Process Outsourcing facility at Mumbai and an additional facility in Chennai, as well as for acquisition of computers and software and communications equipment and the purchase of short term investments of $64.2 million, largely offset by $48.5 million from the sale of short term investments. Net cash used in investing activities was $21.6 million for the three months ended March 31, 2008, consisting principally $39.5 million for the purchase of short term investments and $8.0 million of capital expenditures consisting principally of computer hardware, software, communications equipment, infrastructure and facilities largely offset by sale of short term investments of $25.9 million.
Net cash used in financing activities was $2.4 million for the three months ended March 31, 2009, consisting principally of $2.5 million in dividends paid out, partially offset by proceeds from the issuance of shares under the Company's employee stock option plan exercised during the three months. Net cash used in financing activities was $2.4 million for the three months ended March 31, 2008, consisting principally of $2.5 million in dividends paid out, partially offset by $0.1 million proceeds from the issuance of shares under the Company's employee stock option plan and tax benefit on stock options exercised during the three months.
The Company has a line of credit with JP Morgan Chase Bank NA, which provides
for borrowings up to $20.0 million. The line of credit expires on August 31,
2009. Borrowings under the line of credit will bear interest at greater of
(i) the Prime Rate plus the applicable margin, or (ii) 4% per annum, and each
negotiated rate advance, eurodollar advance at the Eurodollar Rate. There were
no outstanding borrowings at March 31, 2009 or December 31, 2008.
The Company believes that the combination of present cash balances and future operating cash flows will be sufficient to meet the Company's currently anticipated cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. The Company has discussed this critical accounting policy and the estimates with the Audit Committee of the Board of Directors.
Revenue Recognition. Revenue recognition is the most significant accounting policy for the Company. The Company recognizes revenue from time and material contracts as services are performed. During the three months ended March 31, 2009 and 2008 revenues from time and material contracts constituted 56% and 61% of total revenues, respectively. Revenue from fixed-price, application management, maintenance and support engagements is recognized as earned, which generally results in straight-line revenue recognition as services are performed continuously over the term of the engagement. During the three months ended March 31, 2009 and 2008, revenues from fixed price application management and support engagements constituted 34% and 30% of total revenues, respectively.
Revenue on fixed price development projects is measured using the proportional performance method of accounting. Performance is generally measured based upon the efforts incurred to date in relation to the total estimated efforts required through the completion of the contract. The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the change becomes known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss. The Company issues invoices related to fixed price contracts based on either the achievement of milestones during a project or other contractual terms. Differences between the timing of billings and the recognition of revenue based upon the proportional performance method of accounting are recorded as revenue earned in excess of billings or deferred revenue in the accompanying financial statements. During the three months ended March 31, 2009 and 2008, revenues from fixed price development contracts constituted 10% and 9% of total revenues, respectively.
Significant Accounting Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. The Company bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Revenue Recognition. The use of the proportional performance method of accounting requires that the Company make estimates about its future efforts and costs relative to its fixed price contracts. While the Company has procedures in place to monitor the estimates throughout the performance period, such estimates are subject to change as each contract progresses. The cumulative impact of any such changes is reflected in the period in which the change becomes known.
Allowance for Doubtful Accounts. The Company records an allowance for doubtful accounts based on a specific review of aged receivables. The provision for the allowance for doubtful accounts is recorded in selling, general and administrative expenses. These estimates are based on our assessment of the probable collection from specific client accounts, the aging of the accounts receivable, analysis of credit data, bad debt write-offs, and other known factors.
Income Taxes-Estimates of Effective Tax Rates and Reserves for Tax Contingencies. The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company has provided for tax contingencies based on FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") and on the Company's assessment of future regulatory reviews of filed tax returns. Such reserves, which are recorded in income taxes payable, are based on FIN 48 interpretation and on management's estimates and accordingly are subject to revision based on additional information. The provision no longer required for any particular tax year, is credited to the current period's income tax expenses.
Accruals for Legal Expenses and Exposures. The Company estimates the costs associated with known legal exposures and their related legal expenses and accrues reserves for either the probable liability, if that amount can be reasonably estimated, or otherwise the lower end of an estimated range of potential liability.
Undistributed earnings of foreign subsidiaries. The Company intends to use accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and accordingly undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for U. S. federal and state income tax or applicable dividend distribution tax has been provided thereon.
FORWARD LOOKING STATEMENTS
Certain information and statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report, including the allowance for doubtful accounts, contingencies and litigation, potential tax liabilities, interest rate or foreign currency risks, and projections regarding our liquidity and capital resources, could be construed as forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements containing words such as "could", "expects", "may", "anticipates", "believes", "estimates", "plans", and similar expressions. In addition, the Company or persons acting on its behalf may, from time to time, publish other forward looking statements. Such forward looking statements are based on management's estimates, assumptions and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward looking statements. For a detailed discussion of certain risks associated with the Company's business that could cause future results to materially differ from recent results or those projected in any forward-looking statements, see "Item 1A. Risk Factors" in this Form 10-Q.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations", which improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. The new standard requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) has not materialy impacted the Company's financial position, results of operations and liquidity and its related disclosures.
In December 2007, the FASB issued SFAS No. 160, "Non controlling Interests in Consolidated Financial Statements" which improves the relevance, comparability, and transparency of financial information provided in consolidated financials statements by establishing accounting and reporting standards for the non controlling (minority) interests in subsidiaries and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS No. 160 has not materialy impacted the Company's financial position, results of operations and liquidity and its related disclosures.
In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter, however, does not expect the adoption to have a material effect on the results of operations or financial position.
In April 2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that
even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter, however, does not expect the adoption to have a material effect on the results of operations or financial position.
In April 2009, the FASB issued Staff Position (FSP) No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter.
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