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SYNT > SEC Filings for SYNT > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for SYNTEL INC


6-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 for the three months ended March 31, 2013 increased to $189.1 million from $170.7 million for the three months ended March 31, 2012, representing a 10.8% increase. 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 to the business. The Company's focus is to continue investments in more new offerings and geographical expansion. Worldwide billable headcount as of March 31, 2013 increased by 11.5% to 15,379 employees as compared to 13,790 employees as of March 31, 2012. However, the growth in revenues was not commensurate with the growth in the billable headcount. This is primarily because of a lower utilization of onsite and offshore resources. As of March 31, 2013, the Company had approximately 80.1% of its billable workforce in India as compared to 81.1% as of March 31, 2012. The Company's top five clients accounted for 65.7% of the total revenues in the three months ended March 31, 2013, up from 63.0% of its total revenues in the three months ended March 31, 2012. Moreover, the Company's top 10 clients accounted for 79.2% of the total revenues in the three months ended March 31, 2013 as compared to 77.7% in the three months ended March 31, 2012.

Cost of Revenues. The Company's 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. The cost of revenues increased to 58.9% of total revenues for the three months ended March 31, 2013, from 58.2% for the three months ended March 31, 2012. The 0.7% increase in cost of revenues, as a percent of revenues for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, was attributable primarily to increases in headcount, bonus provisions and benefits partially offset by rupee depreciation and a decrease in travel expenses in the first quarter of 2013. Salary increases are discretionary and determined by management.

Applications Outsourcing Revenues. Applications Outsourcing revenues increased to $144.9 million for the three months ended March 31, 2013 or 76.6% of total revenues, from $127.3 million, or 74.5% of total revenues for the three months ended March 31, 2012. The $17.6 million increase was attributable primarily to revenues from new engagements contributing $86.5 million, largely offset by $53.0 million in lost revenues as a result of project completion and a $15.9 million 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 U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Applications Outsourcing cost of revenues increased to 63.3% of total Applications Outsourcing revenues for the three months ended March 31, 2013, from 62.3% for the three months ended March 31, 2012. The 1.0% increase in cost of revenues, as a percent of revenues for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, was attributable primarily to increases in headcount, bonus provisions and benefits partially offset by rupee depreciation and a decrease in travel expenses in the first quarter of 2013. Salary increases are discretionary and determined by management.


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KPO Revenues. KPO revenues increased to $29.4 million for the three months ended March 31, 2013, or 15.5% of total revenues, from $26.4 million, or 15.5% of total revenues for the three months ended March 31, 2012. The $3.0 million increase was attributable primarily to revenues from new engagements contributing $3.6 million and a $0.8 million net increase in revenues from existing projects, offset by $1.4 million in lost revenues as a result of project completion.

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, 2013 decreased to 36.5% of KPO revenues from 36.7% for the three months ended March 31, 2012. The 0.2% decrease in cost of revenues, as a percent of total KPO revenues, for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses partially offset by increases in headcount, bonus provisions and benefits in the first quarter of 2013. Salary increases are discretionary and determined by management.

e-Business Revenues. E-Business revenues decreased to $11.5 million for the three months ended March 31, 2013, or 6.1% of total revenues from $13.5 million for the three months ended March 31, 2012, or 7.9% of total revenues. The $2.0 million decrease was attributable primarily to $2.8 million in lost revenues as a result of project completion and a $0.9 million net reduction in revenues from existing projects, largely offset by a $1.7 million increase in revenues from new engagements.

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 59.1% of total e-Business revenues for the three months ended March 31, 2013, from 61.1% for the three months ended March 31, 2012. The 2.0% decrease in cost of revenues for the three months ended March 31, 2012, as a percent of total e-Business revenues, as compared to the three months ended March 31, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses partially offset by increases in headcount, bonus provisions and benefits in the first quarter of 2013. Salary increases are discretionary and determined by management.

TeamSourcing Revenues. TeamSourcing revenues decreased to $3.4 million for the three months ended March 31, 2013, or 1.8% of total revenues, from $3.5 million, or 2.1% of total revenues for the three months ended March 31, 2012. The $0.1 million decrease was attributable primarily to a $0.6 million decrease in revenues as a result of project completion and conversion of staffing engagements into Syntel managed engagements largely offset by $0.4 million increase in revenues from new engagements and revenue from the SkillBay web portal, which helps clients of Syntel with their supplemental staffing requirements, and a net increase in revenues from existing projects of $0.1 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 increased to 64.1% of total TeamSourcing revenues for the three months ended March 31, 2013, from 59.2% for the three months ended March 31, 2012. The 4.9% increase in cost of revenues, for the three months ended March 31, 2013, as a percent of total TeamSourcing revenues, as compared to the three months ended March 31, 2012, was attributable primarily to increases in headcount, bonus provisions and benefits partially offset by rupee depreciation and a decrease in travel expenses in the first quarter of 2013. Salary increases are discretionary and determined by management.


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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, 2013 were $25.9 million or 13.7% of total revenues, compared to $26.9 million or 15.8% of total revenues for the three months ended March 31, 2012.

Selling, general and administrative costs for the three months ended March 31, 2013 were impacted by an increase in revenue of $18.4 million that resulted in a 1.5% percentage decrease in selling, general and administrative expenses as a percentage of total revenue. The overall decrease in selling, general and administrative costs was attributable to a decrease in corporate expenses of $2.2 million in the three months ending March 31, 2013, inclusive of a foreign exchange gain of $1.6 million, a decrease in professional fees and others of $0.6 million, a decrease in benefits of $0.4 million, a decrease in facility related costs of $0.3 million and a decrease in recruiting expenses of $0.1 million, partially offset by an increase in compensation due to an increase in bonus of $1.5 million, an increase in marketing expenses of $0.2 million, an increase in travel expenses of $0.2 million, and an increase of other expenses of $0.1 million.

Other Income. Other income 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, 2013 was $9.0 million or 4.8% of total revenues, compared to $8.3 million or 4.9% of total revenues for the three months ended March 31, 2012. The increase in other income of $0.7 million was attributable to an increase in interest income of $1.3 million, an increase in the gain on sale of mutual funds of $0.9 million and an increase in other income of $0.1 million offset by a decrease in interest income on Information Technology refund of $1.2 million and a loss on forward contracts of $0.4 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

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 provides for tax uncertainties in income taxes, when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon examination. Such uncertainties, which are recorded in income taxes payable, are based 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. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is concluded or the management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the "more likely than not" concept.

During the three months ended March 31, 2013 and 2012, the effective income tax rates were 23.8% and 22.8%, respectively. The tax rate for the three months ended March 31, 2013 was affected by the effective tax rate impact of a change in the offshore/onshore profit mix of the Company and by certain Company facilities going out of tax holiday effective April 1, 2012.

Other Comprehensive Income (Loss)

The Other Comprehensive Income (Loss) consists of foreign currency translation adjustments, gains (losses) on net investment hedge derivatives, unrealized gains (losses) on securities and a component of a defined benefit plan. During the three months ended March 31, 2013 the Other Comprehensive Income amounted to $1.6 million, primarily attributable to foreign currency translation adjustments of $1.9 million.


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During the three months ended March 31, 2012 the Other Comprehensive Income amounted to $16 million, primarily attributable to foreign currency translation adjustments of $14.8 million.

FINANCIAL POSITION

Cash and Cash Equivalents: Cash and Cash equivalents increased to $131.2 million at March 31, 2013 from $83.8 million at March 31, 2012.

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 and treasury notes. These amounts are held by various banking institutions including US-based and India-based banks. As of March 31, 2013, the total cash and cash equivalent and short term investment balance was $438.0 million. Out of the above, an amount of $379.3 million was held by Indian subsidiaries which was composed of an amount of $62.1 million held in US dollars with the balance of the amount held in Indian rupees. The Company believes that the amount of cash and cash equivalent outside the U.S. will not have a material impact on liquidity.

Net cash generated by operating activities was $20.9 million for the three months ended March 31, 2013. Net cash generated by operating activities was $13.5 million for the three months ended March 31, 2012. The number of days sales outstanding in net accounts receivable was approximately 52 days and 59 days as of March 31, 2013 and 2012, respectively. The decrease in the number of day's sales outstanding in net accounts receivable was due to higher collections.

Net cash generated by investing activities was $17.4 million for the three months ended March 31, 2013, consisting principally of $5.1 million of capital expenditures primarily for the construction/acquisition of the Global Development Center at Pune, the Knowledge Process Outsourcing facility at Mumbai and an additional facility in Chennai, the acquisition of computers, software and communications equipment and the purchase of mutual funds of $50.9 million and purchase of term deposits with banks of $106.2 million, largely offset by $82.4 million from sales of mutual funds and $97.2 million from maturities of term deposits with banks. Net cash used in investing activities was $30.0 million for the three months ended March 31, 2012, consisting principally of $4.4 million of capital expenditures primarily for the construction/acquisition of a Global Development Center at Pune, leasehold land at Tirunelveli, a Knowledge Process Outsourcing facility at Mumbai and an additional facility in Chennai, and for the acquisition of computers, software and communications equipment, as well as $25.6 million for net sales and purchases of short term investments.

Net cash used in financing activities was nil for the three months ended March 31, 2013. Net cash used in financing activities was $2.50 million for the three months ended March 31, 2012, consisting principally of $2.50 million in dividends paid out during the three months.

The Company has a line of credit with JPMorgan Chase Bank NA, which provides for borrowings up to $50.0 million and expires on December 31, 2013. The interest shall be paid to the Bank on the outstanding and unpaid principal amount of each Commercial Bank Floating Rate advance at the Commercial Bank Floating Rate plus the applicable margin and each LIBOR rate advance at the adjusted LIBOR rate of 1.71% at March 31, 2013.


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Syntel, Inc., Syntel Consulting and SkillBay (the "Grantors") have granted to the Bank a continuing security interest in all property of the Grantors specifically excluding all stock of any Syntel foreign subsidiary and all assets owned directly by any Syntel foreign subsidiary.

And with the interest rate charged on the line of credit being variable, the fair value of the line of credit would approximate its reported value as of March 31, 2013, as it would reflect the current market value.

During the quarter ended December 31, 2012, Syntel utilized the Line of Credit for $50 million, on which interest of $0.22 million has been paid as of March 22, 2013 and interest of $ 0.02 million has been accrued as of March 31, 2013 for a total outstanding amount as of March 31, 2013 of $50.02 million. The Line of Credit requires compliance with certain financial ratios and covenants. As of March 31, 2013, the Company was in compliance with all required covenants.

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, 2013 and 2012 revenues from time and material contracts constituted 62% 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, 2013 and 2012, revenues from fixed price application management and support engagements constituted 29% and 28% 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, 2013 and 2012, revenues from fixed price development contracts constituted 9% & 11% 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.


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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 change 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. As at March 31, 2013 and December 31, 2012, the allowance for doubtful accounts was $2.2 million. 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 provides for tax uncertainties in income taxes, when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon examination. Such uncertainties, which are recorded in income taxes payable, are based 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. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is concluded or management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the "more likely than not" concept.

Accruals for Legal Expenses and Exposures. The Company is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory controls. The Company has not accrued any liability for legal contingencies as no legal contingency has been deemed to be probable of occurring. The Company's estimates regarding legal contingencies are based on information known about the matters and its experience in contesting, litigating and settling similar matters. It is the opinion of management with respect to pending or threatened litigation matters that unfavorable outcomes are neither probable nor remote and that estimates of possible loss are not able to be made. Although actual amounts could differ from management's estimates, none of the actions are believed by management to involve future amounts that would be material to the Company's financial position or results of operations.

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. There was no accrual related to litigation at March 31, 2013 and December 31, 2012.

The Company is in litigation with one former customer for which certain IT services had been performed. There is a dispute regarding the IT services performed. The contract with the former customer contains a limitation of liability clause that limits the Company's liability to the amount of the holdback the former customer has retained, amounting to approximately $0.3 million. The Company believes it has meritorious defenses against any claim of liability and will vigorously defend any such claim if raised. The Company does not believe this matter will have a material impact on the consolidated financial statements.

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.


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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.

Although management believes that the expectations, forecasts and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, without limitation, the risks and uncertainties detailed in "Item 1A. Risk Factors" in the Company's annual report on Form 10-K for the year ended December 31, 2012.

Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows, financial position and prospects. There can be no assurance that future results will meet expectations. While we believe that the forward-looking statements in this Quarterly Report on Form 10-Q are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as required by applicable law.


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