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

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Form 10-Q for SYNTEL INC


6-Nov-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 September 30, 2013 increased to $209.9 million from $186.4 million for the three months ended September 30, 2012, representing a 12.6% increase. Net revenues for the nine months ended September 30, 2013 increased to $601.5 million from $536.1 million for the nine months ended September 30, 2012, representing a 12.2% increase. The Company's verticalization sales strategy focusing on Banking and Financial Services; Healthcare; Insurance; Manufacturing; Retail; Logistics and Telecom 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 and geographical expansion. Worldwide billable headcount as of September 30, 2013 increased by 12.9% to 16,800 employees as compared to 14,876 employees as of September 30, 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 resources. As of September 30, 2013, the Company had approximately 80.8% of its billable workforce in India as compared to 81.0% as of September 30, 2012. The Company's top five clients accounted for 62.5% of the total revenues in the three months ended September 30, 2013, down from 63.9 % of its total revenues in the three months ended September 30, 2012. The Company's top five clients accounted for 64.3% of the total revenues in the nine months ended September 30, 2013, up from 63.7% of its total revenues in the nine months ended September 30, 2012. Moreover, the Company's top 10 clients accounted for 76.2% of the total revenues in the three months ended September 30, 2013 as compared to 78.1% in the three months ended September 30, 2012. The Company's top 10 clients accounted for 77.8% of the total revenues in the nine months ended September 30, 2013 as compared to 78.1% in the nine months ended September 30, 2012. The Company's top 3-30 clients accounted for 54.5% of the total revenues in the three months ended September 30, 2013, up from 50.5% of its total revenues in the three months ended September 30, 2012. The Company's top 3-30 clients accounted for 52.6% of the total revenues in the nine months ended September 30, 2013, up from 50.7% of its total revenues in the nine months ended September 30, 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 decreased to 53.4% of total revenue for the three months ended September 30, 2013, from 54.5% for the three months ended September 30, 2012. The 1.1% decrease in cost of revenues, as a percent of revenues, for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses, offset by increases in headcount, salary increases for offshore and onsite employees and increased benefits costs in the third quarter of 2013. Salary increases are discretionary and determined by management.

The cost of revenues decreased to 56.9% of total revenue for the nine months ended September 30, 2013, from 57.1% for the nine months ended September 30, 2012. The 0.2% decrease in cost of revenues, as a percent of revenues, for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses, offset by increases in headcount, salary increases for offshore and onsite employees and increased benefits costs.


Applications Outsourcing Revenues. Applications Outsourcing revenues increased to $162.2 million for the three months ended September 30, 2013 or 77.3% of total revenues, from $140.5 million, or 75.4 % of total revenues for the three months ended September 30, 2012. The $21.7 million increase was attributable primarily to revenues from new engagements contributing $95.7 million, largely offset by $71.2 million in lost revenues as a result of project completion and a $2.8 million net reduction in revenues from existing projects. The revenues for the nine months ended September 30, 2013 increased to $461.7 million, or 76.8% of total revenues, from $401.8 million or 74.9% of total revenues for the nine months ended September 30, 2012. The $59.9 million increase for the nine months ended September 30, 2013 was attributable primarily to revenues from new engagements of $250.0 million, largely offset by $140.5 million in lost revenues as a result of project completion and a $49.6 million net decrease 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 decreased to 56.8% of total Applications Outsourcing revenues for the three months ended September 30, 2013, from 57.9% for the three months ended September 30, 2012. The 1.1% decrease in cost of revenues, as a percent of revenues for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses, offset by increases in headcount, salary increases for offshore and onsite employees and increased benefits costs in the third quarter of 2013. Salary increases are discretionary and determined by management.

Applications Outsourcing cost of revenues for the nine months ended September 30, 2013 increased to 60.9% of total Applications Outsourcing revenues, from 60.7% for the nine months ended September 30, 2012. The 0.2% increase in cost of revenues, as a percent of revenues for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, was attributable primarily to increases in headcount, salary increases for offshore and onsite employees and increased benefits costs partially offset by rupee depreciation and a decrease in travel expenses.

KPO Revenues. KPO revenues increased to $32.0 million for the three months ended September 30, 2013, or 15.2% of total revenues, from $27.9 million, or 15.0 % of total revenues for the three months ended September 30, 2012. The $4.1 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, largely offset by $0.3 million in lost revenues as a result of project completion. The revenues for the nine months ended September 30, 2013 increased to $92.7 million, or 15.4% of the total revenues, from $81.5 million or 15.2% of the total revenues for the nine months ended September 30, 2012. The $11.2 million increase was attributable primarily to revenues from new engagements contributing $7.7 million and a $5.9 million net increase in revenues from existing projects, largely offset by $2.4 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. KPO cost of revenues decreased to 34.5% of total KPO revenues for the three months ended September 30, 2013, from 37.0% for the three months ended September 30, 2012. The 2.5% decrease in cost of revenues, as a percent of total KPO revenues for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses, offset by increases in headcount, salary increases for offshore and onsite employees and increased benefits costs and customer claims in the third quarter of 2013. Salary increases are discretionary and determined by management.


KPO cost of revenues for the nine months ended September 30, 2013 decreased to 36.1% of KPO revenues, from 37.7% for the nine months ended September 30, 2012. The 1.6% decrease in cost of revenues, as a percent of revenues for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses partially offset by increases in headcount, salary increases for offshore and onsite employees, and increased benefits costs, and customer claims.

e-Business Revenues. E-Business revenues decreased to $13.5 million for the three months ended September 30, 2013, or 6.5% of total revenues from $14.0 million for the three months ended September 30, 2012, or 7.5% of total revenues. The $0.5 million decrease was attributable primarily to $3.2 million in lost revenues as a result of project completion and a 0.2 million net decrease in revenues from existing projects, largely offset by a $2.9 million increase in revenues from new engagements. The revenues for the nine months ended September 30, 2013 decreased to $38.1 million, or 6.3% of total revenues, from $41.6 million or 7.8% of total revenues for the nine months ended September 30, 2012. The $3.5 million decrease was attributable primarily to $5.7 million in lost revenues as a result of project completion and a 3.5 million net decrease in revenues from existing projects, largely offset by a 5.7 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 increased to 56.5% of total e-Business revenues for the three months ended September 30, 2013, from 54.3% for the three months ended September 30, 2012. The 2.2% increase in cost of revenues for the three months ended September 30, 2013, as a percent of total e-Business revenues, as compared to the three months ended September 30, 2012, was attributable primarily to increases in headcount, salary increases for offshore and onsite employees and increased benefits costs partially offset by rupee depreciation and a decrease in travel expenses in the third quarter of 2013. Salary increases are discretionary and determined by management.

e-Business cost of revenues for the nine months ended September 30, 2013 decreased to 58.2% of total e-business revenues, from 59.8% for the nine months ended September 30, 2012. The 1.6% decrease in cost of revenues, as a percent of revenues for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, was attributable primarily to rupee depreciation and a decrease in travel expenses partially offset by increases in headcount, salary increases for offshore and onsite employees, increased benefits costs.

TeamSourcing Revenues. TeamSourcing revenues decreased to $2.2 million for the three months ended September 30, 2013, or 1.0% of total revenues, from $4.0 million, or 2.1% of total revenues for the three months ended September 30, 2012. The $1.8 million decrease was attributable primarily to a $1.4 million decrease in revenues from existing projects and $1.2 million in lost revenues as a result of project completion and conversion of staffing engagements into Syntel managed engagements, largely offset by $0.8 million increase in revenues from new engagements and revenue from the Skillbay web portal, which helps clients of Syntel with their supplemental staffing requirements. The revenues for the nine months ended September 30, 2013 decreased to $8.9 million, or 1.5% of total revenues, from $11.2 million or 2.1% of total revenues for the nine months ended September 30, 2012. The $2.3 million decrease was attributable principally to $2.7 million decrease in revenues from existing projects and $1.2 million decrease in revenue from project completion, largely offset by $1.6 million increase in revenues from new engagements.

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


62.2% of total TeamSourcing revenues for the three months ended September 30, 2013, from 55.8% for the three months ended September 30, 2012. The 6.4% increase in cost of revenues, for the three months ended September 30, 2013, as a percent of total TeamSourcing revenues, as compared to the three months ended September 30, 2012, was attributable primarily to increases in headcount, salary increases for offshore and onsite employees and increased benefits costs, partially offset by rupee depreciation and a decrease in travel expenses in the third quarter of 2013. Salary increases are discretionary and determined by management.

TeamSourcing cost of revenues for the nine months ended September 30, 2013 increased to 63.3% of total TeamSourcing revenues, from 58.4% for the nine months ended September 30, 2012. The 4.9% increase in cost of revenues, as a percent of revenues for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, was attributable primarily to increases in headcount, salary increases for offshore and onsite employees, increased benefits costs partially offset by rupee depreciation and a decrease in travel expenses.

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 September 30, 2013 were $23.1 million or 11.0% of total revenues, compared to $29.0 million or 15.6% of total revenues for the three months ended September 30, 2012.

Selling, general and administrative expenses for the three months ended September 30, 2013 were impacted by an increase in revenue of $23.5 million that resulted in a 1.4% decrease in selling, general and administrative expenses as a percentage of total revenue. The overall decrease in selling, general and administrative expenses was attributable to a decrease in corporate expenses of $6.9 million primarily on account of foreign exchange gain, decrease in facility related cost of $0.4 million, decrease in benefits of $0.2 million and other expenses of $0.1 million partially offset by increase in compensation due to increases in headcount and increased bonus provisions of $1.2 million, travel expenses of $0.3 million and other expenses of $0.2 million.

Selling, general, and administrative expenses for the nine months ended September 30, 2013 were $68.0 million or 11.3% of total revenues, compared to $74.9 million or 14.0% of total revenues for the nine months ended September 30, 2012.

Selling, general and administrative expenses for the nine months ended September 30, 2013 were impacted by an increase in revenue of $65.3 million resulting in a 1.4% decrease in selling, general and administrative expenses as a percentage of total revenue. The overall decrease in selling, general and administrative expenses was attributable to a decrease in corporate expenses of $11.5 million due to foreign exchange gain of $11.0 million and other expenses of $0.5 million, decrease in facility related cost $0.2 million, decrease in benefits of $0.7 million and other expenses of $0.1 million partially offset by increase in compensation due to increases in headcount and increased bonus provisions of $4.6 million, travel expenses of $0.4 million, increase in immigration expenses of $0.2 million, increase in contract expenses of $0.2 million and other expenses of $0.2 million.

Other Income (Expense), Net. Other income includes interest and dividend income, gains and losses from sale of securities, other investments and hedging transactions.

Other income for the three months ended September 30, 2013 was $1.6 million or 0.7% of total revenues, compared to $10.0 million or 5.3% of total revenues for


the three months ended September 30, 2012. The decrease in other income of $8.4 million was attributable to an increase in forward contract loss of $7.1 million, decrease in interest income of $0.4 million and decrease in gain on sale of assets of $0.9 million during the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Other income for the nine months ended September 30, 2013 was $9.6 million or 1.6% of total revenues, compared to $20.7 million or 3.9% of total revenues for the nine months ended September 30, 2012. The decrease in other income of $11.1 million was attributable to an increase in forward contract loss of $11.0 million and a decrease in the gain on sale of assets of $0.9 partially offset by an increase in mutual fund gain of $0.8 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 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 September 30,2013 and 2012, the effective income tax rates were 22.0% and 21.7%, respectively. During the nine months ended September 30, 2013 and 2012, the effective income tax rates were 23.6% and 22.9%, respectively. The tax rate for the three and nine months ended September 30, 2013 was affected by the effective tax rate impact of change in the offshore/onshore profit mix of the Company and by certain Company facilities going out of tax holiday effective April 1, 2013.

The tax rate for the three months ended September 30, 2013 included a tax reversal of $1.09 million which related to the true up of tax provisions, pursuant to finalization of the tax computation for filing tax returns of Syntel Limited, which had arisen on account of finalization of the actual numbers of expenses apportionment, wage reconciliations, meal disallowances etc., as against the amounts estimated earlier for the tax provisions.

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 and nine months ended September 30, 2013 the Other Comprehensive Loss amounted to $29.1 million and $81.8 million, respectively, primarily attributable to foreign currency translation adjustments of $27.4 million and $75.3 million, for the three and nine months ended September 30, 2013, respectively.

During the three and nine months ended September 30, 2012 the Other Comprehensive income amounted to $37.3 million and $5.7 million, respectively, primarily attributable to foreign currency translation adjustments of $35.9 million and $6.4 million, respectively.

FINANCIAL POSITION

Cash and Cash Equivalents: Cash and Cash equivalents increased to $150.24 million at September 30, 2013 from $86.7 million at September 30, 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 September 30, 2013, the total cash and cash equivalent and short term investment balance was $578.7 million. Out of the above, an amount of $520.4 million was held by Indian subsidiaries which was composed of an amount of $88.8 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 $114.5 million for the nine months ended September 30, 2013. Net cash generated by operating activities was $124.3 million for the nine months ended September 30, 2012. The number of days sales outstanding in net accounts receivable was approximately 54 days and 52 days as of September 30, 2013 and 2012, respectively. The increase in the number of day's sales outstanding in net accounts receivable was due to higher collections during the corresponding period in 2012.

Net cash used in investing activities was $162.6 million for the nine months ended September 30, 2013, consisting principally of $13.9 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 $251.3 million and the purchase of term deposits with banks of $232.8 million, largely offset by $162.1 million from sales of mutual funds and $173.2 million from maturities of term deposits with banks. Net cash used in investing activities was $133.2 million for the nine months ended September 30, 2012, consisting principally of $22.9 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 $204.3 million and purchase of term deposits with banks of $145.0 million, largely offset by $152.6 million from sales of mutual funds, $84.9 million from maturities of term deposits with banks and $1.5 million from the sale of assets.

Net cash generated by financing activities was $97.0 million for the nine months ended September 30, 2013 consisting principally of proceeds from a loan and borrowing of $150.0 million offset by repayment of a loan and borrowing of $53.0 million. Net cash used in financing activities was $6.9 million for the nine months ended September 30, 2012, consisting principally of $7.5 million in dividends paid out and partially offset by excess tax benefits on stock-based compensation plans of $0.6 million during the nine months.

During the quarter ended December 31, 2012, Syntel utilized the full Line of Credit with JPMorgan Chase Bank NA of $50 million and it was repaid in full on May 23rd, 2013.

On May 23, 2013, Syntel entered into a Credit Agreement with Bank of America, N.A. for $150 million in credit facilities consisting of a three year term loan facility of $60 million and a three year revolving credit facility of $90 million. The Credit Agreement is guaranteed by two of the Company's domestic subsidiaries, SkillBay and Syntel Consulting (collectively, the "Guarantors"). In connection with the credit facilities, the Company and the Guarantors also entered into a related security and pledge agreement granting a security interest in the assets of the Company and the Guarantors, including, without limitation, a pledge of 65% of the equity interests in Syntel India.


The interest rates applicable to loans incurred under the Credit Agreement are
(a) with respect to Revolving Loans, (i) the Eurodollar Rate plus 1.25% with respect to Eurodollar Loans and (ii) the Base Rate plus 0.25% with respect to Base Rate Loans, and (b) with respect to the Term Loan, (i) the Eurodollar Rate plus 1.50% with respect to Eurodollar Loans and (ii) the Base Rate plus 0.50% with respect to Base Rate Loans (each as defined in the Credit Agreement).

As at September 30, 2013, the interest rate was 1.51% for the three year revolving credit facility and was 1.76% for the three year term loan facility.

Principal payments on the term loan are due every quarter and during the three and nine months ended September 30, 2013 principal payments of $1.5 million and $3.0 million have been made, respectively. The related Credit Agreement requires compliance with certain financial ratios and covenants. As of September 30, 2013, the Company was in compliance with all debt 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 September 30, 2013 and 2012 revenues from time and material contracts remained same at 62% of total revenues. 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 September 30, 2013 and 2012, revenues from fixed price application management and support engagements constituted 28% and 26% 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 . . .

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