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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003 or
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-22903
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SYNTEL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2312018
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
525 E Big Beaver Road, Suite 300, Troy, Michigan 48083
- ------------------------------------------------ ---------
(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.)
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, no par value: 39,979,388 shares issued and outstanding as of
October 14, 2003.
1
SYNTEL, INC.
INDEX
Page
----
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 15
Item 4 Controls and Procedures 16
Part II Other Information 17
Signatures 18
Certificate of Principal Executive officer 20
Certificate of Principal Financial officer 21
2
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except per share data)
THREE MONTHS NINE MONTHS
ENDED SEPT 30 ENDED SEPT 30
---------------------------- -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Revenues $ 44,105 $ 42,126 $ 132,098 $ 122,116
Cost of revenues 25,738 23,332 74,974 71,794
--------- --------- --------- ---------
Gross profit 18,367 18,794 57,124 50,322
Selling, general and administrative expenses 5,371 7,976 19,769 23,645
--------- --------- --------- ---------
Income from operations 12,996 10,818 37,355 26,677
Other income, principally interest 632 795 2,092 2,206
--------- --------- --------- ---------
Income before income taxes 13,628 11,613 39,447 28,883
Provision for Income tax 2,884 2,924 10,052 7,548
--------- --------- --------- ---------
Net income before profit / (loss) from equity investment 10,744 8,689 29,395 21,335
Profit / (Loss) from equity investment 13 0 (34) 0
--------- --------- --------- ---------
Net income $ 10,757 $ 8,689 $ 29,361 $ 21,335
========= ========= ========= =========
DIVIDEND PER SHARE $ 1.31 $ 0.00 $ 1.31 $ 0.00
EARNINGS PER SHARE
Basic $ 0.27 $ 0.22 $ 0.74 $ 0.55
Diluted $ 0.26 $ 0.22 $ 0.72 $ 0.54
Weighted average common shares outstanding :
Basic 39,718 38,726 39,478 38,672
========= ========= ========= =========
Diluted 40,975 39,509 40,634 39,788
========= ========= ========= =========
See notes to the condensed consolidated financial statements
3
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
(UNAUDITED) (NOTE 1)
----------- --------
ASSETS
Current assets:
Cash and cash equivalents $100,091 $134,976
Investments, marketable securities 24,965 5,737
Accounts receivable, net of allowance for doubtful accounts 30,416 24,329
Advanced billings and other current assets 8,162 9,674
-------- --------
Total current assets 163,634 174,716
Property and equipment 24,335 20,950
Less accumulated depreciation 17,853 15,801
-------- --------
Property and equipment, net
6,482 5,149
Goodwill 906 906
Deferred income taxes and other noncurrent assets 2,919 2,801
-------- --------
$173,941 $183,572
======== ========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 11,454 $ 11,885
Accounts payable and other current liabilities 9,284 9,027
Income taxes payable 7,871 2,530
Deferred revenue 2,124 5,286
-------- --------
Total liabilities 30,733 28,728
SHAREHOLDERS' EQUITY
Total Shareholders' equity 143,208 154,844
-------- --------
Total liabilities and shareholders' equity $173,941 $183,572
======== ========
See notes to the condensed consolidated financial statements
4
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 29,361 $ 21,335
--------- ---------
Adjustments to reconcile net income to net cash
provided by / (used in) operating activities:
Depreciation and amortization 1,913 1,422
Realized (gains) on sales of available-for-sale securities (414) (390)
Deferred income taxes 981 (98)
Stock warrants sales incentive 1,621 0
Loss on equity investments 34 0
Changes in assets and liabilities:
Accounts receivable, net (4,860) 5,721
Advance billing and other assets 442 (291)
Accrued payroll and other liabilities 4,418 (5,730)
Deferred revenues (3,161) (2,302)
--------- ---------
Net cash provided by operating activities 30,335 19,667
Cash flows from investing activities:
Purchase of Property and equipment (3,012) (1,193)
Equity and other investments 223 0
Purchase of available-for-sale securities (24,601) (15,175)
Proceeds from sales of available-for-sale securities 7,002 24,508
--------- ---------
Net cash provided by / ( used in ) investing activities (20,388) 8,140
Cash flows from financing activities:
Net proceeds from issuance of stock 5,812 3,802
Common stock repurchases (160) (3,325)
Dividend paid (49,865) 0
--------- ---------
Net cash provided by / (used in) financing activities (44,213) 477
Effect of foreign currency exchange rate changes on cash (619) 331
--------- ---------
Net (decrease)/ increase in cash and cash equivalents (34,885) 28,615
Cash and cash equivalents, beginning of period 134,976 88,010
========= =========
Cash and cash equivalents, end of period $ 100,091 $ 116,625
========= =========
NON CASH INVESTING AND FINANCING ACTIVITIES
Cash dividend for third quarter of 2003 declared but unpaid as on
September 30, 2003 $ 2,397 $ 0
See notes to the condensed consolidated financial statements
5
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements of Syntel, Inc.
(the "Company") have been prepared by management, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles in United States have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to
present fairly the financial position of Syntel, Inc. and its subsidiaries
as of September 30, 2003, the results of their operations for the three
month and nine month periods ended September 30, 2003 and September 30,
2002, and cash flows for the nine months ended September 30, 2003 and
September 30, 2002. The condensed consolidated balance sheet as of December
31, 2002 was derived from audited financial statements but does not include
all disclosures required by accounting principles generally accepted in the
United States. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 2002.
Operating results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The consolidated financial statements include the accounts of Syntel, Inc.
("Syntel") and its wholly owned subsidiaries Syntel (India) Limited ("Syntel
India"), an India limited liability company, Syntel "Singapore" PTE., Ltd.,
("Syntel Singapore"), a Singapore limited liability company, Syntel Europe,
Ltd., ("Syntel U.K."), a United Kingdom limited liability company, Syntel
Canada Inc., ("Syntel Canada") a Canada limited liability company, Syntel
Deutschland GmbH, ("Syntel Germany") a Germany limited liability Company,
Syntel Hong Kong Ltd., ("Syntel Hong Kong") a Hong Kong limited liability
Company, Syntel Mauritius Limited, ("Syntel Mauritius") a Mauritius limited
liability Company and Syntel "Australia" Pty. Limited, ("Syntel Australia"),
an Australia limited liability Company. All intercompany balances and
transactions have been eliminated.
As of September 30, 2003, the Company has consolidated Skillbay.com, which
until that date was accounted for as an equity basis investment, after
Syntel acquired 100% of the voting interest in Skillbay.com from the sole
voting shareholder. The effect of the consolidation of Skillbay.com was not
significant to the Syntel financials.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts including, but not limited to
warranty costs, allowance for doubtful accounts, reserves for employee
benefits, amortization and impairment of goodwill, contingencies and
litigation, the recognition of revenues and profits based on the percentage
of completion method. Actual results could differ from those estimates and
assumptions used in the preparation of the accompanying financial
statements.
During the third quarter of 2003, in connection with settlements and other
changes in estimates of underlying litigation and related legal costs the
Company reduced its accounts payable and other current liabilities by $1.7
million. The Company also reduced its allowance for doubtful accounts by
$0.7 million primarily on account of successful collection of overdue debts
that were previously provided for or written off. The above reversals had a
post tax impact of increasing the diluted earnings for the quarter by $0.04
per share.
6
4. FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries use the
currency of the primary economic environment in which they operate as its
functional currency. Revenues, costs and expenses of the foreign
subsidiaries are translated to U. S. dollars at average period exchange
rates. Assets and liabilities are translated to U. S. dollars at period-end
exchange rates with the effects of these translation adjustments being
reported as a separate component of accumulated other comprehensive income
in shareholders' equity.
A portion of the Company's costs in India are denominated in local currency
and are subject to currency exchange fluctuations, which have not had any
material adverse effect on the Company's results of operations.
5. RECLASSIFICATION
Certain prior quarter amounts have been reclassified to conform with the
current quarter presentation.
6. REVENUE RECOGNITION
The Company recognizes revenues from time and material contracts as services
are rendered and costs are incurred. Revenue on fixed-price, development
projects is measured by the percentage of costs incurred to date to the
estimated total costs at completion. The Company issues invoices related to
fixed price contracts based on achievement of milestones during a project or
other contractual terms. Differences between the timing of billings and the
recognition of revenue based upon the percentage of completion method of
accounting, are recognized as accrued or deferred revenue. Revenue from
fixed-price application management and support engagements is recognized as
earned. The cumulative impact of any change in estimates of the percentage
complete or losses on contracts is reflected in the period in which the
changes become known.
Revenues are reported net of sales incentives.
Reimbursements of out-of-pocket expenses are included in net revenue in
accordance with Emerging Issues Task Force Consensus ("EITF") 01-14, "Income
Statement Characterization of Reimbursement received for `Out of Pocket'
expenses incurred".
7. CASH AND CASH EQUIVALENTS
For the purpose of reporting cash and cash equivalents, the Company
considers all liquid investments purchased with a maturity of three months
or less to be cash equivalents.
At September 30, 2003 and 2002, approximately $ 23.9 million and $ 58.8
million, respectively, are in money market accounts and represent corporate
bonds and treasury notes held by Bank One, for which a triple A rated letter
of credit has been provided by the bank. The remaining cash and cash
equivalents are, in money market accounts with various banking institutions,
including other U.S.-based and local India-based banks and represent
certificates of deposit, corporate bonds, and treasury notes.
8. STOCK WARRANTS SALES INCENTIVE
During 2002, the Company granted to a significant customer an immediately
exercisable warrant entitling the customer to purchase 322,210 shares of
Company stock at an exercise price of $7.25 per share. The stated exercise
price was based upon the customer achieving a specified minimum level of
purchases of services (the "Performance Milestone") from the Company over a
specified performance period ending on October 16, 2003. The customer
exercised the warrant in February 2003 and received 209,739 shares in a
cashless exercise.
The customer has now earned the sales incentive as they have met the
performance milestone over the specified performance period ending on
October 16, 2003.
7
In accordance with EITF 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products", the Company
has recorded the value of sales incentive as a reduction of revenues, to the
extent of revenues earned up to September 30, 2003.
The measurement of the sales incentive, which previously was based on the
market value of the Company's stock at each period end, has been finalised
based on sale of the shares in quarter ended September 30, 2003 by the
customer at an average sale price of $22.31. Accordingly, the final value of
the sales incentive is $4.7 million. Cumulatively, the Company has recorded
$4.5 million of the sales incentive as a reduction of revenue up to
September 30, 2003 and the remaining sales incentive of $0.2 million has
been recorded as a contra-equity item in Shareholders' Equity. The remaining
sales incentive of $0.2 million, will be recorded against revenues from the
customer during the fourth quarter of 2003 for the remaining revenues earned
from October 1, 2003 to October 16, 2003.
The Company has granted the same customer certain additional performance
warrants at significantly higher performance milestones. The Company has
estimated that such higher performance milestones will not be met.
Accordingly, the Company has not accounted for these performance warrants.
If and when the Company estimates that such higher performance milestones
will be met, the sales incentive associated with the performance warrants
will be recorded as a reduction of revenue.
9. COMPREHENSIVE INCOME
Total Comprehensive Income for the three and nine month periods ended
September 30, 2003 and 2002 is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $10,757 $ 8,689 $29,361 $21,335
Other Comprehensive Income
Unrealized Gain 291 68 235 98
Foreign currency translation
adjustments 626 367 1443 473
------- ------- ------- -------
Total comprehensive income $11,674 $ 9,124 $31,039 $21,906
======= ======= ======= =======
10. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the applicable period.
The Company has stock options, which are considered to be potentially
dilutive to common stock. Diluted earnings per share are calculated
considering these potentially dilutive options.
The following table sets forth the computation of earnings per share.
THREE MONTHS ENDED
------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Weighted Earnings Weighted Earnings
Average per Average per
Shares share Shares share
------ ----- ------ ------
(in thousands, except per share earnings)
Basic earnings per share 39,718 0.27 38,726 0.22
Net dilutive effect of stock options outstanding 1,257 (0.01) 783 -
Diluted earnings per share 40,975 0.26 39,509 0.22
8
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Weighted Earnings Weighted Earnings
Average per Average per
Shares share Shares share
------ ----- ------ ------
(in thousands, except per share earnings)
Basic earnings per share 39,478 0.74 38,672 0.55
Net dilutive effect of stock options outstanding 1,156 (0.02) 1,116 (0.01)
Diluted earnings per share 40,634 0.72 39,788 0.54
11. SEGMENT REPORTING
The Company manages its operations through three segments, Applications
Outsourcing, e-Business, and TeamSourcing. Management allocates all direct
expenses to the segments. Financial data for each segment for the three and
nine months period ended September 30, 2003 and September 30, 2002 is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2003 2002 2003 2002
(in thousands) (in thousands)
Net Revenues:
Applications Outsourcing $ 34,561 $ 28,759 $100,435 $ 82,865
e-Business 7,491 9,673 24,565 26,889
TeamSourcing 2,053 3,694 7,098 12,362
-------- -------- -------- --------
$ 44,105 $ 42,126 $132,098 $122,116
======== ======== ======== ========
Gross Profit:
Applications Outsourcing $ 15,640 $ 14,311 $ 46,233 $ 38,375
e-Business 2,501 4,074 10,108 10,313
TeamSourcing 226 409 783 1,634
-------- -------- -------- --------
$ 18,367 $ 18,794 $ 57,124 $ 50,322
======== ======== ======== ========
During the three months ended September 30, 2003, revenue from American
Express Corp. was $6.9 million, which is approximately 16% of net revenues,
as compared to $8.2 million during the three months ended September 30,
2002, contributing approximately 19 % of total consolidated revenues.
During the nine months ended September 30, 2003, revenue from American
Express Corp. was $20.1 million, which is approximately 15 % of net revenues
as compared to $20.4 million during the nine months ended September 30,
2002, contributing approximately 17 % of total consolidated revenues.
9
12. GEOGRAPHIC INFORMATION
Customers of the Company are primarily situated in the United States. Net
revenues and net income/(loss) by geographic location were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
(in thousands) (in thousands)
Net Revenues
North America, primarily United States $ 40,421 $ 38,735 $ 120,803 $ 112,963
India 18,866 12,554 51,234 29,831
UK 3,328 3,131 10,632 8,317
Far East, primarily Singapore 253 217 552 692
Germany 163 20 192 76
Intercompany revenue elimination (primarily India) (18,926) (12,531) (51,315) (29,763)
--------- --------- --------- ---------
Net Revenue $ 44,105 $ 42,126 $ 132,098 $ 122,116
========= ========= ========= =========
Net Income / (loss)
North America, primarily United States $ 2,076 $ 2,848 $ 5,437 $ 8,323
India 8,627 5,610 23,521 13,280
UK 111 332 740 (24)
Far East, primarily Singapore (31) (15) (124) 39
Germany (26) (86) (213) (283)
--------- --------- --------- ---------
Net Income $ 10,757 $ 8,689 $ 29,361 $ 21,335
========= ========= ========= =========
13. INCOME TAXES
The following table accounts for the differences between the provision for
income taxes and the amounts obtained by applying the statutory U. S.
federal income tax rate of 35% to income before income taxes:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
Income before income taxes $ 13,628 $ 11,613 $ 39,447 $ 28,883
--------- --------- --------- ---------
Statutory provision 35.0% 35.0% 35.0% 35.0%
State taxes net of federal benefit 1.1% 1.5% 1.1% 1.7%
Tax Free Investment Income (0.4%) (0.8%) (0.6%) (1.0%)
Foreign effective tax rates different
from US Statutory Rate (18.9%) (12.3%) (15.9%) (10.3%)
Tax reserves 4.4% 1.8% 5.9% 1.4%
Other (0.7%)
--------- --------- --------- ---------
PROVISION FOR INCOME TAXES 21.2% 25.2% 25.5% 26.1%
========= ========= ========= =========
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 also provides for tax
contingencies based on the Company's assessment of future regulatory
reviews of filed tax returns. Such reserves are recorded in income taxes
payable, are based on management's estimates and accordingly are subject
to revision based on additional information and are dependent upon the
judgment of regulatory reviews.
10
14. STOCK BASED COMPENSATION
As permitted by SFAS 123, the Company has elected to measure stock based
compensation cost using the intrinsic value method, in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and has
adopted the disclosure requirements of SFAS 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of
FASB Statement No. 123. Had the fair value of each stock option granted
been determined consistent with the methodology of FASB Statement No.
123, "Accounting for Stock Based Compensation", the pro forma impact on
the Company's net income and earnings per share is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
(in thousands) in thousands)
NET INCOME
As reported $ 10,757 $ 8,689 $ 29,361 $ 21,335
Impact of SFAS No. 123, net of tax 60 (1) (1,201) (1,766)
----------------------------------------------------------
PRO FORMA NET INCOME $ 10,817 $ 8,688 $ 28,160 $ 19,569
EARNINGS PER SHARE, PRO FORMA
Basic earnings per share $ 0.27 $ 0.22 $ 0.71 $ 0.51
Diluted earnings per share $ 0.26 $ 0.22 $ 0.69 $ 0.49
EARNINGS PER SHARE AS REPORTED
Basic earnings per share $ 0.27 $ 0.22 $ 0.74 $ 0.55
Diluted earnings per share $ 0.26 $ 0.22 $ 0.72 $ 0.54
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 39,718 38,726 39,478 38,672
Diluted 40,975 39,509 40,634 39,788
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions as on September 30, 2003 and 2002:
AS ON AS ON
SEP 30 2003 SEP 30 2002
----------- -----------
Estimated fair value of option granted $ 5.52 $ 5.26
ASSUMPTIONS
Risk free interest rate 3.14% 3.25%
Expected life 5 5
Expected volatility 76.91% 79.49%
Expected dividend yield 1.05% 0.00%
15. EVENTS AFTER THE BALANCE SHEET DATE
The Board of Directors at a meeting held on July 28, 2003 approved a
quarterly cash dividend of $0.06 per share to the Company's shareholders
of record on September 30, 2003, payable on October 13, 2003.
Accordingly, the Company paid a total of $2.4 million as a dividend to
its shareholders on October 13, 2003.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SYNTEL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
REVENUES. The Company's revenues consist of fees derived from its
Applications Outsourcing, e-Business, and TeamSourcing business segments.
Revenues increased by 4.7% to $44.1 million in the three months ended
September 30, 2003 from $42.1 million in the three months ended September
30, 2002. Fixed price revenues represented approximately 53% and 48% of
total revenues for the three months ended September 30, 2003 and 2002
respectively. Worldwide billable headcount, including personnel employed by
Syntel India, Syntel Singapore, Syntel Europe, and Syntel Germany as of
September 30, 2003 increased to 2,584 compared to 1,938 as of September 30,
2002. As of September 30, 2003, the Company had approximately 51% of its
billable workforce in India as compared to 38% as of September 30, 2002.
Significant growth in billable headcount was in India where a majority of
the Company's Development Centers are located.
APPLICATIONS OUTSOURCING REVENUES. Applications Outsourcing revenues
increased to $34.6 million for the three months ended September 30, 2003, or
78.4% of total revenues, from $28.8 million, or 68.3% of three months ended
September 30, 2002. The $5.8 million increase for the three months ended
September 30, 2003 was attributable principally to net growth in new
engagements, contributing approximately $16.8 million, largely offset by
$11.0 million in lost revenues as a result of project completion. The
revenues for the nine months ended September 30, 2003 increased to $100.4
million, or 76.0% of total revenues, from $82.9 million or 67.9% of total
revenues for the nine months ended September 30, 2002. The $17.5 million
increase for the nine months ended September 30, 2003 was attributable
principally to net growth in new engagements, contributing approximately
$41.4 million, largely offset by $23.9 million in lost revenues as a result
of projects completion and reductions in existing projects.
APPLICATIONS OUTSOURCING COST OF REVENUES. 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, finders fees, trainee compensation, and travel. Applications
Outsourcing costs of revenues increased to 54.7% of total Applications
Outsourcing revenues for the three months ended September 30, 2003, from
50.2% for the three months ended September 30, 2002. The 4.5% increase in
cost of revenues, as a percent of revenues for the three months ended
September 30, 2003 is principally attributable to aggressive hiring in the
third quarter. Although, such hiring impacted costs during this quarter they
did not necessarily add to revenues as a significant number of these hires
went into training. Cost of revenues for the nine months ended September 30,
2003 increased to 54.0% of total Applications Outsourcing revenues, from
53.7% for the nine months ended September 30, 2002, which is a marginal
increase of 0.3% in cost of revenues.
E-BUSINESS REVENUES. e-Business revenues decreased to $7.5 million for the
three months ended September 30, 2003, or 17.0% of total consolidated
revenues, from $9.7 million, or 23.0% of total consolidated revenues for the
three months ended September 30, 2002. The $2.2 million decrease for the
three months ended September 30, 2003 was principally due to net growth in
new engagements contributing approximately $5.8 million, offset by $6.4
million in lost revenues as a result of project completion and a $1.6
million sales incentive granted to a significant customer. Revenues for the
nine months ended September 30, 2003 decreased to $24.6 million, or 18.6 %
of total revenues, from $26.9 million or 22.0% of total revenues for the
nine months ended September 30, 2002. The $2.3 million decrease for the nine
months ended September 30, 2003 was attributable principally to a $1.6
million sales incentive granted to a significant customer and net growth in
new engagements, contributing approximately $13.6 million, offset by $14.3
million in lost revenues as a result of projects completion and reductions
in existing projects.
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, finders fees, trainee compensation, and travel. e-Business cost of
revenues increased to 66.6% of total e-Business revenues for the three
months ended September 30, 2003, from 57.9% for the three months ended
September 30, 2002. Cost of revenues for the nine months ended September 30,
2003 decreased to 58.9% of total e-Business revenues, from 61.6% for the
nine months ended September 30, 2002. The 8.7% increase in cost of revenues,
as a percent of revenues for the three months ended September 30, 2003 is
principally attributable to a reduction in revenues in this segment on
account of a sales incentive granted to a significant customer and
additional hiring in the third quarter. The 2.7% decrease in cost of
revenues, as a percent of revenues for the nine months ended September 30,
2003 is principally attributable to the increase in the offshore component
of the services.
12
TEAMSOURCING REVENUES. TeamSourcing revenues decreased to $2.1 million for
the three months ended September 30, 2003, or 4.7% of total revenues, down
from $3.7 million or 8.8 % of total revenues for the three months ended
September 30, 2002. The revenues for nine months ended September 30, 2003
decreased to $7.1 million, or 5.4 % of total revenues, from $12.4 million or
10.1% of total revenues for the nine months ended September 30, 2003. Both
the $1.6 million decrease for the three months ended September 30, 2003 as
well as the $5.3 million decrease for the nine months ended September 30,
2003 were principally due to a decrease in US based billable consultants on
various engagements, as a result of a conscious decision by management to
reduce organizational focus on this segment and focus on higher margin
segments.
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,
finders fees, trainee compensation, and travel. TeamSourcing cost of
revenues increased to 89.0% of TeamSourcing revenues for the three months
ended September 30, 2003, from 88.9% for the three months ended September
30, 2002. Cost of revenues for the nine months ended September 30, 2003
increased to 89.0% of total TeamSourcing revenues, from 86.8% for the nine
months ended September 30, 2002. Both the 0.1% and 2.2% increase in cost of
revenues, as a percent of revenues for the third quarter and for the nine
months ended September 30, 2003 respectively, were attributable primarily to
lower utilization and the conscious decision by management to reduce
organizational focus on this segment and focus on higher margin segments.
As a result of the continued uncertainty and weakness in the global economic
and political environment, companies continue to seek to outsource their IT
spending offshore. However, the Company also sees clients' needs to reduce
their costs and the increased competitive environment among IT companies.
The Company expects these conditions to continue in the next few quarters.
In response to the continued pricing pressures and increased competition for
outsourcing clients, the Company continues to focus on expanding its service
offerings into areas with higher and sustainable price margins, on managing
its cost structure, and on anticipating and correcting for decreased demand,
and skill and pay level imbalances in its personnel. The Company's immediate
measures include increased management of compensation expenses through
headcount management and variable compensation plans, as well as increasing
utilization rates or reducing non-deployed (sub-contractors) or non-billable
IT professionals.
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, marketing and various
facility costs for the Company's Global Development Centers and various
offices. Selling, general, and administrative costs for the three months
ended September 30, 2003 were $5.4 million or 12.2% of total revenues,
compared to $7.9 million or 18.9% of total revenues for the three months
ended September 30, 2002.
Selling, general, and administrative costs for the three months ended
September 30, 2003 includes reversal of $0.7 million bad debt expense,
primarily on account of successful recovery of receivables previously
provided for as allowance for doubtful accounts or written off, $1.7 million
decrease in the estimated reserves for litigation and legal fees due to
successful settlements ($1.4 million) and other changes in estimates of
underlying legal costs ($0.3 million) during the third quarter and $0.3
million reduction in office related expenses due to settlement of vendor
disputes and other miscellaneous reversals.
Selling, general, and administrative costs for the three months ended
September 30, 2002 included an additional allowance for doubtful accounts of
$0.9 million after collection of $0.1 million of previously provided
receivables and a $0.1 million reduction in office related expenses due to
reversal of outstanding checks pertaining to earlier periods.
Selling, general, and administrative costs for the nine months ended
September 30, 2003 were $19.8 million or 15.0% of total revenues, compared
to $23.6 million or 19.4% of total revenues for the nine months ended
September 30, 2002.
Selling, general, and administrative costs for the nine months ended
September 30, 2003 includes reversals of $1.5 million primarily on account
of successful recovery of receivables previously provided for as allowance
for doubtful accounts or written off, $2.7 million revision of the estimated
reserve for litigation and legal fees due to settlements and other changes
in estimates of underlying legal costs, $0.5 million reduction in office
related expenses due to the settlement of vendor disputes and other
miscellaneous reversals, and a downward revision of the 2002 estimates of
bonus compensation of $0.8 million.
Selling, general, and administrative costs for the nine months ended
September 30, 2002 included an additional allowance for doubtful accounts of
$1.2 million after collection of $0.9 million of previously provided
receivables, a downward revision of the 2001 estimates of bonus compensation
of $2.2 million and a $0.1 million reduction in office related expenses due
to reversal of outstanding checks pertaining to earlier periods.
13
The factors which affect the fluctuations in our allowance for doubtful
accounts and write offs of uncollectible accounts include the financial
health and economic environment of our clients. No one client has
contributed significantly to a loss and we have had no significant changes
in our collection policies or payment terms.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through
operations. The Company's cash and cash equivalents consist primarily of
certificates of deposit, corporate bonds and treasury notes. A large
majority of such amounts are held by Bank One for which a triple A rated
letter of credit has been provided. Remaining amounts are held by various
banking institutions including other U.S.-based and local India-based banks.
Net cash generated by operating activities was $30.3 million for the nine
months ended September 30, 2003, compared to $19.7 million for the nine
months ended September 30, 2002. The number of days sales outstanding in
accounts receivable was at approximately 62 days and 54 days as of September
30, 2003 and September 30, 2002 respectively.
Net cash used in investing activities was $20.4 million for the nine months
ended September 30, 2003, consisting principally of $24.6 million for the
purchase of available-for-sale securities and $3.0 million for capital
expenditures, consisting principally of software, PCs, communication
equipment and property; partially offset by $7.0 million of proceeds from
sale of available-for-sale securities. Net cash provided by investing
activities was $8.1 million for the nine months ended September 30, 2002,
which consisted principally of $24.5 million of proceeds from the sale of
available-for-sale securities, partially offset by $15.2 million for the
purchase of available-for-sale securities and $1.2 million for capital
expenditures consisting principally of computer equipment and communication
equipment.
Net cash used in financing activities was $44.2 million for the nine months
ended September 30, 2003, consisting principally of $5.8 million in proceeds
from the exercise of stock options, offset by common stock repurchases of
$0.2 million and a $49.9 million dividend payout. Net cash provided by
financing activities was $0.5 million for the nine months ended September
30, 2002, consisted principally of $3.8 million in proceeds from the
exercise of stock options; offset by common stock repurchases of $3.3
million.
The Company has a line of credit with Bank One, which provides for
borrowings of up to $20.0 million. The line of credit has been renewed
during this quarter and it now expires on August 31, 2004. The line of
credit contains covenants restricting the Company from, among other things,
incurring additional debt, issuing guarantees and creating liens on the
Company's property, without the prior consent of the bank. The line of
credit also requires the Company to maintain certain tangible net worth
levels and leverage ratios. At September 30, 2003, there was no indebtedness
outstanding under the line of credit. The Line of Credit has a sub-limit of
$5.0 million for letters of credit which bear a fee of 1 % per annum of the
face value of each standby letter of credit issued. Borrowings under the
line of credit bear interest at 1) a formula approximating the bank's
Eurodollar rate plus an applicable margin of 1.25% or 2) the bank's prime
rate plus 1.25%. The Company has made no borrowings under this facility.
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
Revenue recognition is the most significant accounting policy for the
Company. The Company recognizes revenue from time and material contracts as
services are rendered and costs are incurred. Revenue on fixed price
development projects is measured by the percentage of cost incurred to date
to the estimated total cost at completion. Revenue from fixed-price,
application management and support engagements is recognized as earned. The
cumulative impact of any change in estimates of the percentage complete or
losses on contracts is reflected in the period in which the changes become
known.
14
FORWARD LOOKING STATEMENTS / RISK FACTORS
Certain statements contained in this Report are forward looking statements
within the meaning of the Securities Exchange Act of 1934. In addition, the
Company from time to time may 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. Factors which could affect the forward looking
statements include those listed below. The Company does not intend to update
these forward looking statements.
o Recruitment and Retention of IT Professionals
o Government Regulation of Immigration
o Variability of Quarterly Operating Results
o Customer Concentration; Risk of Termination
o Exposure to Regulatory and General Economic Conditions in India
o Intense Competition
o Ability to Manage Growth
o Fixed-Price Engagements
o Potential Liability to Customers
o Dependence on Principal
o Risks Related to Possible Acquisitions
o Limited Intellectual Property Protection
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is primarily exposed to the effects of changes in foreign
currency. Foreign currency exchange risk exists as costs are paid in local
currency and receipts are provided in U.S. dollars. The risk is partially
mitigated as the Company has sufficient resources in the local currency to
meet immediate requirements. The Company's holdings and positions in market
sensitive instruments do not subject the Company to material risk. These
exposures are monitored and managed by the Company.
During the third quarter of 2003, the Indian rupee has appreciated by 2% as
compared to second quarter of 2003 which has marginally reduced the
Company's gross margin by 0.2%. The Indian rupee denominated Cost of
revenues and Selling, General and Administrative cost was 17% and 26%,
respectively which did not have a significant impact.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities - In April
2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. This Statement is effective for contracts
entered into or modified after June 30, 2003, except for specific situations
and for hedging relationships designated after June 30, 2003. The guidance
is to be applied prospectively. The Company has assessed the implication of
this interpretation and no significant impact is anticipated.
Accounting for Financial Instruments with Characteristics of Both
Liabilities and Equity - On May 15, 2003, the FASB issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". The Statement requires issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer. The Statement
is effective for financial instruments entered into or modified after May
31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company has assessed the
implication of this interpretation and no significant impact is anticipated.
15
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
of the Company's disclosure controls and procedures as of a date within 90
days of the filing date of this Quarterly Report on Form 10-Q as well as
mirror certifications from senior Management, the Company's Chairman,
President and Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934
(the Exchange Act) is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms and are operating in an effective manner.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure Controls are procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act, such
as this Report, is recorded, processed, summarized and reported within the
time periods specified in the U.S. Securities and Exchange Commission's (the
SEC) rules and forms. Disclosure Controls are also designed to ensure that
such information is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure. Internal Controls are procedures designed to
provide reasonable assurance that (1) our transactions are properly
authorized; (2) our assets are safeguarded against unauthorized or improper
use; and (3) our transactions are properly recorded and reported, all to
permit the preparation of our financial statements in conformity with
generally accepted accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
The company's management, including the CEO and CFO, does not expect that
our Disclosure Controls or our Internal Controls will prevent all error and
all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
detected. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of
compliance with its policies or procedures.
SCOPE OF THE CONTROLS EVALUATION
In the course of the Controls Evaluation, we sought to identify data errors,
control problems or acts of fraud and confirm that appropriate corrective
actions, including process improvements, were being undertaken. Our Internal
Controls are also evaluated on an ongoing basis by our Internal Audit
Department and by other personnel in our organization. The overall goals of
these various evaluation activities are to monitor our Disclosure Controls
and our Internal Controls, and to modify them as necessary; our intent is to
maintain the Disclosure Controls and the Internal Controls as dynamic
systems that change as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there
were any "significant deficiencies" or "material weaknesses" in the
company's Internal Controls, and whether the company had identified any acts
of fraud involving personnel with a significant role in the company's
Internal Controls. This information was important both for the Controls
Evaluation generally, and because the Rule 13a-14 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our
Board's Audit Committee and our independent auditors. We also sought to deal
with other controls matters in the Controls Evaluation, and in each case if
a problem was identified, we considered what revision, improvement and/or
correction to make in accordance with our ongoing procedures.
From the date of the Controls Evaluation to the date of this Report, there
have been no significant changes in Internal Controls or in other factors
that could significantly affect Internal Controls.
CONCLUSIONS
Based upon the Controls Evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective to ensure that material information
relating to Syntel and its consolidated subsidiaries is made known to
management, including the CEO and CFO, particularly during the period when
our periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting
principles.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
While the Company is a party to ordinary routine litigation incidental to
its business, the Company is not a party to any material pending legal
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
(b) Reports on Form 8-K
On July 18, 2003, the Company filed a Report on Form 8-K dated July 18,
2003. In that report on Form 8-K, the Company reported under Item 12
(furnished under Item 9) that it was releasing its results of operations and
financial condition for the three months ended June 30, 2003 and included
the text of that press release as an exhibit under Item 7.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNTEL, INC.
Date October 31st, 2003 /s/ Bharat Desai
----------------------------------------
Bharat Desai, Chairman, President and
Chief Executive Officer
Date October 31st, 2003 /s/ Keshav Murugesh
----------------------------------------
Keshav Murugesh, Chief Financial Officer
18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
19