Notes to the Unaudited Condensed Consolidated Financial Statements
1.
|
BASIS OF PRESENTATION:
|
The accompanying unaudited condensed consolidated financial statements of
Syntel, Inc. (the Company or Syntel) have been prepared by management, 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 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 and its subsidiaries as of June 30, 2018 and December 31, 2017, and the results of their
operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017. The
year-end
condensed consolidated balance sheet as of
December 31, 2017 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys annual report on Form
10-K
for the year ended December 31, 2017.
Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018.
2.
|
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
|
The condensed consolidated financial statements include
the accounts of Syntel, its wholly owned subsidiaries, and a joint venture and its subsidiary. All significant inter-company balances and transactions have been eliminated.
The wholly owned subsidiaries of Syntel, Inc. are:
|
|
|
Syntel (Australia) Pty. Ltd., an Australian limited liability company;
|
|
|
|
Syntel Canada Inc., an Ontario limited liability company;
|
|
|
|
Syntel Delaware, LLC, a Delaware limited liability company (Syntel Delaware);
|
|
|
|
Syntel Deutschland GmbH, a German limited liability company;
|
|
|
|
Syntel Europe Limited, a United Kingdom limited liability company;
|
|
|
|
Syntel Holding (Mauritius) Limited, a Mauritius limited liability company;
|
|
|
|
Syntel (Hong Kong) Limited, a Hong Kong limited liability company;
|
|
|
|
Syntel (Mauritius) Limited, a Mauritius limited liability company;
|
|
|
|
Syntel Private Limited, an Indian limited liability company (Syntel India);
|
|
|
|
Syntel Solutions Mexico, S. de R.L. de C.V., a Mexican limited liability company;
|
|
|
|
Syntel SPC, Inc., a Michigan corporation; and
|
|
|
|
Syntel Worldwide (Mauritius) Limited, a Mauritius limited liability company.
|
The wholly owned
subsidiaries of Syntel Europe Limited are:
|
|
|
Intellisourcing, SARL, a French limited liability company;
|
|
|
|
Syntel Poland, sp. z o.o., a Polish limited liability company (Syntel Poland);
|
|
|
|
Syntel Solutions BV, a Netherlands limited liability company; and
|
|
|
|
Syntel Switzerland GmbH, a Switzerland limited liability company.
|
The partially owned joint
venture of Syntel Delaware is:
|
|
|
State Street Syntel Services (Mauritius) Limited, a Mauritius limited liability company (SSSSML).
|
The wholly owned subsidiary of SSSSML is:
|
|
|
State Street Syntel Services Private Limited, an Indian limited liability company (SSSSPL).
|
7
The wholly owned subsidiaries of Syntel (Mauritius) Limited are:
|
|
|
Syntel Global Private Limited, an Indian limited liability company;
|
|
|
|
Syntel International Private Limited, an Indian limited liability company; and
|
|
|
|
Syntel Technologies (Mauritius) Limited, a Mauritius limited liability company.
|
The wholly
owned subsidiaries of Syntel Holding (Mauritius) Limited are:
|
|
|
Syntel Services Private Limited, an Indian limited liability company;
|
|
|
|
Syntel Software (Mauritius) Limited, a Mauritius limited liability company; and
|
|
|
|
Syntel Solutions (Mauritius) Limited, a Mauritius limited liability company.
|
The wholly owned
subsidiary of Syntel Solutions (Mauritius) Limited is:
|
|
|
Syntel Solutions (India) Private Limited, an Indian limited liability company.
|
The wholly
owned subsidiary of Syntel Worldwide (Mauritius) Limited is:
|
|
|
Syntel (Singapore) PTE Limited, a Singapore limited liability company.
|
The wholly owned
subsidiary of Syntel (Singapore) PTE Limited is:
|
|
|
Syntel Infotech, Inc., a Philippines corporation.
|
The wholly owned subsidiary of Syntel
Technologies (Mauritius) Limited is:
|
|
|
Syntel Technologies LLP, an Indian limited liability partnership.
|
The wholly owned subsidiary
of Syntel Software (Mauritius) Limited is:
|
|
|
Syntel Software LLP, an Indian limited liability partnership.
|
Through August 31, 2017, SkillBay LLC, a
Michigan limited liability company (SkillBay), and Syntel Consulting Inc., a Michigan corporation (Syntel Consulting), were wholly-owned subsidiaries of Syntel. On September 1, 2017 (the Effective Date),
SkillBay and Syntel Consulting were merged with and into Syntel and ceased to exist. Also on the Effective Date, all assets, liabilities, interests, and reserves of SkillBay and Syntel Consulting were transferred to and assumed by Syntel and all
common stock issued by Syntel Consulting to Syntel as the sole shareholder and Syntels membership interest in SkillBay as the sole member were cancelled.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to, the allowance for doubtful accounts, impairment of long-lived assets and goodwill, contingencies and
litigation, the recognition of revenues and profits for fixed price development contracts, valuation allowance for deferred tax assets, potential tax liabilities and bonus accrual. Actual results could differ from those estimates and assumptions
used in the preparation of the accompanying financial statements.
8
i. Nature of Services
Syntel is a worldwide provider of information technology (IT) and knowledge process outsourcing(KPO) services to Global 2000 companies. The Companys IT
services include programming, system integration, outsourcing and overall project management. The Companys KPO services consist of high-value, customized outsourcing solutions that enhance critical back-office services such as transaction
processing, loan servicing, retirement processing, collections and payment processing.
The Companys revenues are generated from professional
services fees provided through five segments, Banking and Financial Services, Healthcare and Life Sciences, Insurance, Manufacturing, and Retail, Logistics and Telecom. Please refer to Note 13 on Segment Reporting for a detailed
discussion on each of these segments.
ii. Revenue Recognition
The Company adopted ASC Topic 606 Revenue from Contracts with Customers with a date of initial application of January 1, 2018. As a result,
the Company has changed its accounting policy for revenue recognition as detailed below.
Revenue from
time-and-material
contracts are recognized over time at the amount for which the Company has a right to invoice because such amounts correspond directly with the value provided to the customer to date.
Customers are generally invoiced on a monthly basis and consideration is payable when invoiced.
Revenue from fixed-price application management
maintenance and support engagements are recognized, over time as the company satisfies the performance obligations, based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being
delivered, in accordance with the practical expedient in ASC
606-10-55-18.
If our invoicing is not consistent with value
delivered, revenue are recognized over time on straight-line basis as services are performed continuously over the term of the engagement. The contracts include a series of distinct services that are substantially the same and have the same pattern
of transfer; accordingly they are accounted for as a single performance obligation.
Revenue on fixed-price application development projects is recognized
over time based on the actual services provided through the end of the reporting period as a proportion of the total services to be provided. This is determined based on the actual labor hours incurred relative to the total expected labor hours, as
it best depicts the transfer of goods and services to the customers.
Revenue is measured based on the transaction price, which is the consideration, net
of customer incentives, discounts, variable considerations, payments made to customers for third party portal charges (where no benefit is received), and other similar charges, as specified in the contract with the customer.
For reimbursements of
out-of-pocket
expenses incurred in fulfilling promised
services to customers, the Company evaluates whether it is principal (i.e., reported as revenues) or agent (i.e., not reported as revenues). Based on this analysis, the amount billed to customers for reimbursements are either reported as revenues on
a gross basis or reported as revenues on a net basis.
Contracts may include multiple deliverables, such as the maintenance of software developed for the
customers. In most cases, the maintenance is simple and does not include any integration service and could be performed by another party. In such cases, the development and maintenance are each accounted for as separate performance obligations.
Accordingly, the contract transaction price is allocated to each performance obligation based on stand-alone selling prices. Where these stand-alone selling prices are not directly observable, they are estimated based on expected cost plus margin.
9
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Contracts are often modified to account for
changes in contract specification and requirements. The Company considers a contract modification when the modification either creates new or changes the existing enforceable rights and obligations. Most of Companys contract modifications are
initiated through change requests for distinct services inclusive of price increases based on standalone selling price which are accounted as a separate contract.
iii. Significant Accounting Estimates
The use of the
input-based measure of progress method of accounting in case of fixed-price development contracts requires that the Company makes estimates about its future efforts and costs, based on the percentage of hours incurred relative to total estimated
hours, for such 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. Any resulting increases or decreases in the estimated
revenues or costs are reflected in statement of comprehensive income in the period in which the circumstances that give rise to the revision become known by management. In the event that a loss is anticipated on a particular contract, a provision is
made for the estimated loss.
a. Variable consideration
Variable consideration includes volume discounts, term extension credits, service level credits, performance bonuses, price concessions, and incentives. The
Company estimates the variable consideration with respect to the above features based on an analysis of accumulated historical experience. The Company adjusts estimates of revenue for volume discounts at the earlier of when the most likely amount of
consideration expected to be received changes or when the uncertainty associated with the variable consideration is subsequently resolved.
b. Contract
Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records revenue earned in excess of billings
(less associated advances and progress billings) when revenue is recognized prior to invoicing, or unearned revenue/deferred revenue when revenue is recognized subsequent to invoicing.
Contract Assets primarily relate to the Companys rights (other than passage of time) to consideration for work completed on the contract entered but not
yet billed to the customer at the reporting period. Right to consideration arising from Fixed Price Development contracts meets the contract assets definition as stated under ASC
606-10-20.
Contract Assets are transferred to accounts receivable when the invoicing is done per the agreed upon contractual terms.
Contract Liabilities primarily relate to the advance consideration received on contracts entered with customers for which no work has been performed. As the
work is performed and obligations are satisfied, revenue is then recognized.
c. Remaining Performance obligations
Remaining performance obligations related to ASC 606, for fixed-price application management maintenance and support engagements (other than contracts
where revenue is recognized based on the Companys right to invoice)represents the aggregate transaction price allocated to performance obligations with an original contract term greater than one year, including contracts where the customer has
material right not to terminate the contract, which are fully or partially unsatisfied at the end of the period. Remaining performance obligations do not include revenue from contracts with customers with an original term of one year or less,
contracts for which revenue is recognized based on the right to invoice for services performed and contracts which can be terminated for convenience without substantial penalty.
10
5.
|
STOCK-BASED EMPLOYEE COMPENSATION PLANS
|
The Company recognizes stock-based compensation expense in the
consolidated financial statements for awards of equity instruments to employees and
non-employee
directors based on the grant-date fair value of those awards on a straight-line basis over the requisite service
period of the award, which is generally the vesting term. If a plan is modified, the incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award. The
benefits/deficiencies of tax deductions in excess/short of recognized compensation expense are reported as an operating cash flow.
6.
|
STOCK REPURCHASE PLANS
|
The Company recognizes the cost of repurchasing common stock acquired for
purposes other than retirement (formal or constructive), as a reduction from the total of capital stock, additional
paid-in
capital, and retained earnings. The Company has recorded the cost of repurchasing
common stock, as a reduction from capital stock.
7.
|
DERIVATIVE INSTRUMENTS
|
The Company is directly and indirectly affected by changes in certain market
conditions. These changes in market conditions may adversely impact the Companys financial performance and are referred to as market risks. When deemed appropriate, the Company uses derivatives as a risk management tool to mitigate
the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency exchange rate risk and interest rate risk.
Hedging transactions and derivative financial instruments
The Company uses derivative instruments such as interest rate swaps to manage interest rate risks. A swap agreement is a contract between two parties to
exchange cash flows based on specified underlying notional amounts, assets and/or indices. We do not enter into derivative financial instruments for trading purposes.
All derivatives are carried at fair value on our consolidated balance sheets on the following line items, as applicable: other current assets; deferred income
taxes and other
non-current
assets; accounts payable; and deferred income taxes and other
non-current
liabilities. The carrying values of the derivatives reflect the
impact of legally enforceable master netting agreements as applicable. These master netting agreements allow the Company to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same
counterparty.
The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the
derivatives have been designated and qualify as hedging instruments and the type of hedging relationships. Derivatives such as interest rate swaps can be designated as cash flow hedges. The changes in the fair values of derivatives that have been
designated and qualify as cash flow hedges are recorded in Accumulated Other Comprehensive Income (AOCI) and are reclassified into the line item in our consolidated statement of income in which the hedged items are recorded in the same
period the hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in
the fair values or cash flows of the underlying exposures being hedged. The changes in the fair values of derivatives that are not designated and/or do not qualify as hedging instruments are immediately recognized into earnings.
For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a
hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses both at the inception and at least quarterly thereafter, whether the financial
instruments used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a financial instruments change in fair value is immediately
recognized into earnings.
11
The Company determines the fair values of its derivatives based on quoted market prices or pricing models using
current market rates. Fair values of interest rate swaps are measured using standard valuation models using inputs that are readily available in public markets, or can be derived from observable market transactions, including LIBOR spot and forward
rates.
Credit risk associated with derivatives
The
Company considers the risks of
non-performance
by the counterparty as not material. The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign
currency transaction and interest rate swap obligations. The Company also mitigates the credit risk of these derivatives by transacting with major banks as counterparties that are highly rated globally. The Company evaluates the credit and
non-performance
risks associated with its derivative counterparties, and believes that the impact of the credit risk associated with the outstanding derivatives is insignificant.
Cash flow hedging strategy
The Company uses cash flow
hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in interest rates. The changes in the fair values of derivatives designated as cash flow hedges are recorded in AOCI and are
reclassified into the line item in the Companys consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. The changes in fair values of hedges that are determined to be
ineffective are immediately reclassified from AOCI into earnings. The maximum length of time for which the Company hedges its exposure to the variability in future cash flows is typically over the terms of hedged items.
Interest rate swaps
In connection with the
Companys senior credit facility with Bank of America N.A., the Company entered into an interest rate swap arrangement on November 30, 2016 to hedge interest rate risk on the entire term loan of $300 million by entering into a Pay
Fixed and Receive Floating interest rate swap (the Swap) for the entire duration of the term loan. The Swap is designed to reduce the variability of future interest payments with respect to the term loan by effectively fixing the annual
interest rate payable on the term loans outstanding principal.
A designated hedge with exposure to variability in the future interest payments of a
floating rate loan is a cash flow hedge. The criteria for designating a derivative as a cash flow hedge include the assessment of the instruments effectiveness in risk reduction, matching of the derivative instrument to its underlying
transaction including its terms, and the assessment of the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, the Company reports the
after-tax
gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income and reclassifies it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item
on the consolidated statements of income as the impact of the hedged transaction.
Measurement of effectiveness and ineffectiveness:
Effectiveness for interest rate swaps is generally measured by comparing the critical terms of the hedged item and the hedging instrument whereas
ineffectiveness is measured by comparing the cumulative change in fair value of the swap with the cumulative change in the fair value of the hedged item.
12
An interest rate swap with an aggregate amount of $300 million economically converts a portion of the
Companys variable rate debt to fixed rate debt. The effective portions of cash flow hedges are recorded in Accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Deferred gains and losses
associated with cash flow hedges of interest expense are recognized in Other income (expense), net in the same period as the related expense is recognized. The ineffective portions and amounts excluded from the effectiveness testing of
cash flow hedges are recognized in Other income (expense), net.
Derivative instruments designated as cash flow hedges must be
de-designated
as hedges when it is probable that the forecasted hedged transaction will not occur in the initially identified time period. Deferred gains and losses in Accumulated other comprehensive income
(loss) associated with such derivative instruments are reclassified immediately into Other income (expense), net. Any subsequent changes in fair value of such derivative instruments are reflected in Other income (expense),
net unless they are
re-designated
as hedges of other transactions.
The following table provides information
on the location and fair value of the derivative financial instrument included in our consolidated statement of financial positions as of June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Particulars
|
|
Notional
amount
outstanding
|
|
|
Fair value of
derivative and
location on
statement of
financial
position as on
30th June 2018
|
|
|
Gain on fair value
for three
months
ended June 30, 2018
|
|
|
Gain on fair value
for six months
ended
June 30, 2018
|
|
|
|
|
Effective
|
|
|
Ineffective
|
|
|
Effective
|
|
|
Ineffective
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cash flow hedge
|
|
|
|
|
|
|
Deferred income
taxes and other
non-current assets
|
|
|
|
Other current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed interest rate swap
|
|
|
$268.1 Million
|
|
|
$
|
6,438
|
|
|
$
|
754
|
|
|
$
|
975
|
|
|
|
|
|
|
$
|
3,885
|
|
|
|
|
|
The following table presents the net gains (losses) recorded in accumulated other comprehensive (loss) income relating to the
Swap designated as cash flow hedges for the periods ending June 30, 2018 and 2017.
Gains on Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
June 30,
|
|
|
(In thousands)
SIX MONTHS ENDED
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gains(Loss)recognized in other comprehensive income
|
|
$
|
975
|
|
|
$
|
(672
|
)
|
|
$
|
3,885
|
|
|
$
|
291
|
|
The Company will reclassify an amount which will be equivalent to the accrued interest on the Swap in every reporting period
as there is a similar impact of accrued interest on the loan in the income statement.
13
Derivative
(Non-Designated)
Hedging Strategy
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives for its foreign currency
exposure. These derivatives were not designated and/or did not qualify for hedge accounting. The changes in fair value of derivatives are immediately recognized into earnings. The Company does not enter into derivative financial instruments for
trading purposes.
The Company periodically enters into foreign exchange forward contracts to mitigate the risk of changes in foreign currency exchange
rates, specifically changes between the Indian rupee currency and the U.S. dollar currency. The contracts are adjusted to fair value at each reporting period. Gains and losses on forward contracts are generally recorded in Other income
(expense), net unless they are designated as an effective hedge. Although the Company cannot predict fluctuations in foreign currency rates, the Company currently anticipates that foreign currency risk may have a significant impact on the
financial statements. In order to limit the exposure to fluctuations in foreign currency rates, when the Company enters into foreign exchange forward contracts, where the counter-party is a bank, these contracts may also have a material impact on
the financial statements.
The Companys Indian subsidiaries, whose functional currency is the Indian rupee, periodically enter into foreign exchange
forward contracts to buy Indian rupees and sell U.S. dollars to mitigate the risk of changes in foreign exchange rates on U.S. dollar denominated assets, primarily comprised of receivables from the parent Company (Syntel, Inc.) and other direct
customers, and liabilities recorded on the books of the Indian subsidiaries. These forward contracts are denominated in U.S. dollars.
These forward
contracts do not qualify for hedge accounting under ASC 815, Derivative and Hedging. Accordingly, these contracts are carried at a fair value with the resulting gains or losses included in the statement of comprehensive income under
Other income (expense), net. The related cash flow impacts of all of our derivative activities are recorded in the condensed consolidated statements of cash flows under cash flows from operating activities.
During the period ended June 30, 2018, the Company did not enter into any foreign exchange forward contracts. At June 30, 2018 and December 31,
2017, no foreign exchange forward contracts were outstanding.
14
8.
|
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (NET OF TAX EXPENSE OR BENEFIT)
|
The
changes in balances of accumulated other comprehensive loss for the three months ended June 30, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
gain on
derivatives
designated
as cash flow
hedges
|
|
|
Unrealized
Gains
(Losses)
on debt
Securities
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Beginning balance
|
|
$
|
(246,853
|
)
|
|
$
|
4,568
|
|
|
$
|
754
|
|
|
$
|
(463
|
)
|
|
$
|
(241,994
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(12,614
|
)
|
|
|
716
|
|
|
|
294
|
|
|
|
|
|
|
|
(11,604
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(144
|
)
|
|
|
(2
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income/(loss)
|
|
$
|
(12,614
|
)
|
|
$
|
716
|
|
|
$
|
150
|
|
|
$
|
(2
|
)
|
|
$
|
(11,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(259,467
|
)
|
|
$
|
5,284
|
|
|
$
|
904
|
|
|
$
|
(465
|
)
|
|
$
|
(253,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive income (loss) for the three months ended June 30, 2018 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Details about Accumulated Other
Comprehensive Income (Loss)
Components
|
|
Affected Line
Item in the
Statement
Where Net
income (loss)
Is Presented
|
|
Before
Tax
Amount
|
|
|
Tax
Expense
(Benefit)
|
|
|
Net of Tax
|
|
Unrealized gains on available for sale debt securities
|
|
Other income, net
|
|
$
|
(207
|
)
|
|
$
|
63
|
|
|
$
|
(144
|
)
|
Amortization of prior service cost included in net periodic pension cost
|
|
Cost of revenues
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
15
The changes in balances of accumulated other comprehensive loss for the three months ended June 30, 2017 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
gain
(losses) on
derivatives
designated
as cash flow
hedges
|
|
|
Unrealized
Gains
(Losses)
on debt
Securities
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Beginning balance
|
|
$
|
(248,035
|
)
|
|
$
|
904
|
|
|
$
|
362
|
|
|
$
|
(1,336
|
)
|
|
$
|
(248,105
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
937
|
|
|
|
(406
|
)
|
|
|
136
|
|
|
|
|
|
|
|
667
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
18
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
$
|
937
|
|
|
$
|
(406
|
)
|
|
$
|
73
|
|
|
$
|
18
|
|
|
$
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(247,098
|
)
|
|
$
|
498
|
|
|
$
|
435
|
|
|
$
|
(1,318
|
)
|
|
$
|
(247,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive income (loss) for the three months ended June 30, 2017 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Details about Accumulated Other
Comprehensive Income (Loss)
Components
|
|
Affected Line
Item in the
Statement
Where Net
Income
(Loss) Is
Presented
|
|
Before
Tax
Amount
|
|
|
Tax
Expense
(Benefit)
|
|
|
Net of Tax
|
|
Unrealized gains (losses) on available for sale debt securities
|
|
Other income, net
|
|
$
|
(89
|
)
|
|
$
|
26
|
|
|
$
|
(63
|
)
|
Amortization of prior service cost included in net periodic pension cost
|
|
Cost of revenues
|
|
$
|
24
|
|
|
$
|
(6
|
)
|
|
$
|
18
|
|
16
The changes in balances of accumulated other comprehensive loss for the six months ended June 30, 2018 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
gain on
derivatives
designated
as cash flow
hedges
|
|
|
Unrealized
Gains
(Losses) on
debt
Securities
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Beginning balance
|
|
$
|
(244,396
|
)
|
|
$
|
2,430
|
|
|
$
|
515
|
|
|
$
|
(190
|
)
|
|
$
|
(241,641
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(15,071
|
)
|
|
|
2,854
|
|
|
|
498
|
|
|
|
18
|
|
|
|
(11,701
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
4
|
|
|
|
(105
|
)
|
Prior service cost arising during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297
|
)
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
$
|
(15,071
|
)
|
|
$
|
2,854
|
|
|
$
|
389
|
|
|
$
|
(275
|
)
|
|
$
|
(12,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(259,467
|
)
|
|
$
|
5,284
|
|
|
$
|
904
|
|
|
$
|
(465
|
)
|
|
$
|
(253,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive income (loss) for the six months ended June 30, 2018 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Details about Accumulated
Other Comprehensive Income
(Loss)
Components
|
|
Affected
Line Item in
the
Statement
Where Net
income (loss)
Is Presented
|
|
Before
Tax
Amount
|
|
|
Tax
Expense
(Benefit)
|
|
|
Net of Tax
|
|
Unrealized (gains) losses on available for sale debt securities
|
|
Other income, net
|
|
$
|
(156
|
)
|
|
$
|
47
|
|
|
$
|
(109
|
)
|
Amortization of prior service cost included in net periodic pension cost
|
|
Cost of revenues
|
|
$
|
7
|
|
|
$
|
(3
|
)
|
|
$
|
4
|
|
17
The change in balances of accumulated comprehensive loss for the six months ended June 30, 2017 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
gain on
derivatives
designated
as cash flow
hedges
|
|
|
Unrealized
Gains
(Losses)
on
Securities
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Beginning balance
|
|
$
|
(254,210
|
)
|
|
$
|
322
|
|
|
$
|
328
|
|
|
$
|
(1,345
|
)
|
|
$
|
(254,905
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
7,112
|
|
|
|
176
|
|
|
|
165
|
|
|
|
6
|
|
|
|
7,459
|
|
Amounts reclassified from accumulated other comprehensive Income (loss)
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
21
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income
|
|
$
|
7,112
|
|
|
$
|
176
|
|
|
$
|
107
|
|
|
$
|
27
|
|
|
$
|
7,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(247,098
|
)
|
|
$
|
498
|
|
|
$
|
435
|
|
|
$
|
(1,318
|
)
|
|
$
|
(247,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive loss for the six months ended June 30, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Details about Accumulated Other
Comprehensive Loss Components
|
|
Affected Line
Item in the
Statement
Where Net
Income Is
Presented
|
|
Before
Tax
Amount
|
|
|
Tax
(Expense)
Benefit
|
|
|
Net of
Tax
|
|
Unrealized gains on available for sale debt securities
|
|
Other income, net
|
|
$
|
(81
|
)
|
|
$
|
23
|
|
|
$
|
(58
|
)
|
Amortization of prior service cost included in net periodic pension cost
|
|
Cost of revenues
|
|
$
|
32
|
|
|
$
|
(11
|
)
|
|
$
|
21
|
|
18
9.
|
TAX ON OTHER COMPREHENSIVE INCOME (LOSS)
|
Total tax benefit (expense) on other comprehensive income
(loss) for the three and six months ended June 30, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Unrealized gain (loss) on derivatives designated as cash flow hedges
|
|
|
(259
|
)
|
|
|
266
|
|
|
|
(1,031
|
)
|
|
|
(115
|
)
|
Tax benefit (expense) on unrealized gains (losses)
on debt securities
|
|
|
(69
|
)
|
|
|
(36
|
)
|
|
|
(154
|
)
|
|
|
(53
|
)
|
Tax benefit (expense) on defined benefit pension plans
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
157
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax benefit (expense) on other comprehensive income (loss)
|
|
$
|
(329
|
)
|
|
$
|
224
|
|
|
$
|
(1,028
|
)
|
|
$
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
CASH AND CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
|
Cash, Cash Equivalents and Restricted Cash
For reporting cash, cash equivalents and restricted cash the Company considers all liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
The cash and cash equivalents as of June 30, 2018 and December 31, 2017, were $78.0 million and
$96.0 million, respectively, which were held in banks and fixed deposits with various banking and financial institutions.
The following table
provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
(In thousands)
|
|
Cash and Cash equivalent
|
|
$
|
77,971
|
|
|
$
|
95,994
|
|
Restricted cash
|
|
$
|
|
|
|
$
|
|
|
Restricted cash included in other assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash, Cash equivalents, and restricted cash shown in the statement of cash
flow
|
|
$
|
77,971
|
|
|
$
|
95,994
|
|
|
|
|
|
|
|
|
|
|
19
Short-term Investments
The Companys short-term investments consist of short-term mutual funds, which have been classified as
available-for-sale
debt securities and are carried at estimated fair value. Fair value is determined based on quoted market prices. Unrealized gains and losses, net of taxes, on
available-for-sale
debt securities are reported as a separate component of accumulated other comprehensive income (loss) in shareholders equity. Net realized gains
or losses resulting from the sale of these investments, and losses resulting from decline in fair values of these investments that are other than temporary declines, are included in other income (expense), net. The cost of securities sold is
determined using the weighted-average method.
Short-term investments also include term deposits with an original maturity exceeding three months and
whose maturity date is within one year from the date of the balance sheet. Term deposits were $1.2 million and $0.8 million at June 30, 2018 and December 31, 2017, respectively.
The following table summarizes short-term investments as of June 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
(In thousands)
|
|
Investments in mutual funds at fair value
|
|
$
|
48,600
|
|
|
$
|
25,719
|
|
Term deposits with banks
|
|
|
1,197
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,797
|
|
|
$
|
26,501
|
|
|
|
|
|
|
|
|
|
|
Information related to investments in mutual funds (primarily Indian Mutual Funds) is as follows as of June 30, 2018 and
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
(In thousands)
|
|
Cost
|
|
$
|
47,651
|
|
|
$
|
25,314
|
|
Unrealized gain, net
|
|
|
949
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
48,600
|
|
|
$
|
25,719
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
513
|
|
|
$
|
1,494
|
|
Proceeds on sales of mutual funds
|
|
|
144,634
|
|
|
|
239,019
|
|
Purchases of mutual funds
|
|
|
168,352
|
|
|
|
246,660
|
|
Non-current
Term Deposits with Banks
Non-current
term deposits with banks include deposits with maturity exceeding one year from the date of the balance
sheet. As of June 30, 2018 and December 31, 2017
non-current
term deposits with banks were $0.4 and $0.4 million, respectively. Term deposits with banks include restricted deposits of
$0.75 million and $0.54 million as of June 30, 2018 and December 31, 2017, respectively, placed as security towards performance guarantees issued by the Companys bankers on the Companys behalf.
20
11.
|
LINE OF CREDIT AND TERM LOAN
|
On September 12, 2016, the Company entered into a credit agreement
(Senior Credit Facility), as amended as of October 26, 2016, July 18, 2017 (the Second Amendment), and June 7, 2018 (the Third Amendment) with Bank of America, N.A, as administrative agent, L/C
issuer and swing line lender, the other lenders party thereto, and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and sole bookrunner. The Senior Credit Facility was originally for $500 million in credit
facilities consisting of a five-year term loan facility of $300 million (the Term Loan) and a five-year revolving credit facility of $200 million (the Revolving Facility). The Third Amendment reduced the Revolving
Facility from $200 million to $25 million. The maturity date of the Senior Credit Facility is September 11, 2021. The Revolving Facility allows for the issuance of letters of credit and swingline loans. The Senior Credit Facility was
guaranteed by two of the Companys domestic subsidiaries, SkillBay and Syntel Consulting (collectively, the Guarantors). In connection with the Senior Credit Facility, 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 Second Amendment modified the Senior Credit
Facility to allow the Company to make additional restricted payments in an aggregate amount not to exceed $50,000,000 so long as the Company had not defaulted and remained in compliance with the financial covenants set forth in the Senior Credit
Facility on a pro forma basis. On September 1, 2017, SkillBay and Syntel Consulting were merged with and into Syntel, Inc. No approvals or amendments were required under the terms of the Senior Credit Facility for this merger among parties to
the agreement.
The interest rates applicable to the Senior Credit Facility other than in respect of swing line loans are LIBOR plus 1.50% or, at the
option of the Company, the Base Rate (to be defined as the highest of (x) the Federal Funds Rate as that term is defined in the Senior Credit Facility plus 0.50%, (y) the Bank of America prime rate, or (z) LIBOR plus 1.00%) plus 0.50%.
Each swingline loan shall bear interest at the Base Rate plus 0.50%. In no event shall LIBOR be less than 0% per annum.
As of June 30, 2018, the
interest rate was 3.5935% for the Term Loan.
The Company has also hedged interest rate risk on the entire Term Loan of $300 million by entering into
the Swap. The Pay Fixed component of the Swap is fixed at 3.16%. The Company has designated the Swap in a hedging relationship with the Term Loan. The Swap is recorded at fair value and a gain of $1.0 million and loss of $0.7 million were
recorded during the three months ended June 30, 2018 and 2017, respectively, and a gain of $3.9 million and $0.3 million for the six months ended June 30, 2018 and 2017, respectively, is recorded in Accumulated other
comprehensive income with the corresponding adjustment in other current assets and other
non-current
assets.
With the interest rates charged on the Senior Credit Facility being variable, the fair value of the Senior Credit Facility approximates the reported value as
of June 30, 2018, as it reflects the current market value.
The Term Loan provides for the principal payments as follows:
|
|
|
|
|
|
|
Period
|
|
Payment amount per quarter
|
|
Beginning from
|
|
Until
|
|
(In millions)
|
|
October 31, 2017
|
|
September 30, 2018
|
|
$
|
5.625
|
|
October 31, 2018
|
|
September 30, 2021
|
|
$
|
7.500
|
|
During the three months ended June 30, 2018, $5.6 million in principal payments were made toward the Term Loan
The Senior Credit Facility requires compliance with certain financial ratios and covenants. As of June 30, 2018, the Company was in compliance with all
financial ratios and covenants.
As of June 30, 2018, the outstanding balances of the Term Loan and Revolving Facility, including accrued interest,
were $268.1 million and
$-0-
(net of $0.7 million unamortized debt issuance cost), respectively. As of December 31, 2017, the outstanding balances of the
Term Loan and Revolving Facility, including accrued interest, were $278.9 million and $79.8 million (net of $0.7 million unamortized debt issuance cost), respectively.
21
Future scheduled payments on the Senior Credit Facility, as of June 30, 2018 are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Term Loan
|
|
|
|
Principal
Payments
|
|
2018
|
|
$
|
13,125
|
|
2019
|
|
$
|
30,000
|
|
2020
|
|
$
|
30,000
|
|
2021
|
|
$
|
195,000
|
|
|
|
|
|
|
Total
|
|
$
|
268,125
|
|
|
|
|
|
|
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during the applicable period. If the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of basic and
diluted earnings per share are adjusted retroactively for all periods presented to reflect that change in capital structure. If such changes occur after the close of the reporting period but before issuance of the financial statements, the
per-share
computations for that period and any prior-period financial statements presented are based on the new number of shares.
The Company has issued restricted stock units, which are considered to be potentially dilutive to its basic earnings per share. Diluted earnings per share is
calculated using the treasury stock method for the dilutive effect of restricted stock units granted pursuant to the incentive plans, by dividing the net income by the weighted average number of shares outstanding during the period adjusted for
these potentially dilutive restricted stock units, except when the results would be anti-dilutive. The dilutive earnings per share are computed using the treasury stock method.
The following tables set forth the computation of earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share earnings)
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Weighted
Average
Shares
|
|
|
Earnings
per
Share
|
|
|
Weighted
Average
Shares
|
|
|
Earnings
per
Share
|
|
Basic earnings per share
|
|
|
83,130
|
|
|
$
|
0.49
|
|
|
|
83,818
|
|
|
$
|
0.44
|
|
Potential dilutive effect of restricted stock units outstanding
|
|
|
345
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
83,475
|
|
|
$
|
0.49
|
|
|
|
83,853
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share earnings)
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Weighted
Average
Shares
|
|
|
Earnings
per
Share
|
|
|
Weighted
Average
Shares
|
|
|
Earnings
per
Share
|
|
Basic earnings per share
|
|
|
83,130
|
|
|
$
|
1.04
|
|
|
|
83,807
|
|
|
$
|
0.90
|
|
Potential dilutive effect of restricted stock units outstanding
|
|
|
296
|
|
|
|
|
|
|
|
37
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
83,426
|
|
|
$
|
1.04
|
|
|
|
83,844
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syntel, incorporated under Michigan law on April 15, 1980, is a global provider
of digital transformation, information technology (IT) and knowledge process outsourcing (KPO) services to Global 2000 companies.
The Companys
reportable business segments are as follows:
|
|
|
Banking and Financial Services
|
|
|
|
Healthcare and Life Sciences
|
|
|
|
Retail, Logistics and Telecom
|
In each of our business segments, Syntel helps customers adapt to market change
by providing a broad array of technology-based, industry-specific solutions. These solutions leverage Syntels strong understanding of the underlying trends and market forces in our chosen industry segments. These solutions are complemented by
strong capabilities in Digital Modernization, Social, Mobile, Analytics and Cloud (SMAC) technologies, Business Intelligence (BI), KPO, application services, testing, Enterprise Resource Planning (ERP), IT Infrastructure Management Services (IMS),
and business and technology consulting.
Banking and Financial Services
Our Banking and Financial Services segment serves financial institutions throughout the world. Our clients include companies providing banking, capital
markets, cards and payments, investments and transaction processing services to third parties. Our clients engage us to help make their operations as effective, productive and cost-efficient as possible, and to support new capabilities. We assist
these clients in such areas as: payment solutions, retail banking, wholesale banking, consumer lending, risk management, investment banking, reconciliation, fraud analysis, mobile banking, and compliance and securities services. The demand for our
services in the banking and financial services sector is being driven by changing global regulatory requirements, customer interest in newer technology areas and related services such as digital modernization, and an ongoing focus on cost reduction
and operational efficiencies.
Healthcare and Life Sciences
Our Healthcare and Life Sciences segment serves healthcare payers, providers and pharmaceutical and medical device providers, among others. The healthcare
industry is constantly seeking to improve the quality of care while managing the cost of care in order to make healthcare affordable to a larger population. Our healthcare practice focuses on providing a broad range of services and solutions to the
industry across the consumer lifecycle, which includes regulatory requirements, integrated care, stakeholder engagement and wider use of electronic health records, among others. We also partner with clients to modernize their systems and
processes to enable them to deal with the increasing consumer orientation of healthcare, such as adoption of mobile and analytics solutions to improve access to health information and decision making by end consumers.
23
In the life sciences category, we partner with leading pharmaceutical, biotech, and medical device companies, as
well as providers of generics, animal health and consumer health products. Our life sciences solutions help transform many of the business processes in the life sciences value chain (research, clinical development, manufacturing and supply chain,
and sales and marketing) as well as regulatory and administrative functions.
Insurance
Syntel serves the needs of global property and casualty insurers, insurance brokers, personal, commercial, life and retirement insurance service providers.
These customers turn to us for assistance in improving the efficiency and effectiveness of their operations and in achieving business transformation. We focus on aspects of our clients systems and operations, such as policy administration,
claims processing and compliance reporting. We also serve the growing trend among insurers to improve their sales and marketing processes by deepening direct customer relationships and strengthening interactions with networks of independent and
captive insurance agents. This is often accomplished through the use of digital
front-end
technologies like web enablement, social media and mobility, and supported by modernization of applications, product
implementations and infrastructure elements, along with cloud enablement. Additionally, many insurers seek to improve business effectiveness by reducing expense ratios. Syntel helps our customers achieve this by managed services and IT and process
automation with our industry leading SyntBots
®
automation platform.
Manufacturing
We provide technology services and business consulting in a range of
sub-sectors
including industrial products,
aerospace and automotive manufacturing, as well as to processors of raw materials and natural resources. Demand for our services in this segment is being driven by trends that, among others, include the increasing globalization of sourcing and the
desire of clients to further penetrate emerging markets, leading to longer and more complex supply chains. Some of our solutions for industrial and manufacturing clients include warranty management, dealer system integration, Product Lifecycle
Management (PLM), Supply Chain Management (SCM), sales and operations planning, and mobility. Digitization, including connectivity leveraging the Internet of Things, Analytics based decision support and Mobility are some of the emerging trends on
which we are working with our clients.
Retail, Logistics and Telecom
Syntels Retail, Logistics and Telecom (RLT) Business unit leverages its comprehensive understanding of the business and technology needs of these
industries. Aligned to Syntels Corporate Offering strategy, the RLT business unit offers legacy elimination and digital modernization solutions to its clientele. Our industry solutions for our clients include SCM, merchandising, sales and
operations planning, point of sale (POS) solutions, omnichannel enablement and integration, web content management solutions, sales force and cloud foundry enablement, among others. Syntels RLT offerings are designed to provide effective
operations and enhanced customer experiences.
Corporate Direct Costs
Certain expenses, for cost centers such as Centers of Excellence, Architecture Solutions Group, certain portions of Research and Development, Cloud Computing,
and Application Management, are not allocated to specific segments because management believes it is not practical to allocate such expenses to individual segments as they are not directly attributable to any specific segment. Accordingly, these
expenses are separately disclosed as Corporate Direct Costs and adjusted only against the Total Gross Profit.
24
In accordance with ASC 280 Disclosures about Segments of an Enterprise and Related Information,
segment disclosures are presented below. Revenues from external customers and gross profit for the Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics and Telecom segments for the three and
six months ended June 30, 2018 and June 30, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and Financial Services
|
|
$
|
108,016
|
|
|
$
|
103,663
|
|
|
$
|
214,436
|
|
|
$
|
209,632
|
|
Healthcare and Life Sciences
|
|
|
45,227
|
|
|
|
39,614
|
|
|
|
89,858
|
|
|
|
77,176
|
|
Insurance
|
|
|
37,920
|
|
|
|
33,102
|
|
|
|
75,513
|
|
|
|
65,501
|
|
Manufacturing
|
|
|
12,019
|
|
|
|
9,451
|
|
|
|
23,496
|
|
|
|
18,982
|
|
Retail, Logistics and Telecom
|
|
|
46,517
|
|
|
|
40,981
|
|
|
|
91,741
|
|
|
|
81,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249,699
|
|
|
$
|
226,811
|
|
|
$
|
495,044
|
|
|
$
|
452,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and Financial Services
|
|
|
38,618
|
|
|
|
37,816
|
|
|
|
80,711
|
|
|
|
77,259
|
|
Healthcare and Life Sciences
|
|
|
17,212
|
|
|
|
15,495
|
|
|
|
33,747
|
|
|
|
30,020
|
|
Insurance
|
|
|
11,046
|
|
|
|
10,385
|
|
|
|
23,791
|
|
|
|
21,392
|
|
Manufacturing
|
|
|
2,966
|
|
|
|
2,506
|
|
|
|
5,625
|
|
|
|
4,903
|
|
Retail, Logistics and Telecom
|
|
|
15,205
|
|
|
|
16,064
|
|
|
|
32,773
|
|
|
|
31,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Gross Profit
|
|
|
85,047
|
|
|
|
82,266
|
|
|
|
176,647
|
|
|
|
165,354
|
|
Corporate Direct cost
|
|
|
(406
|
)
|
|
|
(508
|
)
|
|
|
(752
|
)
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
84,641
|
|
|
$
|
81,758
|
|
|
$
|
175,895
|
|
|
$
|
164,467
|
|
Selling, general and administrative expenses
|
|
|
27,646
|
|
|
|
28,659
|
|
|
|
54,632
|
|
|
|
58,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
56,995
|
|
|
$
|
53,099
|
|
|
$
|
121,263
|
|
|
$
|
105,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2018, State Street Bank, Federal Express Corp. and American Express Corp. each
contributed revenues in excess of 10% of total consolidated revenues. Revenues from State Street Bank, Federal Express Corp. and American Express Corp. were $39.4 million, $38.1 million and $31.9 million, respectively, during the
three months ended June 30, 2018, contributing approximately 15.8%, 15.3% and 12.8%, respectively of total consolidated revenues. The revenues from State Street Bank and American Express Corp. were generated in the Banking and Financial
Services segment. The revenue from Federal Express Corp. was generated in the Retail, Logistics and Telecom segment. The corresponding revenues for the three months ended June 30, 2017 from State Street Bank, Federal Express Corp. and American
Express Corp. were $34.1 million, $31.6 million and $37.6 million, respectively, contributing approximately 15.0%, 13.9% and 16.6%, respectively, of total consolidated revenues.
During the six months ended June 30, 2018, revenues from State Street Bank, Federal Express Corp. and American Express Corp. were $78.2 million,
$75.4 million and $62.4 million, respectively, contributing approximately 15.8%, 15.2% and 12.6%, respectively, of total consolidated revenues. The corresponding revenues for the six months ended June 30, 2017 from State Street Bank,
Federal Express Corp. and American Express Corp.were $67.9 million, $61.7 million and $79.8 million, respectively, contributing approximately 15.0%, 13.6% and 17.6%, respectively, of otal consolidated revenues.
At June 30, 2018 and December 31, 2017, accounts receivable from State Street Bank were $9.5 million and $10.9 million, respectively. Accounts
receivable from Federal Express Corp. were $16.1 million and $17.2 million, respectively, at June 30, 2018 and December 31, 2017. Accounts receivable from American Express Corp. were $11.1 million and $11.4 million,
respectively, at June 30, 2018 and December 31, 2017.
25
The following table presents our revenues disaggregated by segment and revenue source for the three months ended
June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ In thousands)
|
|
|
|
Banking
and
Financial
services
|
|
|
Healthcare
and Life
Sciences
|
|
|
Insurance
|
|
|
Manufacturing
|
|
|
Retail,
Logistics
and
Telecom
|
|
|
Total
|
|
Revenue from external customers
|
|
|
108,016
|
|
|
|
45,227
|
|
|
|
37,920
|
|
|
|
12,019
|
|
|
|
46,517
|
|
|
|
249,699
|
|
Revenue by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price
|
|
|
20,182
|
|
|
|
24,165
|
|
|
|
11,658
|
|
|
|
7,117
|
|
|
|
40,442
|
|
|
|
103,564
|
|
Time and Material
|
|
|
87,834
|
|
|
|
21,062
|
|
|
|
26,262
|
|
|
|
4,902
|
|
|
|
6,075
|
|
|
|
146,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108,016
|
|
|
$
|
45,227
|
|
|
$
|
37,920
|
|
|
$
|
12,019
|
|
|
$
|
46,517
|
|
|
$
|
249,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents our revenues disaggregated by segment and revenue source for the six months ended June 30,
2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ In thousands)
|
|
|
|
Banking
and
Financial
services
|
|
|
Healthcare
and Life
Sciences
|
|
|
Insurance
|
|
|
Manufacturing
|
|
|
Retail,
Logistics
and
Telecom
|
|
|
Total
|
|
Revenue from external customers
|
|
|
214,436
|
|
|
|
89,858
|
|
|
|
75,513
|
|
|
|
23,496
|
|
|
|
91,741
|
|
|
|
495,044
|
|
Revenue by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price
|
|
|
42,806
|
|
|
|
49,432
|
|
|
|
24,862
|
|
|
|
13,643
|
|
|
|
80,214
|
|
|
|
210,957
|
|
Time and Material
|
|
|
171,630
|
|
|
|
40,426
|
|
|
|
50,651
|
|
|
|
9,853
|
|
|
|
11,527
|
|
|
|
284,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
214,436
|
|
|
$
|
89,858
|
|
|
$
|
75,513
|
|
|
$
|
23,496
|
|
|
$
|
91,741
|
|
|
$
|
495,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents our revenues disaggregated by segment and revenue source for the three months ended June 30,
2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ In thousands)
|
|
|
|
Banking
and
Financial
Services
|
|
|
Healthcare
and Life
Sciences
|
|
|
Insurance
|
|
|
Manufacturing
|
|
|
Retail,
Logistics
and
Telecom
|
|
|
Total
|
|
Revenue from external customers
|
|
|
103,663
|
|
|
|
39,614
|
|
|
|
33,102
|
|
|
|
9,451
|
|
|
|
40,981
|
|
|
|
226,811
|
|
Revenue by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price
|
|
|
23,620
|
|
|
|
24,305
|
|
|
|
12,772
|
|
|
|
2,233
|
|
|
|
35,662
|
|
|
|
98,592
|
|
Time and Material
|
|
|
80,043
|
|
|
|
15,309
|
|
|
|
20,330
|
|
|
|
7,218
|
|
|
|
5,319
|
|
|
|
128,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,663
|
|
|
$
|
39,614
|
|
|
$
|
33,102
|
|
|
$
|
9,451
|
|
|
$
|
40,981
|
|
|
$
|
226,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
The following table presents our revenues disaggregated by segment and revenue source for the six months ended
June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ In thousands)
|
|
|
|
Banking
and
Financial
Services
|
|
|
Healthcare
and Life
Sciences
|
|
|
Insurance
|
|
|
Manufacturing
|
|
|
Retail,
Logistics
and
Telecom
|
|
|
Total
|
|
Revenue from external customers
|
|
|
209,632
|
|
|
|
77,176
|
|
|
|
65,501
|
|
|
|
18,982
|
|
|
|
81,389
|
|
|
|
452,680
|
|
Revenue by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price
|
|
|
47,023
|
|
|
|
48,462
|
|
|
|
25,719
|
|
|
|
4,438
|
|
|
|
70,415
|
|
|
|
196,057
|
|
Time and Material
|
|
|
162,609
|
|
|
|
28,714
|
|
|
|
39,782
|
|
|
|
14,544
|
|
|
|
10,974
|
|
|
|
256,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
209,632
|
|
|
$
|
77,176
|
|
|
$
|
65,501
|
|
|
$
|
18,982
|
|
|
$
|
81,389
|
|
|
$
|
452,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
GEOGRAPHIC INFORMATION
|
The Companys net revenues and long-lived assets, by geographic area, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net Revenues (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America (2)
|
|
$
|
221,657
|
|
|
$
|
203,373
|
|
|
$
|
437,770
|
|
|
$
|
406,949
|
|
India
|
|
|
1,358
|
|
|
|
1,056
|
|
|
|
2,666
|
|
|
|
2,214
|
|
Europe (3)
|
|
|
26,277
|
|
|
|
21,734
|
|
|
|
53,814
|
|
|
|
42,253
|
|
Rest of the World
|
|
|
407
|
|
|
|
648
|
|
|
|
794
|
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
249,699
|
|
|
$
|
226,811
|
|
|
$
|
495,044
|
|
|
$
|
452,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
June, 30
|
|
|
As of
December, 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Long-Lived Assets (4)
|
|
|
|
|
|
|
|
|
North America (2)
|
|
$
|
3,344
|
|
|
$
|
3,600
|
|
India
|
|
|
92,313
|
|
|
|
100,950
|
|
Europe (3)
|
|
|
1,699
|
|
|
|
1,992
|
|
Rest of the world
|
|
|
523
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
97,879
|
|
|
$
|
107,204
|
|
|
|
|
|
|
|
|
|
|
Notes for the Geographic Information Disclosure:
1.
|
Net revenues are attributed to regions based upon customer location.
|
2.
|
Primarily relates to operations in the United States.
|
3.
|
Primarily relates to operations in the United Kingdom and Poland.
|
4.
|
Long-lived assets include property and equipment, net of accumulated depreciation and amortization and goodwill.
|
27
The following table accounts for the differences between the federal statutory tax rate of
21% and 35% for the three months ended June 30, 2018 and 2017, respectively and the six months ended June 30, 2018 and 2017, respectively and the Companys overall effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Statutory provision
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
1.5
|
%
|
|
|
1.1
|
%
|
|
|
1.4
|
%
|
|
|
1.9
|
%
|
City taxes
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Foreign effective tax rates different from US statutory rate
|
|
|
(0.4
|
)%
|
|
|
(9.6
|
)%
|
|
|
0.5
|
%
|
|
|
(10.6
|
)%
|
Prior Year related state tax payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
%
|
Valuation Reserve Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
%)
|
Tax (Reserve) /Charge
|
|
|
0.4
|
%
|
|
|
|
|
|
|
0.4
|
%
|
|
|
|
|
Permanent difference federal tax (BEAT)
|
|
|
0.7
|
%
|
|
|
|
|
|
|
1.5
|
%
|
|
|
|
|
Permanent difference State/City tax (GILTI)
|
|
|
3.1
|
%
|
|
|
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Income Tax Rate
|
|
|
26.5
|
%
|
|
|
26.7
|
%
|
|
|
26.5
|
%
|
|
|
24.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the six months ended June 30, 2018 of 26.5%, was impacted by reduction in the U.S. federal tax
rate from 35% to 21% due to the Tax Cuts and Jobs Act of, 2017 (the Tax Act). Further, the effective tax rate was impacted by a permanent difference due to the tax on payments to foreign related parties as Base Erosion and Anti-Abuse Tax
(BEAT) payments and State Income Tax on Global Intangible Low Tax Income (GILTI) Income. The foreign effective tax rate was 21.5%, which was higher by 0.5% as compared to the reduced federal Tax rate of 21%.
During the six months ended June 30, 2017, the effective income tax rates was 24.4%. The effective tax rate for the six months ended June 30, 2017,
was impacted by a
one-time
reversal of valuation allowance of $2.92 million and an additional charge of $0.9 million (net of federal tax benefits) of state income tax on repatriation. Without the
above, the effective tax rate for the six months ended June 30, 2017 would have been 26.4%.
The Company records provisions for income taxes based on
enacted tax laws and rates in the various tax 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 managements 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 periods 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.
The U.S. Government and state tax authorities are expected to continue to issue guidance regarding the Tax Act, which may result in adjustments to our
provisional estimates of deferred tax charge of $0.9 million was recorded as at December 31, 2017. The adjustments to net deferred tax liabilities are provisional amounts estimated based on information available as of June 30, 2018. These
amounts are subject to change as we obtain information necessary to complete the calculations. We will recognize any changes to the provisional amounts as we refine our estimates of the cumulative temporary differences, including those related to
immediate deduction for qualified property, and our interpretations of the application of the Tax Act. The Company has recorded BEAT in the effective tax rate, which was based on annual estimated payments to foreign related parties. The Company has
also recorded State Income Tax on GILTI.
28
We are continuing to analyze certain aspects of the Tax Act and may refine our estimates, which could potentially
affect the measurement of our net deferred tax assets or give rise to new deferred tax amounts. The final determination of the re-measurement of our net deferred tax assets and the transition tax will be completed as additional information
becomes available, but no later than one year from the enactment date.
Syntel, Inc. and its subsidiaries file income tax returns in various tax
jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for years before 2013 and for State tax examinations for years before 2012.
Syntel India, the Companys India subsidiary, has disputed tax matters for the financial years
1996-97
to 2013-14
pending at various levels of the Indian tax authorities. Financial year 2014-15 and onwards are open for regular tax scrutiny by the Indian tax authorities. However, the tax authorities in India are authorized to reopen the already concluded tax
assessments and may
re-open
the case of Syntel India for financial years 2010-11 and onwards.
During the three
months ended March 31, 2017, the Company reversed a valuation allowance against deferred tax assets recognized on the minimum alternative tax (MAT) of $2.92 million due to the extension of the MAT credit carry forward period
which was enacted in March 2017. The MAT credit can be carried forward and
set-off
against future taxes payable for up to 15 years versus the earlier provision on MAT credit that allowed the MAT credit to be
carried forward and
set-off
against future taxes payable for only up to 10 years.
The Company recognizes accrued
interest and penalties related to unrecognized tax benefits as part of income tax expense. During the three months ended June 30, 2018 and 2017, the Company has accrued interest of approximately $0.48 million and $0.24 million,
respectively. During the six months ended June 30, 2018 and 2017, the Company has accrued interest of approximately $0.94 million and $0.28 million respectively. The Company has accrued approximately $3.29 million and
$2.21 million for interest and penalties as of June 30, 2018 and December 31, 2017, respectively.
The liability for unrecognized tax
benefits was $74.17 million and $77.94 million as of June 30, 2018 and December 31, 2017, respectively. The Company has paid income taxes of $40.35 million and $44.03 million against the liabilities for unrecognized tax
benefits of $74.17 million and $77.94 million, as of June 30, 2018 and December 31, 2017, respectively. The Company has paid the taxes in order to reduce the possible interest and penalties related to these unrecognized tax
benefits.
The Companys net amount of unrecognized tax benefits for tax disputes of $2.92 million could change in the next twelve months as the
court cases and global tax audits progress. At this time, due to the uncertain nature of this process, it is not reasonably possible to estimate an overall range of possible change.
Syntel has not provided for India Income Taxes which are disputed and pending at various levels (including potential tax disputes) of $15.41 million for
the financial year
1996-97
to June 30, 2018, which is after providing $51.05 million as unrecognized tax benefits under ASC740. Indian tax exposures involve complex issues and may need an extended
period to resolve the issues with the Indian income tax authorities. Syntels management, after consultation with legal counsel, believes that the resolution of these matters will not have a material adverse effect on the Companys
consolidated financial position or results of operations.
29
Service Tax Audit
Syntel India regularly files quarterly service tax refund applications and claims refunds of service tax on input services, which remain unutilized against a
lack of service tax on export of services. As of June 30, 2018, Syntel Indian entities have not provided against service tax refund claims of $0.63 million disputed by the Indian Service Tax Department which are pending at various levels.
The Company obtained a tax consultants advice on the aforesaid disputes. The consultant is of the view that the tax disputes are contrary to the
wording of the service tax notifications and provisions. The Company therefore believes that its claims of service tax refunds should be upheld at the appellate stage and the refunds should be accordingly granted. Based on the consultants tax
advice, the Company believes that it has a reasonable basis to defend the rejection of the refunds. Accordingly, no provision has been made in the Companys books.
Undistributed Earnings of Foreign Subsidiaries
During
the three months ended September 30, 2016, and after a comprehensive review of anticipated sources and uses of capital both domestically and abroad, as well as other considerations, the Board of Directors determined that it was in the best
interests of the Company and its shareholders to declare a special cash dividend of fifteen dollars ($15.00) per share. In conducting this evaluation, the Board of Directors considered, among other factors, the operational and financial objectives
of the Company, long-term and short-term capital needs, the Companys projections on growth and working capital needs, planned uses of U.S. and foreign earnings, the available sources of liquidity in the U.S., and growth plans outside of the
U.S. As part of this evaluation, the Company determined that certain amounts which had been previously designated for internal and external expansion and investment at its foreign subsidiaries were no longer required for these purposes. The special
cash dividend was funded through a
one-time
repatriation of approximately $1.03 billion (net of foreign income tax $210 million paid outside of the U.S) of cash held by the Companys foreign
subsidiaries and a portion of borrowings under the new Senior Credit Facility. In connection with the
one-time
repatriation, the Company recognized a
one-time
tax
expense of approximately $270.6 million (net of foreign tax credits) in the third quarter of 2016. The Company has recorded additional state tax of $0.9 million, attributable to the above repatriation, in the quarter ended March 31,
2017. The Company has reversed $6.26 million relating to the true up of tax provisions including the impact of foreign exchange rates, in the computation of the tax related to the dividend repatriation, upon the finalization of the federal tax
return attributable to the above repatriation, in the quarter ended September 30, 2017.
Management regularly evaluates foreign earnings to determine
whether future foreign earnings that accumulate will be permanently invested outside the U.S. In conducting this evaluation, management considers, among other factors, the operational and financial objectives of the Company, long-term and short-term
capital needs, the Companys projections on growth and working capital needs, planned uses of U.S. and foreign earnings, the available sources of liquidity in the U.S., and growth plans outside of the U.S. The Company provides dividend
distribution taxes on any foreign earnings in excess of these requirements. The June 30, 2018 provision includes the impact of certain foreign earnings that are not permanently invested. If in the future, management were to conclude that any
additional portion of foreign earnings will not be permanently reinvested outside the U.S., this would result in an additional provision for income taxes, which could affect the Companys future effective tax rate. If the Company determines to
repatriate all undistributed repatriable earnings of foreign subsidiaries as of June 30, 2018, the Company would have accrued taxes of approximately $36.0 million.
30
Local Taxes
As of June 30, 2018, the Company had a local tax liability provision of approximately $0.4 million, equal to $0.3 million net of federal tax
benefit, relating to local taxes including employer withholding taxes, employer payroll expense taxes, business licenses, and corporate income taxes. As of December 31, 2017, the local tax liability provision was approximately
$0.4 million, equal to $0.3 million net of tax, relating to local taxes including employer withholding taxes, employer payroll expense taxes, business license registrations, and corporate income taxes.
Minimum Alternate Tax (MAT)
Minimum Alternate Tax
(MAT) is payable on the Book Income, including the income for which deduction is claimed under section 10A and section 10AA of the Indian Income Tax Act. The excess MAT over the normal tax liability is MAT Credit. MAT
Credit can be carried forward for 15 years (as amended by the Finance Act, 2017, as compared to 10 years, as previously provided) and
set-off
against future tax liabilities, if normal tax provisions are
in excess of taxes payable under MAT. Accordingly, for the three months ended March 31, 2017, the Company has reversed a valuation allowance of $2.92 million against deferred tax assets which was recognized on MAT Credit. The MAT credit as
of June 30, 2018 of $45.81 million (net of valuation allowance of $2.43 million) must be utilized before March 31 of the following financial years and will expire as follows:
|
|
|
|
|
Year of Expiry Of MAT Credit
|
|
Amount in USD (in millions)
|
|
2022-2023
|
|
|
0.16
|
|
2023-2024
|
|
|
0.51
|
|
2024-2025
|
|
|
1.96
|
|
2025-2026
|
|
|
2.65
|
|
2026-2027
|
|
|
0.67
|
|
2027-2028
|
|
|
5.41
|
|
2028-2029
|
|
|
8.20
|
|
2029-2030
|
|
|
8.53
|
|
2030-2031
|
|
|
9.58
|
|
2031-2032
|
|
|
4.26
|
|
2032-2033
|
|
|
5.91
|
|
2033-2034
|
|
|
0.40
|
|
Total
|
|
|
48.24
|
|
Less: valuation allowance
|
|
|
(2.43
|
)
|
Total (net of valuation allowance)
|
|
|
45.81
|
|
16.
|
COMMITMENTS AND CONTINGENCIES
|
As of June 30, 2018, and December 31, 2017, Syntels
subsidiaries have commitments for capital expenditures (net of advances) of $28.0 million and $28.0 million, respectively, primarily related to the technology campuses being constructed at Pune and Chennai in India.
Syntels Indian subsidiaries operations are carried out from their development centers/units in Mumbai, Pune, Chennai and Gurgaon forming part of a
Special Economic Zone (SEZ)/Software Technology Parks of India (STPI) scheme. Under these schemes, the registered units have export obligations, which are based on the formula provided by the notifications/circulars issued by
the STPI and SEZ authorities from time to time. The consequence of not meeting the above commitments would be a retroactive levy of import duty on items previously imported duty free for these units. Additionally, the respective authorities have
rights to levy penalties for any defaults on a
case-by-case
basis. The Company is confident it will meet these obligations; therefore the above mentioned import duty is
neither probable nor reasonably estimable, accordingly the Company will not accrue for these penalties.
31
The Company is party to various legal actions arising in the ordinary course of business, including litigation
and governmental and regulatory controls. The Companys 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 managements
estimate, none of the pending or threatened actions are believed by management to involve future amounts that would be material to the Companys 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. As of June 30, 2018, and December 31, 2017 there was no accrual related to litigation.
17.
|
STOCK BASED COMPENSATION
|
Share Based Compensation:
On June 1, 2006, the Company adopted an Amended and Restated Stock Option and Incentive Plan (the Amended Plan). Under the Amended Plan, a
total of sixteen million shares of common stock (adjusted for the effects of the 2014 stock split) were reserved for issuance. The dates on which options or restricted stock units granted under the Amended Plan become first exercisable or have
their restriction lapse are determined by the Compensation Committee of the Board of Directors, but generally occur over a four-year period from the date of grant. The term of any option may not exceed ten years from the date of grant. As of
June 1, 2016, the Amended Plan terminated and no further awards may be made under the Amended Plan.
On February 28, 2016, the Companys
Board of Directors approved the adoption of the 2016 Incentive Plan (the 2016 Plan) subject to shareholder approval. On June 8, 2016 the Companys shareholders approved the 2016 Plan. The principal features of the 2016 Plan are
substantially the same as those of the Amended Plan. Under the 2016 Plan, a total of sixteen million shares of common stock were reserved for issuance. The dates on which options or restricted stock units granted under the Amended Plan become
first exercisable or have their restriction lapse are determined by the Compensation Committee of the Board of Directors, but for employees generally occur over a four-year period from the date of grant and for
non-employee
directors generally occur at the Companys next annual meeting of shareholders.
On
November 30, 2016, the Companys Board of Directors and the Compensation Committee established a program for a one time grant of Restricted Stock Units (RSUs) to certain senior management employees. The parameters of the
program and the restrictions on the RSUs granted are consistent with the 2016 Plan approved by shareholders on June 8, 2016, except as follows:
1.
|
The employee may purchase up to a specified number of shares of Syntel, Inc. common stock (Common Stock) whose purchase price is equal to up to 25% of the employees base salary (Purchased
Shares).
|
2.
|
Upon proof of purchase of the Common Stock, the employee will receive a grant of RSUs equal to 25% of the number of the Purchased Shares (the Grant).
|
3.
|
The restriction period on 25% of the Grant will lapse on each of the first four anniversaries of the grant date.
|
The RSUs will be forfeited if the employee ceases to be an employee of the Company or if the employee does not retain Purchased Shares equal to four times the
remaining RSUs from the Grant through the applicable restriction period.
No stock options were issued for the six months ended June 30, 2018 and
2017 under either the Amended Plan or the 2016 Plan.
32
The Company accounts for share-based compensation based on the fair value of share-based payment awards on the
date of grant. Fair value of share-based payment awards are calculated based on the Companys share prices which are quoted in market. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Companys Statement of Comprehensive Income. Share-based compensation expense recognized as above for the three months ended June 30, 2018 and 2017 was $1.4 million (including charges for restricted
stock units and a dividend equivalent) and $2.1 million (including charges for restricted stock units and a dividend equivalent), respectively, including a charge for restricted stock and for six months ended June 30, 2018 and 2017 was
$3.3 million (including charges for restricted stock units and a dividend equivalent) and $4.6 million (including charges for restricted stock units and a dividend equivalent), respectively, including a charge for restricted stock.
The shares issued upon the exercise of the options are new share issues.
Restricted Stock Units:
On different dates during the
years ended December 31, 2017, 2016 and 2015, and for the six months ended June 30, 2018, the Company issued restricted stock awards (adjusted to account for the 2014 stock split) of 315,022, 415,519, 135,440 and 16,572 respectively, to
its
non-employee
directors and some employees as well as to some employees of its subsidiaries. The restricted stock awards were granted to employees for their future services as a retention tool at a zero
exercise price, vest in shares with regards to 25% of the awards issued on or after the first, second, third and fourth anniversary of the grant dates.
During the third quarter of 2016, the Board of Directors declared a special cash dividend of fifteen dollars ($15.00) per share on outstanding common stock
which was payable on October 3, 2016, to shareholders of record at the close of business on September 22, 2016. Further, it was resolved by the Board of Directors that restricted stock units granted to employees and directors prior to the
dividend record date will receive an amount equivalent to the dividend when the applicable restriction on the restricted stock units lapses. The special dividend resulted in a modification of the existing stock compensation plan. Accordingly,
incremental compensation cost was measured as the excess, if any, of the fair value of the modified award over the fair value of the original award accounted on a graded basis with the incremental expense being recognized over the remaining vesting
period. As a result of the above, the Company has recorded an additional compensation cost of $0.1 million and $0.5 million during the three months ended June 30, 2018 and 2017 respectively and $0.3 million and $1.2 million
during the six months ended June 30, 2018 and 2017 respectively.
The impact on the Companys results of operations of recording stock-based
compensation (including impact of restricted stock) for the three months and six months ended June 30, 2018 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Cost of revenues
|
|
$
|
508
|
|
|
$
|
957
|
|
|
$
|
1,167
|
|
|
$
|
1,937
|
|
Selling, general and administrative expenses
|
|
|
923
|
|
|
|
1,159
|
|
|
|
2,140
|
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,431
|
|
|
$
|
2,116
|
|
|
$
|
3,307
|
|
|
$
|
4,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No cash was received from option exercises under all share-based payment arrangements for the six months ended June 30,
2018 and 2017, respectively.
33
A summary of the activity for restricted stock unit awards granted under our stock-based compensation plans as of
June 30, 2018 and December 31, 2017 and changes during the period ended are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
2018
|
|
|
Year ended December 31,
2017
|
|
|
|
Number Of Awards
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Number Of
Awards
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Unvested at January 1
|
|
|
691,468
|
|
|
$
|
22.48
|
|
|
|
669,556
|
|
|
$
|
29.16
|
|
Granted
|
|
|
16,572
|
|
|
$
|
32.58
|
|
|
|
315,022
|
|
|
$
|
18.13
|
|
Vested
|
|
|
(4,008
|
)
|
|
$
|
20.67
|
|
|
|
(209,816
|
)
|
|
$
|
32.09
|
|
Forfeited
|
|
|
(15,430
|
)
|
|
$
|
22.58
|
|
|
|
(83,294
|
)
|
|
$
|
35.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Total
|
|
|
688,602
|
|
|
$
|
22.73
|
|
|
|
691,468
|
|
|
$
|
22.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018, $10.33 million of total remaining unrecognized stock-based compensation cost related to
restricted stock awards is expected to be recognized over the weighted-average remaining requisite service period of 2.44 years.
The accrual for unutilized leave balance is determined based on the entire leave balance
available to the employees at period end. The leave balance eligible for carry-forward is valued at gross compensation rates and eligible for compulsory encashment at basic compensation rates.
The gross charge (reversal) for unutilized earned leave was $2.9 million and $(0.04) million for the three months ended June 30, 2018 and 2017,
respectively.
The gross charge (reversal) for unutilized earned leave of $(0.04) million during the three months ended June 30,2017 was primarily on
account of reversal of leave cost for the differential between leave accruals and actual amount paid due to change in scheme of leave encashment availed by employees during second quarter of 2017.
The gross charge for unutilized earned leave was $4.9 million and $0.4 million for the six months ended June 30, 2018 and 2017, respectively.
The amounts accrued for unutilized earned leave are $16.7 million and $16.2 million as of June 30, 2018 and December 31, 2017,
respectively, and are included within accrued payroll and related costs.
34
19.
|
EMPLOYEE BENEFIT PLANS
|
The Company maintains a 401(k) retirement plan that covers all regular employees
on Syntel, Inc.s U.S. payroll. Eligible employees may contribute the lesser of 60% of their compensation or $18,500, subject to certain limitations, to the retirement plan. The Company may make contributions to the plan at the discretion
of the Board of Directors; however, through June 30, 2018, no Company contributions have been made.
Eligible employees on Syntels Indian
payroll receive benefits under the Provident Fund (PF), which is a defined contribution plan. Both the employee and the Company make monthly contributions equal to a specified percentage of the covered employees salary. The Company
has no further obligations under the plan beyond its monthly contributions. The contributions made to the fund are administered and managed by the Government of India. The Companys monthly contributions are expensed in the period they are
incurred. Provident Fund Contribution expense recognized by Indian entities for the three months ended June 30, 2018 and 2017 was $1.3 million and $1.5 million, respectively and for the six months ended June 30, 2018 and 2017 was
$2.7 million and $2.9 million, respectively.
In accordance with the Payment of Gratuity Act, 1972 of India, Syntels Indian subsidiaries
provide for gratuity, a defined retirement benefit plan (the Gratuity Plan) covering eligible employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement, death, incapacitation or termination of employment,
based on the respective employees salary and the tenure of employment. Liabilities with regard to the Gratuity Plan are determined by actuarial valuation and are expensed in the period determined. The Gratuity Plan is a
non-funded
plan. The amounts accrued under this plan are $15.6 million and $15.3 million as of June 30, 2018 and December 31, 2017, respectively, and are included within current liabilities and
in other
non-current
liabilities, as applicable. Expense recognized by Indian entities under the Gratuity Plan for the three months ended June 30, 2018 and 2017 was $0.6 million and
$0.9 million, respectively, and for six months ended June 30, 2018 and 2017 was $1.2 million and $1.9 million, respectively.
Following table represents the components of net periodic benefit cost of post-retirement benefit plan for gratuity for the three months and six months ended
June 30, 2018 and 2017, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( In thousands )
|
|
Components of net periodic benefit
cost of post-retirement benefits
|
|
Three
Months
ended
June 30,
2018
|
|
|
Three
Months
ended
June 30,
2017
|
|
|
Six
Months
ended
June 30,
2018
|
|
|
Six
Months
ended
June 30,
2017
|
|
Service cost
|
|
$
|
611
|
|
|
$
|
714
|
|
|
$
|
1,192
|
|
|
$
|
1,310
|
|
Interest cost
|
|
|
286
|
|
|
|
315
|
|
|
|
585
|
|
|
|
617
|
|
Amortization prior service cost
|
|
|
4
|
|
|
|
25
|
|
|
|
11
|
|
|
|
40
|
|
Amortization of actuarial gains/ losses
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
899
|
|
|
$
|
1,052
|
|
|
$
|
1,782
|
|
|
$
|
1,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
|
CONSOLIDATION OF A VARIABLE INTEREST ENTITY
|
Syntel Delaware is a 100% subsidiary of Syntel, Inc. and a
49% shareholder of the joint venture (JV) entity SSSSML, the other shareholder being an affiliate of State Street Bank. Syntel Delaware has a variable interest in SSSSML as it is entitled to all the profits and solely responsible for all
losses incurred by SSSSML even though it holds only 49% in the JV entity. Accordingly, Syntel Delaware consolidates the JV entity SSSSML.
The
Companys KPO services to State Street Bank and one other client are provided through the above joint venture between the Company and an affiliate of State Street Bank. Sales of KPO services only to these two clients represented approximately
8.9% and 11.2% of the Companys total revenues for the three months ended June 30, 2018 and 2017, respectively and 9.2% and 11.5% for the six months ended June 30, 2018 and 2017, respectively.
35
21.
|
FAIR VALUE MEASUREMENTS
|
The Company follows the guidance for fair value measurements and fair value
option for financial assets and liabilities, which primarily relate to the Companys investments and forward contracts, interest rate swaps and other financial assets and liabilities.
This standard includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures.
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability
based on market data obtained from independent sources while unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions.
Fair values of interest rate swaps are measured using standard valuation models using inputs that are readily available in public markets, or can be derived
from observable market transactions, including LIBOR spot and forward rates.
The fair value hierarchy consists of the following three levels:
|
|
|
Level 1 Inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted
prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
|
|
|
|
Level 3 Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
|
The following table summarizes the Companys financial assets measured at fair value on a recurring basis as of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Short Term Investments-Available for Sale debt Securities
|
|
$
|
48.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
48.6
|
|
Term Deposits
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
1.6
|
|
Interest Rate Swap
|
|
|
|
|
|
|
7.2
|
|
|
|
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value
|
|
$
|
48.6
|
|
|
$
|
8.8
|
|
|
$
|
|
|
|
$
|
57.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys financial assets measured at fair value on a recurring basis as of
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Short Term Investments-Available for Sale Securities
|
|
$
|
25.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25.7
|
|
Term Deposits
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
Interest Rate Swap
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value
|
|
$
|
25.7
|
|
|
$
|
4.5
|
|
|
$
|
|
|
|
$
|
30.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of other financial assets and financial liabilities approximate its fair value due to their short term
nature.
36
The following table summarizes the term deposits with various banks outstanding as of
June 30, 2018 and December 31, 2017.
Balance Sheet Item
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
As of
June
30, 2018
|
|
|
As of
December
31, 2017
|
|
Short Term Investments
|
|
$
|
1.2
|
|
|
$
|
0.8
|
|
Non-Current
Assets
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.6
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
23.
|
Other Income (Expense), Net
|
The following table represents the components of other income (expense),
net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Interest expense
|
|
$
|
(2,193
|
)
|
|
$
|
(3,216
|
)
|
|
$
|
(4,626
|
)
|
|
$
|
(6,592
|
)
|
Interest income on term deposits
|
|
|
171
|
|
|
|
93
|
|
|
|
217
|
|
|
|
225
|
|
Interest on income tax Refund
|
|
|
739
|
|
|
|
|
|
|
|
739
|
|
|
|
|
|
Gain on sale of mutual funds, net
|
|
|
513
|
|
|
|
329
|
|
|
|
875
|
|
|
|
560
|
|
Non-Service
component of post-retirement benefit
cost
|
|
|
(288
|
)
|
|
|
(338
|
)
|
|
|
(590
|
)
|
|
|
(662
|
)
|
Miscellaneous income
|
|
|
47
|
|
|
|
40
|
|
|
|
200
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,011
|
)
|
|
$
|
(3,092
|
)
|
|
$
|
(3,185
|
)
|
|
$
|
(6,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.
|
Contract balances and significant movements in Contract balances
|
In accordance with ASC 606
disclosures, the following table provides information about receivables, Contracts assets, and Contract liabilities from contracts with customers and the significant changes in the Contract assets and the Contract liabilities during the period.
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
($ In thousand)
|
|
Contract Assets
|
|
|
|
|
|
|
|
|
Revenue earned in excess of billings
|
|
|
3,302
|
|
|
|
3,541
|
|
Net unbilled receivables
|
|
|
3,302
|
|
|
|
3,541
|
|
Other contract assets
|
|
|
|
|
|
|
|
|
Total contract assets
|
|
|
3,302
|
|
|
|
3,541
|
|
Contract liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue on uncompleted contracts
|
|
|
3,542
|
|
|
|
3,240
|
|
Other contract liabilities
|
|
|
|
|
|
|
|
|
Total Contract liabilities
|
|
$
|
3,542
|
|
|
$
|
3,240
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
June 30, 2018
|
|
|
Three Months ended
June 30, 2017
|
|
|
|
Contract
assets
|
|
|
Contract
liabilities
|
|
|
Contracts
assets
|
|
|
Contract
liabilities
|
|
|
|
(In thousands)
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the
period
|
|
|
N.A.
|
|
|
|
2,965
|
|
|
|
N.A.
|
|
|
|
5,911
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
|
|
3,305
|
|
|
|
N.A.
|
|
|
|
4,114
|
|
|
|
N.A.
|
|
Revenue recognized from performance obligations satisfied in previous periods
|
|
|
611
|
|
|
|
|
|
|
|
1,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended
June 30, 2018
|
|
|
Six Months ended
June 30, 2017
|
|
|
|
Contract
assets
|
|
|
Contract
liabilities
|
|
|
Contracts
assets
|
|
|
Contract
liabilities
|
|
|
|
(In thousands)
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the
period
|
|
|
N.A.
|
|
|
|
3,240
|
|
|
|
N.A.
|
|
|
|
7,973
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
|
|
3,541
|
|
|
|
N.A.
|
|
|
|
6,361
|
|
|
|
N.A.
|
|
Revenue recognized from performance obligations satisfied in previous periods
|
|
|
739
|
|
|
|
|
|
|
|
591
|
|
|
|
|
|
Remaining Performance obligations
As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately
$14.3 million. The Company expects to recognize revenue on approximately 52% of the remaining performance obligations in 2018, 32% recognized in 2019 and the remainder recognized thereafter.
25.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
Recently adopted accounting standards
i.
|
Accounting Standards Update
No. 2014-09
(Topic 606) Revenue from Contracts with Customers.
|
In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU)
No. 2014-09
(ASU
2014-09),
Revenue from Contracts with Customers. (Topic 606) which supersedes the revenue recognition requirements in Topic 605 Revenue
Recognition (Topic 605).
ASU
2014-09,
Revenue from Contracts with Customers Issued May 2014, was
scheduled to be effective for Syntel beginning January 1, 2017, however on July 9, 2015, the FASB approved the proposal to defer the effective date of the ASU for public companies to January 1, 2018 with an option to elect to adopt
the ASU as of the original effective date. The new standard is intended to substantially enhance the quality and consistency of how revenue is reported while also improving the comparability of the financial statements of companies using U.S.
generally accepted
38
accounting principles (GAAP) and those using International Financial Reporting Standards (IFRS). The core principle of ASU
2014-09
is that a company should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also addresses the
accounting for some costs to obtain or fulfill a customer contract and provides a set of disclosure requirements intended to give financial statement users comprehensive information about the nature, amount, timing, and uncertainty of revenues and
cash flows arising from customer contracts.
On March 17, 2016, the FASB issued ASU
No. 2016-08,
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. In April 2016,
the FASB issued ASU
2016-10,
Identifying Performance Obligations and Licensing, and ASU
2016-12
Narrow Scope Improvements and Practical Expedients, which amended ASU
2014-09,
Revenue from Contract from Customers (Topic 606). These amendments of this ASU provided additional clarification on criteria within Topic 606 as well as additional guidance for transition to the new revenue
recognition criteria.
We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. We finalized our analysis and
the adoption of ASU
2014-09
did not have a material impact on our consolidated financial statements and our internal controls over financial reporting. The modified retrospective transition method requires the
Company to apply the provisions of ASC 606 to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not
adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
The adoption of Topic 606 did not result in an
adjustment in opening retained earnings as of January 1, 2018 as there was no cumulative impact from adopting Topic 606.
During the three and six
months ended June 30, 2018, the ASC 606 impact primarily related to reclassification of third party portal charges which were previously accounted as cost of revenue and are now required to be deducted from revenues as a result of applying
Topic 606 which resulted in decrease in revenue of $0.34 million and $0.67 million for the three and six month ended June 30, 2018. This is summarized in the following table for the ASC 606 impact on the Companys consolidated
statement of comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of changes in accounting policies for the
three months ended June 30, 2018.
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without adoption
of Topic 606
|
|
|
|
$ In thousand
|
|
Net Revenue
|
|
$
|
249,699
|
|
|
$
|
339
|
|
|
$
|
250,038
|
|
Cost of Revenue
|
|
|
(165,058
|
)
|
|
|
(339
|
)
|
|
|
(165,397
|
)
|
Gross Profit
|
|
$
|
84,641
|
|
|
|
|
|
|
$
|
84,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of changes in accounting policies for the
six months ended June 30, 2018.
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without adoption
of Topic 606
|
|
|
|
$ In thousand
|
|
Net Revenue
|
|
$
|
495,044
|
|
|
$
|
674
|
|
|
$
|
495,718
|
|
Cost of Revenue
|
|
|
(319,149
|
)
|
|
|
(674
|
)
|
|
|
(319,823
|
)
|
Gross Profit
|
|
$
|
175,895
|
|
|
|
|
|
|
$
|
175,895
|
|
ASC 606 did not have any impact on the consolidated Balance Sheet.
39
Upon adoption of Topic 606, the Company is further required to make additional disclosures regarding the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and assumptions used in applying the standard. Please refer to note 4, note 13 and note 24 on Revenue
Recognition, Segment reporting and Contract balances and significant movements in Contract balances for detailed discussion and disclosures around this.
ii.
|
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU
2017-07)
|
In March 2017, the FASB issued ASU
No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost (ASU
2017-07).
The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as
other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss,
and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not
presented separately in the income statement. ASU
2017-07
is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company adopted ASU
2017-07
on January 1, 2018 using a retrospective approach for each period presented. The impact of adoption for the three months ended June 30, 2018 and June 30, 2017 was $0.3 million and
$0.3 million, respectively and for the six months ended June 30,2018 and June 30,2017 was $0.6 million and $0.7 million, respectively of
non-service
components of post-retirement
benefit cost being recorded in the line item Other Income (expense), net in the condensed consolidated statements of income. The adoption did not have a material impact on the Companys financial position, results of operations,
comprehensive income, cash flows or disclosures other than the impact discussed above. Prior year amounts have been reclassified to conform to the current year presentation in our condensed consolidated financial statements.
iii.
|
Statement of Cash Flows (Topic 230)Clarification of certain cash receipts and cash payments (ASU
2016-15)
|
In August 2016, the FASB issued an update on Statement of Cash Flows (Topic 230)- Clarification of certain cash receipts and cash payments (ASU
2016-15)
which requires the Company to present and classify certain cash receipts and cash payments in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This update addresses
eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company adopted this ASU
2016-15
on January 1, 2018. The adoption of this guidance did not have a material impact on the Companys condensed consolidated cash flow statements.
iv.
|
Statement of Cash Flows (Topic 230)Restricted Cash (ASU
2016-18).
|
In November 2016, the FASB issued an update on Statement of Cash Flows (Topic 230)Restricted Cash (ASU
2016-18).
The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents.
The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this ASU
2016-15
on January 1, 2018. The adoption of this guidance did not have a material impact on the Companys condensed consolidated cash flow statements.
40
v.
|
Financial instrumentsOverall (Subtopic 825-10)Recognition and Measurement of Financial Assets and Financial Liabilities (ASU
2016-01)
|
In January 2016, the FASB issued an update (ASU
2016-01)
to the standard on financial instruments. The update
significantly revises an entitys accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair
value. It also amends certain disclosure requirements. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. In February 2018, the FASB issued ASU
2018-03
Technical Corrections and Improvements to Financial Instruments- Overall (Subtopic
824-10).
This standard provides targeted improvements to address aspects of
recognition, measurement, presentation and disclosure of financial instruments, specifically to clarify certain aspects of guidance issued in ASU
2016-01.
Upon adoption, entities will be required to make a
cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value
will apply prospectively to all equity investments that exist as of the date of adoption. Early adoption of certain sections of this update is permitted. The Company adopted this ASU
2016-15
on January 1,
2018. The adoption did not have a material impact on the Companys condensed consolidated financial statements.
vi.
|
ASU
2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
|
In October 2016, the FASB issued ASU
No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other Than Inventory. This update requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized when the intra-entity transfer occurs rather than deferring recognition of income tax consequences
until the transfer was made with an outside party. ASU
2016-16
is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted as
of the beginning of the interim or annual reporting period. A modified retrospective approach should be applied. The Company adopted this ASU
2016-15
on January 1, 2018. The adoption of this guidance did
not have a material impact on the Companys condensed consolidated financial statements for the three months ended March 31, 2018.
vii.
|
ASU
2017-09,
CompensationStock Compensation (Topic 718): Scope of Modification
|
In May 2017, the FASB issued ASU
No. 2017-09,
CompensationStock Compensation (Topic 718): Scope of
Modification Accounting guidance which provide clarity and reduce both (i) diversity in practice; and (ii) cost and complexity when accounting for a change in the terms or conditions of a share-based payment award. The amendments in this
guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The Company adopted this ASU
2016-15
on January 1, 2018 prospectively. The adoption did not have an impact on the Companys condensed consolidated financial statements for the three months and six months ended June 30,
2018.
Recently issued accounting standards
In
February 2016, the FASB issued an update (ASU
2016-02)
to the standard on Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance
sheet and disclosing key information about leasing arrangements. The ASU is effective for public business entities issuing financial statements for the annual periods beginning after December 15, 2018, and interim periods within those annual
periods. The Company is currently evaluating the impact of this standard on our consolidated financial position, results of operations, and cash flows, and expects that the adoption will result in an increase in the Companys assets and
liabilities.
41
In June 2016, the FASB issued an update on Financial InstrumentsCredit Losses (ASU
2016-13)
Measurement of Credit Losses on Financial Instruments which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments
from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on
available-for-sale
(AFS) debt securities through an
allowance account. The update also requires certain incremental disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The requirements
of this ASU and its impact on the Company are currently being evaluated.
In January 2017, the FASB issued an update (ASU
2017-04)
to the standard on IntangiblesGoodwill and Other (Topic 350). To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. In computing
the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure
that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of
goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by
assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce
the cost and complexity of evaluating goodwill for impairment. A public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in
fiscal years beginning after December 15, 2019. The requirements of this ASU are not expected to have material impact on the Companys Consolidated Financial Statements.
In August 2017, the FASB issued
ASU No.2017-12, Derivatives
and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The standard is effective
for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related
disclosures.
In February 2018, as a result of the enactment of the Tax Act, the FASB issued new accounting guidance on the reclassification of certain
tax effects from AOCI to retained earnings. The optional guidance is effective January 1, 2019, with early adoption permitted. The Company is evaluating whether it will adopt the new guidance along with any impacts on the Companys
financial position, results of operations and cash flows, none of which are expected to be material.
26. SUBSEQUENT EVENT
Proposed Merger with Atos S.E.
On July 20, 2018, the Company entered into a definitive merger agreement with Atos S.E. and Green Merger Sub Inc., a
wholly-owned subsidiary of Atos S.E. (
Merger Sub
), with respect to the acquisition of the Company by Atos for $41.00 in cash for each share of Syntel common stock. Consummation of the merger of Merger Sub with and into Syntel is
subject to various conditions and is expected to close by the end of 2018.
We expect to incur significant costs, expenses and fees for professional
services and other transactions costs in connection with the Merger. If the merger agreement is terminated under specified circumstances, we may be required to pay a termination fee of $111.5 million.
For more information regarding the Merger and merger agreement, please see the Form 8-K filed with the Securities and Exchange Commission by the Company on
July 23, 2018.
42