Notes to Consolidated Financial Statements
1. Business
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.
Effective the first quarter of 2014, as a result of the completion of organizational changes, the Company changed its basis of segmentation to vertical
segments as follows:
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Banking and Financial Services
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Healthcare and Life Sciences
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Retail, Logistics and Telecom
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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 Syntel’s 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), Knowledge Process Outsourcing (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 life cycle, which includes regulatory requirements, integrated care, stake holder 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 support for individual mandates and the adoption of mobile and analytics solutions to improve access to health information and decision making by end
consumers.
F-9
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
We serve 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’ 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 retail 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 cloud, social media and mobile, and supported by modernization of applications and infrastructure elements. Additionally, many insurers seek to improve
business effectiveness by reducing expense ratios and exiting non-core lines of business and operations.
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.
Retail, Logistics and Telecom
In Retail, we serve a wide spectrum of retailers in specialty, apparel and home improvement segments. We also serve the travel and hospitality industry
including airlines, hotels as well as online and travel retail, global distribution systems and intermediaries. Our domain intensive solutions transform customer/shopper experiences while keeping down the cost of IT Operations.
In Logistics, our clients look to Syntel to implement business-relevant changes that will make them more productive, competitive and cost effective. To that
end, we help organizations improve operational efficiencies, enhance responsiveness and collaborate with trading partners to better serve their markets and end customers.
In Telecom, we help our clients address important changes in the telecom industry, such as the transition to new network technologies, designing, developing,
testing and introducing new products and channels, improving customer service and increasing customer satisfaction.
F-10
Syntel’s Retail Logistics and Telecom Business unit leverages its comprehensive understanding of the
business and technology needs of the industry. Our industry solutions for our clients includes SCM, sales and operations planning, mobility, Point of Sale (POS) testing, omnichannel enablement and integration, web content management solutions, Sales
force and cloud foundry enablement, among others.
In addition, there is strong demand for digital modernization services across these industries to
enhance efficiency and agility of their underlying technology systems.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial
statements include the accounts of Syntel, Inc., a Michigan corporation (“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:
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Syntel Private Limited, an Indian limited liability company, formerly known as Syntel Limited up to March 17, 2015 (“Syntel India”);
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Syntel Europe Limited, a United Kingdom limited liability company;
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Syntel Canada Inc., an Ontario limited liability company;
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Syntel Deutschland GmbH, a German limited liability company;
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Syntel (Hong Kong) Limited, a Hong Kong limited liability company;
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Syntel Delaware, LLC, a Delaware limited liability company (“Syntel Delaware”);
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SkillBay LLC, a Michigan limited liability company (“SkillBay”);
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Syntel (Mauritius) Limited, a Mauritius limited liability company;
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Syntel Consulting Inc., a Michigan corporation (“Syntel Consulting”);
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Syntel Holding (Mauritius) Limited, a Mauritius limited liability company (“SHML”);
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Syntel Worldwide (Mauritius) Limited, a Mauritius limited liability company (“SWML”);
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Syntel (Australia) Pty. Ltd., an Australian limited liability company; and
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Syntel Solutions Mexico, S. de R.L. de C.V., a Mexican limited liability company.
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The wholly owned
subsidiaries of Syntel Europe Limited are:
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Intellisourcing, SARL, a French limited liability company;
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Syntel Solutions BV, a Netherlands limited liability company;
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Syntel Switzerland GmbH, a Switzerland limited liability company; and
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Syntel Poland, sp. z o. o., a Polish limited liability company (“Syntel Poland”).
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The partially
owned joint venture of Syntel Delaware is:
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State Street Syntel Services (Mauritius) Limited, a Mauritius limited liability company (“SSSSML”).
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The wholly owned subsidiary of SSSSML is:
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State Street Syntel Services Private Limited, an Indian limited liability company (“SSSSPL”).
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F-11
The wholly owned subsidiaries of Syntel (Mauritius) Limited are:
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Syntel International Private Limited, an Indian limited liability company (“SIPL”);
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Syntel Global Private Limited, an Indian limited liability company; and
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Syntel Technologies (Mauritius) Limited, a Mauritius limited liability company (“STML”).
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The wholly
owned subsidiaries of SHML are:
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Syntel Services Private Limited, an Indian limited liability company;
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Syntel Solutions (Mauritius) Limited, a Mauritius limited liability company (“SSML”); and
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Syntel Software (Mauritius) Limited, a Mauritius limited liability company (“SSOML”).
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The wholly
owned subsidiary of SSML is:
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Syntel Solutions (India) Private Limited, an Indian limited liability company.
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The wholly owned subsidiary of
SWML is:
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Syntel (Singapore) PTE Limited, a Singapore limited liability company.
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The wholly owned subsidiary of Syntel
(Singapore) PTE Limited is:
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Syntel Infotech, Inc., a Philippines corporation.
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Revenue recognition
The Company recognizes revenues from time-and-materials contracts as the services are performed.
Revenue from fixed-price applications management, maintenance and support engagements is recognized as earned which generally results in straight-line revenue
recognition as services are performed continuously over the term of the engagement.
Revenue on fixed price applications development and integration
projects are measured using the proportional performance method of accounting. Performance is generally measured based upon the efforts incurred to date in relation to the total estimated efforts to the completion of the contract. The Company
monitors estimates of total contract revenues and costs on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the changes become
known. In the event that a loss is anticipated on a particular contract, a provision is made for the estimated loss. The Company issues invoices related to fixed price contracts based on either the achievement of milestones during a project or other
contractual terms. Differences between the timing of billings and the recognition of revenue based upon the proportional performance method of accounting are recorded as revenue earned in excess of billings or deferred revenue in the accompanying
consolidated balance sheets.
Revenues are reported net of sales incentives to customers.
Reimbursements of out-of-pocket expenses are included in revenue.
F-12
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 is reported as a financing cash flow.
Stock repurchase plans
The Company recognizes its cost
of repurchase common stock acquired for purposes other than retirement (formal or constructive), or if ultimate disposition has not yet been decided, separately as a deduction from the total of capital stock, additional paid-in capital, and retained
earnings.
Derivative instruments
The Company is
directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s 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(“IRS”). 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 in our consolidated balance sheets in 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 and cash collateral held or placed with the same counterparties, 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 IRS 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 were not designated
and/or did not qualify as hedging instruments are immediately recognized into earnings.
F-13
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
instrument’s change in fair value is immediately recognized into earnings.
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 highly rated counterparties globally, which are major banks.
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 was 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 our consolidated statement of (loss) 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 company’s
Senior Credit facility with Bank of America N.A., the Company has entered into an Interest Rate Swap arrangement (the “IRS”) on November 30, 2016 to hedge interest rate risk on entire term loan of $300 million by entering into Pay
Fixed and Receive Floating Interest rate swap. The IRS Swap is designed to reduce the variability of future interest payments with respect to term Loan by effectively fixing the annual interest rate payable on the loan’s outstanding principal.
F-14
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 instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, 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 (loss) 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. Interest rate swap with an aggregate amount of $300 Million economically convert a portion of
company’s 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 of location and fair value of derivative financial instrument included in our
consolidated statement of financial positions as of December 31, 2016.
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Particulars
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Nominal
Amount
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Fair Value of derivative and
location on statement of
financial position as on
31st December 2016
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Gain/(loss) on fair
value
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Effective
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Ineffective
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(In thousands)
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Cash flow Hedge
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Deferred Income
Taxes and Other
non-current
assets
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Other
current
assets
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Pay fixed Interest rate swap
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$300
Million
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$
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503
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$
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30
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$
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533
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—
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F-15
The following table present the net gains (losses) recorded in accumulated other comprehensive (loss)income
relating to the interest rate swap contract designated as cash flow hedges for the period ending December 31, 2016, 2015 and 2014.
Gains (losses)
on derivatives
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2016
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2015
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2014
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(In thousands)
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Gains/ (losses) recognized in other comprehensive income (loss)
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$
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533
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$
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—
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$
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—
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The Company will reclassify an amount which will be equivalent to the accrued interest on the swap contract on every reporting
period as there is a similar impact of accrued interest on the loan in the income statement.
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 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 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, 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 Company’s 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 (Syntel Inc.), 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,net’. The related cash
flow impacts of all of our derivative activities are recorded in cash flows from operating activities.
During the year ended December 31, 2016, the
Company did not enter into new foreign exchange forward contracts. At December 31, 2016 and December 31, 2015, no foreign exchange forward contracts were outstanding.
During the year ended December 31, 2014, the Company entered into foreign exchange forward contracts with a notional amount of $160.0 million with
maturity dates of one to six months. During the year ended December 31, 2014, contracts amounting to $160.0 million expired resulting in a gain of $4.56 million, which is recorded in comprehensive income. At December 31, 2014, no foreign
exchange forward contracts were outstanding.
F-16
The following table presents the net gains (losses) recorded in accumulated other comprehensive income (loss)
relating to the foreign exchange contracts designated as net investment hedges for the periods ending December 31, 2016, 2015 and 2014.
Gains
(losses) on derivatives
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2016
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2015
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2014
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(In thousands)
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Gains/ (losses) recognized in other comprehensive income (loss)
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$
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—
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$
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—
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$
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724
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*
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*
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for and up to three months ended March 31, 2014.
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The following table presents the net gains
(losses) recorded in other income relating to the foreign exchange contracts not designated as hedges for the periods ending December 31, 2016, 2015 and 2014.
Gains (Losses) recognized in other income,net:
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2016
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2015
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2014
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(In thousands)
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Gains/(Losses) recognized in other income, net
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$
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—
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$
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—
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$
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3,836
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F-17
Change in accumulated other comprehensive loss by component (Net of tax expense or benefit)
The change in balances of accumulated comprehensive loss for the year ended December 31, 2016 is as follows:
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(In thousands)
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Foreign
Currency
Translation
Adjustments
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Unrealized
Gains (losses)
on Securities
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Defined
Benefit
Pension
Plans
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Unrealised
gain on
derivatives
designated
as cash flow
hedge
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Accumulated
Other
Comprehensive
Loss
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Beginning balance
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$
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(235,146
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)
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$
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332
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$
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(795
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)
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$
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—
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$
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(235,609
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)
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Other comprehensive income (loss)before reclassifications
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(19,064
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)
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161
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(525
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)
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|
322
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|
|
|
(19,106
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)
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Amounts reclassified from accumulated other comprehensive (loss)income
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—
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|
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(165
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)
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|
(25
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)
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—
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|
|
|
(190
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)
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Net current-period other comprehensive (loss)/income
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$
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(19,064
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)
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$
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(4
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)
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$
|
(550
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)
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$
|
322
|
|
|
$
|
(19,296
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)
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Ending balance
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$
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(254,210
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)
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$
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328
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$
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(1,345
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)
|
|
$
|
322
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|
|
$
|
(254,905
|
)
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Reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2016 is as
follows:
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(In thousands)
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Details about Accumulated Other Comprehensive Income (loss)
Components
|
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Affected
Line Item
in the
Statement
Where Net
Income Is
Presented
|
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Before
Tax
Amount
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Tax (expense)
Benefit
|
|
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Net of Tax
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Unrealized gains on available for sale securities realized in current year
|
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Other
income,
net
|
|
$
|
(248
|
)
|
|
$
|
83
|
|
|
$
|
(165
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)
|
|
Amortization of prior service cost included in net periodic pension cost
|
|
Cost of
revenues
|
|
$
|
(35
|
)
|
|
$
|
10
|
|
|
$
|
(25
|
)
|
F-18
Change in accumulated other comprehensive income (loss) by component (Net of tax expense or benefit)
The change in balances of accumulated comprehensive loss for the year ended December 31, 2015 is as follows:
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|
|
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|
(In thousands)
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gains
(losses) on
Securities
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Beginning balance
|
|
$
|
(189,410
|
)
|
|
$
|
4,600
|
|
|
$
|
(1,434
|
)
|
|
$
|
(186,244
|
)
|
|
Other comprehensive income (loss)before reclassifications
|
|
|
(45,736
|
)
|
|
|
50
|
|
|
|
524
|
|
|
|
(45,162
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
—
|
|
|
|
(4,318
|
)
|
|
|
115
|
|
|
|
(4,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
$
|
(45,736
|
)
|
|
$
|
(4,268
|
)
|
|
$
|
639
|
|
|
$
|
(49,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(235,146
|
)
|
|
$
|
332
|
|
|
$
|
(795
|
)
|
|
$
|
(235,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2015 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Details about Accumulated Other Comprehensive Income
(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 securities realized in current year
|
|
Other
income,
net
|
|
$
|
(6,580
|
)
|
|
$
|
2,262
|
|
|
$
|
(4,318
|
)
|
|
Amortization of prior service cost included in net periodic pension cost
|
|
Cost of
revenues
|
|
$
|
149
|
|
|
$
|
(34
|
)
|
|
$
|
115
|
|
The change in balances of accumulated comprehensive loss for the year ended December 31, 2014 is as follows:
F-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gains
(losses) on
Securities
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Beginning balance
|
|
$
|
(157,416
|
)
|
|
$
|
3,808
|
|
|
$
|
(695
|
)
|
|
$
|
(154,303
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(28,994
|
)
|
|
|
3,853
|
|
|
|
(758
|
)
|
|
|
(25,899
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
—
|
|
|
|
(3,061
|
)
|
|
|
19
|
|
|
|
(3,042
|
)
|
|
Out-of-period adjustment
|
|
|
(3,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
$
|
(31,994
|
)
|
|
$
|
792
|
|
|
$
|
(739
|
)
|
|
$
|
(31,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(189,410
|
)
|
|
$
|
4,600
|
|
|
$
|
(1,434
|
)
|
|
$
|
(186,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2014 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Details about Accumulated Other Comprehensive Income (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 securities realized in the current year
|
|
Other income,
net
|
|
$
|
(4,555
|
)
|
|
$
|
1,494
|
|
|
$
|
(3,061
|
)
|
|
Amortization of prior service cost included in net periodic pension cost
|
|
Cost of
revenues
|
|
$
|
29
|
|
|
$
|
(10
|
)
|
|
$
|
19
|
|
Other income, net
Other
income includes interest and dividend income, gains and losses on forward contracts
,
gains and losses from the sale of securities, other investments, treasury operations and interest expenses on loans and borrowings.
Other comprehensive loss
The other comprehensive loss
consists of foreign currency translation adjustments, gains (losses) on net investment hedge derivatives, gain (losses) on cash flow hedge reserve, unrealized gains (losses) on securities and a component of a defined benefit plan. During the years
ended December 31, 2016, 2015 and 2014, the other comprehensive loss amounts to $19.3 million, $49.4 million and $31.9 million, respectively, primarily attributable to the foreign currency translation loss adjustments of $19.0 million,$45.4
million and $32.4 million respectively.
F-20
Tax on other comprehensive loss
Total tax (expense) benefit on other comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(In thousands)
|
|
|
Tax expense on Foreign currency translation adjustments
|
|
$
|
(46
|
)
|
|
$
|
(308
|
)
|
|
$
|
(337
|
)
|
|
Tax expense on unrealized gains on securities
|
|
|
2
|
|
|
|
2,196
|
|
|
|
(430
|
)
|
|
Tax (expense) benefit on defined benefit pension plans
|
|
|
287
|
|
|
|
(312
|
)
|
|
|
379
|
|
|
Tax expense on cash flow hedge
|
|
|
(211
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (taxes )benefit on other comprehensive income (loss)
|
|
$
|
32
|
|
|
$
|
1,576
|
|
|
$
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
For reporting cash and cash equivalents, 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 at December 31, 2016 and December 31, 2015, were $78.3 million and $500.5 million, respectively,
which were held in bank and fixed deposits with various banking and financial institutions.
Fair value of financial instruments
The fair values of the Company’s current assets and current liabilities approximate their carrying values because of their short maturities. Such
financial instruments are classified as current and are expected to be liquidated within the next twelve months.
Concentration of credit risks
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash, investments and accounts
receivable and certain derivative instruments(IRS) designated as hedge instrument. Cash on deposit is held with financial institutions with high credit standings. The Company has cash deposited with financial institutions that, at times, may exceed
the federally insured limits.
The Company establishes an allowance for doubtful accounts for known and inherent collection risks related to its accounts
receivable. The estimation of the allowance is primarily based on the Company’s assessment of the probable collection from specific customer accounts, the aging of the accounts receivable, analysis of credit data, bad debt write-offs and other
known factors.
F-21
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 obligations. The Company also mitigates the credit risk of these derivatives by transacting with highly rated counterparties
globally, which are major banks. 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 was insignificant.
Investments
Short-term investments
The Company’s short-term investments consist of short-term mutual funds, which have been classified as available-for-sale 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 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. The
cost of securities sold is determined using the weighted-average method.
During the year ended December 31, 2015, the Company has realized
short-term investments in Fixed Maturity Plans (FMPs) of mutual funds, which are classified as held to maturity securities. As at December 31, 2016 and 2015 there were no investment in FMPs of mutual funds, respectively.
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 at December 31, 2016 and 2015 non-current term deposits with banks were at $0.2 million and $0.08 million, respectively. Term deposits with
banks include restricted deposits of $0.44 million and $0.60 million as at December 31, 2016 and December 31, 2015 respectively, placed as security towards performance guarantees issued by the Company’s bankers on the Company’s
behalf.
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 $6.6 million and $413.6 million at December 31, 2016 and 2015, respectively.
F-22
Property and equipment
Property and equipment are stated at cost. Maintenance and repairs are charged to expense when incurred. Depreciation is computed primarily using the
straight-line method over the estimated useful lives as follows:
|
|
|
|
|
|
|
Years
|
|
Office building
|
|
30
|
|
Residential property
|
|
20
|
|
Computer equipment and software
|
|
3
|
|
Furniture, fixtures and other equipment
|
|
5-7
|
|
Vehicles
|
|
3-5
|
|
Leasehold improvements
|
|
Shorter of economic life or life of lease
|
|
Leasehold land
|
|
Shorter of economic life or life of lease
|
Depreciation and amortization expense for the years ended December 31, 2016, 2015 and 2014 was $14.7 million, $15.6
million and $16.1 million, respectively.
Long-lived assets (other than goodwill)
In accordance with guidance on “Accounting for the Impairment or Disposal of Long-Lived Assets” in the FASB Codification, the Company reviews its
long-lived assets (other than goodwill) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that such costs should be evaluated for possible
impairment, the Company assesses the recoverability of the long-lived assets (other than goodwill) by comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The
amount of an impairment charge, if any, is calculated based on the excess of the carrying amount over the fair value of those assets. Management believes assets were not impaired at December 31, 2016 and 2015.
Goodwill
During the first quarter of 2014, as a result
of the completion of organizational changes, the Company changed its basis of segmentation to vertical segments. The company reassigned goodwill to the new reportable segment Healthcare and Life Sciences. In accordance with guidance on goodwill
impairment in the FASB Codification, goodwill is evaluated for impairment at least annually. Management believes goodwill was not impaired at December 31, 2016 or 2015. The Company evaluated goodwill for impairment in the third quarter of each
of 2016 and 2015.
Use of estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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 allowance for doubtful accounts, impairment of long-lived
assets and goodwill, contingencies and litigation, the recognition of revenues and profits based on the proportional performance method, potential tax liabilities and bonus accrual. Actual results could differ from those estimates and assumptions
used in the preparation of the accompanying financial statements.
F-23
Foreign currency translation
The financial statements of the Company’s foreign subsidiaries use the currency of the primary economic environment in which they operate as its
functional currency. Revenues and expenses of the foreign subsidiaries are translated to U.S. dollars at average period exchange rates. Assets and liabilities are translated to U.S. dollars at period-end exchange rates with the effects of these
cumulative translation adjustments being reported as a separate component of accumulated other comprehensive loss in shareholders’ deficit/equity. Transaction gains and losses are reflected within selling, general and administrative expenses in
the consolidated statements of comprehensive income. During the years ended December 31, 2016, 2015 and 2014, foreign exchange gain of $8.3 million, $18.1 million and $10.7 million were included in selling, general and administrative expenses,
respectively.
Earnings per share
Basic (loss)
earnings per share are calculated by dividing net (loss)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.
During 2014, the Company’s Board of Directors authorized a two-for-one stock split of its outstanding common shares. On November 3, 2014, an
additional common share was issued for each existing common share held by shareholders of record on October 20, 2014. Accordingly, all share and per share amounts for all periods presented in these consolidated financial statements and notes
thereto, have been adjusted retroactively, where applicable, to reflect this stock split.
The Company has issued stock options and restricted stock,
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 options and restricted stock granted pursuant to the stock option
and incentive plan, by dividing the net (loss)income by the weighted average number of shares outstanding during the period adjusted for these potentially dilutive options, except when the results would be anti-dilutive. The potential tax benefit on
exercise of stock options is considered as additional proceeds while computing dilutive earnings per share using the treasury stock method.
Vacation
pay
The accrual for unutilized leave balance is determined for the entire available leave balance standing to the credit of 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 for unutilized earned leave was $3.4 million, $5.3 million and $5.4 million for the years ended December 31, 2016, 2015 and 2014,
respectively.
The amounts accrued for unutilized earned leave were $23.1 million and $22.4 million as of December 31, 2016 and 2015, respectively,
and are included within accrued payroll and related costs.
F-24
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, along with any related valuation allowances are measured using enacted tax rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in income in the period that includes the enactment date. The Company has not provided deferred
taxes on the undistributed earnings as the earnings from subsidiaries are considered to be permanently reinvested outside the U.S.. The Company intends to continue to reinvest these earnings in international operations. If the Company decided at a
later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts.
Recently
adopted accounting standards
On November 20, 2015, the FASB issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred
Taxes. Current GAAP requires the deferred taxes to be presented as a net current asset or liability and net non-current asset or liability. ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation
allowance, be classified as non-current on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods with
early adoption permitted. We have adopted this ASU 2015-17 retrospectively in our consolidated financial statements as of December 31, 2016. Accordingly, we reclassified the current deferred tax assets and liabilities to net non-current
deferred tax assets and liabilities within each jurisdiction on our December 31, 2015 Consolidated Balance Sheet, which increased deferred income taxes and other non-current assets by $8.15 million and increased other non-current liabilities by
$0.06 million and corresponding decrease in other current assets and accrued liabilities.
Recently issued accounting standards
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 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 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.
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 provide
additional clarification on criterion within Topic 606 as well as additional guidance for transition to the new revenue recognition criteria. These amendments will provide additional guidance on the application of and transition to the new revenue
recognition standards.
F-25
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. The requirements of this ASU
and its impact on the Company are being evaluated. We have established a cross-functional coordinated implementation team to implement the standard update related to the recognition of revenue from contracts with customers. We are in the process of
reviewing existing revenue contracts for evaluating the required changes in line with above standard. We are in the process of identifying and implementing changes to our processes to meet the standard’s updated reporting and disclosure
requirements. We are also evaluating the internal control changes, if any, during the implementation of the standard. A transition method for this ASU is being evaluated.
In January 2016, the FASB issued an update (ASU 2016-01) to the standard on financial instruments. The update significantly revises an entity’s
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. 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 requirements of this ASU and its impact on the Company are currently being evaluated.
In February 2016, the FASB issued as 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 requirements of this ASU and its impact on the Company are currently being evaluated.
In March 2016, the FASB issued an update (ASU 2016-09) to the standard on Compensation- Stock Compensation as part of improvement and simplification which
involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business
entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The requirements of this ASU are not expected to have material impact on Consolidated
Financial Statements.
F-26
In June 2016, the FASB issued an update on Financial Instruments—Credit 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 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 requirements of this ASU and its impact on the
Company are currently being evaluated.
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 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 does not expect that the adoption of this guidance will have a
significant impact on the Company’s Consolidated Financial Statements.
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 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 Intangibles—Goodwill 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
F-27
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. For public business entity that is a U.S. Securities and Exchange Commission
(SEC) 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
Consolidated Financial Statements.
3. Short-Term Investments
Short-term investments included the following at December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Investments in mutual funds at fair value
|
|
$
|
15,016
|
|
|
$
|
126,479
|
|
|
Term deposits with banks
|
|
|
6,598
|
|
|
|
413,566
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,614
|
|
|
$
|
540,045
|
|
|
|
|
|
|
|
|
|
|
|
Information related to investments in mutual funds (primarily Indian Mutual Funds) is as follows at and for the years ended
December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(In thousands)
|
|
|
Cost
|
|
$
|
14,882
|
|
|
$
|
126,243
|
|
|
$
|
180,143
|
|
|
Unrealized gain, net
|
|
|
134
|
|
|
|
236
|
|
|
|
6,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
15,016
|
|
|
$
|
126,479
|
|
|
$
|
186,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
5,790
|
|
|
$
|
18,796
|
|
|
$
|
14,619
|
|
|
Proceeds on sales of mutual funds
|
|
|
299,208
|
|
|
|
304,083
|
|
|
|
305,298
|
|
|
Purchases of mutual funds
|
|
|
184,692
|
|
|
|
221,097
|
|
|
|
349,791
|
|
F-28
Held to maturity securities
Investments in held-to-maturity securities of the Company consist of investments in the units of FMPs of mutual funds in Indian subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
As of
December
31, 2016
|
|
|
As of
December
31, 2015
|
|
|
As of
December
31, 2014
|
|
|
|
|
(In thousands)
|
|
|
Aggregate fair value of the investment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,612
|
|
|
Less: Gross unrecognized holding gain
|
|
|
—
|
|
|
|
—
|
|
|
|
726
|
|
|
Net carrying amount
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,886
|
|
Information related to investments in term deposits with banks included the following for the years ended December 31,
2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(In thousands)
|
|
|
Cost
|
|
$
|
6,598
|
|
|
$
|
413,566
|
|
|
$
|
466,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of term deposits
|
|
$
|
621,824
|
|
|
$
|
486,651
|
|
|
$
|
445,717
|
|
|
Purchases of term deposits
|
|
|
223,904
|
|
|
|
446,768
|
|
|
|
583,341
|
|
4. Revenue Earned in Excess of Billings and Deferred Revenue
Revenue earned in excess of billings at December 31, 2016 and 2015 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Unbilled revenue for time-and-materials projects
|
|
$
|
20,828
|
|
|
$
|
22,171
|
|
|
Unbilled revenue for fixed-price projects, net of discounts
|
|
|
4,211
|
|
|
|
8,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,039
|
|
|
$
|
30,448
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue at December 31, 2016 and 2015 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Deferred revenue on uncompleted fixed-price development contracts
|
|
$
|
5,216
|
|
|
$
|
6,859
|
|
|
Other deferred revenue
|
|
|
2,757
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,973
|
|
|
$
|
7,716
|
|
|
|
|
|
|
|
|
|
|
|
F-29
5. Allowances for Doubtful Accounts
The movement in the allowance for doubtful accounts for the years ended December 31, 2016, 2015 and 2014 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
622
|
|
|
$
|
703
|
|
|
$
|
2,022
|
|
|
Provision
|
|
|
190
|
|
|
|
—
|
|
|
|
—
|
|
|
Write-offs, net of recoveries
|
|
|
(11
|
)
|
|
|
(81
|
)
|
|
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
801
|
|
|
$
|
622
|
|
|
$
|
703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Property and Equipment
Property and equipment at December 31, 2016 and 2015 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Office building
|
|
$
|
54,125
|
|
|
$
|
55,293
|
|
|
Computer equipment and software
|
|
|
55,614
|
|
|
|
54,951
|
|
|
Furniture, fixtures and other equipment
|
|
|
72,264
|
|
|
|
71,542
|
|
|
Vehicles
|
|
|
2,058
|
|
|
|
2,237
|
|
|
Leasehold improvements
|
|
|
7,536
|
|
|
|
8,058
|
|
|
Leasehold land
|
|
|
4,680
|
|
|
|
4,783
|
|
|
Residential property
|
|
|
1,602
|
|
|
|
1,637
|
|
|
Capital advances / work in progress
|
|
|
29,177
|
|
|
|
19,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,056
|
|
|
|
217,922
|
|
|
Less accumulated depreciation and amortization
|
|
|
120,580
|
|
|
|
112,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,476
|
|
|
$
|
105,776
|
|
|
|
|
|
|
|
|
|
|
|
7. Line of Credit and Term Loan
On May 23, 2013, Syntel entered into a Credit Agreement with Bank of America, N.A. for $150 million in credit facilities consisting of a three-year term
loan facility of $60 million and a three-year revolving credit facility of $90 million (the “Credit Agreement”). The maturity date of both the three-year term loan facility and the three-year revolving credit facility was May 23,
2016. The Credit Agreement was amended on May 9, 2016 (the “First Amendment Effective Date”) thereby extending the maturity date from May 23, 2016 to May 9, 2019. Further, by way of the amended Credit Agreement, an
additional $40 million for term loan facility and $10 million for revolving credit facility was granted by Bank of America to Syntel (the “First Amendment” and together with the Credit Agreement, the “Amended Credit Agreement”).
Thus, the total amount of the credit facility was $200 million, consisting of a three-year term loan facility of $100 million and a three-year revolving credit facility of $100 million. The Amended Credit Agreement was guaranteed by two of the
Company’s domestic subsidiaries, SkillBay and Syntel Consulting (collectively, the “Guarantors”). In connection with the First Amendment, 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.
F-30
The interest rates under the Amended Credit Agreement were, with respect to both the revolving credit facility
and the term loan, (a) for the period beginning on the First Amendment Effective Date through and including the date prior to the first anniversary of the First Amendment Effective Date, (i) the Eurodollar Rate (as that term is defined in
the Amended Credit Agreement) plus 1.50% with respect to Eurodollar Rate Loans (as that term is defined in the Amended Credit Agreement) and (ii) the Base Rate (as that term is defined in the Amended Credit Agreement) plus 0.50% with respect to
Base Rate Loans (as that term is defined in the amendment to the Credit Agreement), (b) for the period beginning on the first anniversary of the First Amendment Effective Date through and including the date prior to the second anniversary of
the First Amendment Effective Date, (i) the Eurodollar Rate plus 1.45% with respect to Eurodollar Rate Loans and (ii) the Base Rate plus 0.45% with respect to Base Rate Loans, and (c) for the period beginning on the second anniversary
of the First Amendment Effective Date and continuing thereafter, (i) the Eurodollar Rate plus 1.40% with respect to Eurodollar Rate Loans and (ii) the Base Rate plus 0.40% with respect to Base Rate Loans.
During the year ended December 31, 2016, the Company fully repaid the revolving credit and term loan of $190.0 million, and terminated the Amended Credit
Agreement.
On September 12, 2016, the Company entered into a new credit agreement, as amended as of October 26, 2016, (“Senior Credit
Facility”) 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 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 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 is guaranteed by two of the Company’s 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 interest rates applicable to the Senior
Credit Facility other than in respect of swing line loans will be 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 December 31, 2016, the interest rates were 2.11% for the Term Loan of $300 million, 2.11% and 2.20% for two portions of the Revolving Facility
equaling $160 million and $40 million, respectively.
The Company has also hedged interest rate risk on the entire Term Loan of $300 million by entering
into a Pay Fixed and Receive Floating interest rate swap on November 30, 2016. The Company has designated this Interest rate swap (“IRS”) in a hedging relationship with the term loan. The IRS is recorded at fair value and a gain of
$0.5 million during the fourth quarter is recorded in “Accumulated other comprehensive income” with the corresponding debit in Other current assets and other long-term assets.
F-31
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 December 31, 2016, as it reflects the current market value.
The Term Loan provides for the principal
payments as under:
|
|
|
|
|
|
|
Period
|
|
Payment amount per quarter
|
|
Beginning from
|
|
Until
|
|
(In millions)
|
|
December 31, 2016
|
|
September 30, 2017
|
|
3.750
|
|
October 31, 2017
|
|
September 30, 2018
|
|
5.625
|
|
October 31, 2018
|
|
June 30, 2021
|
|
7.500
|
During the three months ended December 31, 2016, no principal payment was made towards the term loan. $3.750 million of
principal was due to be paid on December 31, 2016 and the amount was paid on January 3, 2017 as the three day delay originated with the lender. However, the Company was still in compliance with loan covenants related to the payment
schedule as of December 31, 2016.
The Senior Credit Facility requires compliance with certain financial ratios and covenants. As of
December 31, 2016, the Company was in compliance with all financial covenants.
As of December 31, 2016 the outstanding balances of the Term
Loan and Revolving Facility, including accrued interest, are $299.9 million and $199.9 million (net of $0.9 million unamortized debt issuance cost), respectively.
Future scheduled payments on the Senior Credit Facility, at December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
|
Revolving
Facility
|
|
|
|
|
(In thousands)
|
|
|
|
|
Principal
Payments
|
|
|
Principal
Payments
|
|
|
2017
|
|
$
|
20,625
|
|
|
|
|
|
|
2018
|
|
$
|
24,375
|
|
|
|
|
|
|
2019
|
|
$
|
30,000
|
|
|
|
|
|
|
2020
|
|
$
|
30,000
|
|
|
|
|
|
|
2021
|
|
$
|
195,000
|
|
|
$
|
200,000
|
|
F-32
8.Leases
Operating Lease
The Company leases certain facilities and
equipment under operating leases. Current operating lease obligations are expected to be renewed or replaced upon expiration. Future minimum lease payments under all non-cancelable leases expiring beyond one year as of December 31, 2016 are as
follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2017
|
|
$
|
3,268
|
|
|
2018
|
|
$
|
2,946
|
|
|
2019
|
|
$
|
1,825
|
|
|
2020
|
|
$
|
1,520
|
|
|
2021
|
|
$
|
1,230
|
|
|
Thereafter
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
$
|
10,844
|
|
|
|
|
|
|
|
Total rent expense amounted to approximately $10.7 million, $11.3 million and $10.5 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
9. Income Taxes
Income before income taxes for the Company’s U.S. and foreign operations for the years ended December 31, 2016, 2015 and 2014 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
52,742
|
|
|
$
|
42,342
|
|
|
$
|
23,966
|
|
|
Foreign
|
|
|
220,643
|
|
|
|
284,859
|
|
|
|
294,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
273,385
|
|
|
$
|
327,201
|
|
|
$
|
318,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes for the years ended December 31, 2016, 2015 and 2014 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
65,636
|
|
|
$
|
14,521
|
|
|
$
|
8,904
|
|
|
State
|
|
|
3,192
|
|
|
|
2,639
|
|
|
|
1,686
|
|
|
City
|
|
|
533
|
|
|
|
439
|
|
|
|
281
|
|
|
Foreign
|
|
|
256,117
|
|
|
|
61,393
|
|
|
|
65,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
325,478
|
|
|
|
78,992
|
|
|
|
76,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(150
|
)
|
|
|
(537
|
)
|
|
|
(1,328
|
)
|
|
State
|
|
|
(28
|
)
|
|
|
(99
|
)
|
|
|
(245
|
)
|
|
City
|
|
|
(5
|
)
|
|
|
(16
|
)
|
|
|
(41
|
)
|
|
Foreign
|
|
|
5,480
|
|
|
|
(3,665
|
)
|
|
|
(5,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense (benefit)
|
|
|
5,297
|
|
|
|
(4,317
|
)
|
|
|
(6,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
330,775
|
|
|
$
|
74,675
|
|
|
$
|
69,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
The components of net deferred tax assets as of December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Carry-forward losses of subsidiaries
|
|
$
|
7
|
|
|
$
|
53
|
|
|
Minimum alternate tax credit of subsidiaries
|
|
|
35,979
|
|
|
|
30,752
|
|
|
Property, plant and equipment
|
|
|
198
|
|
|
|
394
|
|
|
Accrued expenses and allowances
|
|
|
15,055
|
|
|
|
13,820
|
|
|
Valuation allowance
|
|
|
(9,167
|
)
|
|
|
(5,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
42,072
|
|
|
|
39,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Provision for branch tax on dividend equivalent in India
|
|
|
(9,782
|
)
|
|
|
(1,726
|
)
|
|
Provision for tax on unrealized gains in India
|
|
|
(33
|
)
|
|
|
(53
|
)
|
|
Others
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(10,073
|
)
|
|
|
(1,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
31,999
|
|
|
$
|
37,786
|
|
|
|
|
|
|
|
|
|
|
|
The balance sheet classification of the net deferred tax asset is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Deferred tax asset, non-current
|
|
|
42,072
|
|
|
|
39,565
|
|
|
Deferred tax liabilities, non-current
|
|
|
(10,073
|
)
|
|
|
(1,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,999
|
|
|
$
|
37,786
|
|
|
|
|
|
|
|
|
|
|
|
Syntel’s software development centers/units in India are located in Mumbai, Chennai, Pune and Gurugram. Software
development centers/units enjoy favorable tax provisions due to their registration in Special Economic Zone (SEZ), as Export Oriented Unit (EOU) and as units located in Software Technologies Parks of India (STPI). Units registered with STPI, EOUs
and certain units located in SEZ were exempt from payment of corporate income taxes for ten years of operations on the profits generated by these units or March 31, 2011, whichever was earlier. Certain units located in SEZ are eligible for 100%
exemption from payment of corporate taxes for the first five years of operation and 50% exemption for the next two years and a further 50% exemption for another three years, subject to fulfillment of certain criteria laid down. New units in SEZ
operational after April 1, 2005 are eligible for 100% exemption from payment of corporate taxes for the first five years of operation, 50% exemption for the next five years and a further 50% exemption for another five years, subject to
fulfillment of criteria.
The Company’s units located at SEEPZ Mumbai and the STPI/EOU units ceased to enjoy the tax exemption on March 31,
2011. Three SEZ units have completed their first five years of 100% exemption as of March 31, 2016. One SEZ unit located at Chennai has completed its first five years of 100% exemption as of March 31, 2015. The Company has started
operations in KPO SEZs unit in Airoli, Navi Mumbai in the quarters ended June 30, 2015 and June 30, 2016, respectively.
Syntel’s SEZ in
Pune set up under the SEZ Act 2005, commenced operations in 2008. The SEZ for Chennai commenced operations in 2010. Income from operation of the SEZ, as a developer, is exempt from payment of corporate income taxes for ten out of 15 years from the
date of SEZ notification.
F-34
Provision for Indian Income Tax is made only in respect of business profits generated from these software
development units, to the extent they are not covered by the above exemptions and on income from treasury operations and other income.
The benefit of the
tax holiday under Indian Income Tax was $38.97 million, $45.6 million and $43.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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 Company’s 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 Company’s 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.
Other than the amounts affected by the one-time repatriation, the Company’s
accumulated foreign earnings are deemed to be permanently reinvested outside the United States and the Company has not provided for income taxes on such earnings. 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
Company’s 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. If in the future, management were to conclude that any
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 Company’s future effective tax rate. If the Company determines to repatriate
all undistributed repatriable earnings of foreign subsidiaries as of December 31, 2016, the Company would have accrued taxes of approximately $24.2 million.
For the year ended December 31, 2016, the Company has provided a tax charge of $16.75 million related to repatriation and recorded liabilities for
unrecognized tax benefits related to repatriation. The Company has also classified a deferred tax liability of $1.73 million as unrecognized tax benefits related to repatriation.
The Company reversed a provision for tax of $3.08 million for the quarter ended March 31, 2016 due to the expiration of the time limit with respect to a
particular tax provision.
During the years ended December 31, 2016, 2015 and 2014, the effective income tax rate was 121.0%, 22.8% and 21.7%,
respectively.
F-35
The tax rate for the year ended December 31, 2016 was primarily impacted by a one-time repatriation. Where
the Company recognized a one-time tax expense of approximately $270.6 million (net of foreign tax credits) and reversal of unrecognized tax benefits of $3.08 million. Without the above, the effective tax rate for the year ended December 31,
2016 would have been 23.0%.
The tax rate for the year ended December 31, 2015 was impacted by a favorable adjustments of $1.10 million relating to
the true up of tax provisions upon the finalization of the India tax computation and $1.20 million relating to the finalization of state tax and local tax matters. The company has provided tax charges of $0.84 million on account of valuation
allowances against the minimum alternative tax. Without the above, the effective tax rate for the year ended December 31, 2015 would have been 23.3%.
The tax rate for the year ended December 31, 2014 was impacted by a favorable adjustment of $1.20 million, relating to the true up of tax provisions,
upon the finalization of the tax computation of Syntel India, which was finalized after setoff of unabsorbed inter-company expenses. Further, a $0.86 million charge of tax has arisen on account of a tax dispute raised during the year. The Company
has provided tax charges of $1.63 million and $0.88 million on account of valuation allowances against deferred tax assets recognized on investments and the minimum alternative tax. Without the above, the effective tax rate for the year ended
December 31, 2014 would have been 21.1%.
The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing
jurisdictions in which it operates. In determining the tax provisions, the Company provides for tax uncertainties in income taxes, when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon
examination. Such uncertainties, which are recorded in income taxes payable, are based on management’s estimates and accordingly, are subject to revision based on additional information. The provision no longer required for any particular tax
year is credited to the current period’s income tax expense. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is
concluded or the management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the “more likely than not” concept.
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 Company’s India subsidiary, has
disputed tax matters for the financial years 1996-97 to 2013-14 pending at various levels of tax authorities. Financial year 2014-15 and onwards are open for regular tax examination by the Indian tax authorities. However, the tax authorities in
India are authorized to reopen the already concluded tax assessments for financial years 2009-10 and onwards.
F-36
The following table accounts for the differences between the actual effective tax rate and the statutory U.S.
Federal income tax rate of 35% for the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State taxes, net of federal Benefit
|
|
|
1.0
|
%
|
|
|
0.6
|
%
|
|
|
0.2
|
%
|
|
City taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
Foreign effective tax rates different from U.S. Statutory Rate
1
|
|
|
(13.0
|
%)
|
|
|
(12.6
|
%)
|
|
|
(14.2
|
%)
|
|
Tax reserves
|
|
|
(1.0
|
%)
|
|
|
(0.0
|
%)
|
|
|
(0.1
|
%)
|
|
Prior Year state tax payment
|
|
|
—
|
|
|
|
(0.4
|
%)
|
|
|
0.0
|
%
|
|
Valuation Allowance
|
|
|
—
|
|
|
|
0.2
|
%
|
|
|
0.7
|
%
|
|
Tax related to repatriation
|
|
|
99.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
121.0
|
%
|
|
|
22.8
|
%
|
|
|
21.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
The foreign jurisdiction that materially affects the effective income tax rate is India.
|
During the years
ended December 31, 2016, 2015 and 2014, the effective income tax rates were 121.0%, 22.8% and 21.7%, respectively.
A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Balance as at January 1
|
|
$
|
50.24
|
|
|
$
|
40.47
|
|
|
Additions based on tax positions related to the current year
|
|
|
22.48
|
|
|
|
11.72
|
|
|
Additions based on tax positions for prior years
|
|
|
0.0
|
|
|
|
0.18
|
|
|
Reductions for tax positions of prior years
|
|
|
(3.08
|
)
|
|
|
(0.14
|
)
|
|
Foreign currency translation effect
|
|
|
(1.13
|
)
|
|
|
(1.99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at December 31
|
|
$
|
68.51
|
|
|
$
|
50.24
|
|
|
Income taxes paid, see below
|
|
|
(41.41
|
)
|
|
|
(42.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amounts, net of income taxes paid
|
|
$
|
27.10
|
|
|
$
|
8.06
|
|
|
|
|
|
|
|
|
|
|
|
The above table shows the unrecognized tax benefits that, if recognized, would affect the effective tax rate.
The Company has paid income taxes of $41.41 million and $42.18 million against the liabilities for unrecognized tax benefits of $68.51 million and $50.24
million, as at December 31, 2016 and 2015, respectively. The Company has paid the taxes in order to reduce the possible interest and penalties related to these unrecognized tax benefits.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of tax expense. During the years ended December 31,
2016 and December 31, 2015, the Company recognized a tax charge and tax reversal towards interest of approximately $0.15 million and $0.07 million, respectively.
The Company had accrued approximately $1.45 million and $1.33 million for interest and penalties as of December 31, 2016 and December 31, 2015,
respectively.
F-37
The Company’s amount of net unrecognized tax benefits for the tax disputes of $1.54 million could change in
the next twelve months as litigation 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 Tax which are disputed and pending at various level (including potential tax dispute) of $13.70 million for the
financial year 1996-97 to December 31, 2016, which is after providing $51.50 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. Syntel’s management, after consultation with legal counsel, believes that the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of
operations.
Branch Profit Tax
Syntel India is
subject to a 15% U.S. Branch Profit Tax (BPT) related to its effectively connected income in the United States, to the extent its U.S. taxable adjusted net income during the taxable year is not invested in the United States. The Company expected
that U.S. profits earned on or after January 1, 2008 would be permanently invested in the U.S. Accordingly, effective January 1, 2008 to June 30, 2016, a provision for BPT was not required. The accumulated deferred tax liability of
$1.73 million as of December 31, 2007 continues to be carried forward.
As a result of the dividends declared during the third quarter of 2016, as of
September 30, 2016, the Company expects that U.S. profits earned will not be permanently invested in the U.S. Accordingly, the Company has recorded a provision for additional BPT of $8.05 million for the year ended December 31, 2016.
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 no service tax on export of services. As of December 31, 2016, Syntel Indian entities has not provided against Service tax
refunds claims of $3.24 million disputed by Service tax Department which are pending at various level.
The Company obtained a tax consultant’s
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 consultant’s 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 Company’s books.
Local Taxes
As of
December 31, 2016, 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, 2015, the Company had a local tax liability provision of approximately $1.1 million, equal to $0.7 million net of tax, relating to local taxes including employer withholding
taxes, employer payroll expense taxes, business license registrations, and corporate income taxes. The decrease in December 31, 2016 as compared December 31, 2015 is mainly on account of result of filing, payment, or settlement of such
local taxes.
F-38
Minimum Alternate Tax (MAT)
Minimum Alternate Tax (“MAT”) is payable on 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 10 years and set-off against future tax liabilities, if normal tax provisions are in excess
of taxes payable under MAT. The Company estimated that the Company may not be able to utilize part of the MAT credit for two Indian subsidiaries. Accordingly, a valuation allowance of $5.19 million was recorded against the accumulated MAT credit
recognized as deferred tax assets. The MAT credit as of December 31, 2016 of $30.78 million (net of valuation allowance of $5.19 million) shall be utilized before March 31 of the following financial years and shall expire as follows:
|
|
|
|
|
|
|
Year of Expiry of MAT Credit
|
|
|
|
|
|
|
(In millions)
|
|
|
2017-18
|
|
$
|
0.19
|
|
|
2018-19
|
|
|
0.26
|
|
|
2019-20
|
|
|
0.95
|
|
|
2020-21
|
|
|
1.59
|
|
|
2021-22
|
|
|
0.78
|
|
|
2022-23
|
|
|
5.86
|
|
|
2023-24
|
|
|
6.94
|
|
|
2024-25
|
|
|
7.62
|
|
|
2025-26
|
|
|
9.80
|
|
|
2026-27
|
|
|
1.98
|
|
|
Total
|
|
$
|
35.97
|
|
|
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
(5.19
|
)
|
|
|
|
|
|
|
|
Total (net of valuation allowance)
|
|
$
|
30.78
|
|
|
|
|
|
|
|
India Budget Proposal 2017
The Finance Bill 2017 was presented on February 1, 2017. These proposals include provisions that the MAT credit can be carried forward up to 15 years, as
compared to the existing provision for the MAT credit to be carried forward up to 10 years. The Indian corporate tax rate would be reduced to 25%, as compared to the existing 30% for companies with annual turnover below INR 500 million ($7.3
million). The proposal includes no other changes to corporate income tax rates outside of the changes included above.
If enacted, these proposals would
have a one time tax benefit to Syntel of $2.7 million. These tax benefits would be accounted in the quarter in which the aforesaid proposal is enacted.
F-39
10. Earnings Per Share
The reconciliation of basic and diluted earnings per share for the years ended December 31, 2016, 2015 and 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Weighted-
Average
Shares
Out-
standing
|
|
|
Per
Share
|
|
|
Weighted-
Average
Shares
Out-
standing
|
|
|
Per
Share
|
|
|
Weighted-
Average
Shares
Out-
standing
|
|
|
Per
Share
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Basic earnings per share
|
|
|
84,146
|
|
|
$
|
(0.68
|
)
|
|
|
83,982
|
|
|
$
|
3.01
|
|
|
|
83,785
|
|
|
$
|
2.98
|
|
|
Potential dilutive effect of restricted
stock
1
|
|
|
—
|
|
|
|
—
|
|
|
|
167
|
|
|
|
(0.01
|
)
|
|
|
186
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
84,146
|
|
|
$
|
(0.68
|
)
|
|
|
84,149
|
|
|
$
|
3.00
|
|
|
|
83,971
|
|
|
$
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
For calculating dilutive earning(loss) per share during the year ended December 31, 2016, potential dilutive effect of restricted stock of 103 units are not considered as they are antidilutive in view of current
year loss.
|
11. Dividends
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. Accordingly, $1.261 billion in dividends was paid on October 3, 2016. Further, it was resolved by the Board of Directors that restricted stock units granted to employee 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 cash dividend was
funded through a one-time repatriation of approximately $1.03 billion (net of dividend distribution tax $210 million paid outside the U.S) of cash held by the Company’s foreign subsidiaries and a portion of borrowings under the new Senior
Credit Facility. In connection with the one-time repatriation, where the Company has 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 not declared or paid any dividends in 2015 or 2014.
12. Stock Compensation Plans
Share-Based
Compensation
The Company originally established a Stock Option and Incentive Plan in 1997 (the “1997 Plan”). On June 1, 2006, the
Company adopted the Amended and Restated Stock Option and Incentive Plan (the “Amended Plan”), which amended and extended the 1997 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.
F-40
On February 28, 2016, the Company’s Board of Directors approved the adoption of the 2016 Incentive Plan
(the “2016 Plan”) subject to shareholder approval. On June 8, 2016 the Company’s 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 Company’s next annual meeting of shareholders
On November 30, 2016, Company’s 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 Incentive 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 employee’s 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.
|
|
4.
|
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 years ended December 31, 2016 and 2015 under either the Amended Plan or the
2016 Plan.
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 company’s 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
Company’s Statement of Comprehensive Income. Share-based compensation expense recognized as above for the years ended December 31, 2016, 2015 and 2014 was $8.1 million (including charges for restricted stock units and a dividend
equivalent), $7.2 million and $6.5 million, respectively, including a charge for restricted stock.
The shares issued upon the exercise of the options are
new share issues.
Restricted Stock
On
different dates during the years ended December 31, 2016, 2015 and 2014, the Company issued restricted stock awards of 415,519, 135,440 and 293,904 (adjusted to account for the 2014 stock split), 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.
F-41
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 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 $1.5 million during the year ended December 31, 2016.
The impact on the Company’s results of operations of recording stock-based compensation (including impact of restricted stock) for the years ended
December 31, 2016, 2015 and 2014 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Cost of revenues
|
|
$
|
2,597
|
|
|
$
|
2,478
|
|
|
$
|
2,139
|
|
|
Selling, general and administrative expenses
|
|
|
4,054
|
|
|
|
4,719
|
|
|
|
4,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,651
|
|
|
$
|
7,197
|
|
|
$
|
6,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No cash was received from option exercises under all share-based payment arrangements for the years ended December 31,
2016, 2015 and 2014, respectively.
A summary of the activity for restricted stock awards granted under our stock-based compensation plans as of
December 31, 2016, 2015 and 2014, respectively and changes during the years then ended is presented below, appropriately adjusted, to reflect the 2014 stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Number
Of
Awards
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
Number
Of
Awards
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
Number
Of
Awards
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
Unvested at January 1
|
|
|
465,290
|
|
|
$
|
41.47
|
|
|
|
564,314
|
|
|
$
|
37.37
|
|
|
|
501,292
|
|
|
$
|
28.64
|
|
|
Granted
|
|
|
415,519
|
|
|
$
|
20.57
|
|
|
|
135,440
|
|
|
$
|
46.73
|
|
|
|
293,904
|
|
|
$
|
42.79
|
|
|
Vested
|
|
|
(198,725
|
)
|
|
$
|
39.10
|
|
|
|
(205,233
|
)
|
|
$
|
34.40
|
|
|
|
(227,882
|
)
|
|
$
|
25.03
|
|
|
Forfeited
|
|
|
(12,528
|
)
|
|
$
|
43.77
|
|
|
|
(29,231
|
)
|
|
$
|
36.38
|
|
|
|
(3,000
|
)
|
|
$
|
44.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31
|
|
|
669,556
|
|
|
$
|
29.16
|
|
|
|
465,290
|
|
|
$
|
41.47
|
|
|
|
564,314
|
|
|
$
|
37.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, $15.9 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 3.1 years.
F-42
13. Commitments and Contingencies.
As of December 31, 2016 and December 31, 2015, Syntel’s subsidiaries have commitments for capital expenditures (net of advances) of $33.0
million and $29.0 million, respectively, primarily related to the technology campuses being constructed at Pune and Chennai in India.
Syntel’s
Indian subsidiaries’ operations are carried out from their development centers/units in Mumbai forming part of a Special Economic Zone (“SEZ”) and in Chennai and Pune, which are registered under the Software Technology Parks
(“STP”) scheme. Under these schemes, the registered units have export obligations, which are based on the formula provided by the notifications/circulars issued by the STP 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 of meeting these obligations.
During the year December 31, 2016 $0.75 million was held as a security deposit concerning a
performance guarantee for certain leasehold improvements in Syntel Poland in favor of the lessor.
The Company is party to various legal actions arising
in the ordinary course of business, including litigation and governmental and regulatory controls. The Company’s estimates regarding legal contingencies are based on information known about the matters and its experience in contesting,
litigating and settling similar matters. It is the opinion of management with respect to pending or threatened litigation matters that unfavorable outcomes are neither probable nor remote and that estimates of possible loss are not able to be made.
Although actual amounts could differ from management’s estimate, none of the actions are believed by management to involve future amounts that would be material to the Company’s financial position or results of operations.
The Company estimates the costs associated with known legal exposures and their related legal expenses and accrues reserves for either the probable liability,
if that amount can be reasonably estimated, or otherwise the lower end of an estimated range of potential liability. As at December 31, 2016, the Company has recorded a $0.3 million liability for a litigation matter related contingency. During
the year ended December 31, 2015, there was no accrual related to litigation.
14. Employee Benefit Plans
The Company maintains a 401(k) retirement plan that covers all regular employees on Syntel’s U.S. payroll. Eligible employees may contribute the
lesser of 60% of their compensation or $18,000, 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 December 31, 2016, no Company
contributions have been made.
Eligible employees on Syntel’s 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 employee’s 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 Company’s monthly contributions are expensed in the period they are incurred. Provident Fund Contribution expense recognized by Indian entities was
$5.90 million, $6.50 million and $4.70 million for the years ended December 31, 2016, 2015 and 2014, respectively.
F-43
In accordance with the Payment of Gratuity Act, 1972 of India, the Indian subsidiary provides 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
employee’s 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 $13.6 million and $12.3 million as of December 31, 2016 and 2015, respectively, and are included within current and other non-current liabilities, as applicable. Expense recognized by Indian entities under the Gratuity Plan was $3.5
million, $3.7 million and $3.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The following table sets forth the funded
status of the Gratuity Plan of the Company and the amounts recognized in the Company’s consolidated balance sheets and statements of comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Accumulated benefit obligation
|
|
$
|
9,081
|
|
|
$
|
6,194
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of the year
|
|
$
|
12,349
|
|
|
$
|
12,057
|
|
|
Service cost
|
|
|
2,279
|
|
|
|
2,448
|
|
|
Interest cost
|
|
|
1,167
|
|
|
|
1,177
|
|
|
Actuarial loss/(gain)
|
|
|
900
|
|
|
|
(851
|
)
|
|
Adjustments due to transfer of employees within the group
|
|
|
—
|
|
|
|
—
|
|
|
Benefits paid
|
|
|
(1,928
|
)
|
|
|
(1,951
|
)
|
|
Effect of exchange rate changes
|
|
|
(240
|
)
|
|
|
(531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of the year
|
|
$
|
14,527
|
|
|
$
|
12,349
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet consists of:
|
|
|
|
|
|
|
|
|
|
Provision for gratuity (included in total current liabilities)
|
|
$
|
1,899
|
|
|
$
|
387
|
|
|
Provision for gratuity (included in non-current liabilities)
|
|
|
8,099
|
|
|
|
8,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,998
|
|
|
$
|
8,437
|
|
As of December 31, 2016 and December 31, 2015 amounts in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
1,353
|
|
|
$
|
489
|
|
|
Net prior service cost
|
|
|
106
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
$
|
1,459
|
|
|
$
|
623
|
|
|
|
|
|
|
|
|
|
|
|
Expected amortization out of comprehensive income in 2017 is $0.06 million.
F-44
Reconciliation of net amount recognized
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized as at beginning of the period
|
|
$
|
(12,349
|
)
|
|
$
|
(12,057
|
)
|
|
Company contributions
|
|
|
1,928
|
|
|
|
1,951
|
|
|
Net periodic benefit cost for the period
|
|
|
(3,509
|
)
|
|
|
(3,734
|
)
|
|
Amount recognized in accumulated other comprehensive loss
|
|
|
(863
|
)
|
|
|
960
|
|
|
Adjustments on account of employees transferred
|
|
|
26
|
|
|
|
—
|
|
|
Foreign currency translation adjustment
|
|
|
240
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized as at end of the period
|
|
|
(14,527
|
)
|
|
|
(12,349
|
)
|
|
Funded status of the plans
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
$
|
(14,527
|
)
|
|
$
|
(12,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The components of net gratuity costs are reflected below:
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,279
|
|
|
$
|
2,448
|
|
|
Interest cost
|
|
|
1,167
|
|
|
|
1,177
|
|
|
Amortization of transition obligation
|
|
|
61
|
|
|
|
71
|
|
|
Amortization of net actuarial (gain)/loss
|
|
|
2
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,509
|
|
|
$
|
3,733
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Discount rate
|
|
|
7.75% per
annum.
|
|
|
|
8.5% per
annum
|
|
|
Long-term rate of compensation increase
|
|
|
11% per annum
for first year,
10% for next
five years and
7% thereafter
|
|
|
|
11% per annum
for first
year,10% for
next five years
and
7%thereafter
|
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Discount rate
|
|
|
7.75% per
annum
|
|
|
|
8.5% per
annum
|
|
|
Long-term rate of compensation increase
|
|
|
11% per annum
for first year,
10% for next
five years and
7% thereafter
|
|
|
|
11% per annum
for first
year,10% for
next five years
and
7%thereafter
|
|
Cash Flows
The following
benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
For the year ended December 31,
|
|
Expected
contribution
|
|
|
|
|
(In thousands)
|
|
|
2017
|
|
$
|
2,784
|
|
|
2018
|
|
|
2,737
|
|
|
2019
|
|
|
2,740
|
|
|
2020
|
|
|
2,865
|
|
|
2021
|
|
|
2,882
|
|
|
2022–2026
|
|
|
11,825
|
|
F-45
15. Segment Reporting
Effective the first quarter of 2014, as a result of the completion of organizational changes, the Company changed its basis of segmentation to vertical
segments as follows:
|
|
•
|
|
Banking and Financial Services
|
|
|
•
|
|
Healthcare and Life Sciences
|
|
|
•
|
|
Retail, Logistics and Telecom
|
For detailed discussion on each of these segments,please refer Note 1 on
“Business” forming part of Notes to the Consolidated Financial Statements.
Syntel’s leadership evaluates the Company’s performance
and allocates resources based on segment revenues and segment cost of revenues. Segment gross profit is defined as gross profit before Corporate Direct Costs.
The Company’s cost of revenues consists of costs directly associated with billable professionals in the U.S. and offshore, including salaries, payroll
taxes, benefits, relocation costs, immigration costs, finder’s fees, trainee compensation and travel. Generally, the cost of revenues for each operating segment has similar characteristics and is subject to the same factors, pressures and
challenges. However, the economic environment and its effects on industries served by our operating groups may affect revenue and cost of revenues to differing degrees.
Corporate Direct Costs
Certain expenses, for cost
centers such as Centers of Excellence, Architecture Solutions Group, Research and Development, Cloud Computing, and Application Management, are not allocated to specific industry 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 Total Gross Profit.
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 three years ended December 31, 2016, 2015 and 2014 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(In thousands)
|
|
|
Net Revenues:
|
|
|
|
|
|
Banking and Financial Services
|
|
$
|
472,999
|
|
|
$
|
474,943
|
|
|
$
|
455,100
|
|
|
Healthcare and Life Sciences
|
|
|
155,970
|
|
|
|
157,970
|
|
|
|
147,424
|
|
|
Insurance
|
|
|
128,270
|
|
|
|
133,519
|
|
|
|
137,447
|
|
|
Manufacturing
|
|
|
44,420
|
|
|
|
41,154
|
|
|
|
27,622
|
|
|
Retail, Logistics and Telecom
|
|
|
164,891
|
|
|
|
161,026
|
|
|
|
143,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
966,550
|
|
|
$
|
968,612
|
|
|
$
|
911,429
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and Financial Services
|
|
|
183,530
|
|
|
|
188,152
|
|
|
|
193,916
|
|
F-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Life Sciences
|
|
|
62,466
|
|
|
|
68,822
|
|
|
|
67,289
|
|
|
Insurance
|
|
|
46,192
|
|
|
|
49,497
|
|
|
|
50,050
|
|
|
Manufacturing
|
|
|
13,091
|
|
|
|
13,111
|
|
|
|
8,136
|
|
|
Retail, Logistics and Telecom
|
|
|
68,113
|
|
|
|
69,505
|
|
|
|
63,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Gross Profit
|
|
|
373,392
|
|
|
|
389,087
|
|
|
|
382,653
|
|
|
Corporate Direct Cost
|
|
|
(2,567
|
)
|
|
|
(5,086
|
)
|
|
|
(5,086
|
)
|
|
Gross Profit
|
|
$
|
370,825
|
|
|
$
|
384,001
|
|
|
$
|
377,567
|
|
|
Selling, general and administrative expenses
|
|
|
108,528
|
|
|
|
100,256
|
|
|
|
109,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
262,297
|
|
|
$
|
283,745
|
|
|
$
|
268,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s largest customer in 2016, 2015 and 2014 was American Express, which accounted for revenues in excess of 10%
of total consolidated revenues. Revenue from this customer was approximately $210.1 million, $204.0 million and $201.6 million, contributing approximately 22%, 21% and 22% of total consolidated revenues during 2016, 2015 and 2014, respectively. At
December 31, 2016, 2015 and 2014, accounts receivable from this customer were $24.3 million, $31.8 million and $19.0 million respectively. The revenue from American Express Corp. was generated in Banking and Financial Services segment.
The Company’s second largest customer, State Street Bank, had revenues in excess of 10% of total consolidated revenues for the years 2016, 2015 and 2014.
Revenue from this customer was approximately $134.3 million, $140.6 million and $126.4 million, contributing approximately 14%, 15% and 14% of total consolidated revenues during 2016, 2015 and 2014, respectively. At December 31, 2016, 2015 and
2014, accounts receivable from this customer was $10.9 million, $16.6 million and $11.3 million, respectively. The revenue from State Street Bank was generated in Banking and Financial Services segment.
The Company’s third largest customer, Federal Express Corporation, had revenues in excess of 10% of total consolidated revenues for the year ended 2016,
2015 and 2014. Revenue from this customer was approximately $119.9 million, $120.1 million and $105.0 million, contributing approximately 12%, 12% and 12% of total consolidated revenues during 2016, 2015 and 2014, respectively. At December 31,
2016, 2015 and 2014, accounts receivable from this customer was $17.8 million, $12.2 million and $14.3 million, respectively. The revenue from Federal Express Corporation was generated in the Retail Logistics and Telecom segment.
16. Geographic Information
The Company’s net
revenues and long-lived assets, by geographic area, for the years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Net revenues (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America (2)
|
|
$
|
865,679
|
|
|
$
|
872,788
|
|
|
$
|
827,425
|
|
|
India
|
|
|
5,475
|
|
|
|
3,740
|
|
|
|
2,167
|
|
|
Europe (3)
|
|
|
92,899
|
|
|
|
89,088
|
|
|
|
77,821
|
|
|
Rest of the World
|
|
|
2,497
|
|
|
|
2,996
|
|
|
|
4,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
966,550
|
|
|
$
|
968,612
|
|
|
$
|
911,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America (2)
|
|
$
|
3,307
|
|
|
$
|
3,517
|
|
|
$
|
2,645
|
|
|
India
|
|
|
102,638
|
|
|
|
101,686
|
|
|
|
105,949
|
|
|
Europe (3)
|
|
|
632
|
|
|
|
374
|
|
|
|
71
|
|
|
Rest of the World
|
|
|
805
|
|
|
|
1,105
|
|
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,382
|
|
|
$
|
106,682
|
|
|
$
|
109,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
F-48
17. Selected Quarterly Financial Data (Unaudited)
Selected financial data by calendar quarter were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Full Year
|
|
|
|
|
(In thousands, except per share data)
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
241,390
|
|
|
$
|
246,018
|
|
|
$
|
241,255
|
|
|
$
|
237,887
|
|
|
$
|
966,550
|
|
|
Cost of revenues
|
|
|
151,666
|
|
|
|
155,033
|
|
|
|
146,672
|
|
|
|
142,354
|
|
|
|
595,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
89,724
|
|
|
|
90,985
|
|
|
|
94,583
|
|
|
|
95,533
|
|
|
|
370,825
|
|
|
Selling, general and administrative expenses
|
|
|
29,677
|
|
|
|
18,265
|
|
|
|
29,526
|
|
|
|
31,060
|
|
|
|
108,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
60,047
|
|
|
|
72,720
|
|
|
|
65,057
|
|
|
|
64,473
|
|
|
|
262,297
|
|
|
Other income (expense), net
|
|
|
4,096
|
|
|
|
4,875
|
|
|
|
4,227
|
|
|
|
(2,110
|
)
|
|
|
11,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
64,143
|
|
|
|
77,595
|
|
|
|
69,284
|
|
|
|
62,363
|
|
|
|
273,385
|
|
|
Income tax expense (1)
|
|
|
11,086
|
|
|
|
18,804
|
|
|
|
286,513
|
|
|
|
14,372
|
|
|
|
330,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
53,057
|
|
|
$
|
58,791
|
|
|
$
|
(217,229
|
)
|
|
$
|
47,991
|
|
|
$
|
(57,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per share, diluted (a)
|
|
$
|
0.63
|
|
|
$
|
0.70
|
|
|
$
|
(2.58
|
)
|
|
$
|
0.57
|
|
|
$
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted
|
|
|
84,266
|
|
|
|
84,278
|
|
|
|
84,214
|
|
|
|
84,163
|
|
|
|
84,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
220,599
|
|
|
$
|
239,797
|
|
|
$
|
253,636
|
|
|
$
|
254,580
|
|
|
$
|
968,612
|
|
|
Cost of revenues
|
|
|
141,785
|
|
|
|
148,704
|
|
|
|
146,061
|
|
|
|
148,061
|
|
|
|
584,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
78,814
|
|
|
|
91,093
|
|
|
|
107,575
|
|
|
|
106,519
|
|
|
|
384,001
|
|
|
Selling, general and administrative expenses
|
|
|
35,382
|
|
|
|
21,728
|
|
|
|
15,121
|
|
|
|
28,025
|
|
|
|
100,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
43,432
|
|
|
|
69,365
|
|
|
|
92,454
|
|
|
|
78,494
|
|
|
|
283,745
|
|
|
Other income (expense), net
|
|
|
9,338
|
|
|
|
9,887
|
|
|
|
10,227
|
|
|
|
14,004
|
|
|
|
43,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
52,770
|
|
|
|
79,252
|
|
|
|
102,681
|
|
|
|
92,498
|
|
|
|
327,201
|
|
|
Income tax expense (2)
|
|
|
12,749
|
|
|
|
18,673
|
|
|
|
24,990
|
|
|
|
18,263
|
|
|
|
74,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
40,021
|
|
|
$
|
60,579
|
|
|
$
|
77,691
|
|
|
$
|
74,235
|
|
|
$
|
252,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, diluted (a)
|
|
$
|
0.48
|
|
|
$
|
0.72
|
|
|
$
|
0.92
|
|
|
$
|
0.88
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted
|
|
|
84,127
|
|
|
|
84,135
|
|
|
|
84,131
|
|
|
|
84,204
|
|
|
|
84,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings per share for the quarter are computed independently and may not equal the earnings per share computed for the total year.
|
18. 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 Company’s 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 11%, 12% and 13% of the Company’s total revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
F-49
19. 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
Company’s investments and forward contracts, Interest rate swap 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 entity’s
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 our financial assets measured at fair value on a recurring basis as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
In millions)
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Short term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
$
|
15.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15.0
|
|
|
Term deposits
|
|
$
|
—
|
|
|
$
|
6.8
|
|
|
$
|
—
|
|
|
|
6.8
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
15.0
|
|
|
$
|
7.3
|
|
|
$
|
—
|
|
|
$
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our financial assets measured at fair value on a recurring basis as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Short term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
$
|
126.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
126.5
|
|
|
Term deposits
|
|
$
|
—
|
|
|
$
|
413.7
|
|
|
$
|
—
|
|
|
|
413.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
126.5
|
|
|
$
|
413.7
|
|
|
$
|
—
|
|
|
$
|
540.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
20. Term Deposits
The following table summarizes the term deposits with various banks outstanding as at December 31, 2016 and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Balance Sheet Item
|
|
As at
December 31,
2016
|
|
|
As at
December 31,
2015
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Short term investments
|
|
|
6.6
|
|
|
|
413.6
|
|
|
Non-current assets
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.8
|
|
|
$
|
413.7
|
|
|
|
|
|
|
|
|
|
|
|
21. Other Income, Net
The following table represents the components of other income, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Interest income on term deposits
|
|
$
|
9,695
|
|
|
$
|
26,751
|
|
|
$
|
34,308
|
|
|
Gain(loss)on sale of mutual funds,net
|
|
|
5,790
|
|
|
|
18,796
|
|
|
|
14,619
|
|
|
Gain(loss)on forward contracts,net
|
|
|
—
|
|
|
|
—
|
|
|
|
3,836
|
|
|
Interest Expense
|
|
|
(4,707
|
)
|
|
|
(2,220
|
)
|
|
|
(2,279
|
)
|
|
Miscellaneous income
|
|
|
310
|
|
|
|
129
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,088
|
|
|
$
|
43,456
|
|
|
$
|
50,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22. RELATED PARTY TRANSACTIONS
There were no related party transactions in 2016, 2015 and 2014.
23. STOCK REPURCHASE PLAN
On November 14, 2016, the
Board of Directors authorized a stock repurchase plan under which the Company may repurchase shares of common stock with a total value not to exceed approximately $10 million.
The Company repurchased 510,923 shares of common stock with a total value of $10 million at an average price of $19.57 per share during fourth quarter of
2016.
Repurchases under the Company’s new program were made in the open market or privately negotiated transactions or through a Rule 10b5-1 plan in
compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements, and other relevant factors. Any repurchased common stock will be available for use in connection with the Company’s
incentive plan and for other corporate purposes.
F-51