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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2019June 30, 2020
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from to
Commission File Number 001-33625
VIRTUSA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| | | | |
Delaware |
| |
| 04-3512883 |
(State or Other Jurisdiction of | | | | (I.R.S. Employer |
Incorporation or Organization) | | | | Identification Number) |
| |
132 Turnpike Rd Southborough, Massachusetts (Address of principal executive offices) | 01772 (Zip Code) |
(508) 389-7300
(Telephone Number,
Including Area Code,)
Securities registered pursuant to Section 12(b) of the Act:
| ||
Title of each class | Trading Symbol(s) VRTU | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ |
| Accelerated Filer ☐ |
| | |
Non-Accelerated Filer ☐ | | Smaller reporting company ☐ |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of February 3,July 27, 2020:
| ||
Class |
| Number of Shares |
Common Stock, par value $.01 per share | |
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Virtusa Corporation and Subsidiaries
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| Consolidated Balance Sheets at | 3 |
| 4 | |
| 5 | |
| 6 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Virtusa Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
| | | | | | | | | | | | |
|
| December 31, 2019 |
| March 31, 2019 |
| June 30, 2020 |
| March 31, 2020 | ||||
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 217,387 | | $ | 189,676 | | $ | 285,277 | | $ | 290,837 |
Short-term investments | |
| 20,058 | |
| 33,138 | |
| 4,035 | |
| 9,785 |
Accounts receivable, net of allowance of $1,637 and $2,253 at December 31, 2019 and March 31, 2019, respectively | |
| 149,800 | |
| 162,396 | ||||||
Accounts receivable, net of allowance of $1,401 and $1,541 at June 30, 2020 and March 31, 2020, respectively | |
| 141,358 | |
| 148,950 | ||||||
Unbilled accounts receivable | |
| 106,716 | |
| 113,431 | |
| 91,880 | |
| 137,839 |
Prepaid expenses | |
| 43,845 | |
| 42,314 | |
| 62,405 | |
| 55,574 |
Restricted cash | |
| 1,735 | |
| 351 | |
| 324 | |
| 659 |
Asset held for sale | | | 8,749 | | | 8,978 | | | 8,281 | | | 8,334 |
Other current assets | |
| 32,308 | |
| 29,967 | |
| 30,954 | |
| 29,214 |
Total current assets | |
| 580,598 | |
| 580,251 | |
| 624,514 | |
| 681,192 |
Property and equipment, net | |
| 108,198 | |
| 119,865 | |
| 99,323 | |
| 101,250 |
Operating lease right-of-use assets | | | 50,894 | | | — | | | 44,602 | | | 48,684 |
Investments accounted for using equity method | | | 1,429 | | | 1,446 | | | 1,321 | | | 1,336 |
Long-term investments | |
| 10 | |
| 322 | |
| 7 | |
| 4 |
Deferred income taxes | |
| 31,136 | |
| 28,770 | |
| 30,739 | |
| 30,225 |
Goodwill | |
| 276,089 | |
| 279,543 | |
| 291,743 | |
| 296,493 |
Intangible assets, net | |
| 99,519 | |
| 92,440 | |
| 126,767 | |
| 130,903 |
Other long-term assets | |
| 38,085 | |
| 29,836 | |
| 44,589 | |
| 46,980 |
Total assets | | $ | 1,185,958 | | $ | 1,132,473 | | $ | 1,263,605 | | $ | 1,337,067 |
Liabilities, Series A Convertible Preferred Stock, Redeemable noncontrolling interest | | | | | | | ||||||
Liabilities, Series A Convertible Preferred Stock, and Stockholders’ equity | | | | | | | ||||||
Current liabilities: | |
| | |
| | |
| | |
| |
Accounts payable | | $ | 30,548 | | $ | 46,471 | | $ | 43,097 | | $ | 38,537 |
Accrued employee compensation and benefits | |
| 78,524 | |
| 74,801 | |
| 55,775 | |
| 79,373 |
Deferred revenue | | | 6,592 | | | 6,421 | | | 10,823 | | | 8,054 |
Accrued expenses and other | |
| 65,675 | |
| 70,050 | |
| 92,763 | |
| 95,124 |
Current portion of long-term debt | | | 14,597 | | | 11,407 | | | 17,192 | | | 16,043 |
Operating lease liabilities | | | 11,385 | | | — | | | 11,605 | | | 11,543 |
Income taxes payable | |
| 6,729 | |
| 4,844 | |
| 4,024 | |
| 3,233 |
Total current liabilities | |
| 214,050 | |
| 213,994 | |
| 235,279 | |
| 251,907 |
Deferred income taxes | | | 14,873 | | | 15,824 | | | 15,806 | | | 16,067 |
Operating lease liabilities, noncurrent | | | 44,009 | | | — | | | 38,773 | | | 41,697 |
Long-term debt, less current portion | | | 375,164 | | | 351,320 | | | 419,205 | | | 480,154 |
Long-term liabilities | |
| 27,281 | |
| 29,824 | |
| 43,876 | |
| 42,475 |
Total liabilities | |
| 675,377 | |
| 610,962 | |
| 752,939 | |
| 832,300 |
Commitments and contingencies | | | | | | | | | | | | |
Series A Convertible Preferred Stock: par value $0.01 per share, 108,000 shares authorized, 108,000 shares issued and outstanding at December 31, 2019 and March 31, 2019; redemption amount and liquidation preference of $108,000 at December 31, 2019 and March 31, 2019 | | | 107,285 | | | 107,161 | ||||||
Redeemable noncontrolling interest | | | — | | | 23,576 | ||||||
Series A Convertible Preferred Stock: par value $0.01 per share, 108,000 shares authorized, 108,000 shares issued and outstanding at June 30, 2020 and March 31, 2020; redemption amount and liquidation preference of $108,000 at June 30, 2020 and March 31, 2020 | | | 107,367 | | | 107,326 | ||||||
Stockholders’ equity: | | | | | | | | | | | | |
Undesignated preferred stock, $0.01 par value; Authorized 5,000,000 shares at December 31, 2019 and March 31, 2019 | |
| — | |
| — | ||||||
Common stock, $0.01 par value; Authorized 120,000,000 shares at December 31, 2019 and March 31, 2019; issued 33,246,073 and 33,012,775 shares at December 31, 2019 and March 31, 2019, respectively; outstanding 29,860,509 and 30,132,776 shares at December 31, 2019 and March 31, 2019, respectively | |
| 332 | |
| 330 | ||||||
Treasury stock, 3,385,564 and 2,879,999 common shares, at cost, at December 31, 2019 and March 31, 2019, respectively | |
| (58,332) | |
| (39,652) | ||||||
Undesignated preferred stock, $0.01 par value; Authorized 5,000,000 shares at June 30, 2020 and March 31, 2020 | |
| — | |
| — | ||||||
Common stock, $0.01 par value; Authorized 120,000,000 shares at June 30, 2020 and March 31, 2020; issued 33,632,544 and 33,518,389 shares at June 30, 2020 and March 31, 2020, respectively; outstanding 30,246,980 and 30,132,825 shares at June 30, 2020 and March 31, 2020, respectively | |
| 336 | |
| 335 | ||||||
Treasury stock, 3,385,564 common shares, at cost, at June 30, 2020 and March 31, 2020 | |
| (58,332) | |
| (58,332) | ||||||
Additional paid-in capital | |
| 256,152 | |
| 239,204 | |
| 248,631 | |
| 246,862 |
Retained earnings | |
| 272,673 | |
| 250,279 | |
| 293,638 | |
| 293,831 |
Accumulated other comprehensive loss | |
| (67,529) | |
| (59,387) | |
| (80,974) | |
| (85,255) |
Total Virtusa stockholders’ equity | |
| 403,296 | |
| 390,774 | ||||||
Noncontrolling interest in subsidiaries | | | — | | | — | ||||||
Total Stockholders' equity | | | 403,296 | | | 390,774 | | | 403,299 | | | 397,441 |
Total liabilities, Series A convertible preferred stock, redeemable noncontrolling | | $ | 1,185,958 | | $ | 1,132,473 | ||||||
Total liabilities, Series A convertible preferred stock, and stockholders’ equity | | $ | 1,263,605 | | $ | 1,337,067 |
See accompanying notes to unaudited consolidated financial statement
3
Virtusa Corporation and Subsidiaries
Consolidated Statements of Income (Loss)
(Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | December 31, | | December 31, | | | June 30, | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |
| 2020 |
| 2019 | | ||||||
Revenue | | $ | 335,107 | | $ | 314,681 | | $ | 982,632 | | $ | 920,232 | | | $ | 301,064 | | $ | 319,024 | |
Costs of revenue | |
| 236,427 | |
| 221,461 | |
| 709,746 | |
| 654,288 | | |
| 232,460 | |
| 234,735 | |
Gross profit | |
| 98,680 | |
| 93,220 | |
| 272,886 | |
| 265,944 | | |
| 68,604 | |
| 84,289 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | |
| 68,270 | |
| 73,935 | |
| 209,813 | |
| 218,716 | | |
| 61,449 | |
| 70,861 | |
Income from operations | |
| 30,410 | |
| 19,285 | |
| 63,073 | |
| 47,228 | | |
| 7,155 | |
| 13,428 | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest income | |
| 520 | |
| 634 | |
| 1,744 | |
| 1,988 | | |
| 276 | |
| 673 | |
Interest expense | | | (4,873) | | | (4,597) | | | (14,616) | | | (13,365) | | | | (5,299) | | | (4,908) | |
Foreign currency transaction gains (losses), net | |
| (3,065) | |
| 8,319 | |
| (5,300) | |
| (11,794) | | |
| (1,241) | |
| 1,202 | |
Other, net | |
| 209 | |
| (444) | |
| 1,137 | |
| 998 | | |
| 307 | |
| 364 | |
Total other income (expense) | |
| (7,209) | |
| 3,912 | |
| (17,035) | |
| (22,173) | | |||||||
Total other expense | |
| (5,957) | |
| (2,669) | | |||||||||||||
Income before income tax expense | |
| 23,201 | |
| 23,197 | |
| 46,038 | |
| 25,055 | | |
| 1,198 | |
| 10,759 | |
Income tax expense | |
| 10,363 | |
| 10,400 | |
| 19,932 | |
| 15,863 | | |
| 304 | |
| 4,739 | |
Net income | | | 12,838 | | | 12,797 | | | 26,106 | | | 9,192 | | | | 894 | | | 6,020 | |
Less: net income attributable to noncontrolling interests, net of tax | | | 118 | | | 221 | | | 450 | | | 1,407 | | | | — | | | 186 | |
Net income available to Virtusa stockholders | | | 12,720 | | | 12,576 | | | 25,656 | | | 7,785 | | | | 894 | | | 5,834 | |
Less: Series A Convertible Preferred Stock dividends and accretion | | | 1,087 | | | 1,087 | | | 3,262 | | | 3,262 | | | | 1,087 | | | 1,087 | |
Net income available to Virtusa common stockholders | | $ | 11,633 | | $ | 11,489 | | $ | 22,394 | | $ | 4,523 | | |||||||
Basic earnings per share available to Virtusa | | $ | 0.39 | | $ | 0.38 | | $ | 0.75 | | $ | 0.15 | | |||||||
Diluted earnings per share available to Virtusa | | $ | 0.38 | | $ | 0.37 | | $ | 0.73 | | $ | 0.15 | | |||||||
Net income (loss) available to Virtusa common stockholders | | $ | (193) | | $ | 4,747 | | |||||||||||||
Basic earnings (loss) per share available to Virtusa | | $ | (0.01) | | $ | 0.16 | | |||||||||||||
Diluted earnings (loss) per share available to Virtusa | | $ | (0.01) | | $ | 0.15 | |
See accompanying notes to unaudited consolidated financial statements
4
Virtusa Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | | Three Months Ended | | ||||||||||
| | December 31, | | | December 31, | | | | June 30, | | ||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |
| 2020 |
| 2019 | | ||||||
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 12,838 | | $ | 12,797 | | $ | 26,106 | | $ | 9,192 | | | $ | 894 | | $ | 6,020 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | |
| 4,630 | |
| (2,477) | |
| (2,106) | |
| (20,201) | | |
| 2,065 | |
| (381) | |
Pension plan adjustment | |
| 79 | |
| 73 | |
| (606) | |
| (23) | | |||||||
Unrealized gain (loss) on available-for-sale debt securities, net of tax effect | |
| — | |
| 263 | |
| — | |
| (51) | | |||||||
Pension plan adjustment, net of tax effect | |
| 79 | |
| 162 | | |||||||||||||
Unrealized gain on available-for-sale debt securities, net of tax effect | |
| — | |
| 3 | | |||||||||||||
Unrealized gain (loss) on effective cash flow hedges, net of tax effect | |
| (2,817) | |
| 6,067 | |
| (5,031) | |
| (1,072) | | |
| 2,137 | |
| (834) | |
Other comprehensive income (loss) | | $ | 1,892 | | $ | 3,926 | | $ | (7,743) | | $ | (21,347) | | | $ | 4,281 | | $ | (1,050) | |
Comprehensive income (loss) | | | 14,730 | | | 16,723 | | | 18,363 | | | (12,155) | | |||||||
Comprehensive income | | | 5,175 | | | 4,970 | | |||||||||||||
Less: comprehensive income attributable to noncontrolling interest, net of tax | | | 484 | | | 669 | | | 849 | | | 134 | | | | — | | | 330 | |
Comprehensive income (loss) available to Virtusa stockholders | | $ | 14,246 | | $ | 16,054 | | $ | 17,514 | | $ | (12,289) | | |||||||
Comprehensive income available to Virtusa stockholders | | $ | 5,175 | | $ | 4,640 | |
See accompanying notes to unaudited consolidated financial statements
5
Virtusa Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Three and Nine Months Ended December 31,June 30, 2020 and 2019 and 2018
(Unaudited)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | |
| | | | | | | | | | | | Additional | | | | | Other | | Total | | | |||
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | Comprehensive | | Stockholders’ | | | ||||||||||
|
| Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Loss | | Equity | | | ||||||
Balance at March 31, 2020 |
| 33,518,389 | | $ | 335 |
| (3,385,564) | | $ | (58,332) | | $ | 246,862 | | $ | 293,831 | | $ | (85,255) | | $ | 397,441 | | |
Proceeds from the exercise of stock options | | 5,741 | | | — |
| — | | | — | | | 92 | | | — | | | — | | | 92 | | |
Restricted stock awards vested |
| 108,414 | |
| 1 |
| — | | | — | | | (1) | | | — | | | — | | | — | | |
Restricted stock awards withheld for tax | | — | | | — | | — | | | — | | | (1,914) | | | — | | | — | | | (1,914) | | |
Share-based compensation | | — | | | — | | — | | | — | | | 3,592 | | | — | | | — | | | 3,592 | | |
Series A Convertible Preferred Stock dividends and accretion | | — | | | — | | — | | | — | | | — | | | (1,087) | | | — | | | (1,087) | | |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 4,281 | | | 4,281 | | |
Net income | | — | | | — | | — | | | — | | | — | | | 894 | | | — | | | 894 | | |
Balance at June 30, 2020 |
| 33,632,544 | | | 336 |
| (3,385,564) | | | (58,332) | | | 248,631 | | | 293,638 | | | (80,974) | | | 403,299 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | Total | | | | | | | | | |||
| | | | | | | | | | | | Additional | | | | | Other | | Virtusa | | Non | | Total | | Redeemable | ||||||
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | Comprehensive | | Stockholders’ | | Controlling | | Stockholders’ | | Noncontrolling | |||||||||||||
|
| Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Loss | | Equity | | Interest | | Equity | | Interest | |||||||||
Balance at March 31, 2019 |
| 33,012,775 | | $ | 330 |
| (2,879,999) | | $ | (39,652) | | $ | 239,204 | | $ | 250,279 | | $ | (59,387) | | $ | 390,774 | | $ | — | | $ | 390,774 | | $ | 23,576 |
Proceeds from the exercise of stock options |
| 13,416 | |
| — |
| — | | | — | | | 194 | | | — | | | — | | | 194 | | | — | | | 194 | | | 8 |
Restricted stock awards vested | | 96,763 | |
| 1 |
| — | | | — | | | (1) | | | — | | | — | | | — | | | — | | | — | | | — |
Restricted stock awards withheld for tax |
| — | |
| — |
| — | | | — | | | (2,011) | | | — | | | — | | | (2,011) | | | — | | | (2,011) | | | — |
Share-based compensation |
| — | |
| — |
| — | | | — | | | 6,674 | | | — | | | — | | | 6,674 | | | — | | | 6,674 | | | — |
Adjustments of redeemable noncontrolling interest to redemption value | | — | | | — | | — | | | — | | | 18 | | | — | | | — | | | 18 | | | — | | | 18 | | | 170 |
Purchase of redeemable noncontrolling interest related to Polaris |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,549) |
Foreign currency translation on redeemable noncontrolling interest | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 116 |
Series A Convertible Preferred Stock dividends and accretion | | — | | | — | | — | | | — | | | — | | | (1,087) | | | — | | | (1,087) | | | — | | | (1,087) | | | — |
Other comprehensive income (loss) |
| — | | | — | | — | | | — | | | — | | | — | | | (1,194) | | | (1,194) | | | — | | | (1,194) | | | 144 |
Net income |
| — | |
| — |
| — | | | — | | | — | | | 5,834 | | | — | | | 5,834 | | | — | | | 5,834 | | | 186 |
Balance at June 30, 2019 |
| 33,122,954 | | $ | 331 |
| (2,879,999) | | $ | (39,652) | | $ | 244,078 | | $ | 255,026 | | $ | (60,581) | | $ | 399,202 | | $ | — | | $ | 399,202 | | $ | 18,651 |
Restricted stock awards vested | | 101,178 | |
| 1 |
| — | | | — | | | (1) | | | — | | | — | | | — | | | — | | | — | | | — |
Restricted stock awards withheld for tax |
| — | |
| — |
| — | | | — | | | (1,647) | | | — | | | — | | | (1,647) | | | — | | | (1,647) | | | — |
Share-based compensation |
| — | |
| — |
| — | | | — | | | 5,829 | | | — | | | — | | | 5,829 | | | — | | | 5,829 | | | — |
Repurchase of common stock | | — | |
| — |
| (505,565) | | | (18,680) | | | — | | | — | | | — | | | (18,680) | | | — | | | (18,680) | | | — |
Adjustments of redeemable noncontrolling interest to redemption value | | — | | | — | | — | | | — | | | 25 | | | — | | | — | | | 25 | | | — | | | 25 | | | 101 |
Purchase of redeemable noncontrolling interest related to Polaris | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,126) |
Foreign currency translation on redeemable noncontrolling interest | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (533) |
Reclassification of noncontrolling interest from temporary equity to permanent equity | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 15,093 | | | 15,093 | | | (15,093) |
Series A Convertible Preferred Stock dividends and accretion | | — | | | — | | — | | | — | | | — | | | (1,088) | | | — | | | (1,088) | | | — | | | (1,088) | | | — |
Other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | (8,474) | | | (8,474) | | | (111) | | | (8,585) | | | — |
Net income |
| — | |
| — |
| — | | | — | | | — | | | 7,102 | | | — | | | 7,102 | | | 146 | | | 7,248 | | | — |
Balance at September 30, 2019 |
| 33,224,132 | | $ | 332 |
| (3,385,564) | | $ | (58,332) | | $ | 248,284 | | $ | 261,040 | | $ | (69,055) | | $ | 382,269 | | $ | 15,128 | | $ | 397,397 | | | — |
Proceeds from the exercise of stock options | | 15,914 | | | — |
| — | | | — | | | 233 | | | — | | | — | | | 233 | | | — | | | 233 | | | — |
Restricted stock awards vested |
| 6,027 | |
| — |
| — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Restricted stock awards withheld for tax | | — | | | — | | — | | | — | | | (126) | | | — | | | — | | | (126) | | | — | | | (126) | | | — |
Share-based compensation | | — | | | — | | — | | | — | | | 5,750 | | | — | | | — | | | 5,750 | | | — | | | 5,750 | | | — |
Reclassification of noncontrolling interest from permanent equity to liability | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (13,564) | | | (13,564) | | | — |
Adjustments for reclassification of noncontrolling interest | | — | | | — | | — | | | — | | | 2,011 | | | — | | | — | | | 2,011 | | | (2,048) | | | (37) | | | — |
Series A Convertible Preferred Stock dividends and accretion | | — | | | — | | — | | | — | | | — | | | (1,087) | | | — | | | (1,087) | | | — | | | (1,087) | | | — |
Other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | 1,526 | | | 1,526 | | | 366 | | | 1,892 | | | — |
Net income | | — | | | — | | — | | | — | | | — | | | 12,720 | | | — | | | 12,720 | | | 118 | | | 12,838 | | | — |
Balance at December 31, 2019 |
| 33,246,073 | | | 332 |
| (3,385,564) | | | (58,332) | | | 256,152 | | | 272,673 | | | (67,529) | | | 403,296 | | | — | | | 403,296 | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
6
Virtusa Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Three and Nine Months Ended December 31, 2019 and 2018
(Unaudited)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||
| | | | | | | | | | | | | | | | | Accumulated | | Total | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | |||||||
| | | | | | | | | | | | Additional | | | | Other | | Virtusa | | Non- | | Total | | Redeemable | | | | | | | | | | | | Additional | | | | Other | | Total | | Redeemable | ||||||||||||
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | Comprehensive | | Stockholders’ | | controlling | | Stockholders' | | Noncontrolling | | Common Stock | | Treasury Stock | | Paid-in | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | ||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity |
| interest |
| equity |
| Interest |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity |
| Interest | ||||||||||||||||
Balance at March 31, 2018 |
| 32,469,092 | | $ | 325 |
| (2,879,999) | | $ | (39,652) | | $ | 260,612 | | $ | 238,019 | | $ | (40,681) | | $ | 418,623 | | $ | 17,460 | | $ | 436,083 | | $ | — | |||||||||||||||||||||||||
Balance at March 31, 2019 |
| 30,012,775 | | | 330 |
| (2,879,999) | | | (39,652) | | | 239,204 | | | 250,279 | | | (59,387) | | | 390,774 | | | 23,576 | |||||||||||||||||||||||||||||||
Proceeds from the exercise of stock options |
| 33,173 | |
| — |
| — | | — | | | 294 | | — | | | — | | | 294 | | | — | | | 294 | | | — |
| 13,416 | |
| — |
| — | | — | | 194 | | — | | | — | | 194 | | | 8 | ||||||
Proceeds from the exercise of subsidiary stock options | | — | | — | | — | | — | | | 196 | | — | | | — | | | 196 | | | — | | | 196 | | | — | | — | | — | | — | | — | | — | | — | | | — | | — | | | — | ||||||||
Restricted stock awards vested |
| 95,432 | |
| 1 |
| — | | — | | | (1) | | — | | | — | | | — | | | — | | | — | | | — | | 96,763 | | 1 | | — | | — | | (1) | | — | | | — | | — | | | — | |||||||
Restricted stock awards withheld for tax | | — | | — | | — | | — | | | (2,450) | | — | | | — | | | (2,450) | | | — | | | (2,450) | | | — |
| — | | — |
| — | | — | | (2,011) | | — | | | — | | (2,011) | | | — | ||||||||
Share-based compensation |
| — | |
| — |
| — | | — | | | 7,908 | | — | | | — | | | 7,908 | | | — | | | 7,908 | | | — |
| — | | — |
| — | | — | | 6,674 | | — | | | — | | 6,674 | | | — | |||||||
Subsidiary share-based compensation | | — | | — | | — | | — | | | 30 | | — | | | — | | | 30 | | | — | | | 30 | | | — | ||||||||||||||||||||||||||||
Cumulative effect of adopting ASC Topic 606, net of tax | | — | | — | | — | | — | | | — | | 464 | | | — | | | 464 | | | — | | | 464 | | | — | ||||||||||||||||||||||||||||
Series A Convertible Preferred Stock dividends and accretion | | — | | — | | — | | — | | | — | | (1,087) | | | — | | | (1,087) | | | — | | | (1,087) | | | — | ||||||||||||||||||||||||||||
Other comprehensive income (loss0 | | — | | — | | — | | — | | | — | | — | | | (13,060) | | | (13,060) | | | (1,466) | | | (14,526) | | | — | ||||||||||||||||||||||||||||
Net income (loss) |
| — | |
| — |
| — | | | — | | | — | | | (6,296) | | | — | | | (6,296) | | | 731 | | | (5,565) | | | — | |||||||||||||||||||||||||
Balance at June 30, 2018 |
| 32,597,697 | | | 326 |
| (2,879,999) | | | (39,652) | | | 266,589 | | | 231,100 | | | (53,741) | | | 404,622 | | | 16,725 | | | 421,347 | | | — | |||||||||||||||||||||||||
Proceeds from the exercise of stock options |
| 9,918 | |
| — |
| — | | — | | | 134 | | — | | | — | | | 134 | | | — | | | 134 | | | — | |||||||||||||||||||||||||||
Proceeds from the exercise of subsidiary stock options | | — | | — | | — | | — | | | 64 | | — | | | — | | | 64 | | | — | | | 64 | | | 3 | ||||||||||||||||||||||||||||
Restricted stock awards vested |
| 162,090 | |
| 2 |
| — | | — | | | (2) | | — | | | — | | | — | | | — | | | — | | | — | |||||||||||||||||||||||||||
Restricted stock awards withheld for tax | | — | | — | | — | | — | | | (5,152) | | — | | | — | | | (5,152) | | | — | | | (5,152) | | | — | ||||||||||||||||||||||||||||
Share-based compensation |
| — | |
| — |
| — | | — | | | 8,022 | | — | | | — | | | 8,022 | | | — | | | 8,022 | | | — | |||||||||||||||||||||||||||
Reclassification of previously recognized stock compensation related to liabilities classified awards for Polaris to liabilities | | — | | — | | — | | — | | | (617) | | — | | | — | | | (617) | | | — | | | (617) | | | — | ||||||||||||||||||||||||||||
Adjustments of redeemable noncontrolling interest to redemption value | | — | | — | | — | | — | | | (37,842) | | — | | | — | | | (37,842) | | | (16,450) | | | (54,292) | | | 54,850 | | — | | — | | — | | — | | 18 | | — | | | — | | 18 | | | 170 | ||||||||
Purchase of redeemable noncontrolling interest related to Polaris | | — | | — | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (28,395) | | — | | — | | — | | — | | — | | — | | | — | | — | | | (5,549) | ||||||||
Foreign currency translation on redeemable noncontrolling interest | | — | | — | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (2,045) | | — | | — | | — | | — | | — | | — | | | — | | — | | | 116 | ||||||||
Series A Convertible Preferred Stock dividends and accretion | | — | | — | | — | | — | | | — | | (1,088) | | | — | | | (1,088) | | | — | | | (1,088) | | | — | | — | | — | | — | | — | | — | | (1,087) | | | — | | (1,087) | | | — | ||||||||
Other comprehensive income (loss) | | — | | — | | — | | — | | | — | | — | | | (10,492) | | | (10,492) | | | — | | | (10,492) | | | (255) | | — | | — | | — | | — | | — | | — | | | (1,194) | | (1,194) | | | 144 | ||||||||
Net income |
| — | |
| — |
| — | | | — | | | — | | | 1,505 | | | — | | | 1,505 | | | — | | | 1,505 | | | 456 |
| — | | | — |
| — | | | — | | | — | | | 5,834 | | | — | | | 5,834 | | | 186 |
Balance at September 30, 2018 |
| 32,769,705 | | | 328 |
| (2,879,999) | | | (39,652) | | | 231,196 | | | 231,517 | | | (64,233) | | | 359,156 | | | 275 | | | 359,431 | | | 24,614 | |||||||||||||||||||||||||
Proceeds from the exercise of stock options |
| — | |
| — |
| — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |||||||||||||||||||||||||||
Proceeds from the exercise of subsidiary stock options | | — | | — | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 50 | ||||||||||||||||||||||||||||
Restricted stock awards vested | | 11,669 | | — | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | ||||||||||||||||||||||||||||
Restricted stock awards withheld for tax |
| — | | — |
| — | | — | | | (226) | | — | | | — | | | (226) | | | — | | | (226) | | | — | ||||||||||||||||||||||||||||
Share-based compensation |
| — | | — |
| — | | — | | | 6,993 | | — | | | — | | | 6,993 | | | — | | | 6,993 | | | — | ||||||||||||||||||||||||||||
Subsidiary share-based compensation | | — | | — | | — | | — | | | 6 | | — | | | — | | | 6 | | | — | | | 6 | | | — | ||||||||||||||||||||||||||||
Other | | — | | — | | — | | — | | | (115) | | — | | | — | | | (115) | | | (290) | | | (405) | | | — | ||||||||||||||||||||||||||||
Adjustments of redeemable noncontrolling interest to redemption value | | — | | — | | — | | — | | | 33 | | — | | | — | | | 33 | | | — | | | 33 | | | 603 | ||||||||||||||||||||||||||||
Payment of redeemable noncontrolling interest related to Polaris | | — | | — | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (1,992) | ||||||||||||||||||||||||||||
Foreign currency translation on redeemable noncontrolling interest | | — | | — | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 995 | ||||||||||||||||||||||||||||
Series A Convertible Preferred Stock dividends and accretion | | — | | — | | — | | — | | | — | | (1,087) | | | — | | | (1,087) | | | — | | | (1,087) | | | — | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | | — | | — | | — | | — | | | — | | — | | | 3,478 | | | 3,478 | | | — | | | 3,478 | | | 448 | ||||||||||||||||||||||||||||
Net income |
| — | | | — |
| — | | | — | | | — | | | 12,576 | | | — | | | 12,576 | | | 15 | | | 12,591 | | | 206 | |||||||||||||||||||||||||
Balance at December 31, 2018 |
| 32,781,374 | | | 328 |
| (2,879,999) | | | (39,652) | | | 237,887 | | | 243,006 | | | (60,755) | | | 380,814 | | | — | | | 380,814 | | | 24,924 | |||||||||||||||||||||||||
Balance at June 30, 2019 |
| 30,122,954 | | | 331 |
| (2,879,999) | | | (39,652) | | | 244,078 | | | 255,026 | | | (60,581) | | | 399,202 | | | 18,651 | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements
76
Virtusa Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | |
| | Nine Months Ended | | Three Months Ended | ||||||||||
| | December 31, | | June 30, | ||||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
Cash flows from operating activities: | | | | | | | | | | | | | | |
Net income | | $ | 26,106 | | $ | 9,192 | | | $ | 894 | | $ | 6,020 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | |
Depreciation and amortization | |
| 23,672 | |
| 21,696 | | |
| 8,363 | |
| 7,765 | |
Share-based compensation expense | |
| 18,285 | |
| 24,104 | | |
| 3,592 | |
| 6,676 | |
Provision (recovery) for doubtful accounts | |
| 26 | |
| (549) | | |
| 71 | |
| (64) | |
Gain on disposal of property and equipment | |
| (403) | |
| (115) | | |||||||
Impairment of investment | | | 184 | | | 885 | | |||||||
Foreign currency transaction losses, net | | | 5,300 | | | 11,794 | | |||||||
(Gain) loss on disposal of property and equipment | |
| (2) | |
| 42 | | |||||||
Foreign currency transaction losses (gains), net | | | 1,241 | | | (1,202) | | |||||||
Amortization of discounts and premiums on investments | | | (6) | | | 84 | | | | — | | | (4) | |
Impairment of operating lease right-of-use asset | | | 1,413 | | | — | | |||||||
Amortization of debt issuance cost | | | 863 | | | 819 | | | | 350 | | | 273 | |
Deferred income taxes, net | |
| (970) | |
| (6,225) | | |
| 253 | |
| (72) | |
Net changes in operating assets and liabilities | | | | | | | | | | | | | | |
Accounts receivable and unbilled receivable | |
| 19,129 | |
| 4,780 | | |
| 54,689 | |
| 7,203 | |
Prepaid expenses and other current assets | |
| (1,258) | |
| (7,729) | | |
| (2,899) | |
| (6,015) | |
Other long-term assets | |
| (11,239) | |
| (11,702) | | |
| (1,048) | |
| (7,730) | |
Accounts payable | |
| (12,730) | |
| 12,014 | | |
| 3,252 | |
| (4,479) | |
Accrued employee compensation and benefits | |
| 1,011 | |
| (9,041) | | |
| (23,686) | |
| (12,032) | |
Accrued expenses and other current liabilities | |
| 5,495 | |
| 13,135 | | |
| 9,566 | |
| 6,854 | |
Operating lease liabilities | | | 172 | | | — | | | | (190) | | | 125 | |
Income taxes payable | |
| 2,537 | |
| 2,975 | | |
| (3,138) | |
| 2,620 | |
Other long-term liabilities | |
| (1,720) | |
| 3,705 | | |
| 3,311 | |
| (3,744) | |
Net cash provided by operating activities | |
| 74,454 | |
| 69,822 | | |
| 56,032 | |
| 2,236 | |
Cash flows from investing activities: | | | | | | | | | | | | | | |
Proceeds from sale of property and equipment | |
| 825 | |
| 568 | | |
| — | |
| 19 | |
Purchase of short-term investments | |
| (34,969) | |
| (84,185) | | |
| (42) | |
| (4,622) | |
Proceeds from sale or maturity of short-term investments | |
| 47,716 | |
| 88,204 | | |
| 5,781 | |
| 19,817 | |
Payments for asset acquisitions | |
| (9,192) | |
| — | | |||||||
Payment of contingent consideration of asset acquisition | | | (942) | | | — | | |||||||
Business acquisition, net of cash acquired | | | — | | | (1,919) | | |||||||
Payment of deferred consideration related to business acquisition | | | (17,500) | | | — | | |||||||
Payment for asset acquisitions | |
| (27) | |
| (4,251) | | |||||||
Purchase of property and equipment | |
| (10,865) | |
| (24,715) | | |
| (1,338) | |
| (4,775) | |
Net cash used in investing activities | |
| (24,927) | |
| (22,047) | | |||||||
Payment of deferred consideration related to business acquisitions | | | (6,313) | | | — | | |||||||
Net cash (used in) provided by investing activities | |
| (1,939) | |
| 6,188 | | |||||||
Cash flows from financing activities: | | | | | | | | | | | | | | |
Proceeds from exercise of common stock options | |
| 427 | |
| 428 | | |
| 92 | |
| 194 | |
Proceeds from exercise of subsidiary stock options | | | 93 | | | 531 | | | | — | | | 52 | |
Payment of debt issuance costs | | | (808) | | | — | | |||||||
Proceeds from revolving credit facility | | | 36,000 | | | 32,000 | | |||||||
Payment of debt | | | (9,141) | | | (9,375) | | | | (4,336) | | | (875) | |
Repurchase of common stock | | | (18,680) | | | — | | |||||||
Payment of other noncontrolling interest | | | — | | | (373) | | |||||||
Payments of withholding taxes related to net share settlements of restricted stock | | | (3,783) | | | (7,828) | | | | (1,914) | | | (2,011) | |
Purchase of redeemable noncontrolling interest related to Polaris | | | (8,675) | | | (30,387) | | | | — | | | (5,549) | |
Payment of noncontrolling interest | | | (12,534) | | | — | | |||||||
Principal payments on capital lease obligation | | | (36) | | | (65) | | | | — | | | (18) | |
Payment of contingent consideration related to acquisition | | | — | | | (100) | | |||||||
Payment of dividend on Series A Convertible Preferred Stock | |
| (3,138) | |
| (3,138) | | | | (1,046) | | | (1,046) | |
Payment of revolving credit facility | |
| (55,000) | |
| — | | |||||||
Payment of debt issuance cost | | | (813) | | | — | | |||||||
Payment of contingent consideration related to acquisitions | | | (1,186) | | | — | | |||||||
Net cash used in financing activities | |
| (20,275) | |
| (18,307) | | |
| (64,203) | |
| (9,253) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (131) | |
| (13,530) | | |
| 4,206 | |
| 1,145 | |
Net increase in cash and cash equivalents and restricted cash | |
| 29,121 | |
| 15,938 | | |||||||
Net (decrease) increase in cash and cash equivalents and restricted cash | |
| (5,904) | |
| 316 | | |||||||
Cash, cash equivalents and restricted cash, beginning of year | |
| 190,113 | |
| 195,236 | | |
| 291,601 | |
| 190,113 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 219,234 | | $ | 211,174 | | | $ | 285,697 | | $ | 190,429 | |
87
Virtusa Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets:
| | | | | | | ||||||||
| | | | | | | | | | | ||||
|
| December 31, 2019 |
| March 31, 2019 | | | June 30, 2020 |
| March 31, 2020 | | ||||
Balance sheet classification | | | | | | | | | | | | | ||
Cash and cash equivalents | | $ | 217,387 | | $ | 189,676 | | | $ | 285,277 | | $ | 290,837 | |
| | | | | | | | | | | | | ||
Restricted cash in current assets | |
| 1,735 | |
| 351 | | |
| 324 | |
| 659 | |
Restricted cash in other long-term assets | |
| 112 | |
| 86 | | |
| 96 | |
| 105 | |
Total restricted cash |
| $ | 1,847 |
| $ | 437 | |
| $ | 420 |
| $ | 764 | |
Total cash, cash equivalents and restricted cash |
| $ | 219,234 |
| $ | 190,113 | |
| $ | 285,697 |
| $ | 291,601 | |
See accompanying notes to unaudited consolidated financial statements
98
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
(1) Nature of the Business
Virtusa Corporation (the “Company”, “Virtusa”, “we”, “us” or “our”) is a global provider of digital business strategy, digital engineering and information technology (“IT”) outsourcing services and solutions that accelerate business outcomes for our clients.help clients change, disrupt, and unlock new value through innovation engineering. We support Forbes Global 2000 clients across large, consumer facingkey industries likeincluding banking, financial services, insurance, healthcare, communications, technology, and media and entertainment, as these clients seek toentertainment. We help improve their business performance through accelerating revenue growth, delivering compelling consumer experiences, improving operational efficiencies, and lowering overall IT costs. We provide services across the entire spectrum of the IT services lifecycle, from strategy and consulting, to technology and user experience (“UX”) design, development of IT applications, systems integration, digital engineering, testing and business assurance, and maintenance and support services, including cloud, infrastructure and managed services. We help our clients solve critical business problems by leveraging a combination of our distinctive consulting approach, end-to-end digital engineering capabilities, unique platforming methodology, and deep domain and technology expertise.
OurVirtusa helps clients grow their business with innovative services enable our clients to accelerate business outcomesthat create operational efficiency using digital labor, future-proof operational and IT platforms, and rationalization and modernization of IT applications infrastructure. We help organizations realize the benefits of digital transformation and cloud transformation by consolidating, rationalizingbringing together digital infrastructure, analytics and modernizing their core customer-facing processes into one or more core systems.intelligence and customer experience by engineering the digital enterprise of tomorrow on the cloud. We deliver cost-effectivecost effective solutions through a global delivery model, applying advanced delivery methods such as Agile, an industry standard technique designed to accelerate application development. We also use our consulting methodology, which we referDigital Transformation Studio (“DTS”) engineering tools to as Accelerated Solution Design (“ASD”), which is a collaborative decision-makingdrive software development lifecycle automation to improve quality, enabling speed and design process performed with the client to ensure our solutions meet the client’s specificationsincreasing productivity. Our proprietary DTS was built by Virtusa’s engineering teams that have decades of industry knowledge and requirements. Ourexperience. These teams are certified and leverage Virtusa’s industry leading business transformational solutions combine deep domain expertise with our strengths in software engineeringtools and business consulting to support our clients’ business-imperative initiatives across business growthassets, providing increased speed and IT operations.
transparency.
Headquartered in Massachusetts, we have offices throughout the Americas, Europe, Middle East and Asia, with significant global delivery centers in the United States, Canada, the United Kingdom, the Netherlands, Germany, Switzerland, Sweden, Austria, the United Arab Emirates, Hong Kong, Japan, Qatar, Mexico,Australia and New Zealand, with global delivery centers in India, Sri Lanka, Hungary, Singapore and Malaysia, as well as near shore delivery centers in the United States.Malaysia.We also have many employees who work with our clients either onsite or virtually, which offers flexibility for both clients and employees.
(2) Unaudited Interim Financial Information
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, and should be read in conjunction with the Company’s audited consolidated financial statements (and notes thereto) for the fiscal year ended March 31, 20192020 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or SEC, on May 24, 2019.28, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of the accompanying unaudited consolidated financial statements have been included, and all material adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire fiscal year.
9
Principles of Consolidation
The accompanying financial statements have been prepared on a consolidated basis and reflect the financial statements of Virtusa Corporation and all of its subsidiaries that are directly or indirectly more than 50% owned or controlled. When the Company does not have a controlling interest in an entity, but exerts a significant influence on the entity, the Company
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applies the equity method of accounting. For those majority-owned subsidiaries that are not 100% owned by the Company, the interests of the minority owners are accounted for as noncontrolling interests.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. Management re-evaluates these estimates on an ongoing basis. The most significant estimates relate to the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share-based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities, intangible assets and valuation of financial instruments including derivative contracts and investments. Management bases its estimates on historical experience and on various other factors and assumptions that are believed to be reasonable under the circumstances. The actual amounts may vary from the estimates used in the preparation of the accompanying consolidated financial statements.
Fair Value of Financial Instruments
At December 31, 2019June 30, 2020 and March 31, 2019,2020, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, unbilled accounts receivable, restricted cash, accounts payable, accrued employee compensation and benefits, other accrued expenses and long-term debt, approximate their fair values due to the nature of the items. See Note 56 for a discussion of the fair value of the Company’s other financial instruments.
Recent accounting pronouncements
Recently Adopted Accounting Pronouncements
Unless otherwise discussed below, the adoption of new accounting standards did not have an impact on the consolidated financial statements.
In February 2016, the FASB issued an update (ASU 2016-02) to the standard on leases to increase transparency and comparability among organizations. The FASB subsequently issued ASU 2018-10 and ASU 2018-11 in July 2018, ASU 2018-20 in December 2018 and ASU 2019-01 in March 2019, which provide clarifications and improvements to this new standard. ASU 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented. The new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the ROU asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. For public business entities this standard is effective for the annual periods beginning after December 15, 2018, and interim periods within those annual periods. The standard permits the use of either retrospective to each prior reporting period presented with the cumulative effect of adoption recognized at the beginning of the earliest period presented or retrospective to the beginning of the period of adoption through a cumulative-effect adjustment (the “Modified Retrospective Effective Date Method”).
The Company adopted this standard, (“ASC Topic 842”) effective April 1, 2019, using a Modified Retrospective Effective Date Method. The Company has elected the package of practical expedients which permits the Company to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company did not elect the use of hindsight practical expedient to reevaluate the lease term of existing contracts. Prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies. The impact of adoption primarily relates to the recognition of ROU operating lease assets and operating lease liabilities on the Company’s unaudited consolidated balance sheets for all operating leases with a term greater than twelve months. The adoption of this standard on April 1, 2019 resulted in the recognition of ROU assets for operating leases of $54,762 and operating lease liabilities of $59,157. The Company’s accounting for finance leases (formerly capital leases) remains
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substantially unchanged. The adoption of this standard did not have an impact on the consolidated statements of income and comprehensive income (loss), consolidated statement of changes in stockholders’ equity or the consolidated statement of cash flows.
See Note 7 “Leases” for additional information regarding leases.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The standard also requires the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement. For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company early adopted this standard, as of July 1, 2019, on a prospective basis for applicable implementation costs. The adoption of this standard did not have a material impact on the consolidated balance sheet, consolidated statements of income, consolidated statement of changes in stockholders’ equity or the consolidated statement of cash flows.
New Accounting Pronouncements
Unless otherwise discussed below, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments. The FASB subsequently issued ASU 2019-04 in April 2019, ASU 2019-05 in May 2019 and ASU 2019-11 in November 2019guidance which provide clarifications and improvements to this new standard. The FASBamendments in this update changed how companies measure and recognize credit impairment for many financial assets. The new credit loss model requires companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including accounts receivables) that are in the scope of the update. The standard update also issued ASU 2019-10 in November 2019, which amendsmade amendments to the mandatory effective datecurrent impairment model for all other than public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.available-for-sale debt securities. This standard update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This update is effective for public entities from fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early
The Company adopted this standard (“ASC Topic 326”) effective April 1, 2020 using a modified retrospective approach. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting policies. The adoption is permitted. The effectof this guidance did not have a material impact on the consolidated financial statements, will largely depend ontherefore, the compositionCompany did not record any cumulative adjustments to the opening retained earnings in the consolidated financial statements.
See Note 8, “Revenue and Accounts Receivable” for additional information regarding credit qualitylosses.
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New Accounting Pronouncements
Unless otherwise discussed below, the economic conditions and forecasts at the time of adoption. Based on the current composition of our investment portfolio, current market conditions, and historical credit loss activity,Company believes the impact of recently issued standards that are not yet effective will not have a material impact on ourits consolidated financial statements and related disclosures is not expected to be material.statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The standard will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this new standard will have on its consolidated financial statements.
(3) Earnings (Loss) per Share
Basic earnings (loss) per share available to Virtusa common stockholders (“EPS”) is computed by dividing net income, less any dividends and accretion of issuance cost on the Series A Convertible Preferred Stock by the weighted average
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number of shares of common stock outstanding for the period. In computing diluted EPS, the Company adjusts the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared) applicable to the Series A Convertible Preferred Stock. Such add-back would also include any adjustments to equity in the period to accrete the Series A Convertible Preferred Stock to its redemption price. The Company adjusts the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares resulting from the issuance of restricted stock units, unvested restricted stock and stock options along with the conversion of the Series A Convertible Preferred Stock to common stock. The following table sets forth the computation of basic and diluted EPS for the periods set forth below:
The components of basic earnings (loss) per share are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | December 31, | | December 31, | | | June 30, | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |
| 2020 |
| 2019 | | ||||||
Numerators: |
| |
|
| |
| | |
|
| |
| | | |
|
| |
| |
Net income available to Virtusa stockholders | | $ | 12,720 | | $ | 12,576 | | $ | 25,656 | | $ | 7,785 | | | $ | 894 | | $ | 5,834 | |
Less: Series A Convertible Preferred Stock dividends and accretion | |
| 1,087 | |
| 1,087 | |
| 3,262 | |
| 3,262 | | |
| (1,087) | |
| (1,087) | |
Net income available to Virtusa common stockholders | | $ | 11,633 | | $ | 11,489 | | $ | 22,394 | | $ | 4,523 | | |||||||
Net income (loss) available to Virtusa common stockholders | | $ | (193) | | $ | 4,747 | | |||||||||||||
Denominators: | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
Basic weighted average common shares outstanding | |
| 29,849,368 | |
| 29,893,220 | |
| 30,041,740 | |
| 29,764,507 | | |
| 30,168,174 | |
| 30,167,910 | |
Basic earnings per share available to Virtusa common stockholders | | $ | 0.39 | | $ | 0.38 | | $ | 0.75 | | $ | 0.15 | | |||||||
Basic earnings (loss) per share available to Virtusa common stockholders | | $ | (0.01) | | $ | 0.16 | |
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The components of diluted earnings (loss) per share are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | December 31, | | December 31, | | | June 30, | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |
| 2020 |
| 2019 | | ||||||
Numerators: | | | | | | | | | | | | | | | | | | | | |
Net income available to Virtusa common stockholders | | $ | 11,633 | | $ | 11,489 | | $ | 22,394 | | $ | 4,523 | | |||||||
Net income (loss) available to Virtusa common stockholders | | $ | (193) | | $ | 4,747 | | |||||||||||||
Add : Series A Convertible Preferred Stock dividends and accretion | | | 1,087 | | | 1,087 | | | — | | | — | | | | — | | | — | |
Net income available to Virtusa common stockholders and assumed conversion | | $ | 12,720 | | $ | 12,576 | | $ | 22,394 | | $ | 4,523 | | |||||||
Net income (loss) available to Virtusa common stockholders and assumed conversion | | $ | (193) | | $ | 4,747 | | |||||||||||||
Denominators: | | | | | | | | | | | | | | | | | | | | |
Basic weighted average common shares outstanding | |
| 29,849,368 | |
| 29,893,220 | |
| 30,041,740 | |
| 29,764,507 | | |
| 30,168,174 | |
| 30,167,910 | |
Dilutive effect of Series A Convertible Preferred Stock if converted | | | 3,000,000 | | | 3,000,000 | | | — | | | — | | | | — | | | — | |
Dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units | |
| 608,863 | |
| 768,508 | |
| 658,529 | |
| 833,607 | | |
| — | |
| 766,501 | |
Weighted average shares—diluted | |
| 33,458,231 | |
| 33,661,728 | |
| 30,700,269 | |
| 30,598,114 | | |
| 30,168,174 | |
| 30,934,411 | |
Diluted earnings per share available to Virtusa common stockholders | | $ | 0.38 | | $ | 0.37 | | $ | 0.73 | | $ | 0.15 | | |||||||
Diluted earnings (loss) per share available to Virtusa common stockholders | | $ | (0.01) | | $ | 0.15 | |
During the three months ended December 31,June 30, 2020 and 2019, and 2018, unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase 24,0371,354,558 and 20,6170 shares of common stock, respectively, were excluded from the calculations of diluted earnings per share as their effect would have been anti-dilutive. For the three months ended December 31,June 30, 2020 and 2019, and 2018, all of the 3,000,000 shares of Series A Convertible Preferred Stock were includedexcluded in the calculations of diluted earnings per share as their effect was dilutive using the if-converted method.
During the nine months ended December 31, 2019 and 2018, unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase 100,434 and 13,745 shares of common stock, respectively, were excluded from the calculations of diluted earnings per share as their effect would have been anti-dilutive. For
(4) Business Combinations
During the ninefiscal year ended March 31, 2020, the Company acquired 3 individually immaterial businesses with an aggregate purchase price of $29,624 being paid at closing and a deferred consideration of $10,313 payable within a one-year period. The purchase price is also subject to adjustment after the closing of up to an additional $28,853 in contingent consideration, in the aggregate, upon the achievement of certain revenue and operating margin targets. The performance period for these targets are ranging from 12 months to 24 months from the respective acquisition date. These acquisitions enhanced the breadth and depth of digital offerings and expanded the Company’s relationship with certain existing customers.
Under the purchase method of accounting, assets acquired are recorded at their estimated fair values. The Company is in the process of obtaining additional information primarily regarding valuation assumptions, including contingent consideration and may continue to adjust the preliminary estimated fair values after obtaining more information regarding asset valuations and revision of preliminary estimates. During the three months ended December 31, 2019June 30, 2020, the Company paid $6,313 in deferred consideration related to these acquisitions. During the three months ended June 30, 2020, the Company recorded $4,526 as a reduction of goodwill related to updating the fair value assessment of contingent consideration of $3,915, customer relationships of $313 and 2018, allother adjustments of the 3,000,000 shares of Series A Convertible Preferred Stock were$298.
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excluded fromThe following table shows the calculations of diluted earnings per share as their effect would have been anti-dilutive using the if-converted method.aggregate preliminary purchase price allocation for these acquisitions:
| | | | | | | |
|
| Amount |
| Useful Life | |||
Consideration Transferred: | | | | | | | |
Cash paid at closing |
| $ | 29,624 | | | | |
Deferred consideration payable | | | 10,313 | | | | |
Fair value of contingent consideration | | | 21,049 | | | | |
Fair value of consideration | | | 60,986 | | | | |
Less: Cash acquired | | | (477) | | | | |
Total purchase price, net of cash acquired |
| $ | 60,509 | | | | |
Assets and Liabilities: | | | | | | | |
Cash and cash equivalents | | | 477 | | | | |
Goodwill | | | 22,790 | | | | |
Customer relationships | | | 38,119 | | 5 -7 years | ||
Other net | | | (400) | | | | |
Total purchase price | | $ | 60,986 | | | | |
The primary items that generated goodwill for these acquisitions are the value of the acquired assembled workforce and other benefits expected to result from combining the acquired operations with those of the Company, neither of which qualify as a separate intangible asset.
During the three months ended June 30, 2020, the Company recorded $1,578 in the Company’s consolidated statements income (loss) as fair value changes to the contingent consideration related to events that occurred in the current period. As of June 30, 2020, the fair value of contingent consideration for these acquisitions is $19,495.
(5) Investment Securities
At June 30, 2020 and March 31, 2020, all of the Company’s investment securities were classified as time deposits, available-for-sale debt securities and equity securities. These were carried on its balance sheet at their fair market value. A fair market value hierarchy based on three levels of inputs was used to measure each security (See Note 6 to our consolidated financial statements for a discussion of the fair value of the Company’s other financial instruments).
The following is a summary of investment securities at June 30, 2020:
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | | | |||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
Time deposits: | | | | | | | | | | | | |
Current | | $ | 3,307 | | $ | — | | $ | — | | $ | 3,307 |
Equity securities: | | | | | | | | | | | | |
Mutual funds: | | | | | | | | | | | | |
Current | | | 633 | | | 95 | | | — | | | 728 |
Equity shares/ options: | | | | | | | | | | | | |
Non-current | | | 1 | | | 6 | | | — | | | 7 |
Total investment securities | | $ | 3,941 | | $ | 101 | | $ | — | | $ | 4,042 |
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(4) Investment Securities
At December 31, 2019 and March 31, 2019, all of the Company’s investment securities were classified as available-for-sale debt securities and equity securities. These were carried on its balance sheet at their fair market value. A fair market value hierarchy based on three levels of inputs was used to measure each security (See Note 5 for a discussion of the fair value of the Company’s other financial instruments).
The following is a summary of investment securities at December 31, 2019:
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | | | |||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
Available-for-sale debt securities: | | | | | | | | | | | | |
Time Deposits: | | | | | | | | | | | | |
Current | | $ | 6,849 | | $ | — | | | — | | $ | 6,849 |
Equity securities: | | | | | | | | | | | | |
Mutual funds: | | | | | | | | | | | | |
Current | | | 13,060 | | | 149 | | | — | | | 13,209 |
Equity Shares/ Options: | | | | | | | | | | | | |
Non-current | | | 1 | | | 9 | | | — | | | 10 |
Total available-for-sale debt securities and equity securities | | $ | 19,910 | | $ | 158 | | $ | — | | $ | 20,068 |
The following is a summary of investment securities at March 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | ||||
| | Amortized | | Unrealized | | Unrealized | | | | | Amortized | | Unrealized | | Unrealized | | | | ||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
Available-for-sale debt securities: | | | | | | | | | | | | | ||||||||||||
Corporate bonds: | | | | | | | | | | | | | ||||||||||||
Current | | $ | 2,779 | | $ | 1 | | $ | (2) | | $ | 2,778 | ||||||||||||
Non-current | |
| — | | | — | | | — | | | — | ||||||||||||
Preference shares: | | | 188 | | | — | | | — | | | 188 | ||||||||||||
Agency and short-term notes: | | | | | | | | | | | | | ||||||||||||
Current | |
| 1,492 | | | 1 | | | — | | | 1,493 | ||||||||||||
Time deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 15,861 | | | — | | | — | | | 15,861 | | $ | 3,927 | | $ | — | | $ | — | | $ | 3,927 |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Mutual funds: | | | | | | | | | | | | | | | | | | | | | | | | |
Current | |
| 12,912 | | | 94 | | | — | | | 13,006 | |
| 5,623 | | | 235 | | | — | | | 5,858 |
Equity Shares/ Options: | | | | | | | | | | | | | ||||||||||||
Equity shares/ options: | | | | | | | | | | | | | ||||||||||||
Non-current | |
| 8 | | | 126 | | | — | | | 134 | |
| 1 | | | 3 | | | — | | | 4 |
Total available-for-sale debt and equity securities | | $ | 33,240 | | $ | 222 | | $ | (2) | | $ | 33,460 | ||||||||||||
Total investment securities | | $ | 9,551 | | $ | 238 | | $ | — | | $ | 9,789 |
The Company evaluates investmentsavailable-for-sale debt securities with unrealized losses to determine ifwhether a credit loss exists. The estimate of credit loss is determined by considering available information relevant to the losses are other than temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospectscollectability of the issuers,security and information about past events, current conditions, and reasonable and supportable forecasts. The allowance for credit loss is recorded as a charge to other income (expense), not to exceed the underlying collateralamount of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in anunrealized loss. Any excess unrealized loss position. Additionally, whilegreater than the Company classifiescredit loss is recognized in accumulated other comprehensive income ("AOCI"). We assess expected credit losses at the securities as available for sale,end of each reporting period and adjust the allowance through other income (expense). The Company does not currently intend to sell such investmentshold any available-for-sale debt securities as of June 30, 2020 and it is more likely than not that the Company will not be required to sell such investments prior to the recovery of their carrying value.
March 31, 2020.
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Proceeds from sales of available-for-sale debt and equity securities and the gross gains and losses that have been included in earnings as a result of those sales were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | December 31, | | December 31, | | | June 30, | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |
| 2020 |
| 2019 | | ||||||
Proceeds from sales or maturities of available-for-sale debt securities and equity securities | | $ | 9,476 | | $ | 27,633 | | $ | 47,716 | | $ | 88,204 | | | $ | 5,781 | | $ | 19,817 | |
Gross gains | | $ | 123 | | $ | 253 | | $ | 563 | | $ | 639 | | | $ | 176 | | $ | 228 | |
Gross losses | |
| — | |
| — | |
| — | |
| (32) | | |
| — | |
| — | |
Net realized gains on sales of available-for-sale debt securities and equity securities | | $ | 123 | | $ | 253 | | $ | 563 | | $ | 607 | | | $ | 176 | | $ | 228 | |
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(5)(6) Fair Value of Financial Instruments
The Company carries certain assets and liabilities at fair value on a recurring basis on its consolidated balance sheets. The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2019:June 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Investments: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Available-for-sale debt securities—current | | $ | — | | $ | 6,849 | | $ | — | | $ | 6,849 | ||||||||||||
Time deposits—current | | $ | — | | $ | 3,307 | | | — | | $ | 3,307 | ||||||||||||
Equity securities—current | | | — | | | 13,209 | | | — | | | 13,209 | | | — | | | 728 | | | — | | | 728 |
Available-for-sale debt securities—non-current | |
| — | |
| — | | | — | |
| — | ||||||||||||
Equity securities—non-current | | | — | | | 10 | | | — | | | 10 | | | — | | | 7 | | | — | | | 7 |
Derivative financial instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency derivative contracts | |
| — | |
| 2,152 | | | — | |
| 2,152 | ||||||||||||
Foreign currency derivative contracts—current | | | — | | | 560 | | | — | | | 560 | ||||||||||||
Foreign currency derivative contracts—non-current | |
| — | |
| 379 | | | — | |
| 379 | ||||||||||||
Interest rate swap contracts | |
| — | |
| 288 | | | — | |
| 288 | |
| — | |
| — | | | — | |
| — |
Total assets | | $ | — | | $ | 22,508 | | $ | — | | $ | 22,508 | | $ | — | | $ | 4,981 | | $ | — | | $ | 4,981 |
Liabilities: | |
| | |
| | | | | |
| | |
| | |
| | | | | |
| |
Foreign currency derivative contracts | | | — | |
| 2,264 | | | — | |
| 2,264 | ||||||||||||
Interest rate swap contracts | | | — | |
| 5,836 | | | — | |
| 5,836 | ||||||||||||
Foreign currency derivative contracts—current | | | — | |
| 2,017 | | | — | |
| 2,017 | ||||||||||||
Foreign currency derivative contracts—non-current | | | — | |
| — | | | — | |
| — | ||||||||||||
Interest rate swap contracts—non-current | | | — | | | 11,153 | | | — | | | 11,153 | ||||||||||||
Contingent consideration | | | — | | | — | | | 19,495 | | | 19,495 | ||||||||||||
Total liabilities | | $ | — | | $ | 8,100 | | $ | — | | $ | 8,100 | | $ | — | | $ | 13,170 | | $ | 19,495 | | $ | 32,665 |
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2019:2020:
| | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | |
Time deposits—current | | $ | — | | $ | 3,927 | | | — | | $ | 3,927 |
Equity securities—current | | | — | | | 5,858 | | | — | | | 5,858 |
Equity securities—non-current | | | — | | | 4 | | | — | | | 4 |
Derivative financial instruments: | | | | | | | | | | | | |
Foreign currency derivative contracts—current | | | — | | | 103 | | | — | | | 103 |
Foreign currency derivative contracts—non-current | | | �� | | | 56 | | | — | | | 56 |
Interest rate swap contracts | | | — | | | — | | | — | | | — |
Total assets | | $ | — | | $ | 9,948 | | $ | — | | $ | 9,948 |
Liabilities: | | | | | | | | | | | | |
Foreign currency derivative contracts—current | | $ | — | | | 3,689 | | $ | — | | | 3,689 |
Foreign currency derivative contracts—non-current | | | — | | | 364 | | $ | — | | | 364 |
Interest rate swap contracts—non-current | | | — | | | 11,128 | | | — | | | 11,128 |
Contingent consideration | | | — | | | — | | | 25,012 | | | 25,012 |
Total liabilities | | $ | — | | $ | 15,181 | | $ | 25,012 | | $ | 40,193 |
| | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | |
Available-for-sale debt securities—current | | $ | — | | $ | 20,132 | | | — | | $ | 20,132 |
Equity securities—current | | | — | | | 13,006 | | | — | | | 13,006 |
Available-for-sale debt securities—non-current | |
| — | |
| 188 | |
| — | |
| 188 |
Equity securities—non-current | | | — | | | 134 | | | — | | | 134 |
Derivative financial instruments: | | | | | | | | | | | | |
Foreign currency derivative contracts | | | — | | | 3,411 | | | — | | | 3,411 |
Interest rate swap contracts | | | — | | | 1,349 | | | — | | | 1,349 |
Total assets | | $ | — | | $ | 38,220 | | $ | — | | $ | 38,220 |
Liabilities: | | | | | | | | | | | | |
Foreign currency derivative contracts | | $ | — | | | 321 | | $ | — | | | 321 |
Interest rate swap contracts | | | — | | | 3,633 | | | — | | | 3,633 |
Total liabilities | | $ | — | | $ | 3,954 | | $ | — | | $ | 3,954 |
The Company estimates the fair value of our contingent consideration associated with our business combinations utilizing one or more significant inputs that are unobservable. The Company calculates the fair value of the contingent consideration based on the probability-weighted expected performance of the acquired business against the target performance metric, discounted to present value when appropriate.
15
The following table shows a reconciliation of the beginning and ending balances of Level 3 contingent consideration liabilities associated with our business combinations:
| | | | |
|
| June 30, 2020 |
| |
Beginning balance | | $ | 25,012 | |
Purchase price adjustment | | | (3,915) | |
Contingent consideration recognized in earnings | |
| (1,578) | |
Foreign currency translation adjustments | | | (24) | |
Ending balance | | $ | 19,495 | |
(6)(7) Derivative Financial Instruments
The Company evaluates its foreign exchange policy on an ongoing basis to assess its ability to address foreign exchange exposures on its consolidated balance sheets, consolidated statements of income and consolidated statement of cash flows from all foreign currencies, including most significantly the U.K. pound sterling and Indian rupee. The Company enters into hedging programs with highly rated financial institutions in accordance with its foreign exchange policy (as approved by the Company’s audit committee and board of directors) which permits hedging of material, known foreign currency exposures. There is no margin required, no cash collateral posted or received by us related to our foreign exchange forward contracts.
The U.S. dollar notional value of all outstanding foreign currency derivative contracts was $133,032$112,922 and $118,557$128,728 at December 31, 2019June 30, 2020 and March 31, 2019,2020, respectively. Unrealized net gainslosses related to these contracts which are expected to be reclassified from accumulated other comprehensive income (loss) (“AOCI”)AOCI to earnings during the next 12 months are $52$1,456 at December 31, 2019.June 30, 2020. At December 31, 2019,June 30, 2020, the maximum outstanding term of any derivative instrument was 15 months.
The Company also uses interest rate swaps to mitigate the Company’s interest rate risk on the Company’s variable rate debt. The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the Credit Agreement (See Note 13)13 to the consolidated financial statements), by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. The Company will recognize these transactions in accordance with ASC 815 "Derivatives and Hedging," and have designated the swaps as cash flow hedges.
The Company purchased interest rate swaps in July 2016 with an effective date of July 2017 and in November 2018. The July 2016 interest rate swaps are at a blended weighted average of 1.025% and the Company will receive 1-month LIBOR on the same notional amounts. The November 2018 interest rate swaps were entered into to mitigate the interest rate risk associated with the Credit Agreement executed in February 2018 and subsequent additional borrowings. The November 2018 interest rate swaps are at a fixed rate of 2.85% and are designed to maintain a 50% coverage of our LIBOR debt, therefore the notional amount changes over the life of the swap to retain the 50% coverage target. At December 31, 2019,June 30, 2020, the total notional amounts of the interest rate swaps were $178,800$174,900 with remaining maturity of approximately 43 years. The unrealized losses associated with the swap agreements was $5,548$11,153 and $2,284$11,128 at December 31, 2019June 30, 2020 and March 31, 2019,2020, respectively, which represents the estimated amount that the Company would pay to the counterparties in the event of an early termination.
The following table sets forth the fair value of derivative instruments included in the consolidated balance sheets at December 31, 2019 and March 31, 2019:
Derivatives designated as hedging instruments
| | | | | | |
|
| December 31, 2019 |
| March 31, 2019 | ||
Foreign currency exchange contracts: | | | | | | |
Other current assets | | $ | 2,058 | | $ | 3,264 |
Other long-term assets | | $ | 94 | | $ | 147 |
Accrued expenses and other | | $ | 2,006 | | $ | 318 |
Long-term liabilities | | $ | 258 | | $ | 3 |
| | | | | | |
|
| December 31, 2019 |
| March 31, 2019 | ||
Interest rate swap contracts: |
| |
|
| |
|
Other long-term assets | | $ | 288 | | $ | 1,349 |
Long-term liabilities | | $ | 5,836 | | $ | 3,633 |
16
The following table sets forth the fair value of derivative instruments included in the consolidated balance sheets as of:
Derivatives designated as hedging instruments
| | | | | | |
|
| June 30, 2020 |
| March 31, 2020 | ||
Foreign currency exchange contracts: | | | | | | |
Other current assets | | $ | 560 | | $ | 103 |
Other long-term assets | | $ | 379 | | $ | 56 |
Accrued expenses and other | | $ | 2,017 | | $ | 3,689 |
Long-term liabilities | | $ | — | | $ | 364 |
| | | | | | |
|
| June 30, 2020 |
| March 31, 2020 | ||
Interest rate swap contracts: |
| |
|
| |
|
Other long-term assets | | $ | — | | $ | — |
Long-term liabilities | | $ | 11,153 | | $ | 11,128 |
The following tables set forth the effect of the Company’s foreign currency exchange contracts and interest rate swap contracts on the consolidated financial statements of the Company for the three and nine months ended December 31, 2019 and 2018:Company:
| | | | | | | | |||||||||||||
| | | | | | | | | | | | | | | Amount of Gain or (Loss) | | ||||
| | | | | | | Recognized in AOCI on Derivatives | | ||||||||||||
| | Amount of Gain or (Loss) Recognized in AOCI on Derivatives | | | Three Months Ended | | ||||||||||||||
Derivatives Designated as |
| Three Months Ended December 31, | | Nine Months Ended December 31, | | | June 30, | | ||||||||||||
Cash Flow Hedging Relationships | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | ||||||
Foreign currency exchange contracts | | $ | (3,158) | | $ | 9,398 | | $ | 148 | | $ | (2,203) | | | $ | 1,964 | | $ | 2,633 | |
Interest rate swaps | | $ | 782 | | $ | (2,776) | | $ | (3,054) | | $ | (2,310) | | | $ | (735) | | $ | (3,045) | |
| | | | | | | | |||||||||||||
| | | | | | | | | | | | | | | Amount of Gain or (Loss) | | ||||
| | | | | | | Reclassified from AOCI into Income | | ||||||||||||
Location of Gain or (Loss) Reclassified | | Amount of Gain or (Loss) Reclassified from AOCI into Income | | | Three Months Ended | | ||||||||||||||
from AOCI into Income (loss) (Effective | | Three Months Ended December 31, | | Nine Months Ended December 31, | | | June 30, | | ||||||||||||
Portion) |
| 2019 |
| 2018 | | 2019 |
| 2018 | | | 2020 |
| 2019 | | ||||||
Revenue | | $ | — | | $ | (510) | | $ | (18) | | $ | (1,673) | | | $ | — | | $ | (18) | |
Costs of revenue | | $ | 827 | | $ | (846) | | $ | 2,351 | | $ | (1,187) | | | $ | (613) | | $ | 405 | |
Operating expenses | | $ | 337 | | $ | (405) | | $ | 1,020 | | $ | (578) | | | $ | (240) | | $ | 200 | |
Interest Expenses | | $ | (100) | | $ | 288 | | $ | 209 | | $ | 731 | | | $ | (710) | | $ | 208 | |
| | | | | | | | | | | | | | | |
| | | | | Amount of Gain or (Loss) Recognized in Income | | |||||||||
�� | | | | | (loss) on Derivatives | | |||||||||
| | | | Three Months Ended |
| Nine Months Ended | | ||||||||
Derivatives not Designated | | Location of Gain Or (Loss) | | December 31, |
| December 31, | | ||||||||
as Hedging Instruments |
| Recognized in Income (loss) on Derivatives | | 2019 |
| 2018 |
| 2019 |
| 2018 | | ||||
Foreign currency exchange contracts |
| Revenue | | $ | (1,449) | | $ | 1,131 | | $ | (205) | | $ | 2,237 | |
|
| Costs of revenue | | $ | 1,105 | | $ | (784) | | $ | 380 | | $ | (1,537) | |
|
| Selling, general and administrative expenses | | $ | 114 | | $ | (75) | | $ | 29 | | $ | (93) | |
(7) Leases
The Company’s leased assets primarily consist of operating leases for office space, equipment and vehicles. At the inception of a contract, the Company determines whether a contract contains a lease, and if a lease is identified, whether it is an operating or finance lease. In determining whether a contract contains a lease, the Company considers whether (1) it has the right to obtain substantially all of the economic benefits from the use of the asset throughout the term of the contract, (2) it has the right to direct how and for what purpose the asset is used throughout the term of the contract and (3) it has the right to operate the asset throughout the term of the contract without the lessor having the right to change the terms of the contract. The Company leases vehicles in certain locations primarily as an employee benefit and these leases are classified as either operating or finance leases. The Company does not have finance leases that are material to the Company’s consolidated financial statements. Some of the Company’s lease agreements contain both lease and non-lease components. The Company separates lease components from non-lease components for all the Company’s lease assets. The consideration in the lease contract is allocated to the lease and non-lease components based on the estimated standalone prices.
A portion of the leases for office space contain certain charges for additional rent expenses that are variable. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU lease assets and associated lease liabilities.
The Company’s ROU lease assets represent the Company’s right to use an underlying asset for the lease term and may include any advance lease payments made and any initial direct costs and exclude lease incentives. The Company’s lease liabilities represent the Company’s obligation to make lease payments arising from the contractual terms of the lease. ROU lease assets and lease liabilities are recognized at the commencement of the lease and are calculated using the present value of lease payments over the lease term. The Company’s operating lease agreements do not provide enough information to arrive at an implicit interest rate. Therefore, the Company uses its estimated incremental borrowing rate
17
based on information available at the commencement date of the lease to calculate the present value of the lease payments. The Company determines the incremental borrowing rate on a lease-by-lease basis by developing an estimated borrowing rate of the Company for a fully collateralized obligation with a term similar to the lease term, and adjusts the rate to reflect the incremental risk associated with the currency in which the lease is denominated.
The following table provides information on the components of the Company’s operating leases included in its unaudited consolidated balance sheets:
| | | | | | |
Leases |
| Location on Consolidated Balance Sheets | | December 31, 2019 |
| |
Assets | | | | | | |
Operating lease assets |
| Operating lease right-of-use of assets | | $ | 50,894 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating lease liabilities | | Operating lease liabilities | | $ | 11,385 | |
Noncurrent | | | | | | |
Operating lease liabilities | | Operating lease liabilities, noncurrent | | $ | 44,009 | |
| | Total | | $ | 55,394 | |
The Company’s leases have remaining lease terms ranging from 1 year to 9 years. Certain lease agreements, mainly for office space, include options to extend or terminate the lease before the expiration date. The Company includes such options when determining the lease term when it is reasonably certain that the Company will exercise that option.
The following table provides the components of lease expense related to our operating leases:
| | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended | ||
|
| Location on Consolidated Statements of Income | | December 31, 2019 | | December 31, 2019 | ||
Operating lease cost: | | | | | | | | |
Operating lease cost | | Selling, general and administrative expenses | | $ | 3,789 | | $ | 11,403 |
Variable lease cost | | Selling, general and administrative expenses | | $ | 30 | | $ | 74 |
Short-term lease cost | | Selling, general and administrative expenses | | $ | 90 | | $ | 359 |
Less: Sublease income | | Selling, general and administrative expenses | | $ | (353) | | $ | (870) |
Total operating lease cost | | | | $ | 3,556 | | $ | 10,966 |
The following table provides supplemental cash flow information related to our operating leases:
| | | | |
| | Nine Months Ended | | |
| | December 31, 2019 | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows used for operating leases | | $ | 11,217 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations: | |
| | |
Operating leases | | $ | 5,714 | |
18
The following table provides information on the weighted average remaining lease term and weighted average discount rate related to our operating leases:
|
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There were 0 lease agreements that contained restrictive covenants or material residual value guarantees as of December 31, 2019.
The following table provides the schedule of maturities of the Company’s operating lease liabilities, under ASC Topic 842, as of December 31, 2019:
| | | | |
|
| Operating leases | | |
| | December 31, 2019 | | |
2020-remainder of year | | $ | 3,784 | |
2021 | | | 14,901 | |
2022 | | | 13,663 | |
2023 | | | 10,927 | |
2024 | | | 6,975 | |
2025 and thereafter | | | 17,110 | |
Total lease payments | | $ | 67,360 | |
Interest | | | (11,966) | |
Total lease liabilities | | $ | 55,394 | |
The following table provides the schedule of the Company’s future minimum payments on its operating leases at March 31, 2019, which were accounted for in accordance with its historic accounting policies under ASC Topic 840.
| | | | |
|
| Operating leases | | |
| | March 31, 2019 | | |
2020 | | $ | 14,685 | |
2021 | | | 13,895 | |
2022 | | | 12,663 | |
2023 | | | 9,879 | |
2024 | | | 5,686 | |
2025 and thereafter | | | 16,761 | |
Total lease payments | | $ | 73,569 | |
As of December 31, 2019, the Company had committed to payments of $320 related to operating leases that had yet to commence and therefore are not included in consolidated balance sheets. These leases will commence on various dates in the calendar year 2020 and have lease terms ranging from two years to three years..
| | | | | | | | | |
| | | | Amount of Gain or (Loss) | | ||||
| | | | Recognized in Income | | ||||
| | | | (loss) on Derivatives | | ||||
| | |
| Three Months Ended | | ||||
Derivatives not Designated | | Location of Gain Or (Loss) |
| June 30, | | ||||
as Hedging Instruments |
| Recognized in Income (loss) on Derivatives |
| 2020 |
| 2019 | | ||
Foreign currency exchange contracts |
| Revenue | | $ | (129) | | $ | 355 | |
|
| Costs of revenue | | $ | 145 | | $ | (226) | |
|
| Selling, general and administrative expenses | | $ | 14 | | $ | (20) | |
19
(8) Revenues and Accounts Receivable
Disaggregation of Revenue
The table below presents disaggregated revenues from the Company’s contracts with customers by geography, industry groups, service offerings and contract-type. The Company believes this disaggregation best depicts how the
17
nature, amount, timing and uncertainty of its revenues and cash flows are affected by industry, market and other economic factors.
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | | Three Months Ended | ||||||||||||
| | December 31, | | December 31, | | June 30, | ||||||||||||
Revenue by geography: | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | ||||||
North America | | $ | 251,229 | | $ | 224,143 | | $ | 724,005 | | $ | 652,076 | | $ | 224,322 | | $ | 230,480 |
Europe | |
| 55,154 | |
| 65,046 | |
| 175,258 | |
| 192,175 | |
| 50,424 | |
| 63,080 |
Rest of World | |
| 28,724 | |
| 25,492 | |
| 83,369 | |
| 75,981 | |
| 26,318 | |
| 25,464 |
Consolidated revenue | | $ | 335,107 | | $ | 314,681 | | $ | 982,632 | | $ | 920,232 | | $ | 301,064 | | $ | 319,024 |
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | | Three Months Ended | ||||||||||||
| | December 31, | | December 31, | | June 30, | ||||||||||||
Revenue by customer’s industry groups | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | ||||||
Banking financial services insurance | | $ | 187,312 | | $ | 197,329 | | $ | 570,620 | | $ | 578,138 | ||||||
Banking Financial Services and Insurance | | $ | 165,573 | | $ | 183,202 | ||||||||||||
Communications and Technology | |
| 119,558 | |
| 89,159 | |
| 332,465 | |
| 257,527 | |
| 72,364 | |
| 70,066 |
Media & Information and Other | |
| 28,237 | |
| 28,193 | |
| 79,547 | |
| 84,567 | |
| 22,330 | |
| 19,153 |
Healthcare | | | 40,797 | | | 46,603 | ||||||||||||
Consolidated revenue | | $ | 335,107 | | $ | 314,681 | | $ | 982,632 | | $ | 920,232 | | $ | 301,064 | | $ | 319,024 |
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | | Three Months Ended | ||||||||||||
| | December 31, | | December 31, | | June 30, | ||||||||||||
Revenue by service offerings | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | ||||||
Application outsourcing | | $ | 183,777 | | $ | 165,986 | | $ | 547,303 | | $ | 488,584 | | $ | 162,420 | | $ | 181,963 |
Consulting | | | 151,330 | | | 148,695 | | | 435,329 | | | 431,648 | | | 138,644 | | | 137,061 |
Consolidated revenue | | $ | 335,107 | | $ | 314,681 | | $ | 982,632 | | $ | 920,232 | | $ | 301,064 | | $ | 319,024 |
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | | Three Months Ended | ||||||||||||
| | December 31, | | December 31, | | June 30, | ||||||||||||
Revenue by contract type | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | ||||||
Time-and-materials | | $ | 190,423 | | $ | 189,134 | | $ | 579,657 | | $ | 552,530 | | $ | 176,718 | | $ | 189,899 |
Fixed-price* | |
| 144,684 | |
| 125,547 | |
| 402,975 | |
| 367,702 | |
| 124,346 | |
| 129,125 |
Consolidated revenue | | $ | 335,107 | | $ | 314,681 | | $ | 982,632 | | $ | 920,232 | | $ | 301,064 | | $ | 319,024 |
*Fixed-price includes both retainer-billing basis and fixed-price progress towards completion
Receivables and Contract Balances
The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). The Company presents such receivables in accounts receivable or unbilled accounts receivable, in its consolidated statements of financial position at their net estimated realizable value.
Contract assets included in unbilled accounts receivable are recorded when services have been provided but the Company does not have an unconditional right to receive consideration. Contract assets are primarily related to unbilled amounts on fixed-price contracts utilizing the input method of revenue recognition. The timing between services rendered and timing of payment is less than one year. The Company recognizes an impairment loss when the contract carrying amount is greater than the remaining consideration receivable, less directly related costs to be incurred.
2018
The table below shows the movements in contract assets during the ninethree months ended December 31, 2019 and 2018 in contract assets:ended:
| | | | | | | | | | | ||
|
| | | |
| | | | ||||
| | December 31, 2019 | | December 31, 2018 | | June 30, 2020 | | June 30, 2019 | ||||
Beginning balance | | $ | 18,538 | | $ | 15,998 | | $ | 14,241 | | $ | 18,538 |
Revenues recognized during the period but not yet billed | |
| 67,594 | |
| 92,564 | |
| 18,369 | |
| 20,859 |
Amounts billed | |
| (68,314) | |
| (95,457) | |
| (19,068) | |
| (20,594) |
Other | |
| (20) | |
| (507) | |
| (6) | |
| (65) |
Ending balance | | $ | 17,798 | | $ | 12,598 | | $ | 13,536 | | $ | 18,738 |
Contract liabilities comprise of amounts billed to customers for revenues not yet earned. Such amounts are anticipated to be recorded as revenues when services are performed in subsequent periods.
The table below shows movements in the deferred revenue balances during the ninethree months ended December 31, 2019 and 2018:ended:
| | | | | | | | | | | ||
|
| | | |
| | | | ||||
| | | | | | | | | ||||
| | December 31, 2019 | | December 31, 2018 | | June 30, 2020 | | June 30, 2019 | ||||
Beginning balance | | $ | 6,421 | | $ | 7,908 | | $ | 8,054 | | $ | 6,421 |
Amounts billed but not yet recognized as revenues | |
| 5,342 | |
| 5,310 | |
| 5,930 | |
| 4,123 |
Revenues recognized related to the opening balance of deferred revenue | |
| (5,017) | |
| (6,761) | |
| (3,512) | |
| (3,495) |
Other | |
| (154) | |
| (337) | |
| 351 | |
| 25 |
Ending balance | | $ | 6,592 | | $ | 6,120 | | $ | 10,823 | | $ | 7,074 |
Remaining performance obligation
ASC Topic 606 - Revenue from Contracts with Customers requires that the Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of December 31, 2019. This disclosure is not required for:
(1) | contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty, |
(2) | contracts for which the Company recognizes revenues based on the right to invoice for services performed, |
(3) | variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met, or |
(4) | variable consideration in the form of a sales-based or usage-based royalty promised in exchange for a license of intellectual property. |
Many of the Company’s performance obligations meet one or more of these exemptions. As of December 31, 2019,June 30, 2020, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $41,582$30,235 and will be recognized as revenue within 5 years.
From time to time, the Company enters into arrangements to deliver IT services that include upfront payments to its clients. As of December 31, 2019,June 30, 2020, the total unamortized upfront payments related to these services were $34,420$29,281 and are recorded in prepaid expenses and other long-term assets in the consolidated balance sheet. These upfront payments are expected to be amortized as a reduction to revenue over a benefit period of 54 years.
Allowance for Credit Losses on Accounts Receivable
The allowance for credit losses on accounts receivable is determined using the loss-rate approach and is measured on a collective (pool) basis when similar risk characteristics exist. Where financial instruments do not share risk characteristics, they are evaluated on an individual basis. The Company calculates expected credit losses for accounts receivable based on historical credit loss rates for each aging category as adjusted for the current market conditions and forecasts about future economic conditions. The allowance is based on relevant available information, from internal and
2119
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The following table presents the activity in the allowance for credit losses on accounts receivable:
| | | |
| | Three Months Ended | |
|
| June 30, 2020 | |
Balance at March 31, 2020 |
| $ | 1,541 |
Transition period adjustment on accounts receivable pursuant to ASC 326 | | | — |
Adjusted balance at April 1, 2020 | | | 1,541 |
Current-period provision for expected credit losses | | | 71 |
Write-offs charged against the allowance | | | (218) |
Foreign currency translation adjustments | | | 7 |
Balance at June 30, 2020 |
| $ | 1,401 |
(9) Series A Convertible Preferred Stock
On May 3, 2017, the Company entered into an investment agreement with The Orogen Group (‘‘Orogen’’) pursuant to which Orogen purchased 108,000 shares of the Company’s newly issued Series A Convertible Preferred Stock, initially convertible into 3,000,000 shares of common stock, for an aggregate purchase price of $108,000 with an initial conversion price of $36.00 (the ‘‘Orogen Preferred Stock Financing’’). Under the terms of the investment, the Series A Convertible Preferred Stock has a 3.875% dividend per annum, payable quarterly in additional shares of common stock and/or cash at the Company’s option. If any shares of Series A Convertible Preferred Stock have not been converted into common stock prior to May 3, 2024, the Company will be required to repurchase such shares at a repurchase price equal to the liquidation preference of the repurchased shares plus the amount of accumulated and unpaid dividends thereon. If the Company fails to effect such repurchase, the dividend rate on the Series A Convertible Preferred Stock will increase by 1% per annum and an additional 1% per annum on each anniversary of May 3, 2024 during the period in which such failure to effect the repurchase is continuing, except that the dividend rate will not increase to more than 6.875% per annum.
In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $1,154, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. These issuance costs are recorded as a reduction to the proceeds received from issuance of Series A Convertible Preferred Stock. These direct and incremental expenses reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, May 3, 2024. During the three and nine months ended December 31,June 30, 2020 and 2019, and 2018, the Company recorded accretions to the Series A Convertible Preferred Stock related to its issuance cost. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 3.875% per annum, payable quarterly in arrears. During the ninethree months ended December 31,June 30, 2020 and 2019, and 2018, the Company has paid $3,138$1,046 as cash dividend on Series A Convertible Preferred Stock. As of December 31,June 30, 2020 and 2019, and 2018, the Company had declared and accrued dividends of $686 associated with the Series A Convertible Preferred Stock.
(10) Goodwill and Intangible Assets
Goodwill:
The Company has 1 operating segment. The following are details of the changes in goodwill balance at December 31, 2019:
| | | | |
| | | | |
|
| December 31, 2019 | | |
Balance at April 1, 2019 |
| $ | 279,543 | |
Foreign currency translation adjustments | | | (3,454) | |
Balance at December 31, 2019 |
| $ | 276,089 | |
The acquisition costs and goodwill balance deductible for our business acquisitions for tax purposes are $145,658. The acquisition costs and goodwill balance not deductible for tax purposes are $143,334.
2220
(10) Goodwill and Intangible Assets
Goodwill:
The Company has 1 operating segment. The following are details of the changes in goodwill balances at:
| | | | | | |
| | | | |||
|
| June 30, 2020 | | March 31, 2020 | ||
Beginning balance |
| $ | 296,493 | | $ | 279,543 |
Goodwill arising from acquisitions | | | — | | | 27,316 |
Purchase price adjustment | | | (4,526) | | | — |
Foreign currency translation adjustments | | | (224) | | | (10,366) |
Ending balance |
| $ | 291,743 | | $ | 296,493 |
The acquisition costs and goodwill balance deductible for our business acquisitions for tax purposes are $284,020. The acquisition costs and goodwill balance not deductible for tax purposes are $20,627, primarily related to the Company’s TradeTech acquisition (closed on January 2, 2014), and the eTouch India acquisition.
Intangible Assets:
The following are details of the Company’s intangible asset carrying amounts acquired and amortization at December 31, 2019:at:
| | | | | | | | | | | |
| | December 31, 2019 | |||||||||
| | Weighted | | Gross | | | | | Net | ||
| | Average | | Carrying | | Accumulated | | Carrying | |||
|
| Useful Life |
| Amount |
| Amortization |
| Amount | |||
Amortizable intangible assets: | | | | | | | | | | | |
Customer relationships |
| 12.3 | | $ | 141,267 | | $ | 42,979 | | $ | 98,288 |
Trademark |
| 2.0 | | | 900 | | | 804 | | | 96 |
Technology |
| 5.0 | | | 500 | | | 467 | | | 33 |
Other |
| 5.0 | | | 1,233 | | | 131 | | | 1,102 |
|
| 12.1 | | $ | 143,900 | | $ | 44,381 | | $ | 99,519 |
During the three months ended December 31, 2019, the Company acquired certain assets of a small consulting company located in the United States. The purchase price was approximately $1,400 in cash and an additional earn-out consideration of up to $1,400 payable within one year based on achievement of certain revenue targets. The probable and estimable value of the contingent consideration as of December 31, 2019 is $1,381.
During the three months ended September 30, 2019, the Company’s U.S. subsidiary, eTouch Systems Corp., acquired certain assets of a small consulting company located in the United States. The purchase price was approximately $4,000 in cash and an additional earn-out consideration of up to $4,000 payable within one year based on achievement of certain revenue targets. During the three months ended December 31, 2019, the Company paid $942 towards earn-out consideration based on achievement of revenue targets for the first measurement period. The remaining probable and estimable value of the contingent consideration as of December 31, 2019 is $2,645.
During the three months ended June 30, 2019, the Company acquired certain assets of a small consulting company located in the United States. The purchase price was approximately $4,251 in cash paid at closing and an additional earn-out consideration of up to $4,453, payable within one year based on achievement of certain revenue targets. The probable and estimable value of the contingent consideration as of December 31, 2019 is $3,078.
| | | | | | | | | | | |
| | June 30, 2020 | |||||||||
| | Weighted | | Gross | | | | | Net | ||
| | Average Useful Life | | Carrying | | Accumulated | | Carrying | |||
|
| at Acquisition |
| Amount |
| Amortization |
| Amount | |||
Amortizable intangible assets: | | | | | | | | | | | |
Customer relationships |
| 10.6 | | $ | 176,645 | | $ | 50,839 | | $ | 125,806 |
Trademark |
| 2.0 | | | 900 | | | 900 | | | — |
Technology |
| 5.0 | | | 500 | | | 500 | | | — |
Other |
| 5.0 | | | 1,214 | | | 253 | | | 961 |
|
| 10.5 | | $ | 179,259 | | $ | 52,492 | | $ | 126,767 |
The following are the details of the Company’s intangible asset carrying amounts acquired, and amortization at March 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | March 31, 2020 | ||||||||||||||||||
| | Weighted | | Gross | | | | | Net | | Weighted | | Gross | | | | | Net | ||||
| | Average | | Carrying | | Accumulated | | Carrying | | Average Useful Life | | Carrying | | Accumulated | | Carrying | ||||||
|
| Useful Life |
| Amount |
| Amortization |
| Amount |
| at Acquisition |
| Amount |
| Amortization |
| Amount | ||||||
Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships |
| 13.0 | | $ | 125,520 | | $ | 33,679 | | $ | 91,841 |
| 10.6 | | $ | 176,373 | | $ | 46,494 | | $ | 129,879 |
Trademark |
| 2.0 | |
| 900 | |
| 431 | |
| 469 |
| 2.0 | | | 900 | | | 900 | | | — |
Technology |
| 5.0 | |
| 500 | |
| 370 | |
| 130 |
| 5.0 | | | 500 | | | 500 | | | — |
Other |
| 5.0 | | | 1,214 | | | 190 | | | 1,024 | |||||||||||
|
| 12.9 | | $ | 126,920 | | $ | 34,480 | | $ | 92,440 |
| 10.5 | | $ | 178,987 | | $ | 48,084 | | $ | 130,903 |
The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.
During the fiscal year ended March 31, 2020, the Company acquired certain assets of three consulting companies located in the United States, which were accounted as asset acquisitions and were not material to the Company. The purchase price was approximately $9,651 in cash and an additional earn-out consideration of up to $9,853 payable within one year based on achievement of certain revenue targets. As of June 30, 2020, the Company paid $4,922 towards earn-out consideration based on achievement of revenue targets. The remaining probable and estimable value of the contingent consideration as of June 30, 2020 is $2,579.
2321
(11) Income Taxes
The Company applies an estimated annual effective tax rate to its year-to-date operating results to determine the interim provision (benefit) for income tax expense. The Company’s effective tax rate was 44.7% and 43.3%25.4% for the three and nine months ended December 31, 2019,June 30, 2020, as compared to an effective tax rate of 44.8% and 63.3%44.0% for the three and nine months ended December 31, 2018.June 30, 2019. The Company’s effective tax rate for the three and nine months ended December 31, 2019June 30, 2020 was impacted by executive stock compensation limitations, and Base Erosion Alternative Tax “BEAT” enactedthe election of foreign tax credits in the Tax CutsU.S., the election to treat certain foreign entities as dis-regarded for U.S tax purposes, the application of lower tax rates in India and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government.surrendering any tax holidays in India. The Company’s reported effective tax rate is also impacted by jurisdictional mix of profits and losses in which the Company operates, foreign statutory tax rates in effect, unusual or infrequent discrete items requiring a provision during the period and certain exemptions or tax holidays applicable to the Company.
During the fiscal year ended March 31, 2019, the Company elected to treat several foreign entities as disregarded entities. The earnings of these subsidiaries will be subject to U.S. taxation as well as local taxation with a corresponding foreign tax credit, at the election of the Company. During the three and nine months ended December 31, 2019, the Company has elected to deduct the foreign taxes in computing the income tax expense. The Company’s income tax provision for the three and nine months ended December 31, 2019 includes the impact of Global Intangible Low-taxed Income (“GILTI”) and other provisions of the Tax Act and earnings of disregarded entities. The Company’s aggregate income tax rate in foreign jurisdictions is comparable to its income tax rate in the United States as a result of the Tax Act, other than in jurisdictions in which the Company has tax holiday benefits.
A valuation allowance is required if, based on available evidence, it is more likely than not that all or some portion of the asset will not be realized due to the inability of the Company to generate sufficient taxable income in a specific jurisdiction. The Company has $25,685$27,448 and $2,183$1,914 of net deferred tax assets in the United States and the United Kingdom, respectively, at DecemberJune 30, 2020. The Company has a valuation allowance in the U.S. related to utilization of certain foreign tax credits are not expected to be realized.
During the fiscal year ended March 31, 2020, the Company merged Polaris Consulting and Software Limited (“Polaris”) with into Virtusa Consulting Services Private Limited (“Virtusa India”). The merger of Polaris into Virtusa India is considered an entity liquidation for US income tax purposes. The earnings of this entity will be subject to US taxation as well as local taxation with a corresponding foreign tax credit or deduction, at the election of the Company. The election also makes available to the Company the benefits of future foreign tax credits. The merger makes available to the Company tax deductions for interest on debt used to purchase the group as well as amortization of intangible assets. Under local Indian law, the merger was retroactive to April 1, 2018 resulting in amended tax return filing in India for the year ended March 31, 2019. The Company has not recorded a valuation allowance as management has concluded it is more likely than not thatCompany’s effective tax rate for the deferredthree months ended June 30, 2020, reflects the merger of Polaris India into Virtusa India.
The Company’s income tax assets will be utilized before expiration. The Company expects sufficient taxable income in future periods related toprovision for the three months ended June 30, 2020 includes the expected impact of the GILTIGlobal Intangible Low-taxed Income (“GILTI”) and executive compensation limitations of the electionTax Cuts and Jobs Act (the “Tax Act”) impacting the operating results for the three months ended June 30, 2020. The Company’s aggregate income tax rate in foreign jurisdictions is comparable to its income tax rate in the United States, as a result of the Tax Act, other than in Singapore and Sri Lanka in which the Company has tax holiday benefits and eligible tax exemptions respectively.
During the fiscal year ended March 31, 2019, the Company elected to treat several foreign entities as disregarded entities.
The earnings of these subsidiaries will be subject to US taxation as well as local taxation with a corresponding foreign tax credit or deduction, at the election of the Company. GILTI provisions and executive compensation limitations enacted in the Tax Act, enacted on December 22, 2017 by the U.S. government continue to impact the results. The Company’s Indian subsidiaries operate several development centersreported effective tax rate is also impacted by jurisdictional mix of profits and losses in areas designated as a special economic zone, or SEZ, under the SEZ Act of 2005. In particular,which the Company was approvedoperates, foreign statutory tax rates in effect, unusual or infrequent discrete items requiring a provision and certain exemptions or tax holidays applicable to the Company.
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provided for net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021, may be carried back to each of the five tax years preceding the tax year of such loss. Net operating losses have an unlimited carry forward period, although there are annual limitations on their use suspended for certain years as an SEZ Co-developer and has built a campus on a 6.3 acre parcelresult of land in Hyderabad, India that has been designated as an SEZ. As an SEZ Co-developer, the Company is entitled to certain tax benefits for any consecutive period of 10 years during the 15 year period starting in fiscal year 2008.CARES Act. The Company has elected tofiled an immediate carry back claim SEZ co-developer income tax benefits starting in the United States for losses generated in fiscal yearyears ended March 31, 2013.2018 and March 31, 2019. The Company has other units at various stagesincome tax expense for the three months ended June 30, 2020,included an immaterial adjustment to reflect actual tax receivable.
22
On September 20, 2019, the Indian government issued Ordinance 2019 making certain amendments in the Income-tax Act 1961, which substantially reduces tax rates. The effective rate of tax on India-based companies was reduced from 34.9% to 25.17%, effective for fiscal years beginning April 1, 2019. The Company adopted the new ordinance for the fiscal year beginning April 1, 2019. The new rates require the surrendering of any tax holidays and other attributes of which the Company may be currentlyhistorically was taking advantage of and is able to be elected once thefavorably impacting our tax holidays have concluded. The Company continues to apply the old tax rates and applicable holidays. The Company will continue to analyze and elect this Ordinance 2019 when it is most beneficial to the Company.
rate.
In addition, the Company’s Sri Lankan subsidiary, Virtusa (Private) Limited, was operating under a 12-year income tax holiday arrangement untilthat expired on March 31, 2019 and required Virtusa (Private) Limited to retain certain job creation and investment criteria through the expiration of the holiday period. During the fiscal year ended March 31, 2019, theThe Company believes it hashad fulfilled its hiring and investment commitments and is eligible for tax holiday through March 2019. The 12-year income tax holiday arrangement expired as of March 31, 2019 and therefore during the nine months ended December 31,Beginning April 1, 2019, the Company recordedis taking advantage of certain tax expense on all the earningsexemptions offered to IT service providers in its Sri Lankan subsidiary at the statutory rate.
Lanka.
The Company has been under income tax examination in India, the U.K,U.K., Singapore and the United States. The Indian taxing authorities issued an assessment order with respect to their examination of the various tax returns for the fiscal years ended March 31, 20052006 to March 31, 2017 of the Company’s Indian subsidiary, Virtusa (India) Private Ltd,
24
and Polaris Consulting & Services Limited (Polaris India) now merged with and into Virtusa Consulting Services Private Limited (collectively referred to as “Virtusa India”). At issue were several matters, the most significant of which was the redetermination of the arm’s-length profit which should be recorded by Virtusa India on the intercompany transactions with its affiliates. These matters are currently at different level of appeals. Duringappeals beginning with the fiscal year ended March 31, 2011, the Company entered into a competent authority settlement and settled the uncertain tax position for the fiscal years ended March 31, 2004 and 2005. However, the redetermination of arm’s-length profit on transactions with respect to the Company’s subsidiaries and Virtusa UK Limited has not been resolved and remains under appeal for the fiscal year ended March 31, 2005.2006. In the United Kingdom, the Company is currently under examination for transfer pricing and research benefits for the years ended March 31, 2014 to March 31, 2018. In Singapore, the Inland Revenue Authority is confirming the appropriateness of the Company’s deductions for the year ended March 31, 2017. In the United States, the Internal Revenue Service has concluded an examination of fiscal years ended March 31, 2015 and March 31, 2017 with2017. These ongoing audits are not expected to have a non-materialmaterial impact on the consolidated statements of income and consolidated statements of cash and earnings, while certain employment tax matters remain open.flows.
Unrecognized tax benefits represent uncertain tax positions for which the Company has established reserves. At December 31, 2019June 30, 2020 and March 31, 2019,2020, the total liability for unrecognized tax benefits was $6,905$6,443 and $6,744,$6,627, respectively. Unrecognized tax benefits may be adjusted upon the closing of the statute of limitations for income tax returns filed in various jurisdictions. During the ninethree months ended December 31,June 30, 2020 and 2019, and 2018, the unrecognized tax benefits decreased by $184 and increased by $161 and decreased by $531,$80, respectively. The increasedecrease in unrecognized tax benefits in the ninethree months ended December 31, 2019June 30, 2020 was predominantly due to increase in the liability related to the UK audit, settlement of a state tax matter, foreign currency movementscertain sale proceeds in India and incremental interest accrued on existing uncertain tax positions.positions offset by the release of certain benefits no longer considered required.
Undistributed Earnings of Foreign Subsidiaries
A substantial amount of the Company’s income before provision for income tax is from operations earned in its Indian and Sri Lankan subsidiaries and is currently or has been historically subject to tax holiday.subsidiaries. The Company intends to use accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and, accordingly, undistributed income is considered indefinitely reinvested. The Company does not provide for U.S. income taxes on foreign currency translation or applicable withholding tax until a distribution is declared. At December 31, 2019,June 30, 2020, the Company had approximately $198,020$191,252 of cash, cash equivalents, short-term and long-term investments that would otherwise be available for potential distribution, if not indefinitely reinvested. If required, such cash and investments could be repatriated to the United States. Due to the various methods by which such earnings could be repatriated in the future, the amount of taxes attributable to the undistributed earnings is not practicably determinable.
23
(12) Concentration of Revenue and Assets
Total revenue is attributed to geographic areas based on the location of the client. Geographic information of total revenue is summarized as follows:
| | | | | | | |
| | Three Months Ended | | ||||
| | June 30, | | ||||
|
| 2020 |
| 2019 | | ||
Customer revenue: | | | | | | | |
United States of America | | $ | 212,480 | | $ | 218,092 | |
United Kingdom | |
| 39,574 | |
| 49,879 | |
Rest of World | |
| 49,010 | |
| 51,053 | |
Consolidated revenue | | $ | 301,064 | | $ | 319,024 | |
Revenue from significant clients as a percentage of the Company’s consolidated revenue was as follows:
| | | | | | |
| | Three Months Ended | | | ||
| | June 30, | | | ||
| | 2020 |
| 2019 | | |
Customer A | | 17.0 | % | 15.5 | % | |
Long-lived assets represent property, plant and equipment, intangible assets and goodwill, net of accumulated depreciation and amortization, and are attributed to geographic area based on their location. GeographicThe following table summarizes the geographic information is summarizedof long-lived assets as follows:of:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | December 31, | | December 31, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | | ||||
Customer revenue: | | | | | | | | | | | | | |
United States of America | | $ | 237,754 | | $ | 213,542 | | $ | 685,023 | | $ | 623,224 | |
United Kingdom | |
| 42,902 | |
| 52,248 | |
| 137,795 | |
| 154,813 | |
Rest of World | |
| 54,451 | |
| 48,891 | |
| 159,814 | |
| 142,195 | |
Consolidated revenue | | $ | 335,107 | | $ | 314,681 | | $ | 982,632 | | $ | 920,232 | |
25
| | | | | | | |
| | | December 31, | | March 31, | ||
| |
| 2019 |
| 2019 | ||
Long-lived assets, net of accumulated depreciation and amortization: | | | | | | | |
United States of America | | | $ | 224,670 | | $ | 216,279 |
India | | |
| 240,000 | |
| 251,722 |
Rest of World | | |
| 19,136 | |
| 23,847 |
Consolidated long-lived assets, net | | | $ | 483,806 | | $ | 491,848 |
Revenue from significant clients as a percentage of the Company’s consolidated revenue was as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | | | | | ||||||
| | December 31, | | | December 31, | | |
| June 30, 2020 |
| March 31, 2020 | ||||||
|
| 2019 |
| 2018 |
| | 2019 |
| 2018 | | | ||||||
Customer A | | 16.4 | % | 18.0 | % | | 15.9 | % | 17.7 | % | | ||||||
Long-lived assets, net of accumulated depreciation and amortization: | | | | | | | |||||||||||
United States of America | | $ | 264,366 | | $ | 272,422 | |||||||||||
India | |
| 235,326 | |
| 238,367 | |||||||||||
Rest of World | |
| 18,141 | |
| 17,857 | |||||||||||
Consolidated long-lived assets, net | | $ | 517,833 | | $ | 528,646 |
(13) Debt
On February 6, 2018, the Company entered into a credit agreement (the(as amended the “Credit Agreement”) dated as of February 6, 2018, by and among the Company, its guarantor subsidiaries party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runners and lead arrangers. The Credit Agreement replaced the prior $300,000 credit agreement with J.P. Morgan Securities and Merrill Lynch, Pierce, Fenner & Smith IncorporatedIncorporated. and providesprovided for a $200,000 revolving credit facility, and a $180,000 term loan facility, and a $70,000delayed-draw term loan. The Company drew down $180,000 under the term loan of the Credit Agreement and $55,000 under the revolving credit facility under the Credit Agreement to repay in full the amount outstanding under the prior credit agreement and fund the Polaris delisting transaction (See Note 146 to our consolidated financial information for additional information). On March 12, 2018, the Companywe drew down the $70,000 delayed draw to fund the eTouch Systems Corp. acquisition.
On October 15, 2019, the Company entered into Amendment No. 2 to Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. (the “Administrative Agent”) and the lenders party thereto (the “Credit“Second Credit Agreement Amendment”), which amends the Company’s Amended and Restated Credit Agreement dated as of February 6, 2018, with such parties (the “Credit Agreement”) to, among other things, increase the revolving commitments available to the Company under the Credit Agreement from $200,000 to $275,000, reduce the interest rate margins applicable to term loans and revolving loans outstanding under the Credit Agreement from time to time and reduce the commitment fee payable by the Company to the lenders in respect of unused revolving commitments under the Credit Agreement. The
24
Company executed the Second Credit Agreement Amendment to provide additional lending capacity which the Company could useused to fund the completion of the Polaris delisting transaction, as well as to provide excess lending capacity in the event of future opportunistic, strategic, investment opportunities. The Second Credit Agreement Amendment contains customary terms for amendments of this type, including representations, warranties and covenants. Interest under this newthe credit facility accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on the Company’s ratio of debt to EBITDA. During the fiscal year ended March 31, 2020, the Company drew down $145,000 from the credit facility, inclusive of $84,000 drawn in the three months ended March 31, 2020 as a proactive measure in light of the uncertainty resulting from the COVID-19 pandemic. Earlier draws in the fiscal year March 31, 2020 were used to fund the eTouch 18-month anniversary payment of $17,500 and to fund opportunistic, strategic, investment opportunities.
On May 27, 2020, the Company entered into Amendment No. 3 to Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. (the “ Administrative Agent” ) and the lenders party thereto (the “ Third Credit Agreement Amendment” ), which amends the Credit Agreement to, among other things, (i) provide for $62,492 in incremental 364-day delayed draw term loans (the “New Delayed Draw Term Loans” ), which can be drawn down up to 3 times on or before September 27, 2020 and (ii) extend out the debt to EBITDA ratio covenant step down by two quarters such that the leverage covenant remains at 3.25:1.00 through December 31, 2020. The Administrative Agent increased the LIBOR floor to 1.00% from 0% as part of the Third Credit Agreement Amendment. The Company executed the Third Credit Agreement Amendment to provide additional liquidity in light of the COVID-19 pandemic which the Company could use to fund general working capital and refinance existing indebtedness under the credit facility. On May 27, 2020, the Company prepaid $55,000 on its existing revolving facility as a condition to closing the Third Credit Agreement Amendment. The Third Credit Agreement Amendment contains customary terms for amendments of this type, such as representations, warranties and covenants, including pro forma compliance with the Credit Agreement debt to EBITDA covenant as a condition to borrowing. Interest under the New Delayed Draw Term Loans accrues at a rate per annum of LIBOR plus 3.50%. The New Delayed Draw Term Loans mature on May 26, 2021 and do not amortize.
For the fiscal year ending March 31, 2020,2021, the Company is required to make principal payments of $2,891$4,336 per quarter.quarter. The term of the Credit Agreement is five years ending February 6, 2023. DuringAt June 30, 2020, the nine months ended December 31, 2019,total outstanding amount under the Company drew down $36,000 fromCredit Agreement was $440,633. At June 30, 2020, the credit facility to fund the eTouch 18-month anniversary payment of $17,500 and to fund opportunistic, strategic, investment opportunities. At December 31, 2019, theweighted average interest rate on the term loan and revolving line of credit was 3.99%3.75%.
At December 31, 2019,The credit facility is secured by substantially all of the Company wasCompany’s assets, including all intellectual property and all securities in compliance with its debt covenantsdomestic subsidiaries (other than certain domestic subsidiaries where the material assets of such subsidiaries are equity in foreign subsidiaries), subject to customary exceptions and has provided a quarterly certification to its lenders to that effect. The Company believes that it currently meets all conditions set forth inexclusions from the collateral. All obligations under the Credit Agreement to borrow thereunder and it is not aware of any conditions that would prevent it from borrowing part orare unconditionally guaranteed by substantially all of the remaining available capacity underCompany’s material direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the existing revolving credit facility at December 31, 2019present and throughfuture property and assets of the dateguarantors, with certain exclusions.
Current portion of this filing.long-term debt
The following summarizes our short-term debt balances as of:
| | | | | | |
|
| June 30, 2020 |
| March 31, 2020 | ||
Term loan-current maturities | |
| 18,789 | |
| 17,344 |
Less: deferred financing costs, current | |
| (1,597) | |
| (1,301) |
Total | | $ | 17,192 | | $ | 16,043 |
2625
Current portion of long-term debt
The following summarizes our short-term debt balances as of:
| | | | | | |
|
| December 31, 2019 |
| March 31, 2019 | ||
Term loan- current maturities | |
| 15,898 | |
| 12,500 |
Less: deferred financing costs, current | |
| (1,301) | |
| (1,093) |
Total | | $ | 14,597 | | $ | 11,407 |
Long-term debt, less current portion
The following summarizes our long-term debt balance as of:
| | | | | | |
|
| December 31, 2019 |
| March 31, 2019 | ||
Term loan | | $ | 228,359 | | $ | 237,500 |
Borrowings under revolving credit facility | | | 165,500 | | | 129,500 |
Less: | | | | | | |
Current maturities | |
| (15,898) | |
| (12,500) |
Deferred financing costs, long-term | |
| (2,797) | |
| (3,180) |
Total | | $ | 375,164 | | $ | 351,320 |
In July 2016 and November 2018, the Company entered into interest rate swap transactions to mitigate Company’s interest rate risk on Company’s variable rate debt (See Note 6).
| | | | | | |
|
| June 30, 2020 |
| March 31, 2020 | ||
Term loan | | $ | 221,133 | | $ | 225,469 |
Borrowings under revolving credit facility | | | 219,500 | | | 274,500 |
Less: | | | | | | |
Current maturities | |
| (18,789) | |
| (17,344) |
Deferred financing costs, long-term | |
| (2,639) | |
| (2,471) |
Total | | $ | 419,205 | | $ | 480,154 |
Beginning in fiscal 2009, the Company’s U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse or continuing involvement, certain of its European-based accounts receivable balances from one client to such third party financial institution. During the ninethree months ended December 31, 2019, $21,311June 30, 2020, $13,210 of receivables were sold under the terms of the financing agreement. Fees paid pursuant to this agreement were immaterial during the ninethree months ended December 31, 2019.June 30, 2020. NaN amounts were due as of December 31, 2019,June 30, 2020, but the Company may elect to use this program again in future periods. However, the Company cannot provide any assurances that this or any other financing facilities will be available or utilized in the future.
(14) Noncontrolling interestStock-Based Compensation Plans
On March 3, 2016,In May 2015, the Company adopted the 2015 Stock Option and Incentive Plan (“2015 Plan”) which was also approved the Company’s Indian subsidiary, Virtusa Consulting Services Private Limited (“Virtusa India”), acquired approximately 51.7%stockholders on September 1, 2015. The 2015 Plan permits the granting of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, unrestricted stock awards, performance share awards, performance-based awards to covered employees, cash-based awards and dividend equivalent rights. Stock options, restricted stock and restricted stock units generally vest over four years. Performance share awards and performance-based awards generally vest over three years. Under the 2015 Plan, the Company grants both service condition awards and performance condition awards. Performance awards are contingent upon meeting various departmental or company-wide performance goals in addition to service conditions. Stock compensation is recognized over the vesting period based on the probability of achievement of the fully diluted shares of Polaris Consulting & Services Limited (“Polaris”) for approximately $168,257 in cash (the “Polaris Transaction”) pursuant to a share purchase agreement dated as of November 5, 2015, by and among Virtusa India, Polaris and the promoter sellers named therein. Through a series of transactions and in compliance with the applicable Indian rules on takeovers and SEBI Delisting Regulations, Virtusa increased its ownership interest in Polaris from 51.7% to 93.0% by February 12, 2018, when Virtusa consummated its Polaris delisting offer with respect to the public shareholders of Polaris. The delisting offer resulted in an accepted exit price of INR 480 per share (“Exit Price”), for an aggregate consideration of approximately $145,000, exclusive of transaction and closing costs. On July 11, 2018, the stock exchanges on which Polaris common shares are listed notified Polaris that trading in equity shares of Polaris would be discontinued and delisted effective on August 1, 2018. For a period of one year following the date of delisting, Virtusa India has, in compliance with SEBI Delisting Regulations, permitted the public shareholders of Polaris to tender their shares for sale to Virtusa India at the Exit Price.performance condition.
In connectionMay 2020, the Company issued 250,075 performance shares to its executive officers with a three-year performance measurement period. As of June 30, 2020, the Polaris delisting offer,Company had not yet established the significant terms of the performance shares relevant to vesting (three-year cumulative target) for the three-year performance measurement period. Therefore, as of June 30, 2020, a grant date for financial accounting purposes had not occurred and the Company did not record any stock compensation related to these performance shares during the sixthree months ended SeptemberJune 30, 2019, Virtusa India purchased 1,263,117 shares, or approximately 1.2% of Polaris common2020. Upon the grant date, the Company will recognize the stock compensation expense over the remaining future requisite service period from shareholders for an aggregate purchase price of approximately $8,675. As of September 30, 2019, the number of shares of Polaris common stock held by noncontrolling interest shareholders was 2,009,365 or approximately 1.95% of Polaris’ basic shares of common stock outstanding.grant date.
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Further to the Polaris delisting, in order to acquire the remaining noncontrolling interest, the Company filed an application for approval and authorization to purchase the remaining outstanding Polaris shares held by the Polaris shareholders (“the Polaris Repurchase”) as well as final approval of the merger of Polaris with and into Virtusa India (“Merger”). On December 9, 2019, the Company received a Common Order (“Court Order”) to move forward with the Polaris Repurchase and certain conditional approvals for the Merger.
In connection with the Polaris Repurchase under the Court Order, on December 20, 2019, upon the Company filing the required documents, all the outstanding equity shares of Polaris held by public shareholders were deemed cancelled, but converted to the right to receive payment for these shares from the Company. Within 30 days from December 20, 2019, the Company is required to pay consideration of INR 480 per share for each cancelled share held by these former Polaris shareholders.
At December 20, 2019, the total amount payable by the Company to the remaining Polaris public shareholders was $13,564. During the three months ended December 31, 2019, the Company paid $12,534 to the public shareholders. The remaining balance at December 31, 2019 of $1,030 is presented in accrued expense and other and in restricted cash in the consolidated balance sheet.
In connection with the Merger, the conditional approvals required were approved by the respective authorities on January 2, 2020 and the Merger is effective, with an effective date as of April 1, 2018.
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(15) Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) by component were as follows for the three and nine months ended December 31, 2019 and 2018:follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | December 31, | | December 31, | | | June 30, | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |
| 2020 |
| 2019 | | ||||||
Investment securities | | | | | | | | | | | | | | | | | | | | |
Beginning balance |
| $ | 12 |
| $ | (225) | | $ | 12 |
| $ | 69 | | | $ | 12 |
| $ | 12 | |
Other comprehensive income (loss) (OCI) before reclassifications, net of tax of $0, $0, $0 and $(52) | | | — | | | (8) | | | — | | | (176) | | |||||||
Reclassifications from OCI to other income, net of tax of $0, $0, $0 and $12 | | | — | | | 271 | | | | | | 125 | | |||||||
Less: Noncontrolling interests, net of tax of $0, $(5), $0 and $7 | | | — | | | (8) | | | — | | | 12 | | |||||||
Comprehensive income (loss) on investment securities, net of tax of $0, $(5), $0 and $(33) | | | — | | | 255 | | | — | | | (39) | | |||||||
Other comprehensive income (loss) (OCI) before reclassifications, net of tax of $0, $0 | | | — | | | 1 | | |||||||||||||
Reclassifications from OCI to other income, net of tax of $0 for all periods | | | — | | | 2 | | |||||||||||||
Less: Noncontrolling interests, net of tax of $0 for all periods | | | — | | | — | | |||||||||||||
Comprehensive income (loss) on investment securities, net of tax of $0 for all periods | | | — | | | 3 | | |||||||||||||
Closing balance |
| $ | 12 |
| $ | 30 | | $ | 12 |
| $ | 30 | | | $ | 12 |
| $ | 15 | |
Currency translation adjustments | | | | | | | | | | | | | | | | | | | | |
Beginning balance |
| $ | (64,116) |
| $ | (57,318) | | $ | (57,354) |
| $ | (41,207) | | | $ | (71,207) |
| $ | (57,354) | |
OCI before reclassifications | | | 4,630 | | | (2,477) | | | (2,106) | | | (20,201) | | | | 2,065 | | | (381) | |
Less: Noncontrolling interests | | | (363) | | | (396) | | | (389) | | | 1,217 | | | | — | | | (137) | |
Comprehensive income (loss) on currency translation adjustments | | | 4,267 | | | (2,873) | | | (2,495) | | | (18,984) | | | | 2,065 | | | (518) | |
Closing balance |
| $ | (59,849) |
| $ | (60,191) | | $ | (59,849) |
| $ | (60,191) | | | $ | (69,142) |
| $ | (57,872) | |
Cash flow hedges | | | | | | | | | | | | | | | | | | | | |
Beginning balance |
| $ | (2,175) |
| $ | (5,179) | | $ | 39 |
| $ | 1,881 | | | $ | (11,818) |
| $ | 39 | |
OCI before reclassifications net of tax of $(386), $1,608, $(666) and $(1,582) | | | (1,993) | | | 5,014 | | | (2,240) | | | (2,931) | | |||||||
OCI before reclassifications net of tax of $263, $(210) | | | 966 | | | (202) | | |||||||||||||
Reclassifications from OCI to | | | | | | | | | | | | | | | | | | | | |
—Revenue, net of tax of $0, $178, $7 and $586 | | | — | | | 332 | | | 11 | | | 1,087 | | |||||||
—Costs of revenue, net of tax of $(188), $214, $(504) and $303 | | | (639) | | | 632 | | | (1,847) | | | 884 | | |||||||
—Selling, general and administrative expenses, net of tax of $(77), $102, $(220) and $147 | | | (260) | | | 303 | | | (800) | | | 431 | | |||||||
—Interest expenses, net of tax of $26, $(74), $(54) and $(188) | | | 75 | | | (214) | | | (155) | | | (543) | | |||||||
Less: Noncontrolling interests, net of tax of $0, $(23), $0 and $17 | | | — | | | (44) | | | — | | | 35 | | |||||||
Comprehensive income (loss) on cash flow hedges, net of tax of $(625), $2,005, $(1,437) and $(717) | | | (2,817) | | | 6,023 | | | (5,031) | | | (1,037) | | |||||||
—Revenue, net of tax of $0, $6 | | | — | | | 12 | | |||||||||||||
—Costs of revenue, net of tax of $147, $(77) | | | 466 | | | (328) | | |||||||||||||
—Selling, general and administrative expenses, net of tax of $58, $(38) | | | 182 | | | (162) | | |||||||||||||
—Interest expenses, net of tax of $187, $(54) | | | 523 | | | (154) | | |||||||||||||
Less: Noncontrolling interests, net of tax of $0 for all periods | | | — | | | (1) | | |||||||||||||
Comprehensive income (loss) on cash flow hedges, net of tax of $655, $(373) | | | 2,137 | | | (835) | | |||||||||||||
Closing balance |
| $ | (4,992) |
| $ | 844 | | $ | (4,992) |
| $ | 844 | | | $ | (9,681) |
| $ | (796) | |
Benefit plans | | | | | | | | | | | | | | | | | | | | |
Beginning balance |
| $ | (2,776) |
| $ | (1,511) | | $ | (2,084) |
| $ | (1,424) | | | $ | (2,242) |
| $ | (2,084) | |
OCI before reclassifications net of tax of $0, $0, $0 and $348 | | | — | | | 3 | | | (911) | | | (349) | | |||||||
OCI before reclassifications net of tax of $0, $0 | | | 11 | | | 123 | | |||||||||||||
Reclassifications from OCI for prior service credit (cost) to: | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net of tax of $0 for all periods | | | 6 | | | 14 | | | 19 | | | 42 | | |||||||
Other income (expense), net of tax of $0, $0 | | | 10 | | | 6 | | |||||||||||||
Reclassifications from net actuarial gain (loss) amortization to: | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net of tax of $0 for all periods | | | 70 | | | 36 | | | 210 | | | 113 | | |||||||
Other adjustments | | | 3 | | | 20 | | | 76 | | | 171 | | |||||||
(Less): Noncontrolling interests, net of tax $0 for all periods | | | (3) | | | — | | | (10) | | | 9 | | |||||||
Comprehensive income (loss) on benefit plans, net of tax of $0, $0, $0 and $348 | | | 76 | | | 73 | | | (616) | | | (14) | | |||||||
Other income (expense), net of tax of $0, $0 | | | 96 | | | 36 | | |||||||||||||
Other adjustments, net of tax of $0, $0 | | | (38) | | | (3) | | |||||||||||||
(Less): Noncontrolling interests, net of tax $0, $0 | | | — | | | (6) | | |||||||||||||
Comprehensive income (loss) on benefit plans, net of tax of $0, $0 | | | 79 | | | 156 | | |||||||||||||
Closing balance |
| | (2,700) |
| $ | (1,438) | | | (2,700) |
| $ | (1,438) | | | | (2,163) |
| $ | (1,928) | |
Accumulated other comprehensive loss |
| $ | (67,529) |
| $ | (60,755) | | $ | (67,529) |
| $ | (60,755) | | | $ | (80,974) |
| $ | (60,581) | |
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(16) Treasury StockCommitments, Contingencies and Guarantees.
On August 5, 2019,The Company indemnifies its officers and directors for certain events or occurrences under its charter or by-laws and under indemnification agreements while the Company's board of directors authorizedofficer or director is, or was, serving at its request in a share repurchase program of up to $30,000defined capacity. The term of the Company's common stock over 12 months fromindemnification period is with respect to the approval date, subject to certain price and other trading restrictions as established byperiod that such person was an officer or director of the Company. During the nine months ended December 31, 2019,The maximum potential amount of future payments the Company repurchased 505,565 sharescould be required to make under these indemnification obligations is unlimited. The costs incurred to defend lawsuits or settle claims related to these indemnification obligations have not been material. As a result, the Company believes that its estimated exposure on these obligations is minimal. Accordingly, the Company had 0 liabilities recorded for these obligations as of the Company’s common stock at a weighted average price of $36.93 per share for an aggregate purchase price of $18,680.June 30, 2020.
(17) CommitmentsThe Company is insured against any actual or alleged act, error, omission, neglect, misstatement or misleading statement or breach of duty by any current or former officer, director or employee while rendering information technology services. The Company believes that its financial exposure from such actual or alleged actions, should they arise, is minimal and Contingencies0 liability was recorded at June 30, 2020.
From time to time the Company is involved in legal proceedings, claims and litigation related to employee claims, contractual disputes and taxes in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. Although the Company cannot predict the outcome of such matters, the Company has no reason to believe the disposition of any current matter, other than the specific matters described below, could reasonably be expected to have a material adverse impact on the Company’s balance sheets, income of operations and cash flows or the ability to carry on any of its business activities. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future.
Recently, one
One of the Company’s larger clients made a demand for damages related to a project in which the Company was performing services. The client alleges breaches of certain representations and warranties regarding the Company’s performance and is seeking indemnification for damages from those alleged breaches. NoNaN litigation has been filed. The Company believes that it has defenses against the claims described in the demand, and intends to zealously defend against those claims. However, the Company cannot provide any assurance that the Company will prevail in the dispute or even partially prevail. Further, if the Company is unsuccessful in any settlement discussions, the Company also cannot provide any assurance that the client will not use set off rights in the contract, even if the Company disputes the claims or amount of damages alleged. In the event the Company does not fully prevail in this dispute, the Company may have to pay damages in amounts for which it may not have reserved or which may or may not be covered by the Company’s insurance policies; further, even if the damages are covered, depending on the outcome, the Company’s insurance may not cover or be adequate to pay the entire claim. In addition, the Company cannot guarantee that the Company will not lose future business with such client as a result of such dispute.
On February 28, 2019, the Supreme Court of India issued a ruling interpreting certain statutory defined contribution obligations of employees and employers, which altered historical understandings of such obligations, extending them to cover additional portions of employee income. As a result, contributions by our employees and the Company will increase in future periods. There is uncertainty as to whether the Indian government will apply the Supreme Court's ruling on a retroactive basis and if so, how this liability should be calculated as it is impacted by multiple variables, including the period of assessment, the application with respect to certain current and former employees and whether interest and penalties may be assessed. As such, the ultimate amount of our obligation is difficult to quantify. If the Indian government were to apply the Supreme Court ruling retroactively, without assessing interest and penalties, the impact would be a charge of approximately $7,500 to the Company’s income from operations and cash flows.
The Company is currently involved in an open examination by tax authorities in the United States related to the employment tax treatment of certain payments made to employees in the ordinary course of business. The Company cannot predict the outcome of the dispute, but it is in the process of evaluating the merits of a recent notice of proposed wage adjustment and is preparing a timely and appropriate response. At this time, it is premature to predict whether resolution of the dispute could reasonably be expected to have a material adverse impact on the Company’s income from operations and cash flows.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of theour financial condition and results of our operations of Virtusa Corporation should be read in conjunctiontogether with theour consolidated financial statements and the related notes theretoto consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 20192020 (the “Annual Report”), which has been filed with the Securities and Exchange Commission, or SEC.
Forward-looking statements
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seek,” “intends,” “plans,” “estimates,” “projects,” “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements, such as statements regarding anticipated future revenue, the strength of our market position, the impact of the COVID-19 pandemic, our ability to accurately forecast sales, revenue or pipeline, progress against our goals, market opportunity in the high-tech and healthcare industries, costs of attracting and retaining IT professionals, contract percentage completions, capital expenditures, plans for repatriation of cash to the United States, the effect of new accounting pronouncements, management’s plans and objectives and other statements regarding matters that are not historical facts, involve predictions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. There are a number ofseveral important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including those factors set forth in Item 1A. “Risk Factors” in the Annual Report and those factors referred to or discussed in or incorporated by reference into the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Business overview
Virtusa Corporation (the “Company”, “Virtusa”, “we”, “us” or “our”) is a global provider of digital business strategy, digital engineering and information technology (“IT”) outsourcing services and solutions that accelerate business outcomes for our clients.help clients change, disrupt, and unlock new value through innovation engineering. We support Forbes Global 2000 clients across large, consumer facingkey industries likeincluding banking, financial services, insurance, healthcare, communications, technology, and media and entertainment, as these clients seek toentertainment. We help improve their business performance through accelerating revenue growth, delivering compelling consumer experiences, improving operational efficiencies, and lowering overall IT costs. We provide services across the entire spectrum of the IT services lifecycle, from consulting, to technology and user experience (“UX”) design, development of IT applications, systems integration, digital engineering, testing and business assurance, and maintenance and support services, including cloud, infrastructure and managed services. We help our clients solve critical business problems by leveraging a combination of our distinctive consulting approach, end-to-end digital engineering capabilities, unique platforming methodology, and deep domain and technology expertise.
Our
Virtusa helps clients grow their business with innovative services enable our clients to accelerate business outcomesthat create operational efficiency using digital labor, future-proof operational and IT platforms, and rationalization and modernization of IT applications infrastructure. We help organizations realize the benefits of digital transformation and cloud transformation by consolidating, rationalizingbringing together digital infrastructure, analytics and modernizing their core customer-facing processes into one or more core systems.intelligence and customer experience by engineering the digital enterprise of tomorrow on the cloud. We deliver cost-effectivecost effective solutions through a global delivery model, applying advanced methods such as Agile, an industry standard technique designed to accelerate application development. We also use our consulting methodology, which we refer to as Accelerated Solution Design (“ASD”), which is a collaborative decision-making and design process performed with the client to ensure our solutions meet the client’s specifications and requirements. Our industry leading business transformational solutions combine deep domain expertise with our strengths in software engineering and business consulting to support our clients’ business imperative initiatives across business growth and IT operations.Digital Transformation Studio
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(“DTS”) engineering tools to drive software development lifecycle automation to improve quality, enabling speed and increasing productivity. Our proprietary DTS was built by Virtusa’s engineering teams that have decades of industry knowledge and experience. These teams are certified and leverage Virtusa’s industry leading tools and assets, providing increased speed and transparency.
Headquartered in Massachusetts, we have offices throughout the Americas, Europe, Middle East and Asia, with significant global delivery centers in the United States, Canada, the United Kingdom, the Netherlands, Germany, Switzerland, Sweden, Austria, the United Arab Emirates, Hong Kong, Japan, Qatar, Mexico, Australia and New Zealand, with global delivery centers in India, Sri Lanka, Hungary, Singapore and Malaysia, as well as multiple near shore delivery centers in the United States.Malaysia. We also have many employees who work with our clients either onsite or virtually, which offers flexibility for both clients and employees. At December 31, 2019,June 30, 2020, we had 22,26722,716 employees, or team members.
In fiscal year 2020, we initiated a multi-year strategy to increase our revenue growth, operating margin accretion, and earnings per share growth. Our strategy focuses on three fundamental pillars: increasing profitable revenue growth by targeting large digital and cloud transformation engagements, achieving greater revenue diversification, categorized by geography, industry and client, and increasing gross and operating margins through pyramid efficiencies, project profitability and general and administrative expense leverage.
The significant negative impact of COVID-19 on the global economy has created near-term challenges for us and the entire IT services industry. Simultaneously, the global pandemic has revealed unique opportunities for us to strengthen and advance our three-pillar plan. As a result, in late fiscal year 2020 and early fiscal year 2021, we launched several new initiatives under our three-pillar strategy designed to enable us to navigate the pandemic’s near-term economic impacts, and strengthen our overall market, financial and operational positioning going forward.
Our fiscal year 2021 plan builds on and strengthens our three-pillar strategy of increased profitable revenue growth, revenue and client diversification, and margin expansion. On the first pillar, we are increasing our efforts to capture new opportunities created by a change in Global 2000 enterprises’ buying behaviors during the COVID-19 pandemic. For example, in late fiscal year 2020, we launched several go-to-market campaigns targeting remote workforce enablement, cost reduction and efficiency programs, and end-to-end deep digital transformation. In addition to our COVID-19 specific actions, we are also sharpening our sales and marketing efforts in fiscal year 2021 to target an increasing number of large, recurring, high-margin, and faster growing digital and cloud transformation engagements.
On the second pillar of revenue and client diversification, while our progress in the first quarter of fiscal 2021 was offset by the impact of COVID-19 on overall client demand, we believe that we continued to make headway against our long-term goals of a more diversified portfolio of geographies, industries and accounts. Our recent efforts to increase our geographic diversification, including the realignment of our regional supervision and key local leadership hires made in Europe and the Middle East continued to drive closer relationships with our clients in Europe, Middle East and Asia, and thus increased opportunities in the first quarter of fiscal 2021. With respect to industry group diversification, our first quarter fiscal 2021 results reflect continued steady progress. Our Communications and Technology (C&T) industry group revenue grew 3.3% year-over-year in the first quarter of fiscal 2021, and C&T as a percentage of total revenue increased 200 basis points from 22% to 24% over the same time period in fiscal 2020. Our Media, Information and Other revenue increased 16.6% year-over-year in the first quarter of fiscal 2021. We broke out our Healthcare industry group revenue for the first time in the first quarter of fiscal 2021 to provide our investors with increased transparency into this high-potential industry vertical. In the first quarter of fiscal 2021, Healthcare revenue was 14% of our total revenue. Lastly, our Banking, Financial Services and Insurance revenue mix continued to decline in the first quarter of fiscal 2021 to 55% of our total revenue from 57% in the first quarter of fiscal 2020. Given the significant opportunity we have to continue expanding our presence in high-growth sectors such as High-Tech and Healthcare, in fiscal year 2021 we plan on increasing our investments in our domain expertise, skills, and sales and marketing programs in these sectors.
Regarding client level diversification, we recognize the importance over the long-term to reduce revenue concentration at our largest accounts and capture increasing organic growth opportunities across the remainder of our account base. To do so, in fiscal year 2021, we will direct more of our sales and marketing efforts toward smaller accounts that have the ability to expand significantly with us. We have had success with this strategy at our strategic clients. We will apply these same techniques to grow high potential accounts faster than our total company in order to accelerate account diversification.
Finally, with respect to Virtusa’s third pillar, margin expansion, our fiscal year 2021 plan includes several strategies underway aimed to improve our gross and operating margins by reducing our costs and creating operating efficiencies. Specifically, our fiscal year 2021 plan includes actions underway to improve pyramid efficiencies, reduce the
30
use of sub-contractors, increase utilization, and reduce general and administrative expenses as a percentage of revenue. In the first quarter of fiscal year 2021, our gross and operating margin performance exceeded our expectations, driven in part by higher utilization and execution of our cost containment initiatives.
Recent developments
COVID-19 and factors impacting our business and operating results
During the first quarter of fiscal 2021, the global pandemic related to COVID-19 presented significant challenges and adversely impacted our business and operating results. We are unable at this time to predict the full impact of COVID-19 on our operations, liquidity and financial results, and, depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material. We expect to see continued adverse impacts to our revenue, earnings and cash flows due to the COVID-19 pandemic in the second quarter of fiscal 2021, which may also continue into the third quarter or beyond. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. Refer to “Risk Factors” in the Annual Report for further discussion of the impact of the COVID-19 pandemic on our business.
In response to the COVID-19 pandemic, Virtusa quickly initiated a rigorous plan to protect the health and safety of its global team members, while continuing to serve clients in a safe and sustainable manner. As the world faces unprecedented challenges caused by COVID-19, Virtusa is committed to doing everything possible to help our team members and clients manage through these turbulent times. Actions include:
● | Enacted a Work-From-Home policy starting March 9, 2020. Today, over 98% of Virtusa’s global billable team members are enabled to work from home. |
● | Conduct regular weekly meetings by Virtusa’s COVID-19 Task Force to coordinate the Company’s ongoing response to the pandemic and develop initiatives focused on safety protocols for personnel and facilities, team member support, technology enablement, productivity, and communications with clients to manage the crisis. |
● | Proactively launched a series of new services and solutions tailored to help clients address the challenges created by COVID-19, including Hyper Distributed Agile Services, Agile Squads, and Release Assurance. |
● | Implemented a comprehensive cost reduction and efficiency plan across delivery, shared services and professional services. |
Financial overview
In the three months ended December 31, 2019,June 30, 2020, our revenue increaseddecreased by 6.5%5.6% to $335.1$301.1 million, compared to $314.7$319.0 million in the three months ended December 31, 2018. In the nine months ended December 31, 2019, our revenue increased by 6.8% to $982.6 million, compared to $920.2 million in the nine months ended December 31, 2018.June 30, 2019.
In the three months ended December 31, 2019,June 30, 2020, our income from operations increaseddecreased by 57.7%46.7% to $30.4$7.2 million, compared to $19.3$13.4 million in the three months ended December 31, 2018. In the nine months ended December 31, 2019, our income from operations increased by 33.6% to $63.1 million, compared to $47.2 million in the nine months ended December 31, 2018.June 30, 2019.
In the three months ended December 31, 2019,June 30, 2020, net income (loss) available to Virtusa common stockholders increaseddecreased by 1.3%104.1% to a net loss of $(0.2) million, as compared to a net income of $11.6 million, as compared to $11.5$4.7 million in the three months ended December 31, 2018. Net income increased by 395.1% to a net income $22.4 million in the nine months ended December 31, 2019, compared to a net income of $4.5 million in the nine months ended December 31, 2018.June 30, 2019.
The increasedecrease in revenue for the three and nine months ended December 31, 2019,June 30, 2020, as compared to the three and nine months ended December 31, 2018,June 30, 2019, primarily resulted from:
● |
partially offset by:
● | Decline in revenue from Europe, primarily driven by one of our large European banking clients |
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● | Decrease in several of our top ten clients, primarily in our healthcare industry group |
● | Productivity savings provided to our largest client as part of the vendor consolidation process |
partially offset by:
● | Increase in our largest telecommunication client and revenue from several tuck-in asset and business acquisitions closed in the fiscal year ended March 31, 2020 |
The key drivers of the decrease in our net income for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, were as follows:
● | Decrease in revenue, |
The key drivers of the increase in our net income for the three and nine months ended December 31, 2019, as compared to the three and nine months ended December 31, 2018, were as follows:
● |
partially offset by:
● | Increase in interest expense related to an increase in our outstanding debt under our credit facility |
32partially offset by:
● |
● | Decrease in |
High repeat business and client concentration are common in our industry. During the three months ended December 31,June 30, 2020 and 2019, and 2018, 96% and 88%98%, respectively, of our revenue was derived from clients who had been using our services for more than one year, including clients acquired from eTouch Systems Corp. in March 2018. During the nine months ended December 31, 2019 and 2018, 97% and 89%, respectively, of our revenue was derived from clients who had been using our services for more than one year, including clients acquired from eTouch Systems Corp. in March 2018.year. Accordingly, our global account management and service delivery teams focus on expanding client relationships and converting new engagements to long-term relationships to generate repeat revenue and expand revenue streams from existing clients. We also have a dedicated business development team focused on generating engagements with new clients to continue to expand our client base and, over time, reduce client concentration.
We derive our revenue from two types of service offerings: application outsourcing, which is recurring in nature; and consulting, including technology implementation, which is non-recurring in nature. For the three months ended December 31, 2019,June 30, 2020, our application outsourcing and consulting revenue represented 55%54% and 45%46%, respectively, of our total revenue as compared to 53%57% and 47%43%, respectively, for the three months ended December 31, 2018. For the nine months ended December 31, 2019, our application outsourcing and consulting revenue represented 56% and 44%, respectively, of our total revenue as compared to 53% and 47%, respectively, for the nine months ended December 31, 2018.June 30, 2019.
In the three months ended December 31, 2019,June 30, 2020, our North America revenue increaseddecreased by 12.1%2.7%, or $27.1$6.2 million, to $251.2$224.3 million, or 75.0%74.5% of total revenue, from $224.1$230.5 million, or 71%72.2% of total revenue, in the three months ended December 31, 2018. In the nine months ended December 31, 2019, our North America revenue increased by 11.0%, or $71.9 million, to $724.0 million, or 73.7% of total revenue, from $652.1 million, or 71% of total revenue in the nine months ended December 31, 2018.June 30, 2019. The increasedecrease in North America revenue for the three and nine months ended December 31, 2019June 30, 2020 was primarily due to the increasedecrease in revenue from clients in the C&Tour healthcare industry group, including customer contracts with certain existing customers acquiredpartially offset by revenue from third parties.several tuck-in asset and business acquisitions closed in the fiscal year ended March 31, 2020.
In the three months ended December 31, 2019,June 30, 2020, our European revenue decreased by 15.2%20.0%, or $9.9$12.7 million, to $55.2$50.4 million, or 16.5%16.7% of total revenue, from $65.0$63.1 million, or 21%19.8% of total revenue in the three months ended December 31, 2018. In the nine months ended December 31, 2019, our European revenue decreased by 8.8%, or $16.9 million, to $175.3 million, or 17.8% of total revenue, from $192.2 million, or 21% of total revenue in the nine months ended December 31, 2018.June 30, 2019. The decrease in European revenue for the three and nine months ended December 31, 2019June 30, 2020 was primarily due to a decline in revenue from one of our large banking clients.clients, partially offset by increase in our largest telecommunication client.
Our gross profit increaseddecreased by $5.5$15.7 million to $98.7$68.6 million for the three months ended December 31, 2019,June 30, 2020, as compared to $93.2$84.3 million for the three months ended December 31, 2018. Our gross profit increased by $7.0 million to $272.9 million for the nine months ended December 31, 2019 as compared to $265.9 million in the nine months ended December 31, 2018.June 30, 2019. The increasedecrease in gross profit during the three and nine months ended December 31, 2019,June 30, 2020, as compared to the three and nine months ended December 31, 2018,June 30, 2019, was primarily due to lower revenue, higher revenue
32
onsite effort and an increase in subcontractor costs partially offset by higher onsite effortdecrease in travel and subcontractor costs. related expense as well as cost optimization programs with respect to our subcontractors implemented in the three months ended June 30, 2020. As a percentage of revenue, gross margin was 29.4% and 29.6%decreased from 26.4% in the three months ended December 31,June 30, 2019 and 2018, respectively. Duringto 22.8% in the ninethree months ended December 31, 2019 and 2018, gross margin, as a percentage of revenue, was 27.8% and 28.9%, respectively. The decrease in gross margin during the three and nine months ended December 31, 2019 was primarily due to an increase in subcontractors cost, higher onsite effort, and lower utilization.June 30, 2020.
We perform our services under both time-and-materials and fixed-price contracts. Revenue from fixed-price contracts represented 43% and 40% of total revenue, and revenue from time-and-materials contracts represented 57% and 60% of total revenue for the three months ended December 31, 2019 and 2018, respectively. Revenue from fixed-price contracts represented 41% and 40% of total revenue, and revenue from time-and-materials contracts represented 59% and
33
60%total revenue for the ninethree months ended December 31,June 30, 2020 and 2019, and 2018, respectively. The revenue earned from fixed-price contracts in the three and nine months ended December 31, 2019June 30, 2020 primarily reflects our client preferences.
As an IT services company, our revenue growth is highly dependent on our ability to attract, develop, motivate and retain skilled IT professionals. We monitor our overall attrition rates and patterns to align our people management strategy with our growth objectives. At December 31, 2019,June 30, 2020, our attrition rate for the trailing 12 months, which reflects voluntary and involuntary attrition as part of our cost reduction initiatives, was approximately 25.7%24.1%. Our attrition rate at December 31, 2019June 30, 2020 reflects a higher rate of attrition as compared to the corresponding prior year period. The majority of our attrition occurs in India and Sri Lanka, and is weighted towards the more junior members of our staff. In response to higher attrition and as part of our retention strategies, we have experienced increases in compensation and benefit costs, which may continue in the future. However, we try to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, the mix of professional staff and utilization levels and achieving other operating efficiencies. If our attrition rate increases or is sustained at higher levels, our growth may slow and our cost of attracting and retaining IT professionals could increase.
We engage in a foreign currency hedging strategy using foreign currency forward contracts designed to hedge fluctuations in the Indian rupee against the U.S. dollar and the GBP, as well as the euro, the Canadian dollar, the Australian dollar and the GBP against the U.S. dollar, when consolidated into U.S. dollars. There is no assurance that these hedging programs or hedging contracts will be effective. Because these foreign currency forward contracts are designed to reduce volatility in the Indian rupee, GBP and euro exchange rates, they not only reduce the negative impact of a stronger Indian rupee, weaker GBP, euro, Canadian dollar and Australian dollar but also could reduce the positive impact of a weaker Indian rupee on our Indian rupee expenses or reduce the impact of a stronger GBP, euro, Canadian dollar and Australian dollar on our GBP, euro, Canadian dollar and Australian dollar denominated revenues.
Application of critical accounting estimates and risks
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, in particular those related to the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share-based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities, intangible assets and valuation of financial instruments including derivative contracts and investments. Actual amounts could differ significantly from these estimates. Our management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. Additional information about these critical accounting policies may be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included in the Annual Report.
3433
Results of operations
Three months ended December 31, 2019June 30, 2020 compared to the three months ended December 31, 2018June 30, 2019
The following table presents an overview of our results of operations for the three months ended December 31, 2019June 30, 2020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | Three Months Ended | | | | | | | ||||||||
| | December 31, | | | | | | | | June 30, | | | | | | | ||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
|
| 2020 |
| 2019 |
| $ Change |
| % Change |
| ||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||
Revenue | | $ | 335,107 | | $ | 314,681 | | $ | 20,426 | | 6.5 | % | | $ | 301,064 | | $ | 319,024 | | $ | (17,960) | | (5.6) | % |
Costs of revenue |
| | 236,427 |
| | 221,461 |
| | 14,966 |
| 6.8 | % |
| | 232,460 |
| | 234,735 |
| | (2,275) |
| (1.0) | % |
Gross profit |
| | 98,680 |
| | 93,220 |
| | 5,460 |
| 5.9 | % |
| | 68,604 |
| | 84,289 |
| | (15,685) |
| (18.6) | % |
Operating expenses |
| | 68,270 |
| | 73,935 |
| | (5,665) |
| (7.7) | % |
| | 61,449 |
| | 70,861 |
| | (9,412) |
| (13.3) | % |
Income from operations |
| | 30,410 |
| | 19,285 |
| | 11,125 |
| 57.7 | % |
| | 7,155 |
| | 13,428 |
| | (6,273) |
| (46.7) | % |
Other income (expense) |
| | (7,209) |
| | 3,912 |
| | (11,121) |
| (284.3) | % | ||||||||||||
Other expense |
| | (5,957) |
| | (2,669) |
| | (3,288) |
| 123.2 | % | ||||||||||||
Income before income tax expense |
| | 23,201 |
| | 23,197 |
| | 4 |
| 0.0 | % |
| | 1,198 |
| | 10,759 |
| | (9,561) |
| (88.9) | % |
Income tax expense |
| | 10,363 |
| | 10,400 |
| | (37) |
| (0.4) | % |
| | 304 |
| | 4,739 |
| | (4,435) |
| (93.6) | % |
Net income |
| | 12,838 |
| | 12,797 |
| | 41 |
| 0.3 | % |
| | 894 |
| | 6,020 |
| | (5,126) |
| (85.1) | % |
Less: net income attributable to noncontrolling interests, net of tax |
| | 118 |
| | 221 |
| | (103) |
| (46.6) | % |
| | — |
| | 186 |
| | (186) |
| (100.0) | % |
Net income available to Virtusa stockholders |
| | 12,720 |
| | 12,576 |
| | 144 |
| 1.1 | % |
| | 894 |
| | 5,834 |
| | (4,940) |
| (84.7) | % |
Less: Series A Convertible Preferred Stock dividends and accretion |
| | 1,087 |
| | 1,087 |
| | — |
| — | % |
| | 1,087 |
| | 1,087 |
| | — |
| — | % |
Net income attributable to Virtusa common stockholders | | $ | 11,633 | | $ | 11,489 | | $ | 144 |
| 1.3 | % | ||||||||||||
Net income (loss) attributable to Virtusa common stockholders | | $ | (193) | | $ | 4,747 | | $ | (4,940) |
| (104.1) | % |
Revenue
Revenue increaseddecreased by 6.5%5.6%, or $20.4$17.9 million, from $314.7$319.0 million during the three months ended December 31, 2018June 30, 2019 to $335.1$301.1 million in the three months ended December 31, 2019.June 30, 2020. The increasedecrease in revenue was primarily driven by an increasedue to decrease in revenue from several of our top ten clients, primarily in our C&Thealthcare industry group, including $6.4 millionproductivity savings provided to our largest client as part of revenue from customer contracts acquired from third parties through asset acquisitions, partially offset bythe vendor consolidation process and a decline in revenue from one of our large European banking clients, partially offset by increase in revenue from our largest telecommunication client and a decreaseseveral tuck-in asset and business acquisitions closed in our banking and financial services industry group.the fiscal year ended March 31, 2020. Revenue from North American clients in the three months ended December 31, 2019 increasedJune 30, 2020 decreased by $27.1$6.2 million, or 12.1%2.7%, as compared to the three months ended December 31, 2018,June 30, 2019, particularly due to the increasedecrease in revenue from clients in the C&Thealthcare industry group.group, partially offset by revenue from several tuck-in asset and business acquisitions closed in the fiscal year ended March 31, 2020. Revenue from European clients decreased by $9.9$12.7 million, or 15.2%20.0%, as compared to the three months ended December 31, 2018,June 30, 2019, primarily due to decline in revenue from one of our large banking clients. clients, partially offset by increase in revenue from our largest telecommunication client. We had 216224 active clients at December 31, 2019 and 2018.June 30, 2020, as compared to 217 active clients at June 30, 2019.
Cost of revenue
Costs of revenue increaseddecreased from $221.5$234.7 million in the three months ended December 31, 2018June 30, 2019 to $236.4$232.5 million in the three months ended December 31, 2019, an increaseJune 30, 2020, a decrease of $14.9$2.2 million, or 6.8%1.0%. The increasedecrease in cost of revenue was primarily due to decrease in travel and related expenses of $6.8 million, partially offset by an increase in subcontractor costs of $12.9$1.9 million and an increase in the number of IT professionals and related compensation and benefit costs of $2.8$1.6 million, partially offset by a decrease in travel expense of $1.1 million.which also reflect certain cost reduction actions initiated during the three months ended June 30, 2020. At December 31, 2019,June 30, 2020, we had 20,07520,609 IT professionals as compared to 19,26619,911 at December 31, 2018.June 30, 2019. As a percentage of revenue, cost of revenue increased from 70.4%73.6% for the three months ended December 31, 2018June 30, 2019 to 70.6%77.2% for three months ended December 31, 2019.June 30, 2020.
Gross profit
Our gross profit increaseddecreased by $5.5$15.7 million, or 5.9%18.6%, to $98.7$68.6 million for the three months ended December 31, 2019,June 30, 2020, as compared to $93.2$84.3 million for the three months ended December 31, 2018,June 30, 2019, primarily due to highera decrease in revenue, partially offset byan increase in subcontractor costs and higher onsite effort. Aseffort, partially offset by a percentage of revenue, gross margin is 29.6% in the three months ended December 31, 2018 and 29.4% in the three months ended December 31, 2019. The decrease in grosstravel and related expenses as well as cost
3534
optimization programs with respect to our subcontractors implemented in the three months ended June 30, 2020. As a percentage of revenue, gross margin was 26.4% in the three months ended June 30, 2019 and 22.8% in the three months ended June 30, 2020. The decrease in gross margin during the three months ended December 31, 2019,June 30, 2020, was primarily driven by anlower revenue, increase in subcontractor costs, higher onsite effort and lower utilization.
Operating expenses
Operating expenses decreased from $73.9$70.9 million in the three months ended December 31, 2018June 30, 2019 to $68.3$61.4 million in the three months ended December 31, 2019,June 30, 2020, a decrease of $5.6$9.5 million, or 7.7%13.3%. The decrease in operating expenses was primarily due to a decrease of $5.2 million in compensation related to non-IT professionals of $4.9 million, which reflects ourexpense, including stock and variable compensation expense as well as cost reduction initiatives,initiatives. The decrease in operating expense was also due to a decrease in professional servicestravel and related expenses of $1.8$3.2 million and a decrease in travel expense of $0.4 million, partially offset by an increase in facilities costs of $0.5 million and an increase in amortization of intangible assets of $0.6$0.7 million. As a percentage of revenue, our operating expenses decreased from 23.5%22.2% in the three months ended December 31, 2018June 30, 2019 to 20.4% in the three months ended December 31, 2019.June 30, 2020.
Income from operations
Income from operations increaseddecreased by 57.7%46.7%, from $19.3$13.4 million in the three months ended December 31, 2018June 30, 2019 to $30.4$7.2 million in the three months ended December 31, 2019.June 30, 2020. As a percentage of revenue, income from operations increaseddecreased from 6.1%4.2% in the three months ended December 31, 2018June 30, 2019 to 9.1%2.4% in the three months ended December 31, 2019,June 30, 2020, primarily due to a decrease in revenue, increase in subcontractor costs and higher onsite effort, partially offset by decrease in operating expenses as a percentage of revenue.expense.
Other income (expense)expense
Other expense increased by $11.1$3.3 million, from an income of $3.9$2.7 million in the three months ended December 31, 2018June 30, 2019 to an expense of $7.2$6.0 million in the three months ended December 31, 2019, primarilyJune 30, 2020, primary due to netan increase in net foreign currency transaction losses related to the revaluation of a $300$240.4 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar partially offset byand an increase in interest expense related to our term loan.credit facility, primarily related to increase in the borrowings and interest rate.
Income tax expense
Income tax expense in the three months ended December 31, 2019 remains unchanged compared to $10.4decreased by $4.4 million, from $4.7 million in the three months ended December 31, 2018.June 30, 2019 to $0.3 million in the three months ended June 30, 2020. Our effective tax rate decreased from 44.8%44.0% for the three months ended December 31, 2018June 30, 2019 to 44.7%25.4% for the three months ended December 31, 2019.June 30, 2020. The decrease in thetax expense and effective tax rate for the three months ended December 31, 2019,June 30, 2020, was primarily due to a Base Erosion Alternative Tax (“BEAT”) expense offset by certain discrete benefits duringdecrease in income from operations, the three months ended December 31, 2019.election of foreign tax credits, lower statutory rates in India and the merger of our Indian operations. The merger permits previous nondeductible items to be deducted in computing taxable income.
Noncontrolling interests
In connection with the Polaris acquisition, for the three months ended December 31,June 30, 2019, and 2018, we recorded a noncontrolling interest of $0.1 million and $0.2 million, respectively, representing a 1.71% and 3.46%3.0%, respectively, share of profits of Polaris held by parties other than Virtusa.
During the three months ended March 31, 2020, Polaris merged with and into Virtusa India, with Virtusa India being the surviving entity. As of March 31, 2020, we own 100% of Polaris shares.
Net income available to Virtusa stockholders
Net income available to Virtusa stockholders increaseddecreased by $0.1$4.9 million or 1.1%84.7%, from $12.6$5.8 million in the three months ended December 31, 2018June 30, 2019 to $12.7$0.9 million in the three months ended December 31, 2019.June 30, 2020. The increasedecrease in net income in the three months ended December 31, 2019June 30, 2020 was primarily due to an increasea decrease in revenue and income from operations, offset by an increase in net foreign currency transaction losses and an increase in interest expense related to the revaluation ofour credit facility, partially offset by a $300 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar.decrease in income tax expense.
3635
Series A Convertible Preferred Stock dividends and accretion
In connection with the preferred stock financing transaction with the Orogen Group, we accrued dividends and accreted issuance costs of $1.1 million at a rate of 3.875% per annum during the three months ended December 31, 2019June 30, 2020 and 2018.2019.
Net income (loss) available to Virtusa common stockholders
Net income (loss) available to Virtusa common stockholders increaseddecreased by $0.1$4.9 million or 1.3%104.1%, from $11.5a net income of $4.7 million in the three months ended December 31, 2018June 30, 2019 to $11.6a net loss of $(0.2) million in the three months ended December 31, 2019.June 30, 2020. The increasedecrease in net income in the three months ended December 31, 2019 was primarily due to an increase in income from operations offset by an increase in net foreign currency transaction losses related to the revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar.
Nine months ended December 31, 2019 compared to the nine months ended December 31, 2018
The following table presents an overview of our results of operations for the nine months ended December 31, 2019 and 2018:
| | | | | | | | | | | | |
| | Nine Months Ended | | | | | | | ||||
| | December 31, | | | | | | | ||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
| | (Dollars in thousands) | | |||||||||
Revenue | | $ | 982,632 | | $ | 920,232 | | $ | 62,400 | | 6.8 | % |
Costs of revenue |
| | 709,746 |
| | 654,288 |
| | 55,458 |
| 8.5 | % |
Gross profit |
| | 272,886 |
| | 265,944 |
| | 6,942 |
| 2.6 | % |
Operating expenses |
| | 209,813 |
| | 218,716 |
| | (8,903) |
| (4.1) | % |
Income from operations |
| | 63,073 |
| | 47,228 |
| | 15,845 |
| 33.6 | % |
Other expense |
| | (17,035) |
| | (22,173) |
| | 5,138 |
| (23.2) | % |
Income before income tax expense |
| | 46,038 |
| | 25,055 |
| | 20,983 |
| 83.7 | % |
Income tax expense |
| | 19,932 |
| | 15,863 |
| | 4,069 |
| 25.7 | % |
Net income |
| | 26,106 |
| | 9,192 |
| | 16,914 |
| 184.0 | % |
Less: net income attributable to noncontrolling interests |
| | 450 |
| | 1,407 |
| | (957) |
| (68.0) | % |
Net income available to Virtusa stockholders | | | 25,656 |
| | 7,785 |
| | 17,871 |
| 229.6 | % |
Less: Series A Convertible Preferred Stock dividends and accretion | | | 3,262 |
| | 3,262 |
| | — |
| | % |
Net income attributable to Virtusa common stockholders | | $ | 22,394 | | $ | 4,523 | | $ | 17,871 |
| 395.1 | % |
Revenue
Revenue increased by 6.8%, or $62.4 million, from $920.2 million during the nine months ended December 31, 2018 to $982.6 million in the nine months ended December 31, 2019. The increase in revenue was primarily driven by an increase in revenue from several of our top ten clients, primarily in our C&T industry group, including $21.8 million of revenue from customer contracts acquired from third parties through asset acquisitions, partially offset by a decline in one of our large European banking clients and a decrease in our banking and financial services and media information and other industry groups. Revenue from North American clients in the nine months ended December 31, 2019 increased by $71.9 million, or 11.0%, as compared to the nine months ended December 31, 2018, particularly due to the increase in revenue from clients in the C&T industry group. Revenue from European clients decreased by $16.9 million, or 8.8%, as compared to the nine months ended December 31, 2018, primarily due to a decline in revenue from one of our large banking clients. We had 216 active clients at December 31, 2019 and 2018.
Cost of revenue
Costs of revenue increased from $654.3 million in the nine months ended December 31, 2018 to $709.7 million in the nine months ended December 31, 2019, an increase of $55.5 million, or 8.5%. The increase in cost of revenue was
37
primarily due to an increase in subcontractor costs of $41.0 million and an increase in the number of IT professionals and related compensation and benefit costs of $19.5 million, partially offset by a decrease in travel expense of $5.4 million. At December 31, 2019, we had 20,075 IT professionals as compared to 19,266 at December 31, 2018. As a percentage of revenue, cost of revenue increased from 71.1% for the nine months ended December 31, 2018 to 72.2% for the nine months ended December 31, 2019.
Gross profit
Our gross profit increased by $7.0 million, or 2.6%, to $272.9 million for the nine months ended December 31, 2019, as compared to $265.9 million for the nine months ended December 31, 2018, primarily due to higher revenue, partially offset by increase in subcontractor costs and higher onsite effort. As a percentage of revenue, gross margin decreased from 28.9% in the nine months ended December 31, 2018 to 27.8% in the nine months ended December 31, 2019. The decrease in the gross margin in the nine months ended December 31, 2019, was primarily driven by an increase in subcontractor costs, higher onsite effort, and lower utilization partially offset by depreciation of the Indian rupee against the U.S. dollar.
Operating expenses
Operating expenses decreased from $218.7 million in the nine months ended December 31, 2018 to $209.8 million in the nine months ended December 31, 2019, a decrease of $8.9 million, or 4.1%. The decrease in operating expensesJune 30, 2020 was primarily due to a decrease in compensation related to non-IT professionals of $13.2 million, which reflects our cost reduction initiativesrevenue and a decrease in travel expense of $2.2 million, partially offset by an increase of $3.9 million in facilities costs, an increase in amortization of intangible assets of $1.5 million and an increase in professional services of $0.5 million. As a percentage of revenue, our operating expenses decreased from 23.8% in the nine months ended December 31, 2018 to 21.4% in the nine months ended December 31, 2019.
Income from operations
Income from operations increased by 33.6%, from $47.2 million in the nine months ended December 31, 2018 to $63.1 million in the nine months ended December 31, 2019. As a percentage of revenue, income from operations, increased from 5.1% in the nine months ended December 31, 2018 to 6.4% in the nine months ended December 31, 2019, primarily due to a decrease in operating expenses as a percentage of revenue.
Other expense
Other expense decreased by $5.2 million, from $22.2 million in the nine months ended December 31, 2018 to $17.0 million in the nine months ended December 31, 2019, primarily due to a net decreasean increase in foreign currency transaction losses related to the revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial appreciation of the Indian rupee against the U.S. dollar, partially offset byand an increase in interest expense related to our term loan.
Income tax expense
Income tax expense increased by $4.0 million, from $15.9 million in the nine months ended December 31, 2018 to $19.9 million in the nine months ended December 31, 2019. Our effective tax rate decreased from 63.3% for the nine months ended December 31, 2018 to 43.3% for the nine months ended December 31, 2019. The increase in tax expense for the nine months ended December 31, 2019, was primarily due to improved results of operations, an increase in BEAT expensecredit facility, partially offset by a decrease in tax expense related to disregarded entities during the nine months ended December 31, 2019. The decrease in the effective tax rate in the nine months ended December 31, 2019 is primarily due to improved results of operations offset by a decrease in tax expense related to disregarded entities.
38
Noncontrolling interests
In connection with the Polaris Consulting & Services Limited (“Polaris”) acquisition, for the nine months ended December 31, 2019 and 2018, we recorded a noncontrolling interest of $0.5 million and $1.4 million, respectively, representing a 2.3% and 5.6%, respectively, share of profits of Polaris held by parties other than Virtusa.
Net income available to Virtusa stockholders
Net income available to Virtusa stockholders increased by 229.6%, from $7.8 million in the nine months ended December 31, 2018 to a net income of $25.7 million in the nine months ended December 31, 2019. The increase in net income in the nine months ended December 31, 2019 was primarily due to an increase in income from operations and a decrease in net foreign currency transaction losses related to the revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial appreciation of the Indian rupee against the U.S. dollar partially offset by an increase in income tax expense.
Series A Convertible Preferred Stock dividends and accretion
In connection with the preferred stock financing transaction with the Orogen Group, we accrued dividends and accreted issuance costs of $3.3 million at a rate of 3.875% per annum during the nine months ended December 31, 2019 and 2018.
Net income available to Virtusa common stockholder
Net income available to Virtusa common stockholders increased by 395.1%, from $4.5 million in the nine months ended December 31, 2018 to $22.4 million in the nine months ended December 31, 2019. The increase in net income in the nine months ended December 31, 2019 was primarily due to an increase in income from operations and a decrease in net foreign currency transaction losses related to the revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial appreciation of the Indian rupee against the U.S. dollar partially offset by an increase in income tax expense.
Non-GAAP Measures
We include certain non-GAAP financial measures as defined by Regulation G by the Securities and Exchange Commission. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures should be read in conjunction with our financial statements prepared in accordance with GAAP.
We consider the total measure of cash, cash equivalents, short-term and long-term investments to be an important indicator of our overall liquidity. All of our investments are classified as either equity ortime deposits, available-for-sale debt securities and equity securities, including our long-term investments which consist of fixed income securities, including government agency bonds and corporate bonds, which meet the credit rating and diversification requirements of our investment policy as approved by our audit committee and board of directors.
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The following table provides the reconciliation from cash and cash equivalents to total cash and cash equivalents, short-term investments and long-term investments:
| | | | | | | | | | | | |
| | At December 31, | | At March 31, | | | | | ||||
|
| 2019 |
| 2019 |
| June 30, 2020 |
| March 31, 2020 | ||||
Cash and cash equivalents | | $ | 217,387 | | $ | 189,676 | | $ | 285,277 | | $ | 290,837 |
Short-term investments | |
| 20,058 | |
| 33,138 | |
| 4,035 | |
| 9,785 |
Long-term investments | |
| 10 | |
| 322 | |
| 7 | |
| 4 |
Total cash and cash equivalents, short-term and long-term investments | | $ | 237,455 | | $ | 223,136 | | $ | 289,319 | | $ | 300,626 |
We believe the following financial measures will provide additional insights to measure the operational performance of our business.
● | We present consolidated statements of income measures that exclude, when applicable, stock-based compensation expense, acquisition-related charges, restructuring charges, foreign currency transaction gains and losses, impairment of investments, impairment of long-lived assets, non-recurring third party financing |
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The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the three and nine months ended December 30:measure:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | | | Three Months Ended | | ||||||||||||
| | December 31, | | | December 31, | | | | | June 30, | | ||||||||||||
|
| 2019 |
| 2018 |
| | 2019 |
| 2018 |
| |
| | 2020 |
| 2019 |
| ||||||
| | | | | | | | | in thousands, except | | | ||||||||||||
| | | | | | | | | | | | | | | | | | in thousands, except per share amounts) | | ||||
GAAP income from operations | | $ | 30,410 | | $ | 19,285 | | | $ | 63,073 | | $ | 47,228 | | | | | $ | 7,155 | | $ | 13,428 | |
Add: Stock-based compensation expense | |
| 5,775 | |
| 7,042 | | |
| 18,285 | |
| 24,104 | | | | |
| 3,592 | |
| 6,676 | |
Add: Acquisition-related charges and restructuring charges (1) | |
| 4,345 | |
| 6,378 | | |
| 12,741 | |
| 17,872 | | | ||||||||
Add: Acquisition-related charges and restructuring charges (a) | | |
| 2,590 | |
| 4,097 | | |||||||||||||||
Add: Non-recurring professional fees (b) | | |
| 706 | |
| — | | |||||||||||||||
Non-GAAP income from operations | | $ | 40,530 | | $ | 32,705 | | | $ | 94,099 | | $ | 89,204 | | | | | $ | 14,043 | | $ | 24,201 | |
GAAP operating margin | |
| 9.1 | % |
| 6.1 | % | |
| 6.4 | % |
| 5.1 | % | | | |
| 2.4 | % |
| 4.2 | % |
Effect of above adjustments to income from operations | |
| 3.0 | % |
| 4.3 | % | |
| 3.2 | % |
| 4.6 | % | | | |
| 2.3 | % |
| 3.4 | % |
Non‑GAAP operating margin | |
| 12.1 | % |
| 10.4 | % | |
| 9.6 | % |
| 9.7 | % | | | |
| 4.7 | % |
| 7.6 | % |
GAAP net income available to Virtusa common stockholders | | $ | 11,633 | | $ | 11,489 | | | $ | 22,394 | | $ | 4,523 | | | ||||||||
GAAP net income (loss) available to Virtusa common stockholders | | | $ | (193) | | $ | 4,747 | | |||||||||||||||
Add: Stock-based compensation expense | |
| 5,775 | |
| 7,042 | | |
| 18,285 | |
| 24,104 | | | | |
| 3,592 | |
| 6,676 | |
Add: Acquisition-related charges and restructuring charges (1) | |
| 4,345 | |
| 6,852 | | |
| 13,008 | |
| 19,279 | | | ||||||||
Add: Impairment of investment (9) | | | 184 | | | 885 | | | | 184 | | | 885 | | | ||||||||
Add: Foreign currency transaction gains (losses) (2) | |
| 3,065 | |
| (8,319) | | |
| 5,300 | |
| 11,794 | | | ||||||||
Add: Impact from the Tax Act (8) | |
| — | |
| (1,628) | | |
| — | |
| (1,628) | | | ||||||||
Add: Acquisition-related charges and restructuring charges (a) | | |
| 2,590 | |
| 4,243 | | |||||||||||||||
Add: Non-recurring professional fees (b) | | | | 706 | | | — | | |||||||||||||||
Add: Foreign currency transaction (gains) losses (c) | | |
| 1,241 | |
| (1,202) | | |||||||||||||||
Tax adjustments | |
| 161 | |
| 3,370 | | |
| (4,153) | |
| (6,573) | | | | |
| (1,908) | |
| (1,650) | |
Less: Noncontrolling interest, net of taxes | |
| (16) | |
| (103) | | |
| (44) | |
| 76 | | | | |
| — | |
| (35) | |
Non-GAAP net income available to Virtusa common stockholders | | $ | 25,147 | | $ | 19,588 | | | $ | 54,974 | | $ | 52,460 | | | | | $ | 6,028 | | $ | 12,779 | |
GAAP diluted earnings per share (6) | | $ | 0.38 | | $ | 0.37 | | | $ | 0.73 | | $ | 0.15 | | | ||||||||
GAAP diluted earnings (loss) per share (f) | | | $ | (0.01) | | $ | 0.15 | | |||||||||||||||
Effect of stock-based compensation expense | |
| 0.17 | |
| 0.21 | | |
| 0.54 | |
| 0.72 | | | | |
| 0.12 | |
| 0.20 | |
Effect of acquisition-related charges and restructuring charges (1) (7) | |
| 0.13 | |
| 0.20 | | |
| 0.38 | |
| 0.57 | | | ||||||||
Effect of impairment of investment (9) (7) | | | 0.01 | | | 0.03 | | | | — | | | 0.03 | | | ||||||||
Effect of foreign currency transaction gains (losses) (2) (7) | |
| 0.09 | |
| (0.25) | | |
| 0.16 | |
| 0.35 | | | ||||||||
Effect of impact from the Tax Act (7) (8) | |
| — | |
| (0.05) | | |
| — | |
| (0.05) | | | ||||||||
Tax adjustments (3) (7) | |
| — | |
| 0.10 | | |
| (0.12) | |
| (0.20) | | | ||||||||
Effect of dividend on Series A Convertible Preferred Stock (6) (7) | |
| — | |
| — | | |
| 0.10 | |
| 0.10 | | | ||||||||
Effect of acquisition-related charges and restructuring charges (a) (g) | | |
| 0.09 | |
| 0.13 | | |||||||||||||||
Effect of non-recurring professional fees (b) (g) | | | | 0.02 | | | — | | |||||||||||||||
Effect of foreign currency transaction (gains) losses (c) (g) | | |
| 0.04 | |
| (0.04) | | |||||||||||||||
Tax adjustments (d) (g) | | |
| (0.06) | |
| (0.05) | | |||||||||||||||
Effect of noncontrolling interest (e) (g) | | |
| — | |
| — | | |||||||||||||||
Effect of dividend on Series A Convertible Preferred Stock (f) (g) | | |
| — | |
| 0.03 | | |||||||||||||||
Effect of change in dilutive shares for non-GAAP | |
| — | |
| — | | |
| (0.06) | |
| (0.01) | | | | |
| — | |
| (0.01) | |
Non-GAAP diluted earnings per share (5) (7) | | $ | 0.78 | | $ | 0.61 | | | $ | 1.73 | | $ | 1.66 | | | ||||||||
Non-GAAP diluted earnings per share (g) (h) | | | $ | 0.20 | | $ | 0.41 | |
Acquisition-related charges include, when applicable, amortization of purchased intangibles, external deal costs, transaction-related professional fees, acquisition-related retention bonuses, changes in the fair value of contingent consideration liabilities, accreted interest related to deferred acquisition payments, charges for impairment of acquired intangible assets and other acquisition-related costs including integration expenses consisting of outside professional and consulting services and direct and incremental travel costs. Restructuring charges, when applicable, include |
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termination benefits, |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | December 31, | | December 31, | | | June 30, | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |
| 2020 |
| 2019 | | ||||||
Amortization of intangible assets | | $ | 3,496 | | $ | 2,860 | | $ | 10,157 | | $ | 8,629 | | | $ | 4,168 | | $ | 3,221 | |
Acquisition and integration costs | | | 849 | | | 3,518 | | | 2,584 | | | 9,243 | | | | — | | | 876 | |
Changes in fair value of contingent consideration | | | (1,578) | | | — | | |||||||||||||
Acquisition-related charges included in costs of revenue and operating expense | | | 4,345 | | | 6,378 | | | 12,741 | | | 17,872 | | | | 2,590 | | | 4,097 | |
Accreted interest related to deferred acquisition payments |
| | — |
| | 474 | | | 267 |
| | 1,407 | | | | — |
| | 146 | |
Total acquisition-related charges and restructuring charges | | $ | 4,345 | | $ | 6,852 | | $ | 13,008 | | $ | 19,279 | | | $ | 2,590 | | $ | 4,243 | |
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(b) | Non-recurring fees for advisory, legal, consulting and proxy solicitation services in connection with a potential proxy deliberation with respect to our annual shareholder meeting and the election of directors. |
(c) | Foreign currency transaction gains and losses are inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes. |
(d) | Tax adjustments reflect the tax effect of the non-GAAP adjustments using the tax rates at which these adjustments are expected to be realized for the respective |
(e) | Noncontrolling interest represents the minority shareholders interest of Polaris. |
(f) | During the three months ended |
The following table provides the non-GAAP net income available to Virtusa common stockholders and non-GAAP dilutive weighted average shares outstanding using the if-converted method to calculate the non-GAAP diluted earnings per share for the three and nine months ended December 31, 2019June 30, 2020 and 2018:2019:
| | | | | | | |
| | Three Months Ended | | ||||
| | June 30, | | ||||
|
| 2020 |
| 2019 | | ||
Non-GAAP net income available to Virtusa common stockholders | | $ | 6,028 | | $ | 12,779 | |
Add: Dividends and accretion on Series A Convertible Preferred Stock | | | — | | | 1,087 | |
Non-GAAP net income available to Virtusa common stockholders and assumed conversion | | $ | 6,028 | | $ | 13,866 | |
GAAP dilutive weighted average shares outstanding | |
| 30,168,174 | |
| 30,934,411 | |
Add: Incremental dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units | |
| 250,078 | |
| — | |
Add: Incremental effect of Series A Convertible Preferred Stock as converted | |
| — | |
| 3,000,000 | |
Non-GAAP dilutive weighted average shares outstanding | |
| 30,418,252 | |
| 33,934,411 | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | December 31, | | December 31, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | | ||||
Non-GAAP net income available to Virtusa common stockholders | | $ | 25,147 | | $ | 19,588 | | $ | 54,974 | | $ | 52,460 | |
Add: Dividends and accretion on Series A Convertible Preferred Stock | | | 1,087 | | | 1,087 | | | 3,262 | | | 3,262 | |
Non-GAAP net income available to Virtusa common stockholders and assumed conversion | | $ | 26,234 | | $ | 20,675 | | $ | 58,236 | | $ | 55,722 | |
GAAP dilutive weighted average shares outstanding | |
| 33,458,231 | |
| 33,661,728 | |
| 30,700,269 | |
| 30,598,114 | |
Add: Incremental dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units | |
| — | |
| — | |
| — | |
| — | |
Add: Incremental effect of Series A Convertible Preferred Stock as converted | |
| — | |
| — | |
| 3,000,000 | |
| 3,000,000 | |
Non-GAAP dilutive weighted average shares outstanding | |
| 33,458,231 | |
| 33,661,728 | |
| 33,700,269 | |
| 33,598,114 | |
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(g) | To the extent the Series A Convertible Preferred Stock is dilutive using the if-converted method, the Series A Convertible Preferred Stock is included in the weighted average shares outstanding to determine non-GAAP diluted earnings per share. |
(h) |
Liquidity and capital resources
We have financed our operations primarily from sales of shares of common stock, cash from operations, debt financing and from sales of shares of Series A Convertible Preferred Stock. Our ability to expand and grow our business to execute our strategic objectives will depend on many factors, including our willingness to make opportunistic acquisitions, strategic investments and partnerships. To the extent that existing cash from operations is insufficient for fund these activities, we may raise additional funds through debt or equity financing. We cannot be certain that additional financing, if required, will be available on favorable terms or at all. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions, strategic investments and other liquidity requirements through at least the next 12 months.
We do not believe the deemed repatriation tax on accumulated foreign earnings related to the Tax Act will have a significant impact on our cash flows in any individual fiscal year.
In response to the COVID-19 outbreak, which had and is having a negative business impact on our operations, in March 2020, we drew down approximately $84.0 million dollars from our revolving credit facility to supplement our liquidity and working capital in light of the impact of the COVID-19 pandemic on our clients and our results of operations. For additional liquidity, on May 27, 2020, we entered intoAmendment No. 3 to Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. (the “ Administrative Agent” ) and the lenders party thereto (the “ Third Credit
38
Agreement Amendment” ), which amends the Company’s Amended and Restated Credit Agreement, dated as of February 6, 2018, with such parties (as amended, “Credit Agreement” ) to, among other things, (i) provide for $62.5 million in incremental 364-day delayed draw term loans (the “New Delayed Draw Term Loans” ), which can be drawn down up to three times on or before September 27, 2020 and (ii) extend out the debt to EBITDA ratio covenant step down by two quarters such that the leverage covenant remains at 3.25:1.00 through December 31, 2020. The Company can use the proceeds of the New Delayed Draw Term Loans to fund general working capital and refinance existing indebtedness under the credit facility. On May 27, 2020, the Company prepaid $55.0 million on its existing revolving facility as a condition to closing the Third Credit Agreement Amendment. The Third Credit Agreement Amendment contains customary terms for amendments of this type, such as representations, warranties and covenants, including pro forma compliance with the Credit Agreement debt to EBITDA covenant as a condition to borrowing. Interest under the New Delayed Draw Term Loans accrues at a rate per annum of LIBOR plus 3.50%.
On October 15, 2019, we entered into Amendment No. 2 to Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. (the “Administrative Agent”) and the lenders party thereto (the “Credit“Second Credit Agreement Amendment”), which amends the Company’s Amended and Restated Credit Agreement dated as of February 6, 2018, with such parties (the “Credit Agreement”) to, among other things, increase the revolving commitments available to us under the Credit Agreement from $200.0 million to $275.0 million, reduce the interest rate margins applicable to term loans and revolving loans outstanding under the Credit Agreement from time to time and reduce the commitment fee payable by us to the lenders in respect of unused revolving commitments under the Credit Agreement. We executed the Second Credit Agreement Amendment to provide additional lending capacity which we could useused to fund the completion of the Polaris delisting transaction, as well as to provide excess lending capacity in the event of future opportunistic, strategic, investment opportunities. The Second Credit Agreement Amendment contains customary terms for amendments of this type, including representations, warranties and covenants. Interest under this newthe credit facility accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on the Company’s ratio of debt to EBITDA. During the fiscal year ended March 31, 2020, the Company drew down $145.0 million from the credit facility, inclusive of $84.0 million drawn in the three months ended March 31, 2020 as a proactive measure in light of the uncertainty resulting from the COVID-19 pandemic. Earlier draws in the fiscal year March 31, 2020 were used to fund the eTouch 18-month anniversary payment of $17.5 million and to fund opportunistic, strategic, investment opportunities.
For the fiscal year ending March 31, 2020, the Company is2021, we are required to make principal payments of $2.9$4.3 million per quarter. The term of the Credit Agreement is five years ending February 6, 2023. DuringAt June 30, 2020, the nine months ended December 31, 2019, the Company drew down $36.0 million from the credit facility to fund the eTouch 18-month anniversary payment of $17.5 million and to fund opportunistic, strategic, investment opportunities. As of December 31, 2019, thetotal outstanding amount under the Credit Agreement was $393.9$440.6 million. At December 31, 2019,June 30, 2020, the weighted average interest rate on the term loan and revolving line of credit was 3.99%3.75%.
The credit facility is secured by substantially all of the Company’s assets, including all intellectual property and all securities in domestic subsidiaries (other than certain domestic subsidiaries where the material assets of such subsidiaries are equity in foreign subsidiaries), subject to customary exceptions and exclusions from the collateral. All obligations under the Credit Agreement are unconditionally guaranteed by substantially all of the Company’s material direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of the guarantors, with certain exclusions.
At June 30, 2020, we were in compliance with all covenants set forth in our Credit Agreement. Based upon our current plans, we expect our operating cash flows, together with our cash and short-term investment balances, to be sufficient to meet our operating requirements and service our debt for the foreseeable future. However, given the dynamic nature of the COVID-19 pandemic, there can be no assurances that its future impact will not have a material adverse effect on our ongoing business, results of operations, liquidity needs, debt covenant compliance or overall financial performance.
At December 31, 2019,June 30, 2020, we had approximately $289.3 million of cash, cash equivalents, short term investments and long term investments, of which we hold approximately $191.2 million of cash, cash equivalents, short term investments and long-term investments in non-U.S. locations, particularly in India, Sri Lanka and the Company wasUnited Kingdom. Cash in compliance with its debt covenants and has provided a quarterly certification to our lenders to that effect. We believe that we currently meet all conditions set forththese non-U.S. locations may not otherwise be available for potential investments or operations in the Credit AgreementUnited States or certain other geographies where needed, as we have stated that this cash is indefinitely reinvested in these non-U.S. locations. If our intent were to borrow thereunderchange and we are not awareelected to repatriate this cash back to the United States, or this cash was deemed no longer permanently invested, this cash could be subject to additional taxes and the change in such intent could have an adverse effect on our cash balances as well as our overall statement of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the existing revolving credit facility at December 31, 2019 and through the date of this filing.
income. Notwithstanding these limitations, in April
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On August 5, 2019, our board of directors authorized a share repurchase program of up2020, we were able to $30repatriate $25.0 million of cash from our common stock over 12 monthsIndia entity to our U.S. entity, without tax implication, to support our U.S. legal entity’s liquidity needs. Due to various methods by which cash could be repatriated to the United States in the future, the amount of taxes attributable to the cash is dependent on circumstances existing if and when remittance occurs. In addition, some countries could have restrictions on the movement and exchange of foreign currencies which could further limit our ability to use such funds for global operations or capital or other strategic investments. Due to the various methods by which such earnings could be repatriated in the future, it is not practicable to determine the amount of applicable taxes that would result from the approval date, subjectsuch repatriation.
We believe that our sources of funding will be sufficient to certain pricesatisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions, strategic investments and other trading restrictions as established byliquidity requirements through at least the Company. next 12 months.
To the extent that existing cash from operations is insufficient to fund our working capital needs and other cash obligations, we may raise additional funds through debt or equity financing. We cannot give any assurance that additional financing, if required, will be available on favorable terms or at all.
We do not believe the deemed repatriation tax on accumulated foreign earnings related to the Tax Act will have a significant impact on our cash flows in any individual fiscal year.
During the nine monthsfiscal year ended DecemberMarch 31, 2019,2020, we repurchased 505,565 shares of the Company’s common stock at a weighted average price of $36.93 per sharecompleted multiple tuck-in asset and business acquisitions for an aggregate purchase price consideration of $18.7 million.
To strengthen our digital engineering capabilities and establish a solid base in Silicon Valley, on March 12, 2018, we acquired all of the outstanding shares of eTouch Systems Corp (“eTouch US”), and its Indian subsidiary, eTouch Systems (India) Pvt. Ltd (“eTouch India,” together$49.6 million, with eTouch US, “eTouch”) for approximately $140.0 million in cash, subject to certain adjustments. As part of the acquisition, we set aside up to an additional $15.0earn-out consideration of $38.7 million, for retention bonuses towhich, if earned, would be paid to eTouch management and key employees, in equal installments onpayable over the first and second anniversary of the transaction. We agreed to pay the purchase price in three tranches, with $80.0 million paid at closing, $42.5 million on the 12-month anniversary of the close of the transaction, and $17.5 million on the 18-month anniversary of the close of the transaction, subject in each case to certain adjustments.next two fiscal years. During the three months ended March 31, 2019,June 30, 2020, we paid the 12-month anniversary purchase price payment of $42.5$6.3 million and the retention bonus amount of $7.0 million to the eTouch management and key employees. During the three months ended September 30, 2019, we paid the 18-month anniversary purchase price payment of $17.5 million.
On March 3, 2016, our Indian subsidiary, Virtusa Consulting Services Private Limited (“Virtusa India”) acquired approximately 51.7% of the fully diluted shares of Polaris Consulting & Services Limited (“Polaris”) for approximately $168.3$1.2 million in cash (the “Polaris Transaction”) pursuantdeferred consideration and earn-out consideration respectively related to a share purchase agreement dated asthese tuck-in acquisitions. As of November 5, 2015, by and among Virtusa India, Polaris andJune 30, 2020, the promoter sellers named therein. Through a seriesbalance of transactions and in compliance withcontingent consideration is $22.1 million, of which $18.0 million is expected to be paid within the applicable Indian rules on takeovers and SEBI Delisting Regulations, Virtusa increased its ownership interest in Polaris from 51.7% to 93.0% by Februarynext 12 2018 when Virtusa consummated its Polaris delisting offer with respect to the public shareholders of Polaris. The delisting offer resulted in an accepted exit price of INR 480 per share (“Exit Price”), for an aggregate consideration of approximately $145.0 million, exclusive of transaction and closing costs. On July 11, 2018, the stock exchanges on which Polaris common shares are listed notified Polaris that trading in equity shares of Polaris would be discontinued and delisted effective on August 1, 2018. For a period of one year following the date of delisting, Virtusa India has, in compliance with SEBI Delisting Regulations, permitted the public shareholders of Polaris to tender their shares for sale to Virtusa India at the Exit Price. In connection with the Polaris delisting offer, during the six months ended September 30, 2019 Virtusa India purchased 1,263,117 shares, or 1.2%, of Polaris common stock from Polaris public shareholders for an aggregate purchase price of approximately $8.7 million.months.
Further to the Polaris delisting, in order to acquire the remaining noncontrolling interest, the Company filed an application for approval and authorization to purchase the remaining outstanding Polaris shares held by the Polaris shareholders (“the Polaris Repurchase”) as well as final approval of the merger of Polaris with and into Virtusa India (“Merger”). On December 9, 2019, the Company received a Common Order (“Court Order”) to move forward with the Polaris Repurchase and certain conditional approvals for the Merger.
In connection with the Polaris Repurchase under the Court Order, on December 20, 2019, upon the Company filing the required documents, all the outstanding equity shares of Polaris held by public shareholders were deemed cancelled, but converted to the right to receive payment for these shares. Within 30 days from December 20, 2019, the Company is required to pay consideration of INR 480 per share for each cancelled share held by these former Polaris shareholders. At December 20, 2019, the total amount payable to the remaining Polaris public shareholders was $13.6 million. During the three months ended December 31, 2019, the Company paid $12.5 million to the public shareholders.
In connection with the Merger, the conditional approvals required were approved by the respective authorities on January 2, 2020 and the Merger is effective as of that date.
In connection with, and as part of the Polaris acquisition, on November 5, 2015, we entered into an amendment with Citigroup Technology, Inc. (“Citi”) and Polaris, which became effective upon the closing of the Polaris Transaction, pursuant to which Virtusa was added as a party to the master services agreement with Citi and Citi agreed to appoint the Company and Polaris as a preferred vendor.
44
On December 31, 2019, in connection with a request for proposal (“RFP”) and vendor consolidation process conducted by Citi,Citigroup Technology, Inc. (“Citi”), and as part of the Company being one of the vendors selected to continue preferred vendor status at Citi and have the opportunity to compete for additional vendor consolidation work, the Company and Citi entered into Amendment No. 5 to the Master Professional Services Agreement, by and between the Company and Citi, dated as of July 1, 2015, as amended (the “Amendment”). Pursuant to the Amendment, (i) Citi agreed to maintain the Company as a preferred vendor under the Resource Management Organization (“RMO”) for the provision of IT services to Citi on an enterprise wide basis, (ii) the Company agreed to provide certain savings to Citi for the period from April 1, 2020 to December 31, 2020 (“Savings Period”), which savings can be achieved through productivity and efficiency measures and associated reduced spend; provided that if these productivity and efficiency measures do not achieve the projected savings amounts, the Company is required to provide certain discounts to Citi for the Savings Period to achieve the savings commitments; and (iii) to the extent that Citi awards the Company additional or new work in addition to the services covered by the RFP, the Company agreed to provide Citi with a certain percentage of savings (whether achieved through productivity measures, efficiencies, discounts or otherwise) as a condition to performing such services.
On May 3, 2017, we entered into an investment agreement with The Orogen Group (“Orogen”) pursuant to which Orogen purchased 108,000 shares of the Company’s newly issued Series A Convertible Preferred Stock, initially convertible into 3,000,000 shares of common stock, for an aggregate purchase price of $108$108.0 million with an initial conversion price of $36.00 (the “Orogen Preferred Stock Financing”). In connection with the investment, Vikram S. Pandit, the former CEO of Citigroup, was appointed to Virtusa’s Board of Directors. Orogen is a newan operating company that was created by Vikram Pandit and Atairos Group, Inc., an independent private company focused on supporting growth-oriented businesses, to leverage the opportunities created by the evolution of the financial services landscape and to identify and invest in financial services companies and related businesses with proven business models.
Under the terms of the investment, the Series A Convertible Preferred Stock has a 3.875% dividend per annum, payable quarterly in additional shares of common stock and/or cash at our option. If any shares of Series A Convertible Preferred Stock have not been converted into common stock prior to May 3, 2024, wethe Company will be required to repurchase such shares at a repurchase price equal to the liquidation preference of the repurchased shares plus the amount of accumulated and unpaid dividends thereon. If we fail to effect such repurchase, the dividend rate on the Series A
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Convertible Preferred Stock will increase by 1% per annum and an additional 1% per annum on each anniversary of May 3, 2024 during the period in which such failure to effect the repurchase is continuing, except that the dividend rate will not increase to more than 6.875% per annum. During the ninethree months ended December 31, 2019,June 30, 2020, the Company paid $3.1$1.0 million as a cash dividend on its Series A Convertible Preferred Stock.
The Company also uses interest rate swaps to mitigate the Company’s interest rate risk on the Company’s variable rate debt. The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the Credit Agreement (See Note 13 to the consolidated financial statements), by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. The Company purchased interest rate swaps in July 2016 with an effective date of July 2017 and November 2018. The July 2016 interest rate swaps are at a blended weighted average of 1.025% and the Company will receive 1-month LIBOR on the same notional amounts. The November 2018 interest rate swaps are at a fixed rate of 2.85% and are designed to maintain a 50% coverage of our LIBOR debt, therefore the notional amount changes over the life of the swap to retain the 50% coverage target.
The counterparties to the interest rate swap agreementsInterest Rate Swap Agreements could demand an early termination of the June 2016 and November 2018 swap agreementsSwap Agreements if we are in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and we are unable to cure the default. An event of default under the Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio commencing on December 31, 2018,2017, , of not more than 3.50 to 1.00 for all periods thereafter ending prior to December 31, 2019, of not more than 3.25 to 1.00 commencing December 31, 2019 and for periods ending prior to September 30, 2020,thereafter through December 2021, and 3.00 to 1.00 thereafter and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As of DecemberMarch 31, 2019,2020, we were in compliance with these covenants. The net unrealized loss associated with interest rate swapInterest Rate Swap Agreement was $5.5$11.2 million as of December 31, 2019,June 30, 2020, which represents the estimated amount that we would pay to the counterparties in the event of an early termination.
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At December 31, 2019, we had approximately $237.5 million of cash, cash equivalents, short term investments and long term investments, of which we hold approximately $198.0 million of cash, cash equivalents, short term investments and long-term investments in non-U.S. locations, particularly in India, Sri Lanka and the United Kingdom. Cash in these non-U.S. locations may not otherwise be available for potential investments or operations in the United States or certain other geographies where needed, as we have stated that this cash is indefinitely reinvested in these non-U.S. locations. We do not currently plan to repatriate this cash to the United States. However, if our intent were to change and we elected to repatriate this cash back to the United States, or this cash was deemed no longer permanently invested, this cash would be subject to additional taxes and the change in such intent could have an adverse effect on our cash balances as well as our overall statement of income. Due to various methods by which cash could be repatriated to the United States in the future, the amount of taxes attributable to the cash is dependent on circumstances existing if and when remittance occurs. In addition, some countries could have tight restrictions on the movement and exchange of foreign currencies which could further limit our ability to use such funds for global operations or capital or other strategic investments. Due to the various methods by which such earnings could be repatriated in the future, it is not practicable to determine the amount of applicable taxes that would result from such repatriation.
From time to time, the Company enters into arrangements to deliver IT services that include upfront payments to our clients. As of December 31, 2019,June 30, 2020, the total unamortized upfront payments related to these services were $34.4$29.3 million and are expected to be amortized as a reduction to revenue over a benefit period of 54 years.
Beginning in fiscal 2009, our U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse, certain of its Europe-based accounts receivable balances from one client to the financial institution. During the ninethree months ended December 31, 2019,June 30, 2020, we sold $21.3$13.2 million of receivables under the terms of the financing agreement. Fees paid pursuant to this agreement were not material during the ninethree months ended December 31, 2019.June 30, 2020. No amounts were due under the financing agreement at December 31, 2019,June 30, 2020, but we may elect to use this program again in future periods. However, we cannot provide any assurances that this or any other financing facilities will be available or utilized in the future.
During the three months ended March 31, 2019, we have recorded an impairment loss of $4.0 million relating to the reclassification of land acquired in the Polaris acquisition to held for sale. The decision to sell this land was made during the three months ended March 31, 2019 as part of our annual planning process where we evaluated strategic alternatives to maximize return on our cash and assets. As part of the assessment process, we considered projected headcount growth in this region, as well as ongoing compliance costs associated with holding the land, and concluded that our cash, including cash from the sale of this asset, would generate a higher return elsewhere. The reclassification to held for sale triggered a reduction in value to $8.7 million, which represents the lower of net book value and market value at December 31, 2019. We are actively marketing this land for sale and expect to complete a transaction over the next 12 months.
On February 28, 2019, the Supreme Court of India issued a ruling interpreting certain statutory defined contribution obligations of employees and employers, which altered historical understandings of such obligations, extending them to cover additional portions of employee income. As a result, contributions by our employees and the Company will increase in future periods. There is uncertainty as to whether the Indian government will apply the Supreme Court's ruling on a retroactive basis and if so, how this liability should be calculated as it is impacted by multiple variables, including the period of assessment, the application with respect to certain current and former employees and whether interest and penalties may be assessed. As such, the ultimate amount of our obligation is difficult to quantify. If the Indian Government were to apply the Supreme Court ruling retroactively, without assessing interest and penalties, the impact would be a charge of approximately $7.5 million to our income from operations and cash flows.
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Cash flows
The following table summarizes our cash flows for the periods presented:
| | | | | | | | | | | | | | |
| | Nine Months Ended | | Three Months Ended | | |||||||||
| | December 31, | | June 30, | | |||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
| | (In thousands) | | (In thousands) | ||||||||||
Net cash provided by operating activities | | $ | 74,454 | | $ | 69,822 | | | $ | 56,032 | | $ | 2,236 | |
Net cash used in investing activities |
| | (24,927) |
| | (22,047) |
| |||||||
Net cash (used in) provided by investing activities |
| | (1,939) |
| | 6,188 |
| |||||||
Net cash used in financing activities |
| | (20,275) |
| | (18,307) |
|
| | (64,203) |
| | (9,253) |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| | (131) |
| | (13,530) |
|
| | 4,206 |
| | 1,145 |
|
Net increase in cash and cash equivalents and restricted cash |
| | 29,121 |
| | 15,938 |
| |||||||
Net (decrease) increase in cash and cash equivalents and restricted cash |
| | (5,904) |
| | 316 |
| |||||||
Cash, cash equivalents and restricted cash, beginning of year |
| | 190,113 |
| | 195,236 |
|
| | 291,601 |
| | 190,113 |
|
Cash, cash equivalents and restricted cash, end of period | | $ | 219,234 | | $ | 211,174 | | | $ | 285,697 | | $ | 190,429 | |
Operating activities
Net cash provided by operating activities increased in the ninethree months ended December 31, 2019June 30, 2020 compared to the nine monthsthree ended December 31, 2018,June 30, 2019, primarily due to increasea decrease in the net income adjusted for non-cash expenses and an increaseaccounts receivable as a result of a decrease in the working capitalour days sales outstanding during the ninethree months ended December 31, 2019.June 30, 2020.
Investing activities
Net cash used in investing activities increased induring the ninethree months ended December 31, 2019June 30, 2020 compared to ninenet cash provided by investing activities during the three months ended December 31, 2018. The increase in net cash used in investing activities wasJune 30, 2019 is primarily due to payments for asset acquisitions and a payment for deferred consideration related to the acquisitiondecrease in net proceeds from sale or maturity of eTouch made during the nine months ended December 31, 2019,short-term investments, partially offset by the decrease in the purchase of property and equipment and a net decrease in the purchase of investments.equipment.
Financing activities
Net cash used in financing activities increased in the ninethree ended June 30, 2020 compared to the three months ended December 31, 2019 compared to nine months ended December 31, 2018.June 30, 2019. The increase in net cash used in financing activities duringin the ninethree months ended December 31, 2019June 30, 2020 was primarily due to repurchasean increase in payment of common stockdebt and payment of contingent consideration related to acquisitions partially offset by to a decrease in payment of redeemable noncontrolling interest, a decrease in payment of withholding taxes related to restricted stock and an increase in proceeds from debt.interest.
Commitments and Contingencies
See Note 1716 to our consolidated financial statements for additional information.
Off-balance sheet arrangements
We do not have investments in special purpose entities or undisclosed borrowings or debt.
We have entered into foreign currency derivative contracts with the objective of limiting our exposure to changes in the Indian rupee, the GBP,U.K. pound sterling, the euro, the Canadian dollar, the Australian dollar and the Swedish Krona as described below and in “Quantitative and Qualitative Disclosures about Market Risk.”
We maintain a foreign currency cash flow hedging program designed to further mitigate the risks of volatility in the Indian rupee against the U.S. dollar and GBPU.K. pound sterling as described below in “Quantitative and Qualitative Disclosures about Market Risk.” From time to time, we may also purchase multiple foreign currency forward contracts designed to hedge
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fluctuation in foreign currencies, such as the GBP,U.K. pound sterling, euro, the Canadian dollar, the Australian dollar and Swedish Krona against the U.S. dollar to minimize the impact of foreign currency fluctuations on foreign currency denominated revenue and expenses. Other than these foreign currency derivative contracts, we have not entered
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into off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of or requirements for capital resources.
Recent accounting pronouncements
See Note 2 to our consolidated financial statements for additional information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks, and the ways we manage them, are summarized in Part II, Item 7A of the Annual Report. There have been no material changes in the ninethree months ended December 31, 2019June 30, 2020 to such risks or to our management of such risks except for the additional factors noted below.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk in the ordinary course of business. We have historically entered into, and in the future we may enter into, foreign currency derivative contracts to minimize the impact of foreign currency fluctuations on both foreign currency denominated assets and forecasted revenue and expenses. The purpose of this foreign exchange policy is to protect us from the risk that the recognition of and eventual cash flows related to Indian rupee denominated expenses might be affected by changes in exchange rates. Some of these contracts meet the criteria for hedge accounting as cash flow hedges (See Note 67 of the notes to our consolidated financial statements included herein for a description of recent hedging activities).
We evaluate our foreign exchange policy on an ongoing basis to assess our ability to address foreign exchange exposures on our balance sheet, statement of income and operating cash flows from all foreign currencies, including most significantly the GBP and the Indian rupee.
We have an 18 month rolling hedge program comprised of a series of foreign exchange forward contracts that are designated as cash flow hedges. This program is designed to mitigate the impact of volatility in the U.S. dollar equivalentand the GBP equivalents of our Indian rupee denominated expenses. While these hedges are achieving the designed objective, upon consolidation they may cause volatility in revenue. The U.S. dollar equivalent notional value of all outstanding foreign currency derivative contracts at December 31, 2019June 30, 2020 was $133.0$112.9 million. There is no assurance that the hedging program or hedging contracts will be effective. As these foreign currency hedging programs are designed to reduce volatility in the Indian rupee, they not only reduce the negative impact of a stronger Indian rupee but also reduce the positive impact of a weaker Indian rupee on our Indian rupee expenses.
The GBP, the euro, the Canadian dollar (“CAD”) and the Australian dollar (“AUD”) exchange fluctuations can have an unpredictable impact on our GBP, euro, CAD and the euroAUD revenues generated and costs incurred. In response to this volatility, we have an economic hedge program under which we have entered into hedging transactions designed to hedge our forecasted revenue and expenses denominated in the GBP, the euro, the Canadian dollar and the Australian dollar. These derivative contracts have maximum duration of 92 days and do not meet the criteria for hedge accounting. Such hedges may not be effective in mitigating this currency volatility. These hedges are designed to reduce the negative impact of a weaker GBP, euro, Canadian dollarCAD and Australian dollar,AUD, however they also reduce the positive impact of a stronger GBP, euro, CAD or the euroAUD on the respective revenues.
Interest Rate Risk
Interest under our credit facility accrues at a rate per annumthe higher of LIBOR or 1.00%, plus 2.75%, subject to step-downsstep downs based on the Company’sour ratio of debt to EBITDA. In the event that LIBOR is discontinued as expected in 2021, we expect the interest rates for our debt following such event will be based on either alternate base rates or an agreed upon replacement reference rates. While we do not expect a LIBOR discontinuation would affect our ability to borrow or maintain already
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outstanding borrowings, it could result in higher interest rates. We entered into interest rate swap agreements to minimize interest rate exposure. The Credit Agreement for our credit facility includes maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years, ending February 6, 2023. At December 31, 2019,June 30, 2020, the
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weighted average interest rate on the term loan and line of credit was 3.99%3.75%. At December 31, 2019,June 30, 2020, the outstanding amount under the Credit Agreement was $393.9$440.6 million.
At December 31, 2019,June 30, 2020, we had $237.5$289.3 million in cash and cash equivalents, short-term investments and long-term investments, the interest income from which is affected by changes in interest rates. Our invested securities primarily consist of money market mutual funds and preference shares.time deposits. Our investments are classified as either equity or available-for-sale debt securities, time deposits and equity securities. These investments are recorded at fair value. Our investments are sensitive to changes in interest rates. Interest rate changes would result in a change in the net fair value of these financial instruments due to the difference between the market interest rate at the period end and the market interest rate at the date of purchase of the financial instrument.
Concentration of Credit Risk
Financial instruments which potentially expose us to concentrations of credit risk primarily consist of cash and cash equivalents, short-term investments and long-term investments, accounts receivable, derivative contracts, other financial assets and unbilled accounts receivable. We place our operating cash, investments and derivatives in highly-rated financial institutions. We adhere to a formal investment policy with the primary objective of preservation of principal, which contains credit rating minimums and diversification requirements. We believe that our credit policies reflect normal industry terms and business risk. We do not anticipate non-performance by the counterparties as we invest with highly-rated financial institutions and, accordingly, do not require collateral. Credit losses and write-offs of accounts receivable balances have historically not been material to our consolidated financial statements and have not exceeded our expectations.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
At December 31, 2019,June 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level in (i) enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period and (ii) ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may becomeWe are involved in various claims and legal proceedingsactions arising in the ordinary course of business. In the opinion of our business. Except as indicated below, we aremanagement, the outcome of such claims and legal actions, if decided adversely, is not presently a partycurrently expected to any legal proceedings that if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business,operating results, of operations,cash flows or consolidated financial condition or cash flows.position, except as disclosed below;
Recently, one
One of our larger clients during our fiscal year ending March 31, 2020 made a written demand for damages related to a project in which we were performing services. The client alleges breaches of certain representations and warranties regarding our performance and is seeking indemnification for damages from those alleged breaches. No litigation has been filed. We believe that we have defenses against the claims described in the demand, and intend to zealously defend against those claims. However, we cannot provide any assurance that we will prevail in the dispute or even partially prevail. Further, although we have engaged in settlement discussions, if we are unsuccessful in any settlement discussions, we also cannot provide any assurance that the client will not use set off rights in our contract, even if we dispute the claims or amount of damages alleged. In the event we do not fully prevail in this dispute, or we agree on a settlement for such claims, we may have to pay damages in amounts for which we may not have reserved or which may or may not be covered by our insurance policies; further, even if the damages are covered, depending on the outcome, our insurance may not cover or be adequate to pay the entire claim. In addition, we cannot guarantee that we will not lose future business with such client as a result of such dispute.
From time to time, we are subject to audit from immigration authorities to ensure we are in compliance with applicable immigration law. In August 2019, one of our UK subsidiaries, Virtusa UK Limited, was subject to audit and was notified that the audit was unsatisfactory and, as such, UK Visas and Immigration took the decision to suspend the sponsor license which allows our UK subsidiary to sponsor the Tier 2 visas of non- European Economic Area skilled workers visas and work permits for workers located in non-UK locations such as India and Sri Lanka. The suspension was in effect until such time as we could adequately respond to the questions raised in the audit and requests for additional documentation. In September 2019, we successfully responded to the UK Visas and Immigration audit such that UK Visas and Immigration reinstated and restored our sponsor license with immediate effect, allowing Virtusa UK Limited again to sponsor visas and work permits. Although our sponsorship license was restored, we can give no assurance that our UK subsidiaries will not be subject to future audits or that such future audits will not result in future sponsorship license suspensions. If our sponsor license was suspended, our key project personnel may not be able to obtain necessary visas or work permits which could delay or prevent our fulfillment of certain client projects in the United Kingdom, which could hamper our growth and cause our revenue to decline. Any delays in staffing or inability to obtain proper resources for a project can result in project postponement, delays or cancellation, which could result in lost revenue and decreased profitability and have a material adverse effect on our business, revenue, profitability and utilization rates.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report, which could materially affect our business, financial condition or future results.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Under the terms of our 2007 Stock Option and Incentive Plan (“2007 Plan”) and 2015 Stock Option and Incentive Plan (“2015 Plan”), we have issued shares of restricted stock to our employees. On the date that these restricted shares vest, we automatically withhold, via a net exercise provision pursuant to our applicable restricted stock agreements and the 2007 Plan and 2015 Plan, as the case may be, the number of vested shares (based on the closing price of our common stock on such vesting date) equal to tax liability owed by such grantee. The shares withheld from the grantees under the 2007 Plan or the 2015 Plan, as the case may be, to settle their tax liability are reallocated to the number of shares available for issuance under the 2015 Plan. For the three months period ended December 31, 2019,June 30, 2020, we withheld an aggregate of 2,80363,254 shares of restricted stock at a weighted average price of $44.70$30.28 per share.
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On August 5, 2019, our board of directors authorized a share repurchase program of up to $30 million of shares of our common stock on or prior to August 5, 2020. There were no stock repurchase under this program for the three months ended December 31, 2019.
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Item 6. Exhibits.
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:
| | | |
---|---|---|---|
Exhibit No. |
| | Description |
| | | |
3.1 | | | |
| | | |
10.1*+ | | | |
| | | |
10.2* | | | |
| | | |
10.3* | | | Amendment No. 3 to Amended and Restated Credit Agreement dated May 27, 2020, by and among Virtusa Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A. |
| | | |
31.1* | | | |
| | | |
31.2* | | | |
| | | |
32.1** | | | |
| | | |
32.2** | | | |
| | | |
101. INS* | | | XBRL Instance Document – The instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 * | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
+ Certain confidential portions (indicated by brackets and asterisks) have been omitted from this exhibit.Indicates a management contract or compensation plan, contract or arrangement.
** Furnished herewith. This certification shall not be deemed filed for any purpose, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| Virtusa Corporation | |
| | |
Date: | By: | /s/ Kris Canekeratne |
| | |
| | Kris Canekeratne, |
| | Chairman and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: | By: | /s/ Ranjan Kalia |
| | |
| | Ranjan Kalia, |
| | Executive Vice President and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
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