VIRTUSA CORPORATION The following discussion and analysis of our financial condition and results of our operations should be read together with our consolidated financial statements and related notes to 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 endedMarch 31, 2020 (the "Annual Report"), which has been filed with theSecurities and Exchange Commission , orSEC . 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 tothe United States , the effect of new accounting pronouncements, management's plans and objectives, the proposed Merger and expectations regarding the satisfaction of conditions under the Merger Agreement and the timing and completion of the Merger, 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 several 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 overviewVirtusa Corporation (the "Company", "Virtusa", "we", "us" or "our") is a global provider of digital business strategy, digital engineering and information technology ("IT") services and solutions that help clients change, disrupt, and unlock new value through innovation engineering. We support Global 2000 clients across key industries including banking, financial services, insurance, healthcare, communications, technology, and media and entertainment. We help improve 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.Virtusa helps clients grow their business with innovative services that 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 bringing together digital infrastructure, analytics and intelligence and customer experience by engineering the digital enterprise of tomorrow on the cloud. We deliver cost effective solutions through a global delivery model, applying advanced methods such as Agile, an 30 Table of Contents
industry standard technique designed to accelerate application development. We use ourDigital Transformation Studio ("DTS") engineering tools to drive software development lifecycle automation to improve quality, enabling speed and increasing productivity. Our proprietary DTS was built byVirtusa's engineering teams that have decades of industry knowledge and experience. These teams are certified and leverageVirtusa's industry leading tools and assets, providing increased speed and transparency. Headquartered inMassachusetts , we have offices throughout theAmericas ,Europe ,Middle East andAsia , with significant global delivery centers inthe United States ,India ,Sri Lanka ,Hungary ,Singapore andMalaysia . We also have many employees who work with our clients either onsite or virtually, which offers flexibility for both clients and employees. AtDecember 31, 2020 , we had 23,837 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 built on and strengthened 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 have sharpened 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, we continue to make headway against our long-term goals of a more diversified portfolio of geographies, industries and accounts. Our efforts to increase our geographic diversification, including the realignment of our regional supervision and key local leadership hires made inEurope and theMiddle East , continued to drive closer relationships with our clients inEurope ,Middle East andAsia . With respect to industry group diversification, our third quarter fiscal 2021 results reflect continued steady progress. OurCommunications and Technology (C&T) industry group revenue decreased 6.9% year-over-year in the third quarter of fiscal 2021, and C&T as a percentage of total revenue decreased 200 basis points from 24% to 22% over the same time period in fiscal 2020. Our Media, Information and Other revenue increased 13.5% year-over-year in the third 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 third quarter of fiscal 2021, Healthcare revenue was 15.0% of our total revenue. Lastly, our Banking, Financial Services and Insurance ("BFSI") revenue mix continued to grow in the third quarter of fiscal 2021 to 55.0% of our total revenue from 54.0% in the third quarter of fiscal 2020. Given the significant opportunity we had and continue to have expanding our presence in high-growth sectors such as High-Tech and Healthcare, in fiscal year 2021 we have increased 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 client revenue concentration by accelerating growth of high potential accounts and adding targeted new clients. To do so, in fiscal year 2021, we have directed 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 toVirtusa's third pillar, margin expansion, our fiscal year 2021 plan included 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 use of sub-contractors, increase utilization, and reduce general and administrative expenses as a percentage of revenue.
In
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the third quarter of fiscal year 2021, our gross margin and non-GAAP operating
margin expanded by 644 basis points and 637 basis points, respectively, over the
second quarter of fiscal 2021 driven in part by sequential revenue growth,
higher utilization and execution of our cost containment initiatives such as
reduced use of subcontractors.
Recent developments
Proposed Merger with
OnSeptember 9, 2020 , we entered into an Agreement and Plan of Merger (the "Merger Agreement"), withAustin HoldCo Inc. , an entity wholly-owned by funds affiliated with Baring Private Equity Asia ("Parent"), andAustin BidCo Inc. , a wholly-owned subsidiary of Parent ("Sub"), with respect to the acquisition of the Company by Parent for$51.35 in cash for each share ofVirtusa common stock ("Baring Transaction"). Pursuant to the Merger Agreement, Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Consummation of the Merger is subject to various conditions, including, among others, customary conditions relating to the approval of the Merger Agreement by the requisite vote of the Company's stockholders, the receipt of certain foreign regulatory approvals and the approval or other clearance of theCommittee on Foreign Investments inthe United States ("CFIUS"). The applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), with respect to the transactions contemplated by the Merger Agreement expired onOctober 23, 2020 without any review. Consummation of the Merger is not subject to any financing condition and is expected to occur in the first half of calendar year 2021. OnDecember 21, 2020 , the Company received written notice from theCommittee on Foreign Investment inthe United States ("CFIUS") that it had concluded its review under Section 721 of the Defense Production Act of 1950, as amended, of the Merger. CFIUS determined that there are no unresolved national security concerns with respect to the Merger. Receipt of the CFIUS clearance satisfies a certain condition to the closing of the Merger. OnNovember 20, 2020 , via a special meeting of stockholders, the stockholders of the Company approved and adopted the Merger Agreement. OnJanuary 11, 2021 , theCompetition Commission of India ("CCI") approved the Merger. The closing of the Merger remains subject to the satisfaction or waiver of the remaining conditions to the Merger set forth in the Merger Agreement.
We expect to incur significant costs, expenses and fees for professional
services and other transaction costs in connection with the Merger. If the
Merger Agreement is terminated under specified circumstances, we may be required
to pay a termination fee of
For more information regarding the Merger and Merger Agreement, please see the
Form 8-K filed with the
COVID-19 and factors impacting our business and operating results
During our 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. 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
Virtusa's global billable team members are enabled to work from home. 32 Table of Contents
Conduct regular weekly meetings by
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. Human Capital AtDecember 31, 2020 , we had 23,837 employees, or team members. Our human capital development framework is aligned to our ability to hire, retain and grow which allows us to invest in the development of our team members in a focused manner, while keeping our team members culturally anchored to our core values. We are able to accomplish this by focusing our people management strategy on six key components: recruiting, performance management, training and development, employee engagement and communication, as well as compensation and retention. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives. We measure our team members performance by certain key performance areas, their self-development, their teamwork and their impact on our overall organization. Financial overview
In the three months ended
In the three months ended
In the three months endedDecember 31, 2020 , net income available toVirtusa common stockholders increased by 109.4% to$24.4 million , as compared to$11.6 million in the three months endedDecember 31, 2019 . Net income available toVirtusa common stockholders increased by 42.2% to a net income$31.8 million in the nine months endedDecember 31, 2020 , compared to a net income of$22.4 million in the nine months endedDecember 31, 2019 .
The increase in revenue for the three months ended
Increase in revenue from several banking clients, including our largest banking
? client, and revenue from several tuck-in asset and business acquisitions closed
in the fiscal year ended
? Increase in revenue from
banking clients partially offset by:
? Impact from COVID-19 pandemic, primarily due to business interruptions and
project delays, as well as elongated client decision making cycles
? Decrease in growth of revenue from several of our top ten clients, primarily in
our healthcare industry group
? Decrease in revenue from our C&T industry group
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The decrease in revenue for the nine months ended
? Impact from COVID-19 pandemic, primarily due to business interruptions and
project delays, as well as elongated client decision making cycles
? Decrease in revenue from
banking clients
? Decrease in revenue from our BFSI industry group, primarily from financial
services and a decrease in revenue from our healthcare industry group
? Decrease in growth of revenue from several of our top ten clients, primarily in
our healthcare industry group
partially offset by:
Increase in revenue from our largest banking and telecommunication clients and
? revenue from several tuck-in asset and business acquisitions closed in the
fiscal year endedMarch 31, 2020 The key drivers of the increase in our net income for the three months endedDecember 31, 2020 , as compared to the three months endedDecember 31, 2019 ,
were as follows:
? Increase in revenue, primarily related to revenue from several banking clients,
including our largest banking client
Substantial decrease in foreign currency transaction losses, primarily related
? to the revaluation of Indian rupee denominated intercompany note, primarily due
to substantial appreciation of the Indian rupee against theU.S. dollar
Decrease in costs of revenue reflecting cost reduction initiatives in response
? to weakening of demand across our clients due to the COVID-19 pandemic as well
as reduced travel partially offset by:
Substantial legal, banking and advisory professional service fees incurred in
? connection with the proxy solicitation contest initiated by
The key drivers of the increase in our net income for the nine months ended
Substantial decrease in foreign currency transaction losses, primarily related
? to the revaluation of Indian rupee denominated intercompany note, primarily due
to substantial appreciation of the Indian rupee against the
? Decrease in income tax expense, including tax benefit related to our merger of
ourIndia operations
Decrease in costs of revenue and operating expense, reflecting cost reduction
? initiatives in response to weakening of demand across our clients due to the
COVID-19 pandemic as well as reduced travel partially offset by:
? Decrease in revenue, primarily related to the COVID-19 pandemic
34
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? Periodic restoration of previously reduced compensation programs
Substantial legal, banking and advisory professional service fees incurred in
? connection with the proxy solicitation contest initiated by
? Increase in interest expense related to an increase in our outstanding debt
under our credit facility
High repeat business and client concentration are common in our industry. During the three months endedDecember 31, 2020 and 2019, 97% and 96%, respectively, of our revenue was derived from clients who had been using our services for more than one year. During the nine months endedDecember 31, 2020 and 2019, 96% and 97%, respectively, of our revenue was derived from clients who had been using our services for more than one 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 endedDecember 31, 2020 , our application outsourcing and consulting revenue represented 57% and 43%, respectively, of our total revenue as compared to 55% and 45%, respectively, for the three months endedDecember 31, 2019 . For the nine months endedDecember 31, 2020 , our application outsourcing and consulting revenue represented 56% and 44%, respectively, of our total revenue as compared to 56% and 44%, respectively, for the nine months endedDecember 31, 2019 . In the three months endedDecember 31, 2020 , ourNorth America revenue increased by 2.1%, or$5.3 million , to$256.5 million , or 74.1% of total revenue, from$251.2 million , or 75.0% of total revenue, in the three months endedDecember 31, 2019 . In the nine months endedDecember 31, 2020 , ourNorth America revenue decreased by 1.4%, or$10.1 million , to$713.9 million , or 74.0% of total revenue, from$724.0 million , or 73.7% of total revenue in the nine months endedDecember 31, 2019 . The increase inNorth America revenue for the three months endedDecember 31, 2020 was primarily due to revenue from several tuck-in asset and business acquisitions closed in the fiscal year endedMarch 31, 2020 partially offset by decrease in revenue from clients in our healthcare industry group. The decrease inNorth America revenue for the nine months endedDecember 31, 2020 was primarily due to the decrease in revenue from clients in our healthcare industry group, partially offset by revenue from several tuck-in asset and business acquisitions closed in the fiscal year endedMarch 31, 2020 . In the three months endedDecember 31, 2020 , our European revenue increased by 7.3%, or$4.0 million , to$59.2 million , or 17.1% of total revenue, from$55.2 million , or 16.5% of total revenue in the three months endedDecember 31, 2019 . In the nine months endedDecember 31, 2020 , our European revenue decreased by 6.6%, or$11.5 million , to$163.7 million , or 17.0% of total revenue, from$175.3 million , or 17.8% of total revenue in the nine months endedDecember 31, 2019 . The increase in European revenue for the three months endedDecember 31, 2020 was primarily due to an increase in revenue from one of our large banking clients. The decrease in European revenue for the nine months endedDecember 31, 2020 was primarily due to a decline in revenue from one of our large banking clients, partially offset by an increase in our largest telecommunication client. Our gross profit increased by$15.3 million to$114.0 million for the three months endedDecember 31, 2020 , as compared to$98.7 million for the three months endedDecember 31, 2019 . As a percentage of revenue, gross margin increased from 29.4% in the three months endedDecember 31, 2019 to 32.9% in the three months endedDecember 31, 2020 . During the nine months endedDecember 31, 2020 and 2019, gross margin, as a percentage of revenue, was 27.6% and 27.8%, respectively. Our gross profit decreased by$6.3 million to$266.6 million for the nine months endedDecember 31, 2020 as compared to$272.9 million in the nine months endedDecember 31, 2019 . The increase in gross profit during the three months endedDecember 31, 2020 , as compared to the three months endedDecember 31, 2019 , was primarily due to lower onsite effort, decrease in travel and related expense, as well as cost optimization programs with respect to our subcontractors implemented in the nine months endedDecember 31, 2020 , partially offset by restoration of 35 Table of Contents previously reduced compensation programs during the three months endedDecember 31, 2020 . The decrease in gross profit during the nine months endedDecember 31, 2020 , as compared to the nine months endedDecember 31, 2019 , was primarily due to the lower utilization and restoration of previously reduced compensation programs during the three months endedDecember 31, 2020 , partially offset by lower onsite effort, decrease in travel and related expense as well as cost optimization programs with respect to our subcontractors implemented in the nine months endedDecember 31, 2020 . We perform our services under both time-and-materials and fixed-price contracts. Revenue from fixed-price contracts represented 50% and 43% of total revenue, and revenue from time-and-materials contracts represented 50% and 57% of total revenue for the three months endedDecember 31, 2020 and 2019, respectively. Revenue from fixed-price contracts represented 45% and 41% of total revenue and revenue from time-and-materials contracts represented 55% and 59% for the nine months endedDecember 31, 2020 and 2019, respectively. The revenue earned from fixed-price contracts in the three and nine months endedDecember 31, 2020 primarily reflects our client preferences. We monitor our overall attrition rates and patterns to align our people management strategy with our growth objectives. AtDecember 31, 2020 , our attrition rate for the trailing 12 months, which reflects voluntary and involuntary attrition as part of our cost reduction initiatives, was approximately 19.9%. Our attrition rate atDecember 31, 2020 reflects a higher rate of attrition as compared to the corresponding prior year period. The majority of our attrition occurs inIndia andSri 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 theU.S. dollar and the GBP, as well as the euro, the Canadian dollar, the Australian dollar and the GBP against theU.S. dollar, when consolidated intoU.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 withU.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. 36 Table of Contents Results of operations
Three months ended
The following table presents an overview of our results of operations for the
three months ended
Three Months Ended
December 31,
2020 2019 $ Change % Change
(Dollars in thousands)
Revenue $ 346,100 $ 335,107 $ 10,993 3.3 %
Costs of revenue 232,142 236,427 (4,285) (1.8) %
Gross profit 113,958 98,680 15,278 15.5 %
Operating expenses 72,507 68,270 4,237 6.2 %
Income from operations 41,451 30,410 11,041 36.3 %
Other expense (4,228) (7,209) 2,981 (41.4) %Income before income tax expense 37,223 23,201
14,022 60.4 % Income tax expense 11,776 10,363 1,413 13.6 % Net income 25,447 12,838 12,609 98.2 % Less: net income attributable to noncontrolling interests, net of tax - 118 (118) (100.0) % Net income available to Virtusa stockholders 25,447 12,720 12,727 100.1 % Less: Series A Convertible Preferred Stock dividends and accretion 1,087 1,087 - - % Net income attributable toVirtusa common stockholders$ 24,360 $ 11,633 $ 12,727 109.4 % Revenue
Revenue increased by 3.3%, or$11.0 million , from$335.1 million during the three months endedDecember 31, 2019 to$346.1 million in the three months endedDecember 31, 2020 . The increase in revenue was primarily due to an increase in revenue from several banking clients, including our largest banking client, revenue from several tuck-in asset and business acquisitions closed in the fiscal year endedMarch 31, 2020 , and an increase in revenue fromEurope , primarily driven by one of our large European banking clients, partially offset by a decrease in growth of revenue from several of our top ten clients, primarily in our healthcare industry group and decrease in revenue from our C&T industry group. Revenue from North American clients in the three months endedDecember 31, 2020 increased by$5.3 million , or 2.1%, as compared to the three months endedDecember 31, 2019 , particularly due to revenue from several tuck-in asset and business acquisitions closed in the fiscal year endedMarch 31, 2020 partially offset by decrease in revenue from clients in our healthcare industry group. Revenue from European clients increased by$4.0 million , or 7.3%, as compared to the three months endedDecember 31, 2019 , primarily due to an increase in revenue from one of our large banking clients. We had 230 active clients atDecember 31, 2020 , as compared to 216 active clients at December
31, 2019. Cost of revenue Costs of revenue decreased from$236.4 million in the three months endedDecember 31, 2019 to$232.1 million in the three months endedDecember 31, 2020 , a decrease of$4.3 million , or 1.8%. The decrease in cost of revenue was primarily due to a decrease in subcontractor costs of$12.0 million , which also reflect certain cost reduction actions initiated during the nine months endedDecember 31, 2020 , a decrease in travel and related expenses of$4.7 million , partially offset by an increase in the number of IT professionals and related compensation and benefit costs of$11.9 million , reflecting the restoration of certain compensation programs during the three months endedDecember 31, 2020 and an increase in facilities costs of$0.4 million . AtDecember 31, 2020 , we had 21,779 IT professionals as compared to 20,075 atDecember 31, 2019 . As a percentage of revenue, cost of revenue decreased from 70.6% for the three months endedDecember 31, 2019 to 67.1% for three months endedDecember 31, 2020 . 37 Table of Contents Gross profit Our gross profit increased by$15.3 million , or 15.5%, to$114.0 million for the three months endedDecember 31, 2020 , as compared to$98.7 million for the three months endedDecember 31, 2019 . As a percentage of revenue, gross margin was 29.4% in the three months endedDecember 31, 2019 and 32.9% in the three months endedDecember 31, 2020 . The increase in the gross profit was primarily due to lower onsite effort, decrease in travel and related expense as well as cost optimization programs with respect to our subcontractors implemented in the nine months endedDecember 31, 2020 , partially offset by restoration of previously reduced compensation programs during the three months endedDecember 31, 2020 . Operating expenses Operating expenses increased from$68.3 million in the three months endedDecember 31, 2019 to$72.5 million in the three months endedDecember 31, 2020 , an increase of$4.2 million , or 6.2%. The increase in operating expenses was primarily due to substantial legal, banking and advisory combined professional service fees of$4.4 million incurred in connection with the proxy solicitation contest as well as with the Baring Transaction, an increase in compensation expense, including stock and variable compensation expense of$3.6 million and an increase in amortization of intangible assets of$1.4 million , partially offset by a decrease in travel and related expenses of$3.1 million , and a decrease in other operating expense of$1.2 million . As a percentage of revenue, our operating expenses increased from 20.4% in the three months endedDecember 31, 2019 to 20.9% in the three months endedDecember 31, 2020 .
Income from operations
Income from operations increased by 36.3%, from$30.4 million in the three months endedDecember 31, 2019 to$41.5 million in the three months endedDecember 31, 2020 . As a percentage of revenue, income from operations increased from 9.1% in the three months endedDecember 31, 2019 to 12.0% in the three months endedDecember 31, 2020 , primarily due to an increase in revenue, lower onsite effort, as well as cost optimization programs with respect to our subcontractors implemented in the nine months endedDecember 31, 2020 , partially offset by an increase in operating expense. Other expense Other expense decreased by$3.0 million , from$7.2 million in the three months endedDecember 31, 2019 to$4.2 million in the three months endedDecember 31, 2020 , primary due to a decrease in net foreign currency transaction losses related to the revaluation of Indian rupee denominated intercompany note, primarily due to a substantial appreciation of the Indian rupee against theU.S. dollar, partially offset by loss on sale of land acquired in the Polaris Transaction that was classified as asset held for sale and an increase in interest expense related to our credit facility, primarily related to increase in the borrowings and interest rate. Income tax expense Income tax expense increased by$1.4 million , from$10.4 million in the three months endedDecember 31, 2019 to$11.8 million in the three months endedDecember 31, 2020 . Our effective tax rate decreased from 44.7% for the three months endedDecember 31, 2019 to 31.6% for the three months endedDecember 31, 2020 . The increase in tax expense is primarily due to increase in income from operations during the three months endedDecember 31, 2020 . The decrease in effective tax rate for the three months endedDecember 31, 2020 , was primarily due to a reduction in Base Erosion and Anti-Abuse Tax ("BEAT) impact, the election of foreign tax credits, lower statutory rates inIndia and the merger of our Indian operations. The merger of our Indian operations permits previous nondeductible items to be deducted in computing local taxable income. Noncontrolling interests
In connection with the
38
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Net income available to
Net income available toVirtusa stockholders increased by$12.7 million or 100.1%, from$12.7 million in the three months endedDecember 31, 2019 to$25.4 million in the three months endedDecember 31, 2020 . The increase in net income in the three months endedDecember 31, 2020 was primarily due to an increase in revenue, an increase in income from operations and a decrease in foreign currency transaction losses, 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 theOrogen Group , we accrued dividends and accreted issuance costs of$1.1 million at a rate of 3.875% per annum during the three months endedDecember 31, 2020 and 2019.
Net income available to
Net income available toVirtusa common stockholders increased by$12.8 million or 109.4%, from$11.6 million in the three months endedDecember 31, 2019 to$24.4 million in the three months endedDecember 31, 2020 . The increase in net income in the three months endedDecember 31, 2020 was primarily due to an increase in revenue, an increase in income from operations and a decrease in foreign currency transaction losses, partially offset by an increase in income tax expense.
Nine months ended
The following table presents an overview of our results of operations for the
nine months ended
Nine Months Ended
December 31,
2020 2019 $ Change % Change
(Dollars in thousands)
Revenue $ 964,352 $ 982,632 $ (18,280) (1.9) %
Costs of revenue 697,772 709,746 (11,974) (1.7) %
Gross profit 266,580 272,886 (6,306) (2.3) %
Operating expenses 205,248 209,813 (4,565) (2.2) %
Income from operations 61,332 63,073 (1,741) (2.8) %
Other expense (10,396) (17,035) 6,639 (39.0) %Income before income tax expense 50,936 46,038
4,898 10.6 %
Income tax expense 15,826 19,932 (4,106) (20.6) %
Net income 35,110 26,106 9,004 34.5 %
Less: net income attributable to
noncontrolling interests - 450 (450) (100.0) %
Net income available to Virtusa stockholders 35,110 25,656 9,454 36.8 %
Less: Series A Convertible Preferred Stock
dividends and accretion 3,262 3,262 - - %
Net income attributable to Virtusa common
stockholders $ 31,848 $ 22,394 $ 9,454 42.2 %
Revenue
Revenue decreased by 1.9%, or$18.3 million , from$982.6 million during the nine months endedDecember 31, 2019 to$964.4 million in the nine months endedDecember 31, 2020 . The decrease in revenue was primarily due to an impact from COVID-19 pandemic, primarily due to business interruptions and project delays, as well as elongated client decision making cycles, a decline in revenue from one of our largest European banking clients, a decrease in revenue from 39
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our BFSI industry group, primarily financial services, a decrease in revenue from our healthcare industry group and a decrease in growth of revenue from several of our top ten clients, primarily in our healthcare industry group, partially offset by an increase in revenue from our largest banking and telecommunication clients and revenue from several tuck-in asset and business acquisitions closed in the fiscal year endedMarch 31, 2020 . Revenue from North American clients in the nine months endedDecember 31, 2020 decreased by$10.1 million , or 1.4%, as compared to the nine months endedDecember 31, 2019 , particularly due to the decrease in revenue from clients in the healthcare industry group, partially offset by revenue from several tuck-in asset and business acquisitions closed in the fiscal year endedMarch 31, 2020 . Revenue from European clients decreased by$11.5 million , or 6.6%, as compared to the nine months endedDecember 31, 2019 , primarily due to decline in revenue from one of our large banking clients, partially offset by increase in revenue from our largest telecommunication client. We had 230 active clients atDecember 31, 2020 , as compared to 216 active clients atDecember 31, 2019 . Cost of revenue Costs of revenue decreased from$709.7 million in the nine months endedDecember 31, 2019 to$697.8 million in the nine months endedDecember 31, 2020 , a decrease of$11.9 million , or 1.7%. The decrease in cost of revenue was primarily due to a decrease in travel and related expenses of$17.2 million , a decrease in subcontractor costs of$16.2 million , which also reflect certain cost reduction actions initiated during the nine months endedDecember 31, 2020 , partially offset by an increase in the number of IT professionals and related compensation and benefit costs of$20.1 million ,. We also incurred an increase in facilities and other costs of$0.9 million in the nine months endedDecember 31, 2020 . AtDecember 31, 2020 , we had 21,779 IT professionals as compared to 20,075 atDecember 31, 2019 . As a percentage of revenue, cost of revenue increased from 72.2% for the nine months endedDecember 31, 2019 to 72.4% for nine months endedDecember 31, 2020 . Gross profit
Our gross profit decreased by$6.3 million , or 2.3%, to$266.6 million for the nine months endedDecember 31, 2020 , as compared to$272.9 million for the nine months endedDecember 31, 2019 . As a percentage of revenue, gross margin was 27.8% in the nine months endedDecember 31, 2019 and 27.6% in the nine months endedDecember 31, 2020 . The decrease in gross margin during the nine months endedDecember 31, 2020 , was primarily due to lower utilization and restoration of previously reduced compensation programs during the three months endedDecember 31, 2020 , partially offset by lower onsite effort, a decrease in travel and related expense as well as cost optimization programs with respect to our subcontractors implemented in the nine months endedDecember 31, 2020 .
Operating expenses Operating expenses decreased from$209.8 million in the nine months endedDecember 31, 2019 to$205.2 million in the nine months endedDecember 31, 2020 , a decrease of$4.6 million , or 2.2%. The decrease in operating expenses was primarily due to a decrease in compensation expense, including stock and variable compensation expense as well as cost reduction initiatives of$4.4 million , a decrease in travel and related expenses of$9.3 million and a decrease in other operating expense of$2.5 million , partially offset by substantial legal, banking and advisory combined professional service fees of$12.7 million incurred in connection with the proxy solicitation contest as well as with the Baring Transaction. As a percentage of revenue, our operating expenses decreased from 21.4% in the nine months endedDecember 31, 2019 to 21.3% in the nine months endedDecember 31, 2020 . Income from operations Income from operations decreased by 2.8%, from$63.1 million in the nine months endedDecember 31, 2019 to$61.3 million in the nine months endedDecember 31, 2020 . As a percentage of revenue, income from operations was unchanged from 6.4% in the nine months endedDecember 31, 2019 to the nine months endedDecember 31, 2020 . The decrease in income from operations primarily due to a decrease in revenue, lower utilization, partially offset by decrease in subcontractors cost and operating expense, primarily due to cost optimization programs implemented in the nine months endedDecember 31, 2020 . 40 Table of Contents Other expense Other expense decreased by$6.6 million , from$17.0 million in the nine months endedDecember 31, 2019 to$10.4 million in the nine months endedDecember 31, 2020 , primarily due to a decrease in net foreign currency transaction losses related to the revaluation of Indian rupee denominated intercompany note, primarily due to a substantial appreciation of the Indian rupee against theU.S. dollar and a gain on redemption of equity method investment, partially offset by loss on sale of land acquired in the Polaris Transaction that was classified as asset held for sale and an increase in interest expense related to our credit facility, primarily related to increase in the borrowings and interest rate. Income tax expense Income tax expense decreased by$4.1 million , from$19.9 million in the nine months endedDecember 31, 2019 to$15.8 million in the nine months endedDecember 31, 2020 . Our effective tax rate decreased from 43.3% for the nine months endedDecember 31, 2019 to 31.1% for the nine months endedDecember 31, 2020 . The decrease in tax expense and effective tax rate for the nine months endedDecember 31, 2020 , was primarily due to a reduction in BEAT impact, the election of foreign tax credits, reduction of global intangible low-taxed income, lower statutory rates inIndia and the merger of our Indian operations, partially offset by tax expense on increased income from operations. The merger of our Indian operations permits previous nondeductible items to be deducted in computing local taxable income. Noncontrolling interests In connection with the Polaris acquisition, for the nine months endedDecember 31, 2019 , we recorded a noncontrolling interest of$0.5 million , representing a 2.3%, share of profits of Polaris held by parties other thanVirtusa . During the fiscal year endedMarch 31, 2020 , Polaris merged with and into Virtusa India, with Virtusa India being the surviving entity. As ofMarch 31, 2020 , we own 100% of Polaris shares.
Net income available to
Net income available toVirtusa stockholders increased by$9.5 million or 36.8%, from$25.7 million in the nine months endedDecember 31, 2019 to$35.1 million in the nine months endedDecember 31, 2020 . The increase in net income in the nine months endedDecember 31, 2020 was primarily due to a decrease in foreign currency transaction losses, a decrease in income tax expense, a decrease in costs of revenue and operating expense, partially offset by a decrease in revenue and an increase in interest expense related to our credit facility.
Series A Convertible Preferred Stock dividends and accretion
In connection with the preferred stock financing transaction with theOrogen Group , we accrued dividends and accreted issuance costs of$3.3 million at a rate of 3.875% per annum during the nine months endedDecember 31, 2020 and 2019.
Net income available to
Net income available toVirtusa common stockholders increased by$9.5 million , or 42.2%, from$22.4 million in the nine months endedDecember 31, 2019 to$31.9 million in the nine months endedDecember 31, 2020 . The increase in net income in the nine months endedDecember 31, 2020 was primarily due to a decrease in foreign currency transaction losses, a decrease in income tax expense, a decrease in costs of revenue and operating expense, partially offset by a decrease in revenue and an increase in interest expense related to our credit facility. Non-GAAP Measures We include certain non-GAAP financial measures as defined by Regulation G by theSecurities 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. 41 Table of Contents 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 time deposits, available-for-sale debt securities and equity securities, including our long-term investments which meet the credit rating and diversification requirements of our investment policy as approved by our audit committee and board of directors. The following table provides the reconciliation from cash and cash equivalents to total cash and cash equivalents, short-term investments and long-term investments: December 31, 2020 March 31, 2020 Cash and cash equivalents $ 347,173$ 290,837 Short-term investments 2,633 9,785 Long-term investments 22 4 Total cash and cash equivalents, short-term and long-term investments $ 349,828$ 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 cost, gain on redemption of equity method investment,
non-recurring fees for potential proxy deliberation, the initial impact of our
election to treat certain subsidiaries as disregarded entities for
purposes, and other non-recurring tax items to provide further insights into
the comparison of our operating results among periods.
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The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure:
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019
in thousands, except
per share amounts)
GAAP income from operations$ 41,451 $ 30,410 $ 61,332 $ 63,073 Add: Stock-based compensation expense 4,027 5,775 11,697 18,285 Add: Acquisition-related charges and restructuring charges (a) 6,512 4,345 19,869 12,741 Add: Non-recurring professional fees (b) 2,998 - 6,337 - Non-GAAP income from operations$ 54,988 $ 40,530 $ 99,235 $ 94,099 GAAP operating margin 12.0 % 9.1 % 6.4 % 6.4 % Effect of above adjustments to income from operations 3.9 % 3.0 % 3.9 % 3.2 % NonGAAP operating margin 15.9 % 12.1 % 10.3 % 9.6 % GAAP net income available toVirtusa common stockholders$ 24,360 $ 11,633 $ 31,848 $ 22,394 Add: Stock-based compensation expense 4,027 5,775 11,697 18,285 Add: Acquisition-related charges and restructuring charges (a) 6,512 4,345 19,869 13,008 Add: Non-recurring professional fees (b) 2,998 - 6,337 - Add: Impairment of investment (c) - 184 - 184 Less : Gain on redemption of equity method investment - - (1,179) - Add : Loss on sale of asset held for sale (d) 619
619
Add: Foreign currency transaction (gains) losses (e) (1,126) 3,065 (3,983) 5,300 Tax adjustments (f) (3,625) 161 (8,491) (4,153) Less: Noncontrolling interest, net of taxes (g) - (16) - (44) Non-GAAP net income available toVirtusa common stockholders$ 33,765 $ 25,147 $ 56,717 $ 54,974 GAAP diluted earnings per share (h)$ 0.75 $ 0.38 $ 1.04 $ 0.73 Effect of stock-based compensation expense (i) 0.12 0.17 0.35 0.54 Effect of acquisition-related charges and restructuring charges (a) (i) 0.19 0.13 0.61 0.38 Effect of non-recurring professional fees (b) (i) 0.09 - 0.19 - Effect of impairment of investment (c) (i) - 0.01 - - Effect of gain on redemption of equity method investment (i) - - (0.04) - Effect of loss on sale of asset held for sale (d) (i) 0.02
0.02
Effect of foreign currency transaction (gains) losses (e) (i) (0.03) 0.09 (0.12) 0.16 Tax adjustments (f) (i) (0.11) - (0.26) (0.12) Effect of noncontrolling interest (g) (i) - - - - Effect of dividend on Series A Convertible Preferred Stock (h) (i) - - 0.07 0.10 Effect of change in dilutive shares for non-GAAP (h) - - (0.06) (0.06) Non-GAAP diluted earnings per share (i) (j)$ 1.03 $ 0.78 $
1.80
Acquisition-related charges include, when applicable, amortization of
purchased intangibles, external deal costs, transaction-related professional (a) 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
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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
termination benefits, as well as certain professional fees related to
restructuring. The following table provides the details of the
acquisition-related charges and restructuring charges:
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019Amortization of intangible assets$ 4,858 $ 3,496 $ 13,983 $ 10,157 Acquisition and integration costs - 849 - 2,584 Transaction costs related to Barings Transaction 1,370 - 6,367 - Changes in fair value of contingent consideration 284 - (481) - Acquisition-related charges included in costs of revenue and operating expense 6,512 4,345 19,869 12,741 Accreted interest related to deferred acquisition payments - - - 267 Total acquisition-related charges and restructuring charges$ 6,512 $ 4,345 $ 19,869 $ 13,008
Non-recurring fees for advisory, legal, consulting and proxy solicitation
services in connection with a contested proxy solicitation with respect to (b) our annual shareholder meeting and the election of directors. Also included
is the reimbursement of fees and expenses incurred in connection with the
settlement of the contested proxy solicitation.
(c) Other-than-temporary impairment of available-for-sale securities recognized
in earnings.
(d) Loss on sale of land acquired in the Polaris Transaction that was classified
as asset held for sale
Foreign currency transaction gains and losses are inclusive of gains and (e) losses on related foreign exchange forward contracts not designated as
hedging instruments for accounting purposes.
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 (f) respective periods. For fiscal year 2020, tax adjustments exclude BEAT tax
impact in contemplation of a reorganization of our Indian legal entities and
assume application of foreign tax credit benefits in the United States .
(g) Noncontrolling interest represents the minority shareholders interest of
Polaris.
During the three months ended
shares of Series A Convertible Preferred Stock were included in the
calculations of both GAAP and non-GAAP diluted earnings per share as their (h) effect would have been dilutive using the if-converted method. During the
nine months ended
Series A Convertible Preferred Stock were excluded from the calculations of
GAAP diluted earnings per share as their effect would have been anti-dilutive
using the if-converted method.
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, 2020 and 2019:
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Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019
Non-GAAP net income available to
Virtusa common stockholders $ 33,765 $ 25,147 $ 56,717 $ 54,974
Add: Dividends and accretion on
Series A Convertible Preferred Stock 1,087 1,087 2,175 3,262
Non-GAAP net income available to
Virtusa common stockholders and
assumed conversion $ 34,852 $ 26,234 $ 58,892 $ 58,236
GAAP dilutive weighted average shares
outstanding 33,897,596 33,458,231 30,665,142 30,700,269
Add: Incremental effect of Series A
Convertible Preferred Stock as
converted - - 2,000,000 3,000,000
Non-GAAP dilutive weighted average
shares outstanding 33,897,596 33,458,231 32,665,142 33,700,269
To the extent the Series A Convertible Preferred Stock is dilutive using the (i) 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.
(j) Non-GAAP diluted earnings per share is subject to rounding.
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.
OnSeptember 9, 2020 , we entered into the Merger Agreement, with Parent, and Sub, with respect to the acquisition of the Company by Parent for$51.35 in cash for each share ofVirtusa common stock. We expect to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the merger contemplated by the Merger Agreement. During the nine months endedDecember 31, 2020 , we incurred approximately$6.4 million as transaction costs in connection with the Merger. If the Merger Agreement is terminated under specified circumstances, we may be required to pay a termination fee of$54.3 million toAustin HoldCo Inc. For more information regarding the merger contemplated by the Merger Agreement and Merger Agreement, please see the Form 8-K filed with theSEC by the Company onSeptember 11, 2020 . In response to the COVID-19 outbreak, which had and is having a negative business impact on our operations, inMarch 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, onMay 27, 2020 , we entered into Amendment No. 3 to Amended and Restated Credit Agreement withJPMorgan Chase Bank, N.A . (the " Administrative Agent" ) and the lenders party thereto (the " Third Credit Agreement Amendment" ), which amends the Company's Amended and Restated Credit Agreement, dated as ofFebruary 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 beforeSeptember 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 throughDecember 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. OnMay 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%. The Company did not elect to draw down on the New Delayed Draw Term Loans. 45 Table of Contents OnOctober 15, 2019 , we entered into Amendment No. 2 to Amended and Restated Credit Agreement withJPMorgan Chase Bank, N.A . (the "Administrative Agent") and the lenders party thereto (the "Second Credit Agreement Amendment"), which amends 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 used 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 the 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 endedMarch 31, 2020 , the Company drew down$145.0 million from the credit facility, inclusive of$84.0 million drawn in the three months endedMarch 31, 2020 as a proactive measure in light of the uncertainty resulting from the COVID-19 pandemic. Earlier draws in the fiscal yearMarch 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 endingMarch 31, 2021 , we are required to make principal payments of$4.3 million per quarter. The term of the Credit Agreement is five years endingFebruary 6, 2023 . During the nine months endedDecember 31, 2020 , the Company paid$13.0 million and$105.0 million towards the term loan and the revolver facility, respectively. AtDecember 31, 2020 , the total outstanding amount under the Credit Agreement to$382.0 million and the weighted average interest rate on the term loan and revolving line of credit was 3.50%. 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. AtDecember 31, 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. AtDecember 31, 2020 , we had approximately$349.8 million of cash, cash equivalents, short term investments and long term investments, of which we hold approximately$126.6 million of cash, cash equivalents, short term investments and long-term investments in non-U.S. locations, particularly inIndia ,Sri Lanka and theUnited Kingdom . We intend to use accumulated and future earnings of foreign subsidiaries to expand operations outsidethe United States and, accordingly, undistributed income is considered indefinitely reinvested. If our intent were to change and we elected to repatriate this cash back tothe 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 income. Due to various methods by which cash could be repatriated tothe 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 such repatriation. 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. 46 Table of Contents 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 fiscal year endedMarch 31, 2020 , we completed multiple tuck-in asset and business acquisitions for an aggregate purchase price consideration of$49.6 million , with an additional earn-out consideration of$38.7 million , which, if earned, would be payable over the next two fiscal years. During the nine months endedDecember 31, 2020 , we paid$10.3 million and$7.6 million in deferred consideration and earn-out consideration respectively related to these tuck-in acquisitions. As ofDecember 31, 2020 , the balance of undiscounted contingent consideration is$17.1 million , of which$12.5 million is expected to be paid within the next 12 months. OnDecember 31, 2019 , in connection with a request for proposal ("RFP") and vendor consolidation process conducted byCitigroup 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 ofJuly 1, 2015 , as amended (the "Amendment"). Pursuant to the Amendment, (i) Citi agreed to maintain the Company as a preferred vendor under theResource Management Organization 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 fromApril 1, 2020 toDecember 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. OnMay 3, 2017 , we entered into an investment agreement withThe 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$108.0 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 our board of directors. Orogen is an operating company that was created byVikram Pandit andAtairos 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 toMay 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 we fail 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 ofMay 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 nine months endedDecember 31, 2020 , the Company paid$3.1 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 14 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 inJuly 2016 with an effective date ofJuly 2017 andNovember 2018 . The interest rate swaps purchased inJuly 2016 matured on inJuly 28, 2020 . TheNovember 2018 interest rate swap is at a fixed rate of 2.85% and is designed to maintain a 50% coverage of our LIBOR debt, therefore the notional amount changes over the life of the interest rate swap to retain 47 Table of Contents
the 50% coverage target. During the three months ended
In addition, the Company conducted a simultaneous de-designation and a re-designation of the hedge for this interest rate swap to align with theMay 2020 debt amendment and maintain a highly effective hedge relationship given the increase of the notional amount of the interest rate swap and in consideration of the increase in interest rate floor to 1%. The counterparties to the Interest Rate Swap Agreements could demand an early termination of theNovember 2018 Interest Rate Swap 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 onDecember 31, 2017 , of not more than 3.50 to 1.00 for all periods thereafter ending prior toDecember 31, 2019 , of not more than 3.25 to 1.00 commencingDecember 31, 2019 and for periods thereafter throughDecember 2021 , and 3.00 to 1.00 thereafter and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As ofMarch 31, 2020 , we were in compliance with these covenants. The net unrealized loss associated with Interest Rate Swap Agreement was$8.9 million as ofDecember 31, 2020 , which represents the estimated amount that we would pay to the counterparties in the event of an early termination. From time to time, the Company enters into arrangements to deliver IT services that include upfront payments to our clients. As ofDecember 31, 2020 , the total unamortized upfront payments related to these services were$15.7 million and are expected to be amortized as a reduction to revenue over a benefit period of 3 years. During the nine months endedDecember 31, 2020 , our accounts receivables and unbilled receivables significantly decreased due to a decrease in days sales of outstanding ("DSO"). As ofDecember 31, 2020 , our DSO was 57 days compared to 78 days atMarch 31, 2020 . The significant increase in deferred revenue during the nine months endedDecember 31, 2020 was primarily due to a change in timing of our work performed compared to timing of invoicing to our clients. Beginning in fiscal 2009, ourU.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse, certain of itsEurope -based accounts receivable balances from one client to the financial institution. During the nine months endedDecember 31, 2020 , we sold$42.6 million of receivables under the terms of the financing agreement. Fees paid pursuant to this agreement were not material during the nine months endedDecember 31, 2020 . No amounts were due under the financing agreement atDecember 31, 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. OnFebruary 28, 2019 , theSupreme 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 theSupreme 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 theSupreme Court ruling retroactively, without assessing interest and penalties, the impact would be a charge of approximately$7.5 million to our income from operations and cash flows. 48 Table of Contents Cash flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended
December 31,
2020 2019
(In thousands)Net cash provided by operating activities$ 171,416 $ 74,454 Net cash provided by (used in) investing activities 2,872
(24,927)
Net cash used in financing activities (129,096)
(20,275)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
16,269 (131)
Net increase in cash and cash equivalents and restricted cash 61,461
29,121
Cash, cash equivalents and restricted cash, beginning of year 291,601
190,113
Cash, cash equivalents and restricted cash, end of period
$ 219,234 Operating activities Net cash provided by operating activities increased in the nine months endedDecember 31, 2020 compared to the nine endedDecember 31, 2019 , primarily due to a decrease in accounts receivable as a result of a decrease in our days sales outstanding during the nine months endedDecember 31, 2020 . Investing activities Net cash used in investing activities decreased in the nine months endedDecember 31, 2020 compared to the nine months endedDecember 31, 2019 is primarily due to a decrease in the payments for acquisitions, proceeds from sale of land acquired in the Polaris Transaction, a decrease in purchase of property and equipment, partially offset by a decrease in net proceeds from sale or maturity of short-term investments. Financing activities
Net cash used in financing activities increased in the nine endedDecember 31, 2020 compared to the nine months endedDecember 31, 2019 . The increase in net cash used in financing activities in the nine months endedDecember 31, 2020 was primarily due to an increase in payment of debt, net of proceeds and payment of contingent consideration related to acquisitions partially offset by no payments made for repurchase of common stock and noncontrolling interest during the nine months endedDecember 31, 2020 . Commitments and Contingencies
See Note 17 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, theU.K. pound sterling, the euro, the Canadian dollar and the Australian dollar 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 theU.S. dollar andU.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 fluctuation in foreign currencies, such as theU.K. pound sterling, euro, the Canadian dollar and
the
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Australian dollar 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 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.
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